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Are the travails of the bond market, like Macbeth expounds, a “tale told by an idiot, full of sound and fury, signifying nothing?” As we grapple with the whole edifice of fixed income, the existential crisis of Treasurys, the multitrillion-dollar market that the tale is based on, I have come to wonder what bonds really are signifying and whether they even matter to our portfolios. I know that’s a radical proposition, but hear me out. We need to steel ourselves to what may come from a failed set of debt ceiling talks between President Joe Biden and the part of the government that might only nominally be run by House Speaker Kevin McCarthy. The two are set to resume negotiations Monday, with a possible historic government default as early as 10 days away. Now, I am not a denialist, I know that a debt default — a failure to pay for the nation’s tab on spending that’s already happened — would ignite a cataclysm of unknown proportions. Again, we have 10 days before things could get out of hand. But I also know that, in the end, the Republic won’t fall apart, the center will hold, because we are a rich, albeit paralyzed country that has the money to pay the bills. The House of Morgan has been very busy of late, but the odds don’t favor our new banking colossus, JPMorgan, needing to loan the U.S. government money to pay Social Security bills. Nevertheless, I think it’s worth discussing that in an era where the mega-caps are known not only for their technical prowess but for their financial strength that the role of the bond market — so central to much of the transfer of capital from the government to the people — may not be as important to all equities, default or not, as so many believe. I know of the heretical way of which I speak. From the moment I got to Goldman Sachs in 1982 and didn’t start my pitch to buy the stock of Delta with my view of the bellwether bond — then the 30-year Treasury —and was castigated for it, I know the value of the multitrillion bond market’s impact on the much smaller equity asset class. But the so-called tyranny of the bond market, other than when its existence could vanish for a few days because of partisan antipathy, has really led many of us astray, particularly those trying to find good stocks to buy. At times, in my more rebellious days, I might have pondered whether abstruse discussions of the vicissitudes of the yield curve might actually have been generated by those who want to keep you in your cash management chains. The billionaire class — so incorrectly sought after by the media — so often seems to use the bond market as a sort of intellectual cudgel. It’s meant to discourage you — or almost admonish you as a financial hick — to stick with what you know, your job, your salary, and your index fund. Anything but individual stocks. To put it in old-fashioned, unvarnished argot, I am sick of commentators who refuse to acknowledge that things have changed. Our companies, our biggest companies, aren’t beholden to anything but their own prowess. They, themselves are cash allocators, simply because they have so much of it. The bond market plays a role only for them to tap for even more cash, usually to buy back stock and only occasionally, rarely, to pay bills. Most of the companies who use it, like Club holding Apple (AAPL), Pfizer or Verizon of late, remind me of the old days of banking where the only companies that could access the debt market are ones that don’t need it. However, beginning in the early-1980s, when the government became an overwhelming, voracious consumer of cash and the Federal Reserve chairman at the time, Paul Volcker, tried to rein in inflation, did the price of money really matter? We used to hang on the results of every Treasury auction during the so-called bad old days because a 14% risk-free treasury, out 30 years, sure was a better bet than the common stocks of an airline. I sold tens of millions of those bonds and remained a hero for three decades to many a wealthy client. As rates fell, when Volcker broke the back of inflation, we still dwelled on the bond market’s every imaginary power, mostly because a 7% 10-year Treasury auction seems the reminiscent norm for decades. The competition was so fierce to equities for ages, so we accepted stock serfdom and did our best to assess if any company’s equity paper could beat its bond offerings. Those days are just plain dead, over and done with. But, to admit it seems to admit some sort of ignorance. Few on TV agree with this point publicly, at least that I know of. With this product, the Investing Club, and with my CNBC show “Mad Money,” I think some believe I traffic in ignorance, pandering to the striving classes. But my real currency is ideas to help you make more money. My thinking is not clouded by the 10s and 2s (10-year Treasurys and 2-year Treasurys ). It’s not grounded in the yield curve inversion for the simple reason that you would have missed the entire move in as ChatGPT went viral, the way you would have missed the entire internet move, or the smartphone era, a much more diffuse rally with only a handful of survivors yet one that made you a ton of money, because we have picked some decent stocks. That said, we are finally where there’s some actual short-term competition to equities, a fixed-income bonanza that makes almost any stock dividend yield irrelevant or a pittance. Witness the run from, not toward, the excellent, safe, 6.5% distribution from natural gas storage and transport company Oneok after last week’s obviously reviled bid for Magellan Midstream Partners . So, the question becomes are we back in the bad old days where we must first talk about owning yearlong Treasury paper versus any stock? My answer is an emphatic NO. First, a year is a very short time and unless you are talking billions, you are simply reaching for 2 percentage points of yield, not enough to make a difference versus a large, obtainable capital gain. Second, you must already, 365 days in, consider what happens, when we see the slowdown that ends the wage inflation that’s the real target of the Fed. It’s initially being hidden. We don’t see the college graduate workforce not getting jobs or the last three years of expensive young labor getting laid off. Next though, by this summer, is the termination of “real,” tech and soon non-tech. Those lay-offs, more than any aggregate indicator, I think will slow the rising price of housing — the Fed’s other target — and, at last, end the interest rate hikes and end the issuance of competitive 1-year Treasury bills. Right now, just to be clear, the main reason why housing is such a sticky form of inflation — confounding the Fed — is that the housing companies aren’t building to make their numbers. They’re building to suit individuals, which then allows them to BEAT numbers. The long-awaited surfeit of apartments that were started during Covid has sated nothing because rates had been kept so low by the Fed for so long after the threat of the pandemic was waning that everyone who wanted one, got a low-mortgage gift that no one wants to lose. That’s why I always start my discussion on bonds with the simple query of “where are the layoffs, not forget about stocks, think fixed income.” Homes are what buttresses the chain of inflation from the demand side and lack of new homes determines rising prices — 25% over two years’ time. The supply side of the inflation conundrum still comes from a diverse set of sources: food, as worldwide farm equipment maker Agco told us Friday on “Mad Money,” still starts with Russia’s invasion of Ukraine, with a war that took 13% of the calorie production offline, creating an unresolved global scramble. The freight shortages, at last, are over, because the training period is, at last, finished for most of the young people who were said not to be interested in $100,000 jobs that were lonely and dispiriting, until, I guess, they weren’t. So, where will the layoffs begin in abundance? It was obvious from the previous quarter we saw in retail, that we already own everything that’s made of, wood, metal and porcelain — save flooring — that we need in our homes. This is the quarter, however, when we realized that people have everything they need in their closets. That’s widely being interpreted as actual weakness on the part of the consumer, brought on by what can only be considered the apologies and perhaps, under promises to over deliver (UPOD, for short) by executives like Mary Dillon, CEO of Club name Foot Locker (FL). We took a placeholder in that one and urged waiting until AFTER the miserable quarter only to realize it was a lot more miserable, and the lower-end consumer was much more horrible than we thought. For the record, this quarter caused a moment of angst in the office where we posited that unless UPOD’s at work, unless there is a kitchen-sinking of inventory by Dillon, we made a plain old mistake, as I told several distraught buyers at my wife’s Fosforo Mezcal signing at Total Wine in Redondo Beach, Calif. I hold to the pattern of the once faltering Ulta Beauty , where Dillon crushed that stock before it — and she —embarked on a historic run. We stick with that thesis even as it seems to be nothing but a flimsy rationale for a mistake made after a premature set of “promisers,” coupled with a huge, now-ill-fated stock buy of Dillon’s. Still, the obvious takeaway is that the consumer seemed to have run out of expendable money during the month of April. Many-a-retailer so far has indicated that the cadence of February to March to April has led to a profound and negative spending pattern, totally unpredicted by many, in retail, starting with Target and proceeding with most of the other reporting firms. More ahead. If hard and soft goods apparel are now fill-up, that leaves travel and leisure as the lone-spending holdouts. There are so few stocks to profit from for that thesis that we have reached for everything from the obvious— Marriott and Royal Caribbean — to the exaggerated — Chipotle and Darden . Oddly, those stocks still work even as American Express , because it has some debt load, fails to excite or entice. The lack of buyable stocks for anything still consumer has brought us back to buying enterprise stocks, even once despised enterprise software companies with pristine balance sheets, as we see with the still unfinished runs in ServiceNow and Club name Salesforce (CRM), which we have elected to own but one of those stocks, because rightly or wrongly, they trade together.) Here the bond market polices only those companies that haven’t pivoted to making a profit. The sense is that the bond market has helped close the initial public officer (IPO) market, which has brought on a religion of free cash flow or bust, and limits the issuance to an insane trickle. Which brings me to the uselessness of the bond market as a predictor of almost anything enterprise and the need to stay long as many of the nation-state big-caps as we can. A company that serves other companies and helps them integrate artificial intelligence (AI), seems slated to go higher. We are embracing them, albeit a much-needed, soon-to-be-shown, portfolio discipline so we don’t become the AI fund.) I think that the next few weeks will become a pick-and-choose contest among owning tech, health care, industrials and oils. For us, tech will be Amazon (AMZN) and Meta Platforms (META), health care will be the recent edition of GE Healthcare (GEHC) as well as the crippled but soon-to-be-cured Johnson & Johnson (JNJ), industrials will be Emerson (EMR), Caterpillar (CAT) and Linde (LIN) and oils will be Coterra (CTRA), Halliburton (HAL) and Pioneer Natural Resources (PXD). Those will be our table pounders, especially GE Healthcare. We might buy some Foot Locker after we see where it settles which is probably not here. Why these? Because these can go up either way. That would fit the pattern of 2011, or even of this time, if the president foolishly goes for the 14th Amendment and a Republican-dominated Supreme Court. These are our thick-and-thin buys even into the teeth of a shutdown and a rationing. They will be hard to buy because they could be part of a vast free-for-all, once again led by the banks. They, among all sectors, could be pummeled by the bond market freeze and by the consumers’ paralysis. Let me give you my thoughts on the consumer. Something happened in April that I think extended to May, something of a profound shift. Yes, I think people are no longer long money and short time. I think they are just unsure of themselves, deluged by negative stories about stocks from traders, billionaires and strategists. That unsureness, and not a lack of money, has led to a decline in spend everywhere. Yes, we hear of more credit being used, which seems odd given the cash balances being so high versus pre-pandemic, but it’s a Costco (COST) market, which means one where frugality triumphs. We also own Costco. It reminds me of the days when Pop left a five under the clock and not a ten spot, because things had just gotten harder. The fight over the fives versus the tens, much more pertinent than the 2s over the 10s, determined hamburger meat versus steaks, not that I knew about this until much later in life. My parents weren’t outliers, Pop was a salesman like so many others, except he wasn’t a great one or there would have been no small bills and a nicer clock. I always think of my parents, though, when we get to these moments because they are the ones that determined whether we got a new range or icebox, or went to Bamburgers or Bloomies. They are the ones who cut out vacation altogether. It feels like that moment for this country and it’s why the tech enterprise or health care or the infrastructure beneficiaries are worth buying. Oil’s a bit of an afterthought, but cheapness can matter in any portfolio. Pop, so decimated by the loss in shares of National Video, via a tip from a tennis-playing friend of his brother, would never buy a stock until my Charitable Trust began under the auspices of another entity since bitterly swallowed up by Sports Illustrated and friends. The Pops of the world, who perhaps fight over the $50s versus $20s under the personal computer, feel this moment acutely, the way they did in 2011. They were told endlessly that “this is the end, my friend the end” (thank you to The Doors for that), and they believed it. They had been burned by the 2021 bubble and, to mix rock metaphors as The Who sang, “We won’t be fooled again.” Why go on so long to get here? Because the battle in Washington involves debt, not equity, but is reverberating to the stock market as sure as it did when the S & P 500 fell 17% on that one-two punch of a sequester and then a foolish downgrade of the United States’ bulletproof credit rating by Standard & Poor’s. I feel the train wreck of Biden coming back to Washington only to be cast as the villain behind your Medicare fears and your lack of Social Security. A sitting president with weak ratings from inflation is a loser as one-term Jimmy Carter would have to admit. Within that context, you now know what can await you, and you know that the twenty under the PC means, the end of the hard goods, soft goods and, soon, the vacation. The stocks we are buying take that into account and will stay stronger and bounce back harder when the debt ceiling deal is finally made, because, alas, without a deal, there is nothing but a Brazil or Argentina during the dark days of South American lore. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Construction workers build the “Signature Bridge,” replacing and improving a busy highway intersection at I-95 and I-395 on March 17, 2021 in Miami, Florida.
Joe Raedle | Getty Images
Are the travails of the bond market, like Macbeth expounds, a “tale told by an idiot, full of sound and fury, signifying nothing?”
As we grapple with the whole edifice of fixed income, the existential crisis of Treasurys, the multitrillion-dollar market that the tale is based on, I have come to wonder what bonds really are signifying and whether they even matter to our portfolios. I know that’s a radical proposition, but hear me out.
We need to steel ourselves to what may come from a failed set of debt ceiling talks between President Joe Biden and the part of the government that might only nominally be run by House Speaker Kevin McCarthy. The two are set to resume negotiations Monday, with a possible historic government default as early as 10 days away.
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