As the Headlines Heat Up, I’m Focused on This Bond Fund and Energy
Summer is ending but the chaotic news flow won’t quit, so here’s my take on current events and how to trade them.
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Summer is winding down. But the news flow just doesn’t quit: Treasury Sec. Scott Bessent made his speeches on sanctions and Treasury buybacks, Nvidia (NVDA) earnings landed, Fed Chair Kevin Warsh appeared at Jackson Hole, we have fresh fighting in Iran and an apparent Venezuela oil deal, and the G20 is in North Carolina. Oh, and on a personal note, I started the week early, with 5:50 a.m. appearance on CNBC.
What a way to close out August! Now, let’s try to make sense of it all.
Oil and War
The U.S. attacked Iran over the weekend, but it was limited in scope to hitting launchers that were set to send more mines into the Strait of Hormuz. That is consistent with the U.S. attempts to keep the Strait clear (which is something CENTCOM has stated).
Iran attacked U.S. bases, so it appeared to be a “measured” response, not designed to hurt the infrastructure of any Gulf countries.
The U.A.E., meanwhile, responded with a comment that sounded a lot like “knock it off, both of you.”
I do not expect the “kinetic” action to ramp up. Just before the renewed fighting, the U.S. announced an oil deal with Venezuela. Let’s wait and see about the details and follow-through from all parties, but for now there is nothing about the deal that seems like it will move the needle in the near term. Best case is a lot of investment is required to make the reserves productive. Then there is the matter of refining it. So, despite the hype for now (and the foreseeable future) the Venezuela deal doesn’t change much for the global energy market.
I think, however, oil prices are under control. They will drift higher and lower with the fighting, but base case is controlled, and probably drifting slightly lower. I am keeping a close eye on diesel as that directly impacts so much of the economy and highlights what bottlenecks remain in the system.
My Trade: I like owning energy companies globally. On a daily basis they will move up and down with the commodity, so the global need to produce energy is only growing and is only starting to be properly addressed. Is see plenty of opportunities with energy companies, even if the commodities drift lower. I own the XLE exchange-traded fund (XLE) and the BP (BP) and Shell (SHEL) American Depository Receipts, or ADRs.
Rates
I think Fed Chair Kevin Warsh wasted an opportunity to drive a new narrative. Many measures of inflation show a better picture than some of the “traditional” methods. The inflation we currently have, from wars (on Iran and also between Russia and Ukraine, as more energy infrastructure is targeted) and from the compute build will not be “fixed” by hiking rates.
My Trade: I like the 2-year bond here and will be adding to a position I have in the Simplify Short Term Treasury Futures Strategy ETF TUA (TUA) ETF (an ETF that uses leveraged futures to get the price moves in TUA to be larger than the prices moves in the 2 year note in both directions).
Bonds Away
I think the long bond will drift higher. Sovereigns that needed to issue debt, are issuing more debt. Buyers of treasuries, like the Saudis, are in the market to take on loans, implying they are unlikely to be buying.
Finally, the compute spend is massive. This August saw almost $100 billion more investment-grade corporate debt issued than the average of the prior three years in August.
The pressure on the long end of treasuries is less about “bond vigilantes” and more about having to compete with lots of supply that is competitive with treasuries (and in my opinion, on the compute side, even more attractive than treasuries).
Bessent’s efforts in increasing buybacks of long-dated Treasuries are too small to make a lasting difference at this time. He needs to step it up, or get some help from Warsh and the Fed on a new take of “Operation Twist.”
My Trade: For now, I’d own the iShares iBoxx Investment Grade Corporate Bond ETF (LQD) over the bond fund TLT (TLT) (long-dated corporate vs long dated treasuries) — though I don’t own either now.
Oh, and Canada…
It looks like Bessent will admonish the G20 for its trade with China. Had we started to work on this back in early 2025, he’d probably have had a more receptive audience.
While countries are clearly worried about trade with China, trade with the U.S. hasn’t been a piece of cake…. Just look at Canada.
I think Canada, like every country, needs to figure out what they can do to make money. For Canada, it’s extracting energy, rare earths and critical minerals, and then refine and process it. (This fits well with my thesis that globally, energy companies will do well, as countries try and do more with what they and with close neighbors).
Last Monday, Bessent stated their would be sanctions on a big financial institution. So far nothing on that.
On one hand, I can see the point of giving “cure” periods to those doing business with Iran. On the other hand, I can easily see the admin not really wanting to go after China, who, by all accounts, is the biggest accomplice in getting around Iranian sanctions.
Maybe we will see some positive momentum come out of the G20, but I expect we will continue to “kick the hornets” nest on trade, which will have the impact of spurring economic activity outside of the U.S. making those markets remain attractive.
Bottom Line
My biggest concern for markets and the economy is any disruption in the “compute” trade. NVDA seemed to quash any fears (for a day), but I think that narrative remains susceptible to challenges and pullbacks.
At the time of publication, Tchir was long BP, SHEL, TUA and XLE.
