Avoid This “Dangerous Cocktail” of Assets

Treasuries are on a “suicide mission.”

That’s what Jeffrey Gundlach told investors on a recent webcast.

Gundlach is a man we follow closely here at PBRG headquarters. His peers call him the “Bond King” because of his prescient calls…

  • In 2007, he warned that the subprime mortgage market would get worse. After his call, the market dropped a spectacular 70% from 2007 to 2009. Despite that, he made a cool $4 billion for his clients in 2009.
  • In 2015, he warned investors not to be fooled by a rally in oil. He pounded the table and said oil prices would crash. Later that year, oil crashed 42% from its peak, hitting a 13-year low.
  • In January 2016, he said gold would hit $1,400 per ounce. At the time, gold was trading at $1,050 per ounce. By early May 2016, gold had already hit a high of $1,305.

Over the past eight years, Gundlach’s Total Return Bond Fund has beaten its benchmark, the Bloomberg Barclays U.S. Aggregate Index, by 92%.

During the webcast, Gundlach said a combination of rising interest rates and growing government deficits have created a “dangerous cocktail” for Treasuries.

At writing, the Federal Reserve’s 10-year benchmark rate is 2.89%. Gundlach says that if it goes over 6%, bond investors will take a beating.

Before we get to how you can protect yourself from this ticking time bomb, let me give you a little background.

The Extermination Is Coming

Bond investors should always pay close attention to interest rates. That’s because bond prices are inversely correlated to interest rates. When rates rise, bond prices fall, and vice versa.

As you can see in the chart below—despite pulling back a little over the past month—the rate on the 10-year Treasury yield is in an uptrend.

Since bottoming in the summer of 2016, the 10-year yield went from 1.35% to a peak of 3.11%—a 129% rise.

Holders of 10-year Treasuries have gotten smoked. Over that span, the iShares Barclay’s 7-10 Year Treasury Bond ETF (IEF) is down 10.2%.

Keep in mind… the 10-year yield is the “risk-free” rate. That’s because U.S. bonds are supposed to be the safest securities in the world.

The rout could just be getting started, too.

If yields rise to 6% as Gundlach predicts, these “safe” securities will tumble another 23%.

PBRG guru Teeka Tiwari calls this Income Extermination. That’s when rising interest rates crush the bond market.

Income Investors Have Been Warned

Most investors buy bonds to generate income from interest payments. For instance, retirees use the payments for everyday expenses.

But now’s the time to start protecting yourself from Income Extermination. There are two steps you should take immediately.

1. Rotate into short-term bonds

One way to combat rising interest rates is to buy short-term bonds.

You won’t generate a lot of income from short-term bonds—the four-week Treasury note currently yields 1.9%. That means you’ll make $1,900 on every $100,000 you invest.

But that’s still 24 times more than what you’d get by putting your money in a bank savings account, which yields about 0.08% on average, according to the Federal Deposit Insurance Corporation (FDIC). And it’s much better than losing money by holding long-term bonds.

2. Buy high-yielding closed-end funds (CEFs) that are trading at a discount to their assets

CEFs are an investment structure with shares traded on the open market. They’re similar to exchange-traded funds (ETFs). But there’s one main difference: CEFs do not issue shares daily. That means CEFs can trade on the market at prices different than the value of their assets, called the net asset value (NAV).

When a CEF trades for less than its NAV, you can buy it at a discount. This means you could buy, for example, $1 worth of assets for 90 cents.

If you want to avoid the threat of Income Extermination, remove the “dangerous cocktail” of long-term bonds from your portfolio… and add safer options like short-term bonds or quality CEFs.

This Chart Proves Cryptos Will Go Even Higher

It was the winter of 1986.

A New York City film crew followed a brash young trader’s every step.

At just 32 years old, he had been dominating the trading scene. He was most famous for making $100 million in a single day (around $250 million in today’s money)… all using a secret trading tool he called “The Analog.”

But he had made one critical mistake.

You see, this man had unwittingly revealed the secret to his success to the documentary crew.

Realizing his mistake, he spent years buying up every single copy of the film he could, so that no one else could access his edge.

In the 1980s and ’90s, rare copies of the film would sell for thousands of dollars.

By the time it went mainstream via the internet, the trader had already made over $4.5 billion… all from “The Analog.”

Today, I want to explain to you what “The Analog” is… and how I’ve been using the idea behind it for the past two years to make many of my readers wealthy from the cryptocurrency market.

More importantly: I’ll show you what “The Analog” is telling us right now about the future of the crypto market.

Understanding “The Analog”

An analog model uses one data set to forecast the outcome of another similar data set.

In stock investing, an analog is a period in history when one set of trading data lines up with another set of trading data. Sometimes, these data sets can be separated by decades.

That’s how Paul Tudor Jones—the young trader from our story above—made $100 million in 1987. He and his then-27-year-old partner, Peter Borish, stumbled upon an amazing discovery.

While analyzing the Great Bull Market of the 1920s, Borish realized he had seen similar chart patterns before. He pulled out a chart of the 1980s bull market and put the two side by side.

After manually entering the opening, high, low, and closing prices of the Dow in the 1920s and the ’80s, he uncovered something remarkable.

Two markets—separated by six decades—were showing an almost identical trading pattern. They matched 92% of the time. Tudor and Borish called the study “The Analog.”

They bet their entire fledgling hedge fund on “The Analog” continuing. A 2014 Business Insider article referenced “The Analog” with a quote from Tudor Jones about his remarkable performance in 1987:

How did he manage to profit so handily from an event nobody saw coming? Jones answers, “our analog model to 1929…”

All through the 1980s, Jones followed “The Analog.” It proved to be the secret path that led him and his investors to a mother lode of wealth.

Our Very Own “Analog”

Sitting in a sparsely populated Las Vegas convention hall in January 2016, the penny finally dropped.

That’s when I discovered the huge potential of crypto assets.

In that moment, I knew I had uncovered a massive wealth-building opportunity on par with the 1990s tech boom.

Back in the ’80s and ’90s, I saw technologies like the PC and internet go from being ridiculed curiosities to mainstream necessities in just a few short years.

That experience gave me “The Analog” for understanding how the crypto trend would play out.

Just like the early tech days, I knew crypto was little-understood and would face huge skepticism, but would eventually impact just about every aspect of our lives.

Even the early 2018 pullback correlates with the 1990 pullback we saw in tech. Just like Peter Borish’s study of the 1920s and 1980s stock markets, the crypto market is closely following the trajectory of the 1990s.

So far, we’re seeing an 87% correlation between the 1990 Nasdaq and today’s crypto market (see chart below).

Even though they are separated by 27 years, the correlation between these markets is uncanny.

You’ll see that the crypto market has more volatility and moves faster.

That’s because we have far greater connectivity now. In other words, information moves faster and is much more widespread today than in the 1990s. So moves on both the downside and upside happen quicker and with greater ferocity.

“The Analog” is suggesting we’ll start to see a new bull phase emerge soon in the crypto market.

If it follows the post-1990 recovery, we will see the market start to turn higher in the second half of 2018.

Back in 1990, the market made new all-time highs within 14 months. If we see the crypto market follow the same path, we’ll witness a 300% rally in the entire market.

However, due to crypto being a global market (meaning it’s traded by the entire world, not just a small region like tech stocks were in 1990), I expect new highs to happen in about half the time of the 1990 market.

That suggests we’ll see new highs in the crypto market by the end of 2018.

But it doesn’t stop there.

If I’m correct about “The Analog”—and I believe I am—it suggests we will see a minimum of a tenfold increase in crypto valuations from here.

That is enough of a move to make you rich. Not just “well-off”… not even “well-to-do.” Rich.

You will see prices explode higher in a way that will dwarf anything you have seen before.

Let the Game Come to You!

Teeka Tiwari
Editor, Palm Beach Confidential

P.S. According to a recent Thomson Reuters survey, about 20% of financial firms indicate they will begin trading cryptocurrencies over the course of this year. A major national exchange also has just announced it’s backing a bitcoin ETF…

This Big Announcement Is Wildly Bullish for Cryptos

If you’re like many investors, you may never have heard of the CBOE… but that’s going to change soon.

Recently, it made a huge announcement that could send bitcoin over $10,000… or even higher.

CBOE is short for the Chicago Board Options Exchange. Opened in 1973, the CBOE is known as the first marketplace for trading listed options.

Since then, it’s become a leading global exchange operator. It’s the largest U.S. options exchange, with annual trading volume of around 1.1 billion contracts.

The CBOE offers options on over 2,200 companies, 22 stock indexes, and 140 exchange-traded funds (ETFs).

Today, it’s the No. 1 U.S. options market. It’s also No. 1 in U.S. and European equities by retail volume.

Over the years, it introduced many innovative products. Including…

  • Long-Term Equity Anticipation Securities (LEAPS) in 1990. LEAPS are like long-term options that help investors reduce risk.

  • Listing options on the Dow Jones Industrial Average in 1997.

  • And being the first to launch bitcoin futures in 2017.

In short, the CBOE is one of the most credible financial institutions in the world. So, when it plans to introduce a new product, it’s smart to pay attention.

Here’s the thing…

The CBOE recently made a pivotal announcement. And it will have huge implications for the cryptocurrency market.

Third Time’s the Charm

You see, on June 26, the CBOE filed an application with the Securities and Exchange Commission (SEC). And it’s for a bitcoin ETF.

In the filing, CBOE said it will list and trade shares issued by the VanEck SolidX Bitcoin Trust. That’s a joint venture between investment management firm VanEck and financial services company SolidX.

This is the trust’s third attempt to gain approval. (The SEC has rejected over a dozen other bitcoin ETFs in the past.) But this filing has the best chance for approval yet.

So, the question is: What changed this time around that will lead to the first-ever bitcoin ETF?

Three Reasons the SEC Will Say Yes

The first reason is the CBOE.

It brings credibility to the product. The CBOE already brought bitcoin futures to the market. It’s averaging 7,000 contracts per day.

And it’s solving one of the issues highlighted by the SEC in past bitcoin ETF rejections.

The problem it’s solving—and this is the second reason the SEC will say yes to the fund—has to do with safety. Specifically, the CBOE will provide insurance.

You see, one of the SEC’s missions is to protect investors. Regulators want to see certain safeguards in place before they’ll approve a product.

Insurance would protect cryptocurrency investors from fraud, hacks, or the loss of private keys used to access crypto funds.

That’s why providing insurance is critical to a bitcoin ETF’s approval.

Per the filing:

The Trust will maintain comprehensive insurance coverage underwritten by various insurance carriers. The purpose of the insurance is to protect investors against loss or theft of the Trust’s bitcoin. The insurance will cover loss of bitcoin by, among other things, theft, destruction, bitcoin in transit, computer fraud and other loss of the private keys that are necessary to access the bitcoin held by the Trust.

The SEC has another concern about cryptocurrencies. That’s the lack of global regulatory rules surrounding cryptocurrency exchanges.

But that, too, has changed. And it’s the third reason the SEC will say yes.

Japan and South Korea recently made improvements in regulating cryptocurrency exchanges. They are two of the biggest countries by cryptocurrency trading volume.

Japan introduced stricter guidelines for cryptocurrency exchange platforms in May.

It will improve security standards, know-your-customer (KYC) regulations, and asset management practices.

Something similar is happening in South Korea.

South Korea reclassified cryptocurrency exchanges from “communication vendors” to regulated financial institutions. That happened in June.

It beefed up guidelines for anti-money laundering (AML) and KYC. And it’s improving customer due diligence, too.

We now have the CBOE, insurance, and better global regulations. That’s what the SEC is looking for.

We’ll likely see the SEC approve the bitcoin ETF this time around. And it could happen before the year is out.

That would be wildly bullish for bitcoin and cryptocurrencies in general.

The “Buy Bitcoin” Easy Button

On July 11, Palm Beach Confidential editor Teeka Tiwari told his subscribers this

Mark my word, friends, this ETF will get approved. When it’s as easy to buy bitcoin as logging into your Fidelity account and pushing a “buy” button, you will see tens—if not hundreds—of billions flow into this ETF.

This is the most pivotal announcement that I have seen not only this year, but ever within this space. When we can get an ETF that makes it easy to buy, sell, and hold bitcoin, it’s going to open the floodgates of capital to people who would have never ever opened up an account on Coinbase or who would have never ever messed around with a digital wallet. It now allows the mainstream adoption of bitcoin by the everyday investor, and it’s wildly bullish.

So, what should you do now?

If you already hold bitcoin, don’t let the current volatility scare you out of your position. And if you don’t own any bitcoin, consider buying some today, before the floodgates open.

If you do invest in this emerging asset class, we always recommend you take a small position size. Don’t bet more than you can afford to lose—$200–$400 is enough for a small investor to make life-changing gains.

Bitcoin and all cryptocurrencies are volatile. So, small position sizes will allow you to keep a cool head during extreme periods of volatility in the crypto market.


Greg Wilson
Analyst, Palm Beach Confidential

Solar Power Will Shine on These Two Metals

In yesterday’s Dailywe told you about a safe way to play the growing trend in solar power.

If you need a refresher, here it is…

Earlier this month, California passed a new regulation that requires nearly all new homes and residential developments to install solar panels. The mandate takes effect on January 1, 2020.

SunPower Corporation estimates that the new law will increase California’s solar market by at least 50% in 2020.

We aren’t fans of the regulation. It’s expected to increase the cost of a new house by $10,000. Plus, it will create massive distortions in the state’s electricity market.

That isn’t good news for Golden State homeowners. But if you’re an investor in solar power, there’s plenty of upside in this trend.

For instance, you could buy the Guggenheim Solar ETF (TAN). TAN holds a broad basket of solar companies. The fund is up 18% since we first mentioned it in October 2017. And I expect prices to surge higher as the new regulation kicks in.

But there’s another way to play this trend for potentially much higher gains. I’ll show you in a moment.

Solar Is Growing—But It Won’t Be Easy

Solar is also the fastest-growing energy source in America. But solar power has some drawbacks…

A major (and obvious) one is that solar panels only produce electricity during the day. And most of that generation happens around high noon, when the sun shines brightest.

So at night—when everyone is at home using their lights, cooking dinner on the stove, and watching Netflix—electric power needs to come from elsewhere.

That power comes from natural gas and coal-fired plants, which operate day and night.

Here’s the thing… Running solar, natural gas, and coal-fired plants during the day can overload a power grid.

Let me explain…

Solar panels don’t store energy. Any excess energy they produce goes back into the electrical grid.

But remember, solar plants aren’t the only ones operating during the day. Coal and natural gas plants are producing electricity, too.

You can’t just turn off coal and natural gas plants like a light switch… The shutdown and startup times are costly and lengthy.

All that energy—from solar, coal, and natural gas plants—puts tremendous strain on the power grid. This overload can damage generators and motors connected to the grid.

Last year, California produced so much solar power that on some days, the state had to pay Arizona to take some of the excess energy off its grid.

These power distortions also create wild fluctuations in California’s electricity costs.

Around noon, it costs about $15 per megawatt hour because there’s plenty of power and less demand. It jumps to $60 at 7 p.m., when power supply is less and demand is higher.

Before solar can become widespread, these problems need to be solved.


The Solution

One way to solve this problem is to store excess solar energy in batteries. But you can’t just use any type of battery. You need specialized lithium-ion batteries. Power plants like them because they are rechargeable.

For instance, San Diego Gas & Electric built a large lithium-ion battery that holds enough electricity to power 20,000 homes for up to four hours. Utilities in Australia and Japan have also built large batteries.

Analysts project the lithium-ion battery market to grow 400% over the next seven years. And about a quarter of that growth is going into energy storage… aka batteries.

But here’s the thing… The supply of lithium and cobalt (the two main metals used in lithium-ion batteries) are mostly fixed. Plus, it can take decades to bring a new lithium or cobalt mine online.

The increased demand for these metals—combined with a fixed supply—has caused prices to soar in recent years.

I don’t expect that this will let up anytime soon. Demand will continue to grow while miners take time to open new mines.

If you want an easy, one-click way to play the boom in lithium prices, consider the Global X Lithium & Battery Tech ETF (LIT).

It holds a basket of lithium producers and battery manufacturers. LIT will be a good way to play the growth of lithium-ion battery tech.

Cobalt is much rarer than lithium and could be an even more profitable play.

The metal is mostly found as a byproduct of copper and nickel mining. Mines that focus exclusively on cobalt generally aren’t that profitable… so they don’t get built out.

And over half the world’s cobalt supply comes from the Democratic Republic of the Congo, one of the world’s most politically unstable countries. If another war breaks out in the country, it could jeopardize that supply. And prices would really soar.

Unlike lithium, there’s no ETF for cobalt. If you want to invest in this metal, you’ll need to buy small junior mining companies.

This is a risky industry for novices to wade through. So you’ll need an expert to help you find cobalt mines.

And we can’t think of anyone better to help you find highly profitable cobalt mining companies than my colleague Dave Forest, editor of International Speculator.

Dave is a geologist. He’s done everything in the mining business… from working in the field to running the show as a mining executive.

Dave has just published a new special report called “The Cobalt Blueprint: How to Earn 86,900% Gains From America’s Next ‘Super Metal.’”

If you’re interested in making potential life-changing gains in commodities, you can learn more about his service here.

David tells us that he’s making this report available until June 15, so you must act soon


Nick Rokke, CFA
Analyst, The Palm Beach Daily

California’s New Law Is a Boon for These Investors

On May 9, California became the first state to require new homes to install solar panels.

The California Energy Commission passed the regulation as part of the state’s 2019 update of energy efficiency standards. The mandate will start on January 1, 2020.

It will apply to most single-family homes as well as multi-family residential buildings up to three stories… including condos and apartment complexes.

At the Daily, we don’t like the government telling us what to do or buy. So we’re not fans of this legislation.

But you’re not reading this to hear our political views… You’re reading it to make money. And the U.S. solar industry is about to make a lot of money for investors.


Timing Is Right for Solar

Regular readers know that we like the solar industry. In October 2017, we told you solar was the fastest-growing energy source in the United States.

We also said that solar is getting cheaper every year, and we’re currently seeing that play out.

According to financial research firm Lazard, the cost of generating electricity from solar continues to decline. In fact, it now costs about the same (in terms of megawatts per hour) to run a solar power plant as it does to run a coal power plant.

I also said that analysts expect the solar industry to grow over 12% per year. But with California’s new solar mandate, we could see that number increase.

California alone makes up 40% of the U.S. solar industry. That’s about five times larger than North Carolina, the nation’s second-biggest solar market.

Californians build about 80,000 homes per year. Currently, about 15,000 of them install solar panels on the roof. When the new regulations take effect, 65,000 more homes per year will need solar panels.

If all those new homes add panels, that would be about a 430% increase. (SunPower Corporation… estimates the new law will increase California’s solar market, both residential and commercial, by at least 50% in 2020.)


How to Take Advantage of Solar’s Rise

If you want to gain some exposure to this trend, consider the Guggenheim Solar ETF (TAN). TAN holds a broad basket of solar companies.

We’re already up 18% since talking about it in October 2017.


As you can see in the chart, TAN recently broke out to a new 52-week high. To market technicians, this is bullish price action.

I feel confident that we’ll continue to see higher prices. Analysts are just starting to factor in additional growth… and increase their price targets for these companies.

It’s not too late to add some solar exposure to your portfolio.


Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. As I said earlier, we’re not fans of this mandate. We think it’ll create massive distortions in the electricity market… But there is an investment that will capitalize off this distortion. Tomorrow, I’ll show you how to play it.

Income Extermination Has Arrived… Here’s What to Buy (and Avoid)

Last week, yields on the 10-year Treasury reached 2.995%… And as usual, the mainstream media panicked.

  • “World stocks stumble as US Treasury yields near 3%,” blared CNBC’s April 23 headline.
  • “Stocks Sink as 3% Yields Rattle Bulls,” screamed Bloomberg on April 23.
  • “Global Stocks Extend Slide After Treasurys Cross Milestone,” bellowed Morningstar on April 25.

The press is worried that rising interest rates will sink the current bull market. You see, the 10-year U.S. Treasury note is the benchmark for interest rates. It’s an important number in global finance.

When the 10-year rate rises, other loan rates follow. That means you pay more interest on your mortgages, student loans, credit cards, and car loans.

In April, yields on the 10-year note rose to nearly 3% before pulling back a bit. That may not seem like much. But it’s the highest level since January 2014.

Just since September 2016, bond yields have shot up by 46.3%, from 2.05% to 3%. That’s the difference between paying $2,050 per year in interest on a $100,000 loan and $3,000 per year.

At the Daily, we’ve been warning readers for months that rising interest rates will lead to Income Extermination.

That’s when bond investors get “exterminated” by rising interest rates. As interest rates rise, bond prices drop. When interest rates rise rapidly (like they’re doing now), bond prices drop a lot.

Here’s the thing…

Headlines about rising rates are scaring investors out of stocks, too. The market fell 2.7% just two days after the 10-year rate almost touched 3%.

Selling quality companies just because yields are rising is irrational. (In fact, it’s nonsensical.)

But as regular readers know, we look past the headlines to find the real money-making opportunities. Today, I’ll tell you which companies will beat Income Extermination. But first, let me tell you what you should avoid…

Income Extermination Is Already Underway

The Fed has signaled that it will raise rates another two or three times this year. And projections have more raises next year.

This will put pressure on bond prices… specifically, long-dated bonds. (Or as Wall Street calls them, “long duration bonds.”)

Retirees are in the greatest danger. According to the U.S. Census Bureau, those age 65 and older own the highest percentage of U.S. government and corporate debt.

If you own bonds—especially those with long durations—you should consider ridding your portfolio of them.

As you can see in the chart below, the “safe” iShares 20+ Year Treasury Bond ETF (TLT) is down 6% this year.

The 10-year yield is still less than 2.9%. Its long-term average is 6%. Clearly, there’s plenty of risk in bonds.

However, the story is different for certain stocks…

These Companies Will Beat Income Extermination

History shows that when interest rates are rising, it’s a good time to hold stocks.

The chart below shows the Federal Reserve Funds Rate compared to the S&P 500. The funds rate is the rate at which banks lend to other banks on an overnight basis.

As you can see, when the funds rate goes up, the S&P 500 usually moves higher.

Of course, rising rates will increase borrowing costs. But for high-quality companies, an increase from 2.9% to 3% won’t matter much.

Here’s why…

Even if a company has $100 million in debt… the extra cost to service that debt would only be $100,000 per year. For quality companies, that’s just a rounding error.

Rising rates hurt heavily indebted companies. And it will get only get worse in the next stage.

But market leaders like Amazon, Apple, Facebook, Google, and Microsoft have little or no debt. So they don’t have to worry about higher rates.

If you’re looking for companies to beat Income Extermination, consider the market leaders.


Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. The next stage of Income Extermination will hit marginally profitable companies with lots of debt… especially if they must roll over their debt in the next year or two. If you’re interested in a list of companies to avoid, let us know right here. If there’s enough interest, I’ll put the PBRG team on the case.

This Ignored Market Could Grow 8x More Than the S&P 500

Since I first started writing The Palm Beach Letter in June 2016, my main goal has been to help you find safe, income-generating ideas.

And in my very first issue, my strategy was to follow a maverick income investor who was known for making outlandish predictions about the markets.

  • In 2007, he publicly warned that the subprime market would get worse. After his call, the market dropped a spectacular 70%. In the process, he made a cool $4 billion in profit.
  • In 2015, he warned investors not to be fooled by a rally in oil. He pounded the table and said oil prices would crash. Later that year, oil crashed 42% from its peak, hitting a 13-year low.
  • In January 2016, he said gold would hit $1,400 per ounce. At the time, gold was trading at $1,050 per ounce. By early May 2016, gold had already hit a high of $1,305.

In mid-2016, he started betting against an interest rate hike. At the time, Wall Street was convinced rates would rise.

That’s when we followed his contrarian lead… and I recommended the iShares Mortgage Real Estate Capped ETF (REM).

(The strategy paid off well for us. In February 2018, we sold REM for a 15.1% profit… Along the way, we collected $7.63 per share in dividends.)

By now, you should be asking yourself two questions: Who is this market oracle? And what’s his next pick?

Today, I’ll tell you who this market wizard is and what he’s buying next.

Investing Alongside One of America’s Brightest Stars

The name of the bond trader who’s quickly developing into an investing legend is Jeffrey Gundlach. His DoubleLine Capital family of mutual funds manages more than $85 billion in assets.

His investment returns are the envy of Wall Street.

Over the last five years, his bond fund has generated 0.02%, 6.73%, 2.32%, 2.17%, and 3.79% respectively in annual returns—outperforming the sector by an average 0.86% per year.

That might not seem like much, but in the world of bonds—where the yield on the benchmark 10-year Treasury was 1.88% last September—it puts him in the upper echelon of his industry.

In fact, Gundlach’s Total Return Bond Fund ranked ninth in its category the last five years—out of 958 funds. That’s in the top 10% of his field.

Gundlach’s track record was the main reason we followed him into mortgage-backed securities (MBS) in June 2016.

MBS are a type of bond composed of thousands of property loans and packaged into a single security.

At the time, Wall Street hated MBS. The Street was convinced interest rates were going to rise. When rates rise, MBS (as well as all bonds) decrease in value.

Gundlach said that there would be only one Fed hike in 2016. And he was right again… The Fed raised rates only once in 2016, and that’s how we made 15% in REM.

So, what’s Gundlach looking at now?

Gundlach’s Next Big Idea

During a live interview on CNBC in December 2017, Gundlach was asked point-blank: “What’s your highest-conviction idea for 2018?”

His answer: “Commodities.”

He went on to say:

If you ever thought about buying commodities, … maybe you should buy them now. …We’re right at that level where in the past you would have wanted commodities instead of stocks.

And he continued, “The repetition of this is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy.”

Below is the chart Gundlach referenced. It shows the valuation of the S&P Commodity Index (GSCI) relative to the S&P 500.

When the ratio is below the median, commodities are cheap relative to stocks. And when the ratio is above the median, commodities are expensive relative to stocks.

The red and green circles show areas of extreme valuation. The green circles show when commodities are extremely undervalued compared to stocks. And the red circles show when commodities are extremely overvalued compared to stocks.

As you can see, commodities haven’t been this cheap relative to stocks since the early 1970s.

The next two charts show the last two times commodities were this cheap compared to the S&P 500 (1970 and 1999). They went on to rally 200% and 560%, respectively.

And according to Gundlach, the 1970s commodities market eventually grew eight times larger than the market capitalization of the S&P 500.

If that happens again, we could see commodities skyrocket…

How to Play the Commodities Rally

If you’re looking to gain broad-based exposure to commodities, you can take a look at the PowerShares DB Commodity Tracking ETF (DBC).

It’s an exchange-traded fund that gives you exposure to the price of oil, gas, precious metals, industrial metals, and agricultural commodities like wheat and corn.

One drawback of DBC is that it doesn’t pay a dividend.

In this month’s issue of The Palm Beach Letter, I’ve found an idea that gives you broad exposure to the commodities sector and pays a dividend.

It yields 7% per year in dividends alone… and could make as much as another 200% in capital gains over the next three years.

PBL subscribers can access the issue right here

Let the Game Come to You!


Teeka Tiwari
Editor, The Palm Beach Letter

Are You Holding The World’s Worst Investment?

I just found the world’s worst investment—and you probably own it.

As Palm Beach Letter editor Teeka Tiwari told me in a recent interview, “anyone holding bonds is about to get annihilated. Especially those holding long-term bonds.”

Few bonds are longer-term than Argentina’s century bonds. Last year, the country issued bonds that mature in 2117. And investors scooped them up because of the high yield… Right now, they’re yielding 7.7%.

This may sound like a good bit of income, but these bonds are getting crushed. Just look at this chart of the bond’s price over the past year.

As you can see, it has plummeted 11%.

Now you might think, “I’d never buy bonds from Argentina.”

But for income-starved investors, the 7.7% yield looks pretty juicy. It can be tough to pass up on something like that right now. And it looks even more appealing because these bonds are issued in dollars. So you have no foreign exchange risk.

But even if you don’t own Argentina’s century bonds… you’re likely holding another ticking time bomb in your portfolio right now

I’m talking about the 30-year Treasury bond.

You see, savings accounts today yield about 1%. CDs might give you a fraction of a percentage more. 10-year Treasuries only give you 2.8%.

That’s why investors are turning to longer-term Treasuries. And while the 30-year is only yielding 3.1%… it’s considered the “safest yield” today.

As you’ll see, this is a huge mistake.

The Two Main Ways to Lose Money Owning Bonds

Investors typically buy bonds for their safety. Bond prices fluctuate less than stocks. And when the bond matures, you know how much it’ll be worth.

They also give you income. Most bonds give you semi-annual interest payments. So you get something for your investment. And for those living off their savings, this is very important.

But bonds can lose money. The first, most obvious way is if the bond defaults—you may never see the return of capital if that happens.

While that probably won’t happen anytime soon with U.S. Treasuries, there are two other ways they can lose value. You need to watch out for both today…

No. 1: Inflation “The Silent Killer”

Inflation is the silent killer for bond investors. It doesn’t make the price of your bonds go down. But it certainly does reduce the value of the money you get back.

The Federal Reserve has a target rate of inflation of 2%. They want our dollars to inflate 2% a year. Said another way, they want the value of our bonds to go down 2% a year.

But a target is hard to set. And I don’t trust the Fed to get it right. Looking at history, since 1914, the purchasing power of the dollar has gone down an average of 3.2% per year.

Let’s say you put $100,000 into 30-year Treasuries today. In 30 years you’ll get that $100,000 back, but it will only be worth the equivalent of $37,693 today.

You get back almost $62,000 less than what you put in.

At today’s current yield of 3.1%, you’re essentially losing 0.1% of real value every year.

No.2: Rising Interest Rate—”Duration Risk”

Wall Street calls this “duration risk.” It’s the fact that as interest rates rise, the prices of your bonds go down.

If you don’t want to hold that 30-year Treasury for the entire time, you could have to sell it at a loss.

And the longer out a bond matures, the more the price fluctuates.

As Teeka told me, some long-duration bond funds have already lost 9% of their value. That could only be the beginning…

And interest rates still have a lot higher to go… They’d have to double just to get back to the long-term average.

Just going from 2.7% to 3.1% caused the price of the 30-year Treasury ETF to go down 9%.

If the 30-year goes back to its historical average of 6.9%, holders can expect the prices of their bonds to go down over 40%.

How to Avoid Income Extermination

To survive the coming interest rate hikes, avoid long-term bonds… And any mutual funds or ETFs that hold long-term bonds.

They will be hit the hardest in the coming income extermination. I wouldn’t be surprised if some of those funds fall over 50%.

I know many of you are desperate to get income from your investments. But don’t reach for yield in long-term bonds. You’ll get burned.

Paid-up Palm Beach Letter subscribers can read the latest issue to see which safe, high-yielding investments they can make to collect income while avoiding the income extermination.

Everyone else, stick to short-term bonds. You won’t get as much in interest right now. But you’ll be in a better position in a couple years to reap the benefits of higher interest rates.