"When all feels calm and prices surge, the markets may feel safe; but, in fact, they are dangerous because few investors are focusing on risk." --Seth A. Klarman

LONG TREASURIES, SHORT STOCKS (September 4, 2023): In the entire history of the U.S. financial markets there has rarely been an opportunity where U.S. Treasuries were such compelling investments relative to U.S. stocks. The 6-month U.S. Treasury bill is yielding just about exactly 5.5% while the S&P 500 Index is yielding less than 1.6%, one of the greatest spreads ever recorded.

The U.S. Treasury yield curve is at all-time record inversion, meaning that the short-term U.S. Treasury bills of several months to maturity have their widest-ever spreads over longer-term U.S. Treasuries. This chart shows the spread between the 3-month and 10-year U.S. Treasuries going back to 1982:

Here is a chart showing the extreme relative outperformance of the S&P 500 Index relative to the 10-year U.S. Treasury since 1993:

The 10-year U.S. Treasury hasn't underperformed so dramatically since it was first introduced by Alexander Hamilton in 1789, the year before the 1790 debut of equities trading on the Philadelphia Stock Exchange:

Commercials in U.S. Treasuries, analogous to top corporate insiders for individual companies, have a total net long position which is roughly twice their previous all-time record going back to 1990. The maroon bars represent the commercials in the 10-year U.S. Treasury, meaning those who trade it as a necessary part of their career rather than for the purpose of speculation (special thanks to Software North):

The U.S. money supply, measured by M2, has never contracted as sharply as it has done recently, as you can see from this chart dating back to 1965:

We have also experienced the lowest prices for one-year index put options since these valuations started to be tabulated in 2008:

Investors love call options and hate put options at market peaks, while chasing after puts during all bottoming patterns. Meanwhile, most people were so excited about megacap U.S. tech shares in 2021 that total fund inflows exceeded those of 2001 through 2020 combined [not a misprint], but this record was far exceeded by the AI bubble eagerness in 2023:

U.S. equity overvaluations have never been more glaring than they were near their 2021, 2022, and 2023 peaks including July 2023:

The prices of the most popular technology companies have soared far out of line with their actual earnings:

Not all global stock markets are overpriced. U.S. gold mining and silver mining shares and their funds are moving toward undervaluations which could become compelling later in 2023, although silver's traders' commitments warn that it's too early to buy as you can see by comparing the current maroon bars with those from the leftmost part of the following graph in September 2022 which was the last excellent purchase opportunity for precious metals and the shares of their producers:

Much-hated Chinese stocks have suffered recent record net outflows and will likely be worth buying sometime during the next several months after U.S. stocks have already been in more pronounced downtrends:

The bottom line: In 2000, 2007, and 2023, we experienced the highest U.S. Treasury yields of each decade when investors were far more eager to own U.S. stocks than they were to be long "boring" U.S. Treasuries. This was followed by losses of more than half for most U.S. equities while those who had bought U.S. Treasuries were rewarded by locking in yields just before they had dropped steeply after both 2000 and 2007. It is more likely that this will occur again this time, rather than less likely, because we have a far greater degree of commercial accumulation of U.S. Treasuries now than we have experienced at any time since 1990. We also have all-time record extremes of U.S. equity call buying, the most undervalued put options, all-time record net equity fund inflows, and the lowest-ever total U.S. dollar amount of insider buying ever recorded during the past three months:

Barron's: Insiders Wave a Red Flag

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Monday, August 28, 2023. Each position is listed as its percentage of my total liquid net worth.

I computed the exact totals for each position and grouped these according to sector.

The order is as follows: 1) U.S. government bonds; 2) shorts; 3) bear funds; 4) gold/silver mining; 5) coins; 6) miscellaneous securities.

VMFXX/TIAA(Traditional)bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/Savings/Checking long: 31.83%;

26-Week/17-Week/52-Week/13-Week/2-Year/8-Week/3-Year/5,10-Year TIPS/4-Week/42-Day long: 17.24%;

TLT long: 9.92%;

I Bonds long: 9.53%;

XLK short (all shorts unhedged): 25.15%;

QQQ short: 12.48%;

XLE short: 5.04%;

XLI short: 2.55%;

XLV short: 1.67%;

SMH short: 0.88%;

AAPL short: 0.02%;

SARK long: 1.20%;

PSQ long: 0.01%;

ASA long: 1.26%;

GDXJ long: 0.57%;

GDX long: 0.25%;

BGEIX long: 0.00%;

Gold/silver/platinum coins: 5.69%;

PAK long: 0.03%.

“The real secret to investing is that there is no secret to investing.” --Seth A. Klarman

UP YOUR ASSET ALLOCATION (February 6, 2022): Surprisingly few people recognize how dramatically the financial landscape has changed during the past year. Exactly one year ago the vast majority of global assets were in bull markets. Today, more than 40% of all Nasdaq shares have dropped over 50% from their 52-week highs while most global stocks, high-yield corporate bonds, cryptocurrencies, NFTs, and perhaps even real estate have been in downtrends. Some oversized percentage pullbacks have created worthwhile bargains at various points in recent months.

I have shifted my equity short:long ratio dramatically toward the long side while remaining 2:1 short to long.

My current total as of the close on Friday, February 4, 2022 was long 20.636% and short 42.13%, or almost exactly 1:2, not counting TLT. If the bear market continues for large-cap U.S. growth shares as I expect then I will likely be more long than short before the end of 2022. I list the exact percentages at the bottom of this essay.

TLT has become very unpopular as investors don't trust a forty-year bull market.

One of my very first investments was purchasing long-dated U.S. Treasuries in 1981. At that time there was a nearly unanimous consensus that U.S. Treasury yields would keep climbing indefinitely due to permanently high inflation and soaring budget deficits. Each year, often more than twice per year even in the early 1980s, there was a proclamation that the bull market for the 30-year U.S. Treasury had ended, and we have continued to experience this gloom and doom each year since then including right now. On Friday, February 4, 2022, TLT dropped to 138.78 at 10:52:28 a.m. Eastern Time. I made my most frequent purchases of TLT on Friday since it had been even more depressed during the late winter and early spring of 2021. The longest-tenured writer at Barron's, Randall W. Forsyth, penned a bullish column about long-dated U.S. Treasuries which is the lead article in this week's print edition and can be found below:

Contrarians Indeed: Two Seers See Lower Rates, Bond Boom

The online version has the same essay but a different title: "Forget About Inflation. Contrarians Expect a Recession and a Drop in Bond Yields." It is probably not a coincidence that The Economist has the following cover story:

How High Will Interest Rates Go?

Many investors confuse the Fed's overnight lending rate with long-term yields.

If we are heading toward increasing recessionary expectations, as the flattening U.S. Treasury yield curve has been telling us, then this would mean higher short-term yields and probably lower long-term Treasury yields to create additional flattening. I plan to keep buying TLT into weakness because it could be one of the top performers as it has been in the past whenever investors have gone from almost zero expectation of a U.S. recession, like now, to a majority of investors expecting such an economic slowdown.

U.S. housing prices may have begun to drop following a more extreme bubble in 2021 than we had in 2005-2006.

The price of the median U.S. house dropped about 34% following the housing bubble we had sixteen years ago. Average valuations were even higher in 2021 by Case-Shiller and many other reliable measures, so the overall pullback is likely to be greater. The U.S. Fed's data for new home prices experienced its first pullback in a long time:

Numerous sectors had become especially compelling in recent weeks including GDXJ, KWEB, and XBI.

In addition to my very recent buying of TLT, I have been accumulating GDXJ, KWEB, and XBI into weakness. GDXJ is a fund of mid-cap gold mining shares; this sector had been one of the largest percentage winners following the collapse of previous U.S. growth-stock bubbles in 1929, 1972, and 2000. KWEB is a fund of Chinese internet companies which has one of the highest ratios of profit growth to price-earnings ratio for any U.S.-listed exchange traded fund. XBI is a fund of biotech shares which recently had more than a 1.5 to 1 ratio of profit growth to price-earnings, according to the sponsor's web site, and which had also featured significant insider buying of several of its components. XBI and GDXJ traded near two-year lows while KWEB had fallen to a five-year nadir. T (AT&T) is sharply out of favor partly over confusion about its upcoming spinoff and related uncertainties. I plan to continue to purchase all of the above into either lower lows or higher lows, especially whenever we are experiencing dramatic net outflows from these and related funds along with continued above-average insider buying relative to insider selling.

Too many investors are waiting for nonexistent triggers.

Extreme deviations from fair value in either direction are sufficient reason for dramatic price changes to occur. People often ask "what is going to trigger a huge drop for QQQ" or "what will cause Chinese internet shares to rebound?" I often answer these kinds of questions with this question: what caused U.S. internet companies to collapse after 1999-2000? What caused the crash of 1929? What caused stocks worldwide to surge in the late winter and early spring of 2009? The answer in all three cases is that, even with years or decades of hindsight, there were no obvious triggers to either of these major trends. Any irrationally huge deviation from fair value will always resolve itself sooner or later.

The bottom line: we have dangerous overvaluations for large-cap U.S. growth shares combined with compelling bargains for several other sectors. Now is a good time to combine long positions in unpopular assets and short positions in the trendiest shares.

Disclosure of current holdings (most recent purchases in red):

Here is my asset allocation with average opening prices adjusted for dividends/splits and newly-opened positions in boldface: 43.6% cash including I Bonds paying 7.12% guaranteed (available to anyone with a U.S. social security number), TIAA Traditional Annuity paying 2.758% to 3.519% (for legacy retirement accounts), and Discover Bank high-yield savings paying 0.50% (available for all U.S. residents with retirement and ordinary savings accounts); 18.0% short XLK (112.7737); 17.3% long TLT (147.86); 15.9% short QQQ (309.7504); 6.4% short TSLA (494.9721); 5.9% long GDXJ (39.68); 5.0% long GEO (7.52); 2.54% long GDX (28.98); 1.68% long KWEB (35.19); 1.32% long EWZ (27.33); 1.23% long TUR (17.17); 1.05% long ASA (19.49); 0.90% short AAPL (125.5481); 0.74% long XBI (86.14); 0.62% long ECH (22.98); 0.53% short IWF (223.0119); 0.40% short SMH (170.7813); 0.27% long T (23.33); 0.12% long UGP (2.565); 0.10% long ITUB (3.83); 0.052% long BBD (3.39); 0.014% long TIMB (9.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.