Inflation is raging higher and the Fed is raising rates aggressively, states Steve Reitmeister of Reitmeister Total Return.

And yet long-term bond rates are falling...say what?

There is only one logical answer. That bond investors, consistently thought of as the sharpest guys in the investment world, see the following chain reaction:

Fed needs to CRUSH inflation > rapidly rising rates in the short run > hurt economy > recession > lower inflation > Fed reverses course and lower rates to hurt ailing economy.

And that is why longer dated Treasuries, like the 10-year have come down dramatically in the last few days leading to these two trades:

  1. Sell all shares of ProShares UltraShort 20+ Treasury ETF (TBT)
  2. Buy 13.5% allocation to AdvisorShares Ranger Equity Bear ETF (HDGE)

Why Buy HDGE? There is less room for profits in shorting bonds and there is plenty more downside in shorting stocks. This unique ETF tries to short the weakest fundamental stocks that are likely to fall the most in a bear market environment. But the reason I did not invest in it earlier in this bear market cycle is because they have a large allocation to BUYING Treasury bonds. That didn't make sense when rates were going up...but makes a lot more sense now with rates leveling out...and maybe heading lower given the chain reaction shared above.

Now the sum total of our short positions = 70% short the stock market. A tad more aggressive than it was before. But as we move towards 30% or more down for the S&P...I will start to take some of these gains off the table...and then start bottom fishing other stocks.

Reity, why not sell RISR or SBJ given what you said above about rates?

Rising Rates ETF (RISR) is constructed very differently than TBT and may actually continue to rise as the Fed raises rates. So I want to give it a little more time in the portfolio.

Proshares Short High Yield (SBJ) is still a great call on how any looming recession will lead to higher rates for junk bonds as investors will demand higher rates as their earnings outlooks deteriorate. As stated in commentary yesterday...this is kind of my favorite trade at this moment. So its not going anywhere.

Reity, you loved TBT for a long time...this seems very sudden...and quite odd to be honest.

Are you sure about this?

That is the nature of investing. The past is in the past. You have to objectively look at new evidence as it rolls in. And what I share above is a fresh understanding of why rates are falling at this time...which by the way is the natural direction of rates during bear-market cycles. This is another way of bond investors saying unequivocally that a recession is on the way which only bolsters the rest of the trades we are making.

I will never apologize for changing my mind when the facts change. To do otherwise is hubris and harmful to our portfolios. We cannot abide by that.

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