One of America's Most Hated Assets May Be a Big Buy Soon

More about cheap, hated assets... One of America's most hated assets may be a big buy soon... The other side of a terrible year... The fundamental story... We're not there yet, but it's close...

Is there anything more 'hated' than bonds today?

Maybe bitcoin, Sam Bankman-Fried, your nosy neighbor, or your least favorite politician ranks higher... But I (Corey McLaughlin) am willing to bet that among traditional investment choices, at least, long-term bonds are the most despised.

After all, these bonds were supposed to be so "safe" and protect balanced portfolios from stock market losses. Yet they've gone down with the rest of the market ship in 2022... and bond yields, though they've improved some, haven't been high enough to beat inflation.

So bonds are hated. And therein lies the opportunity.

We're picking up where we left off yesterday – with our discussion about finding assets that are "cheap, hated, and in an uptrend," a longtime mantra of True Wealth editor Dr. Steve Sjuggerud.

Today, I have another idea to share...

And this one is among the biggest sectors in the entire world. I'm talking about the U.S. Treasury market...

Treasurys get constantly overlooked by the sexier stock market – about which an endless number of stories are seemingly written every day. But as we've discussed frequently this year, the bond market is more than worth paying attention to.

The prices and yields of Treasury bills, notes, and bonds can tell you a lot about economic expectations and risk appetite. This is why we look at what the "yield curve" is telling us. (It's still "Recession Ahead – Proceed With Caution," by the way.)

But the bond market has many other sides and nuances. Today, we'll talk about one of them... a way you might actually be able to make money over the long run from bonds again.

With the Federal Reserve indicating it will slow down rate hikes starting next week, the value of the U.S. dollar could continue to weaken (a big story). So for the first time in about a year, sleepy ol' government bonds would have bullish tailwinds behind them.

It's a similar story to what we shared yesterday about gold, silver, and emerging markets.

This is the other side of the 60/40 portfolio's terrible year...

We talked last week about the historically terrible performance of the conventional 60/40 stock-bond portfolio in 2022. As inflation has raged and dollars have become more expensive, backed by Fed rate hikes, both major asset classes have dropped in tandem.

Now, a lot of people are focused on whether a new bull run for stocks is beginning. And we showed last week via Stansberry NewsWire analyst Kevin Sanford, past similar performances of the 60/40 portfolio have portended strong stock returns one or two years out...

But what we haven't talked about, and what I don't hear much discussion about, is how government bonds might perform coming out of their unprecedented rout. They're so hated nobody is talking about them. And that could mean an opportunity.

It's easy to get caught up in the terrible recent performance. But step back and think of the long-term view and buck your own emotions. The logic suggests right now is exactly when you want to consider adding bond exposure back to a portfolio.

The fundamental story is fairly straightforward...

As we have said recently, the Fed is telegraphing that it plans to slow down the pace of interest-rate hikes (to 50 basis points per increase) beginning as early as next week at the central bank's next policy meeting on December 13 and 14.

It's not doing this because it's planning on speeding up the process at the meetings following that. It's doing it because Fed officials are seeing the pace of inflation cool enough and the jobs market beginning to weaken.

As Fed Chair Jerome Powell said at a financial conference last week, "We don't want to crash the economy." (Not that the Fed has really proven it can do anything it says, but the markets keep listening anyway.)

And so with the official inflation numbers showing signs of easing in the past several months, the Fed is taking its foot off the rate-hike accelerator. This change leads to a cascade of effects.

Our friend and Ten Stock Trader editor Greg Diamond explored the idea of the Fed actually beating inflation in his latest Weekly Market Outlook. Among other things, Greg told subscribers...

I wouldn't be short bonds over the next 12 to 24 months, that's for sure.

Similarly, our colleague Dr. David "Doc" Eifrig's latest Intelligent Retirement model portfolio suggests a heavy allocation to government bonds for the first quarter of 2023. Alliance members and Doc's Income Intelligence subscribers can find his latest update here.

Remember, the spectacular rise in Treasury yields reflects Fed policy, especially on the shorter end of the yield curve. If rate hikes slow down, this trend should slow down as well... and could ultimately stop and reverse trend next year.

And that means bond prices – which trade inversely to yields – would cease falling as well. It might not happen overnight if rates keep rising in early 2023. But, eventually, this scenario is plausible...

Then, if the U.S. economy enters a recession – mild, medium, or strong, whatever – and the Fed is compelled to cut rates again or stop trimming its balance sheet, those would be huge tailwinds for lower yields and higher bond prices. Eventually.

We're already seeing this play out on the longer end of the yield curve...

Longer-term yields like the 10-, 20-, and 30-year have been falling over the past month or so... while shorter-term yields have plateaued (around 4.3% for a 2-year Treasury and 4.7% for a 1-year note).

This is why long-term/short-term spreads like the widely followed 10-year/2-year Treasury spread continues to widen to new lows... It's a concerning sign, but also one that might indicate lows are near.

But there's no sense in rushing that call. Remember, we've seen this story before...

The same kind of stock-bond behavior happened this summer.

Amid a massive "bear market rally" in stocks, long-term bond yields fell as well, while short-term yields traded sideways. Then Jerome Powell threw the rate-hike hammer down in Jackson Hole, Wyoming... and the trends reversed.

In late summer and early fall, stocks fell again and yields across the curve rose. The difference now is that Powell is striking an easier tone than he did in August, but we don't know if that message might change next week or in the months ahead.

If not, it's a good bet the recent run-up in long-term bond prices (and the downtrend in yields) will continue.

But all I can tell you for sure right now is that the stock and bond markets are acting exactly like they were in the summer... And should the path of inflation or Fed policy take a surprise turn, this whole conversation could be moot.

Next week could be volatile...

I also would not be surprised if next week, both the stock and bond markets react negatively to the Fed's next policy meeting.

This is one of only four meetings throughout the year where Fed officials will publish updated projections on inflation, unemployment, and growth for the next one to three years. These might show a higher-than-expected "terminal" rate in this hiking cycle, even if they are slowing down the pace of hikes.

This whole discussion could unsettle enough folks in the markets. So could whatever the heck Powell says. We've seen it happen a lot this year – notably in September when the last projections were published, which showed higher inflation rates, greater unemployment, and slower growth.

In other words, don't be surprised if the stock and bond markets take a bit of a hit over the next week or so.

But no matter what happens, keep the long term in mind...

For the past several weeks, the market has been backing the story for bonds "won't get worse." Here's a two-year chart of the widely followed iShares 20+ Year Treasury Bond Fund (TLT)...

You may look at this chart and see a general downtrend since the end of 2020... and a massive decline over the past 12 months that amounts to a 40% loss from peak to most recent low.

Will bonds lose another 40%? I can't tell you for sure.

But look at the recent action. The fund has been trending higher since October 24 – right around when stocks made their most recent low, too. It broke through its 50-day moving average last month and is on a path toward meeting its 200-day moving average.

Should TLT break then hold above this long-term average, that will a big sign it's time to buy bonds.

It's critically important to note that hasn't happened yet, though. Similar price action occurred in the summer... then Treasury bonds took another leg down into the fall. And Treasury bonds are still trading below their long-term technical trend.

In other words, bonds are not in a long-term uptrend yet, but they sure are cheap and hated.

So, like gold, silver, and emerging market stocks, keep an eye on bonds in the next few weeks and months. If current trends continue, you might find a great buying opportunity in one of America's most hated assets.

Conversely, if longer-term bond prices break down again, that tells you the story that has been 2022 isn't over yet... and that more pain could be ahead for stocks, bonds, and likely everything else priced in dollars.

The Smoke Bubble Goes 'Pop'

In this week's episode of the Stansberry Investor Hour, Dan Ferris and I bring on Crypto Capital editor Eric Wade to educate us on what's really going on with the FTX story... and what it means (or doesn't) for the future of cryptocurrencies...

Click here to listen to this episode of the Stansberry Investor Hour right now. And to catch all of the podcasts and videos from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime or listen wherever you get your podcasts.

New 52-week highs (as of 12/5/22): Flowers Foods (FLO) and Novo Nordisk (NVO).

In today's mailbag, more discussion on Sam Bankman-Fried and the FTX saga, which was a topic in yesterday's mail... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Regarding comments by Thomas S. on FTX and SBF's culpability... Do I for one second believe anything SBF says? To quote the great Charles Payne's two-word answer, 'Hell No!!'

"SBF said he wasn't made aware of the dollar amount of funds transferred from FTX to Alameda, that, 'No one at Alameda was talking to him.' Really? Really. SBF's girlfriend ran Alameda." – Stansberry Alliance member Bob K.

"Hey Tom, Really! Huh! Come on man!!!!! I've got no sympathy or empathy for a 30 year old swindler. I do thank him for showing us the multitude of financial know-it-alls who were crazy enough to speculate with this spoiled, unkempt, video game playing wannabe. And these are the people we listen to day in and day out about our finances and retirement plans???

"I'm retired at 62, made my income with a real job, saved and invested yearly for 35 years and took no crazy chances with my hard earned money. I'm laughing at all the suckers." – Stansberry Alliance member Nick P.

All the best,

Corey McLaughlin
Baltimore, Maryland
December 6, 2022