- Brandon Cao
New Year, New Recession: What Goliath is Doing to Prepare.
Updated: Jan 18
In recent times, the Federal Reserve has been raising interest rates to levels not seen since before the '08 recession. With rates nearing 5% it is difficult to foresee a future where the government will be able to negate a recession within the next 6 months. However, it is important to note that interest rates cannot continue to increase indefinitely and will eventually return to 0. The FED can try to "slow" interest rates from increasing, but sustaining interest rates above 5% would devastate small businesses as well as banks. Raising Interest Rates is a response to inflation, which has already decreased Y/Y for consumer goods.
One of the most reliable metrics for predicting a weak economy is the "10-Year Treasury Minus 2-Year Treasury" which compares the yield rates for the long term against the short term. Normally, the 10 year yield should be much more than the 2 year yield. This is because the long term economy is much more stronger than the short term economy. This is known as the yield curve, and when the value falls into the negative, its a pretty solid indicator that there may be a recession within the next 4-6 months.
Another metric that has not failed in over 100 years is the CAPE or (Cyclically Adjusted Price-To-Earning) Ratio. It is used to judge how overvalued the market is (factoring inflation), with a value of between 10-15 being considered an accurate valuation. Today that value sit around 28, and for the past 100+ years, the market has never bottomed out at 28 and even has topped out at 28 in the past. This suggests that the market is extremely overvalued and could justify some downward movement, leading to a decline in the value of large cap companies and the SPY broad market.
So what is Goliath Doing?
To navigate the potential recession, Goliath is taking the following actions:
20+ Year Treasury Bonds
We are purchasing iShares' 20+ Year Treasury Bond ETF ($TLT) as well as Direxion's 3x Bull Leveraged 20+ Treasury Bond ETF ($TMF). We are confident in this strategy from our previous investment in Direxion's 3x Bear Leveraged 20+ Treasury Bond ETF ($TMV) on the assumption that interest rates would continue to rise. However, now Goliath expects interest rates to decline and as those rates decline $TLT and $TMF will rise in value.
Being 3x Leveraged, we see $TMF as a much riskier investment but it was also balance out our portfolio of 20+ Year Treasury Bonds with an ETF that is comprised of 70% OTC-Derivatives and SWAPs and 30% of either ETF Treasury Bonds or the Securities themselves. There is a huge upside for $TMF given its present day value of ~$9.00 and it's all time high during COVID of ~$40.00 when Interest Rates were 0%.
Given the tremendous risk of owning $TMF we will be evaluating whether we want to purchase Put options on $TMF or Call options on $TMV closer to 1st quarter GDP reports.
Goliath is taking a cautious approach by diversifying its portfolio of Treasury Bonds and ETFs while keeping a close eye on market indicators such as the yield curve and CAPE ratio to make more informed decisions.