Good morning traders. I have been getting quite a few questions lately regarding bonds - specifically, would it make sense to get short bonds (using TBT). The answer is yes, the tricky part is when.
Let's face it, while the Fed has managed to snuff out every crisis since Alan Greenspan took office, one could easily argue that that has done more harm than good...at least it will in the long-run. Rather than taking our medicine at the time of the crisis - we simply placed a Band-Aid on it and kept on strolling down the road. The result we see now is that problems are addressed by simply adding more and more liquidity (i.e. printing money) to the system.
You cannot tell me that all this extra liquidity not only leads to a mis-allocation of capital, but also inflation. While the 'official' government stats on inflation suggest there is none; I will take issue with that. With hedonic adjustments the CPI can be made to look rather tame, my wallet on the other hand tells a different story - prices, in general, are rising on just about everything I buy.
A recent quote by a former Fed Governor Alan Blinder captures just how much faith many mistakenly put in The Fed:
"When I hear people say 'we're building up to 10% or 12% inflation rate', I just don't know what they're thinking," Blinder says. "The only way that could happen is utter and complete incompetence at the Federal Reserve."
Well, given that The Fed claims there was no way to see the bubbles in the Internet and housing markets (they were pretty obvious to me and others), can someone please tell me how on Earth they will see rising inflation? They won't - they are academics that are in way over their heads.
So, I simply cannot see how inflation will not become a major problem in the years ahead. Rates are at historic lows - they cannot go lower. While they may stay low for a while yet, the next move is up and that will be a disaster for bonds.
For now however, The Fed is keeping a lid on rates, but there are subtle signs that this is going to get away from them. 10-year Treasury rates are above 2% and the 30-year at 2.46% suggests that the bond market is sniffing out the next big fiasco. However, that is not enough for me just yet. The usual scenario we see now is that when equity markets hiccup; bond prices move higher. My suspicion is that the next time we see some equity weakness AND bond market weakness simultaneously or even just a tepid respond higher by bonds, we may well be seeing the early stages of a nasty bond market rout. Short Treasuries or long TBT will be a great choice for ones portfolio. Stay tuned.
Aspen's NEW Portfolio Alerts Service allows you to ore effectively and efficiently manage your longer-term investment portfolio
