Beating the coming inflation

Bought Oil in the 30's huh?


Gotta love ET, where people get in positions at make believe prices/ at the exact bottom.

 

Are you saying anybody who posts about going long oil in the 30's is lieing?

Or are you just jealous?

 

Just found this thread and it looks like a decent conversation but I just don't know how anyone could tie up their capital now, planning for inflation, when deflation is staring us all in the face. It's like shorting the NASDAQ in the mid 90's because you KNOW it's overbought. How much money will you lose waiting for the inevitable to happen? We may not see inflation for another five years, meanwhile deflation erodes your assets. I have to wait. Best of luck to those picking the bottom.

 

I think about this frequently, since on the surface it calls my macro opinion into significant doubt, and I am not one to cling to unsupportable views in the face of overwhelming evidence.

After having given it some thought, I don’t think the current bond yields overwhelm my opinion.

You cite the current low yields and say “the market points to a tiny recovery near terms and then near stagnation and slow creeping growth.”

I think the market is saying “Lots of people are scared shitless, have had their retirement savings cut in half, are worried about their own currencies (foreign wealth), and there’s one particular player (the US government) very active in this market.”

I think there has been a serious flight to bonds (duh…), as many individuals have seen their stock portfolios hammered over the last year. This puts pressure on the yields.

I think foreigners (let’s say the British, for example) whose currency is getting hammered versus the dollar (not because the dollar is so great, necessarily, but because it has special privileges as a world reserve currency) are buying and holding these bonds (which in turn further strengthens the dollar in a sort of virtuous/vicious cycle). By the way I also believe the dollar is currently strong because of demand by foreigners servicing dollar denominated debt, who are finding that they cannot just re-finance as they usually would. This is not a structural currency strength, and can retrace very suddenly if sentiment changes. If the dollar goes, yields will jump.

The other thing that I think is depressing yields is (as I said above), the US Govt. I’m no conspiracy theorist, but there are a number of reasons why low interest rates are “convenient:” it helps housing prices, it reduces the pain of variable rate mortgages and rate re-sets on funky mortgages (ostensibly reducing foreclosure pressures), and govt debt for all these recovery programs is “cheap.” In a desperate attempt to get lending to start again they are making money virtually free. The fed itself is targeting low interest rates (0-.25%) How do they do that? By buying bonds like crazy. Of course they are going to get expensive. The thing is that they are not retiring debt by capitalizing on increased revenues that are a result of productivity growth in the economy (which would be awesome) but by simply creating money to buy them with.

I remember a few months ago when almost every week I’d hear about “liquidity injections” in the hundreds of billions. I bet some of that is sitting in bonds on balance sheets somewhere. I bet TARP money is parked in bonds. I bet margin cash (shitloads of it) on underwater derivative contracts is sitting in treasuries right now.

I think for all the reasons above and a number of others bonds are very dear at the moment. I also think it can unwind very quickly. Money can flee bonds back to other investments. Foreign currencies can snap back and foreigners will liquidate bond positions. China could diversify it’s reserves ( I said could ). The government may decide to sell bonds to take some liquidity out as money velocity starts increasing again. Derivative contracts expire or get marked more favorably as spreads narrow, CDS rates ease, etc., and margin cash gets pulled out of t-bills. Highly leveraged, large bond players may start liquidating their positions and go short (lots of chatter about the bond bubble). Mini carry-trades unwind. All of these things are in my mind co-variant, in the sense that any one makes the others more likely.

Once it starts I think it could be quite exciting (abrupt in it’s correction). Once it corrects violently and yields shoot up to 7-8%, the Fed will create more money to try to buy the yield curve back down, but this time it wont be as easy: somewhere investments will have heated up, people wont be scared anymore, dollar denominated debt will be more easy to roll over, the dollar will sink against other currencies (we’re printing the daylights out of the USD, so in absence of other distorting circumstances it should go down).

Anyway, I’ve spent way too much time rambling. I think you get my drift: tiny yields can mean exactly what you’re saying: that we’re pointed to a slow recovery with no inflation. I think they may be saying something else, that they are distorted by circumstances that may fade with time, or even precipitously reverse.

I am not short bonds, for whatever that tells you about my conviction on this longwinded theory. I’m scared about getting squeezed by the ultimate 800 lb gorilla (the US govt). I am considering it though.

 

Depending on how bad it can get the Yen would be a good place if we hit hyperinflation, of course a run to their currency would kil their economy but for the short haul before they start printing and burning yen it might just hold together a little better then everyone else.. note.. I am talking hyperinflaiton not inflation