John Paulson is making an inflation bet that conveniently makes money even if the U.S. economy recovers more strongly than expected.
Financial Times: “It will be difficult for the government to withdraw the economic stimulus,” Mr Paulson said in a speech. “An increase in the monetary base leads to an increase in the money supply, which leads to inflation.”
Bond prices fall as yields rise, and Mr Paulson told the Financial Times last week that he has been hoping to benefit in the Treasury market by buying options that would become profitable if rates headed higher.
This makes money if inflation picks up, yet also does well if the U.S. rebounds strongly since the Fed would then be even more likely to hike rates. It only does badly in one scenario – deflation. Thus hopefully the U.S. doesn’t become a Japanese crash re-run.
“Nobody understood the extent of deflation and economic weakness in Japan,” said Dino Kos of Portales Partners, a research consultancy, who was then a Fed official. “More money was lost on that trade than on any other single trade. Everyone piled in when rates were at 3 per cent and then at 2.5 per cent and then at 2 per cent.”
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