Dear Reader,
TGIF.
Before you head into the weekend, I want to address something that’s been on a lot of people’s minds this week.
Stocks and bonds are selling off.
Yields are going higher.
And retail investors are making a mistake I want to help you avoid.
The TLT Problem
Retail investors have been rushing into TLT — a 20-year Treasury bond ETF.
Last Wednesday alone they bought $61 million worth of it.
Tuesday, $59 million.
Monday, $50 million.
$170 million into one ETF in three days.
I understand the instinct.
Yields are rising, bond prices are falling, and people want to bet on a reversal.
But TLT is not the right vehicle for that trade.
Here’s why.
The longer a bond is to maturity, the more sensitive it is to changes in interest rates.
Think of it like a seesaw.
Yields go up, prices go down.
Yields go down, prices go up.
The longer the bond, the bigger those swings.
If you wanted to make a directional bet on long-term bond prices, you’d want the 30-year Treasury ETF — UTHY — not the 20-year.
More duration means more volatility means bigger moves when rates finally turn.
But I’m not recommending that trade either.
Because right now we’re in the middle of a repricing.
Catching a falling dagger is an exercise in futility and pain.
What I’m Actually Doing
I’ve said this many times on this channel.
I keep my excess cash in short-term US Treasury money market funds.
Specifically SNOXX — the Schwab Treasury Money Market Fund.
It only invests in government securities with a maturity of one year or less.
Right now you’re earning about 4% doing that.
No volatility. No guessing when yields peak. No catching falling daggers.
When this repricing is over — when yields have found their new level — that’s when I’ll consider moving into longer-dated bonds.
Not before.
What This Means for Your Portfolio
Now let me address the bigger question.
Is this a brace-for-impact moment?
No.
2008 was brace for impact.
The dot-com crash was brace for impact.
COVID was brace for impact.
This is not that.
What this is — and I want to be honest with you — is a period of turbulence.
The companies that are going to get hit hardest are the speculative ones.
Companies with no consistent earnings.
Highly leveraged companies.
The stuff we tend to avoid anyway.
I’ve gone through our model portfolios across all of our services.
We sold some positions a few weeks back.
There are one or two I might want to lighten up.
But overall I feel pretty good about where we stand.
Will it get bumpy?
Yes.
Is this our first rodeo?
Absolutely not.
Here’s how I’m thinking about it.
Look back at the passengers — all your little stocks — and say: prepare for a little turbulence.
Fasten your seatbelt.
Don’t panic.
Don’t psych yourself out.
Because here’s the thing that hasn’t changed.
Earnings are very, very strong.
This is still a tennis match between interest rates and earnings.
Interest rates, earnings. Interest rates, earnings.
Higher rates will eventually bite into earnings — that’s the whole thesis of monetary policy.
But we are not there yet.
When we get there, I’ll tell you.
The Safe Haven That Stopped Acting Like One
In the meantime, here’s one more thing worth thinking about heading into the weekend.
For most of my career, when markets got turbulent, long-term Treasuries were where people ran for safety.
That’s exactly the bet those retail investors piling into TLT are making.
But something has changed.
The Financial Times recently reported that gold has broken its long-term correlation with US Treasuries.
The old safe haven and the new one aren’t moving together anymore.
I don’t think that’s an accident.
On September 14, 2023, the price gap between gold in London and gold in Shanghai — normally a few dollars an ounce — blew out to $120.
Since then, gold has made more than 100 new all-time highs.
I believe we’re in the early innings of a historic repricing in gold.
And a 90-year-old law most investors have never heard of is about to drag it into the open.
I’ve put together a full presentation on what’s happening — and the one stock I call the “Shadow Miner” that I believe sits right at the center of it.
God bless you.
I’ll see you Monday.
“The Buck Stops Here,”
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Written by Dylan Jovine