U.S. Treasury buyback move lifts TLT from danger zone

Danger Zone Please click here for an enlarged chart of iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT ).

Note the following: The chart shows the TLT dipped in the danger zone.

When we first presented the danger zone, it was not known how spot on it would turn out.

With the benefit of hindsight, we know that when TLT dipped in the danger zone, Treasury Secretary Bessent acted with an unprecedented move to increase the buyback of long-dated securities.

Please see the Morning Capsule from August 19 for details.

The chart shows that TLT has now bounced out of the danger zone due to Bessent’s announcement.

In our analysis, the buyback of long dated securities is simply a band-aid for the $40T U.S. debt problem.

A band-aid does nothing to fix the problem.

The chart shows that there was an initial euphoria.

The euphoria was entirely limited to the momo crowd that aggressively bought bonds and stocks on the news.

The chart shows the initial euphoria has faded.

In our analysis, the reason the euphoria faded is that smart money sold into the strength generated by the momo crowd.

Apparently concerned about smart money selling into the strength, Bessent is announcing that the $4B amount for the buyback may be the floor, not the ceiling.

The buyback can be much larger than anticipated.

In our analysis, Bessent’s reaction is simply saying that he is going to put on a bigger band-aid.

Further, a bigger band-aid will do nothing to solve the $40T debt problem.

Prudent investors need to discern that smart money and the momo crowd are reacting differently to this major move from the U.S.

Treasury.

Smart money is concerned because they understand that a buyback only temporarily restrains the move in the long bond.

If inflation heats up, this move may simply make matters worse.

On the flip side, as usual, the momo crowd is not thinking that far and is simply elated due to the short term upward momentum.

So far, the biggest victim of the Treasury’s move is the king dollar.

Foreigners have been selling the dollar after the announcement.

A lower dollar can import inflation at a time when inflation is a big concern.

U.S. consumers are addicted to cheap Chinese goods.

A lower dollar means these goods become more expensive.

As the momo crowd buys extremely aggressively, prudent investors need to make sure they have appropriate risk control measures in place.

Those who are heavily into the AI trade and are tempted to not have multiple layers of risk control just need to look at the blow up of the Situational Awareness fund.

The fund lost 67% in July.

Now we know that the U.S.

Treasury plans to use a bigger band-aid and do nothing fundamental towards the U.S. debt problem and risk significant adverse consequences in the long term.

The question is what is the Fed going to do.

Fed Chair Warsh will face a test in his speech at Jackson Hole next week.

What Warsh says can have tremendous consequences for the markets and the U.S. economy both in the short term and the long term.

Magnificent Seven Money Flows Most portfolios are now heavily concentrated in the Mag 7 stocks.

For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis.