We are hanging on a thread–a very thin thread. And when hanging by a thread, the best stock to buy is TLT, which is an Exchange Traded Fund that reflects the bond market. In uncertain times, bonds do nothing but head higher.
The most disturbing thing about the recent stock market rally is that it is happening with “no new news.” Meaning, we all know things are bad. The pooch is screwed. The economy is hosed. Protestors in the USA are going to gain more traction after the “pepper spray” incident. Europe is sinking into an abyss. This isn’t new information. Things were bad months ago, and yet stocks rallied. Key stocks like Amazon and Apple cranked out new highs. Hedge funds generally had an appetite to take on additional risk. Gold and silver enjoyed buying pressure, along with key currencies. Assets climbed the wall of worry.
Instead of risk, hedge funds are looking for safety. They are shunning stocks like Apple for the safety of bonds. Why is Apple’s status so important? After all, isn’t it just one stock? Well, it’s THE stock. It’s the one stock that hedge funds own the most of, hands down. It’s a great reflection on their appetite for risk. If Apple is being sold hard, it isn’t because grandma is lightening up her portfolio.
And what about gold and silver?
Aren’t they supposed to be safe havens? Well, they are in most cases . . . but not when hedge funds are shunning risk. When they are shunning risk, a curious phenomenon happens in the market that makes no sense to most investors.
They sell all assets, including stocks, gold, silver, other currencies, oil . . . you name it. They sell these assets in order to raise cash. Where does that cash go? Into US Dollars, in the form of treasury bonds. This pushes up both the US Dollar as well as the price of bonds.
This is why, during times of moderate uncertainty, gold and silver rise, but during times of extreme uncertainty, they fall apart, right along with everything else.
And this is where all the doom and gloom newsletters get it wrong. Dead wrong, in fact, as they were in 2008 when they told everyone to buy gold stocks. These stocks got hit hard, some dropping over 80% in price during the 2008 financial crisis. That’s safety? In the face of extreme uncertainty, it’s bonds that go higher, not gold.
I realize that may not make sense, but here is another way to think about it.
There is a lot of fiat currency out there. Oceans full. In fact, at last count it’s about 57 trillion dollars’ worth. How much gold is there on the planet?
About 5 trillion dollars’ worth.
In other words, gold does not have the liquidity to support massive in-flights to safety. Therefore, it is not viewed as a safe investment. Ironic, right? A safe investment is a liquid investment. Yes, gold is liquid if you’ve got $10,000 in it, or even a few million. But a few billion? What about a few trillion? Are you going to take that bag of coins into a coin store to exchange for cash? And try not to get robbed, or worse, in the process? The only safe liquid investment in that case is bonds. There is nothing else.
And now that Italy, the world’s third largest bond market, is at risk of default, this makes US bonds that much more attractive. This is why TLT is such an attractive investment right now, and a good place to be if you are looking for a spot to ride out this uncertainty.
John Frederick Carter