Image 1. Invest and chill. And maybe win. Calvin and Hobbes, B. Waterson
A subscriber asked for my thoughts as to the best way to add $10k in dividends to a portfolio a year.
There is no ‘best’, let alone a straightforward answer - as always, we are managing risk for the best possible outcomes. We are building on the prior Crow Magnum pieces, Crow Cash I and Crow Cash II. In these I laid out some macro themes as well as the importance of timing.
That last point is especially relevant to the bond trade, which is now about 7% underwater from publication. On the other hand, miners have done exceptionally well. And biotech and energy are primed for upside this year.
To repeat: there is no guarantee in trading. I still think the bond trade is viable, but may require a washout first. I mention some thoughts on that below before I share the $10k dividend generating basket. This first part is free for all subscribers.
For the Crow Mags, this will be the application of the upcoming quarterly macro piece… where practice comes before the theory! This is, of course, in the spirit of the post-GFC market: where everything is backwards.
Bessent’s Bond Blowout
My thesis from earlier this year was a bid on bonds. So far this has eluded the Birdscribers. We were even close to testing the 2023 lows in TLT. The Fed has been reluctant to cut, although even the cuts didn’t seem to have the intended effect on bond prices, rather quite the opposite. Everything is backwards!
Meanwhile Bessent seems just as stubborn to deploy the Treasury Put. Never mind, the bond market is still king and is not very well understood by retail traders. Meaning there is only so far the Fed will let bond prices slide before taking action (at the expense of equities).
The question is just how much carnage that would take. My guess is somewhere close to 6% rates on the long end. That would put us close to prices from the 2000s! Take a look to our updated TLT chart below:
Image 2. TLT monthly chart
I added a ‘Do Not Cross’ line for Bessent and his team - I am sure we all agree that’s when an already dicey US fiscal situation could make an Argentine default look tame by comparison.
According to BoA, the US is already averaging a 9% budget deficit over the last 5 years. On May 16, five House Republicans joined Democrats to oppose Trump’s “Big Beautiful Bill” - which aside from (ugly) theatrical politics is a big beautiful middle finger to the middle class. However the bill has since then made it onto the Senate.
Image 3. US Deficit Spending, BoA Global Research
Any bill was guaranteed to add to the American deficit (increased borrowing). Aside from devaluing the US Dollar - while keeping inflation in check - there is little this Administration could or would do to turn the trajectory. On that thought, perhaps that’s just what they have in mind! At least with regards to the trade deficit.
Image 4. A long way to 2011! DXY monthly chart
For example, a 10% fall in the value of the USD could reduce the trade deficit by around $150 billion. Still a drop compared to $2T budget deficit, but that’s not what this Adminsitration is after! The DXY has broken 2023 lows and looks to fall further, seemingly in line with current policy: which leads us back to our emerging market thesis once again.
And by the way - that red line? That’s the US 30 year rate, which could suggest that blow-off to 6% I mentioned above. That might be enough for Bessent to finally act and turn bonds around this year. What event and when the turnaround could be I won’t speculate right now - but again it will likely come at the expense of equities.
All we can do is offer some possible trajectories and levels in the TLT chart above. Perhaps a ‘look below and fail’ of the 2000s lows coinciding with a 6% test on the long end could do it. Regardless, the rotation back into bonds ideally waits for a low to be in, and now is not the time in my view.
The cheat sheet below suggests prices where that bottom may form.