Uh, Has Anyone Noticed the Bonds?

My whole career has been investing. I started working on the floor of CME in 1986. I haven’t been right all the time. I have been investing in startups since 2005. Not all of them have made it either. But many are doing quite well.

One observation I have made is that a lot of people are starting to invest in startups. They think it’s pretty simple. You put seed money in, and the company continues to raise capital at higher valuations. As an investor, you mark up the investment, and calculate the rate of return and feel pretty good about yourself.

I think that’s going to change. Valuations of startups are a little pumped up. It’s not just my observation, but the observations of many more experienced investors than me. It might be good for some water to be thrown on the fire. It shakes out weak investors and companies. It gives a jolt of reality to everyone.

Not sure if anyone has noticed, but the bond market ($ZB_F) might be starting to flex it’s muscles.  Been up and down, but mostly down.  That means the cost of money is moving up.  Here is $TLT over the last month on Ycharts. I threw up a graph of a US Treasury Index for good measure.

TLT data by YCharts

We have been living in very very very strange economic times since 2009. 0% interest rates and the negative interest rates they have in Europe right now are an anomaly. Most people pay attention to the stock market as a sign of financial health-but the Treasury market dwarfs the stock market and the Forex market dwarfs the bond market.

I have an old trader friend who scalps futures in Florida.  He always has a finger in the bond market.  He says, “I love when the long end leads” and right now the long end of the Treasury market is pointing to higher rates.  He also says the leading indicator for stocks is the NASDAQ, not the S&P or Dow.  Here is a $QQQ chart over the same period. Looks pretty choppy. Not sure if it’s a top or building a base for another leg up.

QQQ data by YCharts

To have a coherent view of the world, it’s better to put pieces of a puzzle together and then form a hypothesis. Different pieces fit together differently depending on how someone views it. All this action in the bonds could just be fallout from Greece and we have nothing to worry about. Or, it could be fall out from China, and we worry about the Chinese dumping some bonds in a rush for liquidity, which causes domino effects everywhere else.

My gut tells me this. The strange economic times we are living in are going to get a lot stranger. The US is going to have to raise rates, and that will have effects on the US Dollar relative to the Yen and Euro. If a US company is going to expand internationally, now might be the time. At the same time, risk/reward ratios for capital allocations are going to change. If you are a startup, you better get control of your burn rate now. If you thought it was tough to raise capital before, wait until you see how much tougher it is with a bear market and higher interest rates.