Until very recently, the investors who have been betting on rising T-bond rates have been betting wrong. So if you were one of the early short-sellers of T-bonds, you may have already thrown in the towel. With the meter running, being early doesn’t feel much different than being wrong. But I believe that the mere passage of time, plus the accumulation of inflationary forces, has stacked the deck in favor of shorting Treasury bonds now. Here are the reasons:
- The government has actually done what it said it would do. It has run trillion-dollar-plus annual deficits, and it has bloated the M1 money supply. (That’s the accumulation of inflationary forces.)
- With QE2 (the second round of money creation and attempted interest-rate suppression), the Federal Reserve will be doing more of the same at least into the middle of 2011. And with the current federal budget plans, the Treasury also will be continuing on the path it set upon late in 2008.
- Inflation is starting to look overdue, which increases the chance that it’s not too far away. The effects of money creation don’t follow a tight schedule – moving more like a jitney than a metronome. But on average, a burst of money creation will have its peak effect on economic activity 9 to 18 months later, and the peak effect on price inflation may not show up until a year after that. It’s now two and one-quarter years since the monetary burst began.
- The stock market has been doing what it usually does before economic activity starts picking up – it’s been rising.
Does this add up to a “sure thing” of rising yields and falling prices for Treasuries in 2011? No. But it does stack the deck, which is all a speculator can ask for.