Gentlemen Prefer Bonds

I don’t talk about them enough in the Rude, but bonds may be making a big comeback. September 04, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Gentlemen Prefer Bonds SEAN RING When Andrew Mellon famously said, “Gentleman prefer bonds,” the world was very different than it is today. In 1925, Anita Loos wrote her book Gentlemen Prefer Blondes, which was made into the classic 1953 film starring Marilyn Monroe. Mellon was nearly midway through his tenure as U.S. Treasury Secretary, which lasted from 1921 - 1932. At the time, the stock market was known for its speculative frenzy leading up to the Crash of 1929. In contrast, bonds were seen as a safer and more stable investment. Government and high-grade corporate bonds were considered less risky and more suited for conservative investors. Mellon’s quote suggests that sophisticated investors, who might prioritize preserving wealth over seeking high-risk returns, would naturally lean towards bonds. It plays on the idea that gentlemen would favor investments that provide steady, reliable returns rather than the volatile gains of stocks. In today’s Rude, I will introduce, or reintroduce, you to the world of bonds in a simple way. Why Investing in Bonds is a Good Thing: A Primer for Stock Investors As someone deeply entrenched in finance and investment, I often come across seasoned stock investors who, surprisingly, know very little about bonds. While stocks tend to dominate the headlines with their rollercoaster ride of price movements and potential for massive returns, bonds quietly serve as the bedrock of our capital markets… and many successful investment portfolios. This week, I'll be heading to Frankfurt to teach a two-day class on bonds—a topic that's crucial for a well-rounded investment strategy and deserves more attention than it typically gets. I'll explain the basics of bonds, why they should be a vital component of an investment portfolio (stock and options traders are exempt from this), and demystify some of the misconceptions surrounding them. If you know your way around stocks but haven't yet dipped your toes into bonds, consider this your introductory guide. What Are Bonds? Let's start with the basics. A bond is two things. First, it’s a promise. “My word is my bond.” Dictum meum pactum. It’s literally a promise to repay. Now comes the second, cooler part. It’s a tradable loan. That means when someone doesn’t want your repayments anymore, they can sell your bond to someone else, and you can repay them instead. Dear reader, this tradability is a miracle. It allows investors to offload risk without having to break anyone’s kneecaps. Just sell the bond for its current price, which may be less than you paid, and you can invest those proceeds elsewhere. Or just stick the money in a bank. When you buy a bond, you're lending money to the issuer in exchange for periodic interest payments (coupons) and the return of the bond's face value when it matures. The word “coupon” comes from the French couper, which means “to cut.” In the old days, you cut the coupon off the bottom of your bond and brought it to the bank to exchange it for your interest payment. Think of bonds as IOUs with a fixed income component. Unlike stocks, which represent ownership in a company, bonds are debt securities. As a bondholder, you don't get a say in how the company is run, but you have a claim on its assets and earnings before shareholders do, especially in bankruptcy. [WARNING: Apple’s Coming “AiOS” Update?]( If you have an iPhone, then please pay close attention. Soon, your home screen could generate this strange-looking alert. Once it appears on your phone, get ready. Because the world of technology is about to change forever. [Click here now and see the shocking details for yourself.]( Why Should You Invest in Bonds? If you're a stock market fan, you might wonder: Why should I bother with bonds? Aren't stocks the better investment? While stocks have the potential for higher returns, bonds offer several unique benefits that make them an essential component of a balanced investment portfolio. Stability and Predictability One of the most compelling reasons to invest in bonds is their relative stability compared to stocks. Bonds are less volatile because they provide predictable income streams through regular interest payments. This stability is desirable in uncertain economic climates or market downturns when stock prices are wildly unpredictable. For example, during the 2008 financial crisis, while global stock markets were in freefall, many high-quality bonds held their value or even appreciated. This is because bonds, especially government bonds, are seen as safe havens in times of crisis. However, the 60/40 portfolio, a popular investment strategy that allocates 60% to stocks and 40% to bonds, was severely tested during the 2020-2023 period, which saw a significant decline in bond values and raised questions about the traditional wisdom of this allocation. Income Generation Bonds are a reliable source of regular income, making them an attractive option for investors looking to generate a steady cash flow. This is especially true for retirees or those approaching retirement who need a consistent income stream without the risks associated with more volatile investments like stocks. Bond interest can be predictable and, in some cases, tax-advantaged, depending on the type of bond and the investor's tax situation. For example, municipal bonds in the United States provide tax-free interest income at the federal and, in some cases, state and local levels. Diversification Benefits If you're heavily invested in stocks, adding bonds to your portfolio can provide diversification benefits that reduce your investment risk. Stocks and bonds often have an inverse relationship, meaning bonds tend to hold steady or even rise when stocks go down. This counterbalancing effect can smooth out your portfolio's volatility and protect it from extreme swings in value. Diversification is a crucial principle of modern portfolio theory, which suggests that a mix of asset classes—such as stocks, bonds, real estate, and commodities—can maximize returns for a given level of risk. By holding both stocks and bonds, you spread your risk and improve the potential for a more stable return. Of course, with the Fed printing money, that rising tide lifted all boats and led to an unwelcomely higher correlation between stocks and bonds. Capital Preservation Capital preservation becomes a priority for investors who are more risk-averse or nearing their financial goals. Bonds, particularly high-quality government and corporate bonds, are excellent for preserving capital. Unlike stocks, which can lose significant value quickly, bonds offer a fixed return and the repayment of principal upon maturity, provided the issuer does not default. Think of bonds as the ballast of a ship—they provide stability and reduce the portfolio's sensitivity to market turbulence. This characteristic is particularly valuable for investors who cannot afford to lose a significant portion of their investments, such as retirees or those saving for a near-term goal like buying a home or funding a child's education. Inflation Protection While bonds are often perceived as a poor hedge against inflation, certain types can offer protection from rising prices. Treasury Inflation-Protected Securities (TIPS) in the U.S., for example, adjust their principal and interest payments based on inflation, helping to preserve the purchasing power of your investment. Moreover, floating-rate bonds—where the interest rate resets periodically based on a benchmark rate—can also provide some protection in a rising interest rate environment, which is often a sign of inflationary pressures. Understanding Bond Risks No investment is without risk, and bonds are no exception. However, understanding these risks can help you make more informed investment decisions. Interest Rate Risk: Bond values tend to move inversely with interest rates. When interest rates rise, bond prices typically fall, and vice versa. This is particularly relevant for long-term bonds, which are more sensitive to interest rate changes. Credit Risk: This is the risk that the bond issuer will default on its obligations. Bonds issued by entities with lower credit ratings generally offer higher yields to compensate for this increased risk but also carry a higher chance of default. Inflation Risk: Fixed-rate bonds can lose value in real terms if inflation rises significantly, eroding the purchasing power of the fixed interest payments. Liquidity Risk: If the market for some bonds is thin, some bonds, particularly those issued by smaller companies or municipalities, may not be easily sold without potentially incurring a loss. Despite these risks, bonds remain a foundational element of a well-rounded investment portfolio, mainly when appropriately managed within an investor's overall risk tolerance and investment objectives. How to Invest in Bonds For those convinced about the merits of bonds, the next question is: How do I get started? Here are a few avenues to consider: Direct Purchase: You can buy bonds directly through brokers, from the government (like U.S. Treasury bonds), or during new issuances in the primary market. Bond Funds: Bond mutual funds or exchange-traded funds (ETFs) provide exposure to a diversified portfolio of bonds, which can reduce individual security risk. Bond Ladders: This strategy involves buying bonds with staggered maturities, which can provide a more stable income stream and reduce interest rate risk over time. Managed Accounts: Professionally managed accounts can offer tailored bond portfolios based on specific investment goals and risk tolerances for those who prefer a hands-off approach. Wrap Up As I prepare for my class in Frankfurt this week, I'm reminded of the critical importance of understanding bonds—not just as a standalone investment but as an integral part of a comprehensive portfolio strategy. While stocks may offer the thrill of high returns and the headlines that go with them, bonds provide stability, predictable income, and a counterbalance to the risks inherent in equity markets. If you're heavily invested in stocks and have yet to explore the world of bonds, now might be the perfect time to start. They can provide a valuable diversification tool and offer a level of security and predictability that stocks simply cannot match. As with any investment, it's about finding the right balance that aligns with your financial goals, risk tolerance, and time horizon. Bonds may be less glamorous than stocks, but their role in achieving long-term financial stability and success must be considered. As you consider your investment strategy moving forward, pay attention to the power of bonds to protect, preserve, and grow your wealth in a balanced and strategic manner. I look forward to diving deeper into these topics and exploring more sophisticated bond strategies with my students in Frankfurt. If you're ready to learn more about how bonds can benefit your portfolio, I encourage you to explore further. All the best, Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( Rate this email Like Dislike Thanks for rating this content! Looks like something went wrong. Please try to rate again. In Case You Missed It… Pre-Election Everything Rally! SEAN RING August 2024 Monthly Asset Class Report I’ll go to my grave thinking Jay Powell should’ve cut rates in June and removed himself from the political stage. But some people just can’t help themselves, and Jay stayed his hand. As the September FOMC meeting rapidly approaches, it looks like he will finally cut 25 bps from the US base rate. While it won’t do much economically, it will goose traders’ expectations and make the bots buy faster than you can say “algorithm!” The stage is set for a mini-rally anyway, as Friday gave us some lovely numbers for the holiday weekend. Personal income was slightly up, while the core PCE index was softer than expected. The Chicago PMI was stronger than expected, while consumer sentiment was just below the consensus estimate. We know the economic numbers are nonsense, especially after the BLS revised nonfarm payrolls downward by 818,000 jobs. But that’s okay. Everyone’s dealing with the same nonsense. And so starts the rally. Most people are looking for a recession, but I don’t think you’ll find it here. As it’s September, the traders will return to work, and the junior varsity will return to getting coffee. The first-team players may see some buying opportunities their counterparts missed. Sell NVDA? Crazy. Do you think the market’s overcooked? It may be wobbly, but we’ve just closed on a monthly all-time high for the S&P 500. And how about gold? Still over $2,500. Ain’t that grand. Let’s get to the charts. S&P 500 ***New Monthly Closing High of 5,648.40.*** The SPX rose roughly 120 points to establish a new monthly closing record of 5,648.40. I just don’t know how anyone can want to get short right now. The problem with brilliant people is they see far into the future. Too far, by half. Sure, there will be a day to sell, but it’s not today, and I don’t think it’ll be anytime soon. I still target 6,000. Nasdaq Composite Even the allegedly beleaguered Nasdaq closed up 200 points on the month. Of course, I’ll feel much better once we establish new all-time highs. But for now, we’re only 1,000 points away from there. Percentage-wise, it’s not all that much. Russell 2000 (Small caps) The Russell had a terrible first week of August but nearly recovered all its losses. It finished the month down less than 4 points, which is a major victory. As the small caps are holding up, this bodes well for the rest of the stock market. The US 10-Year Yield We indeed fell another 12 basis points this month in the 10-year. The 10-year fell slightly lower than that but found a floor at 3.80%. Much of where the 10-year goes depends on the upcoming cuts from Jay Powell and friends. Dollar Index The dollar index fell out of bed this month before recovering in the last week of August. Still, a fall from 104.36 to 101.62 is nothing to sneeze at. This goosed stocks and bonds, but not crypto, surprisingly. The yen and euro seem strong, thanks to central bank action. USG Bonds Grabbed another few points this month. The target remains 99. Investment Grade Bonds From two months ago: If we clear 109, we can retest the 132 level. Scary, but possible. We have now cleared; off we go to 132. The next target after that is 146. High Yield Bonds Again, from last month: Junk continues its ascent. I’m looking at 79 as the next upside target. That still stands, too, but our new upside target is 85. Real Estate [кошмар путина — A WARNING TO RUSSIA]( According to a military insider, the U.S. has developed an arsenal of brand-new AI superweapons with the power to win ANY war. кошмар путина directly translates to Putin’s Nightmare… because come September 12, when these weapons are unveiled, Russia will have no ability to fight against us. [Details here.]( After another positive month, VNQ was up about 5.5%. The target is now 116. Energy: West Texas Intermediate (Oil) Even on a weaker dollar, oil is getting hammered. I thought we’d turn it around, and that still may happen. But it certainly hasn’t happened yet. From 77.91 to 73.55, it was a terrible place to be in August. Perhaps if the Fed cuts rates this month, we’ll see a rally start to form. Base Metals: Copper We had a nice recovery this month. I’m still erring to the downside, though I think we’re close to, or at the beginning of, the next big commodities cycle. For now, the big downside price target is $2.25. But I’m hoping the ascent continues. Precious Metals: Gold ***HIGHEST MONTHLY CLOSE OF 2,527.60*** From last month: $2,609 is still the next target. But beyond that, we’re now looking at $2,759. With the Fed set to cut rates before inflation has been slain, I think we’re still nearer the beginning of a bull market than at an end. Precious Metals: Silver Silver performed much better in August, but we still need to get above $33 to get excited. Cryptos: Bitcoin Despite Bitcoin's recent downturn, I maintain a bullish outlook. I reiterate my target of $100,000 by January 2026, and I see the current consolidation pattern as a potential precursor to a breakout. This could be a nice consolidation pattern here. Let’s see which way it breaks out. Cryptos: Ether Ether has broken down. I’m unsure what the problem is, but ETH is considerably weaker than BTC. We could see ETH hit $1,950 from here. Trad Asset Class Summary This month, the big loser was the USD, following last month’s downer. The SPX and commodities did well, up 3.70% and 1.26%, respectively. The long bond was as flat as a pancake, moving up only 18 basis points. Crypto Class Summary Crypto had another stinker this month. Only Monero, the most secretive coin, was up this month. Bitcoin, Doge, and Ether were the three biggest losers, with ETH down over 20%. Wrap Up The party is far from over. In fact, Jay Powell is about to bring the punch bowl back out. So participate. We’re not at the end yet. We’re still in moneymaking mode. Enjoy it while it lasts. Finally, let’s take a moment, courtesy of the Twitterverse: Have a wonderful day! All the best, Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We allow the editors of our publications to recommend securities that they own themselves. However, our policy prohibits editors from exiting a personal trade while the recommendation to subscribers is open. In no circumstance may an editor sell a security before subscribers have a fair opportunity to exit. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. All other employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. Please read our [Privacy Statement.]( If you are having trouble receiving your Rude Awakening subscription, you can ensure its arrival in your mailbox by [whitelisting Rude Awakening.](