I don’t usually put explicit trade ideas in my articles because, well, you should pay for ‘em! But this idea is free.
So here it is.
There is too much panic about interest rates going higher. It has become a consensus trade. I have been pounding the table on short bonds for years. But now is the time to go the other way, at least for the time being.
How I Find Trade Opportunities
Here is a chart that shows the growing divergence between tech on the one hand, and rate-sensitive stuff (in this case REITs and Utilities) on the other.
Source: @HayekAndKeynes
The chart suggests now is probably a good time to bet on mean reversion.
One of the attractive things about this trade is that it is mathematically perfect. We are going to be running huge deficits far out into the future. And this supply of bonds will far exceed the dwindling demand from overseas.
Well, the funny thing about demand is that you never know where it is going to come from. We are running $1-trillion deficits now. Back in 2009/2010, we were running $1.8-trillion deficits—and interest rates went down!
People showed up at those auctions and bid lustily. They might show up at these auctions if they are incentivized to do so.
Plus, yields are starting to look attractive. We’re getting near 3% on tens, and 3% on 10-year notes (risk-free, I might add) is going to look tasty to a lot of people. In fixed-income land, they call this the Rule of Fives. Every time bonds get near a big figure, people find value.
Side note: A good heuristic to find trade opportunities is to think about what sort of trade ideas make people angry. The folks at Mauldin Economics gave this a nickname a couple of years ago: “angry analytics.”
You want to be bullish on the thing that, if you told people, would anger them. People would call you a fool for buying bonds. If you went on CNBC and told Rick Santelli you were buying bonds, he would probably call you a fool.
You could buy bonds, or you could buy things that are correlated to bonds. In which case you would be an even bigger fool.
The Stupidest Trade Idea
Let’s take this one step further. Let’s come up with the stupidest trade idea in the world.
So buying bonds is stupid. Buying REITs is doubly stupid because they have adverse exposure to rising interest rates.
You know what is the stupidest idea of all?
Mall REITs.
And it’s genius.
Everyone knows malls are all going tango uniform. Amazon (AMZN
Hell, the mall in Myrtle Beach actually has a physical compact disc store. You can’t get any more donkey than that. It also has an Abercrombie & Fitch (ANF
Everyone knows all malls are going out of business. It is only a matter of time.
Except…
What if…
We have reached peak bearishness on malls?
The mall REIT trade isn’t priced for perfection. It’s priced for whatever the opposite of perfection is. So, by buying a mall REIT, you want…
- Interest rates to go down (which is mathematically impossible), and…
- Malls to recover (which is insane). Really what you need is…
- Amazon to go down. Madness.
That, my friends, is the essence of 10th Man trading. It is the duty of the 10th Man to disagree. And it works a lot.
I’m not going to select any tickers in there—you can do the last bit of research. Let’s revisit this about a year from now and see how the idea worked out. I bet it’s up.
Actually, I bet it outperforms the S&P. I bet it is negatively correlated to the SPX. I bet it generates alpha.
Go on CNBC and tell them that your best idea is buying mall REITs, and see what happens. You’ll get laughed off the set. Everyone knows malls are going to zero.
Have fun, guys.
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