If you believed in deflation and loaded up with treasury strips then you recently cashed in a year-to-date return of more than 25%. I did warn about the coming bond rally here:
I argued that bonds would outperform stocks and suggested using overweight positions with leverage; a long treasury strip could do just that. One reason to be bullish on long treasuries was the change in behaviour observed when I wrote this in October 2009.
“It’s become clear that investors’ attitudes are changing and the new normal is not to invest one’s savings in stocks; rather, that money is flowing to bonds.”
If you read this now, after the fact, then you really suffered from paradigm paralysis; of course, everyone has 20/20 vision in retrospect.
I will now argue that deflation is unsustainable. It will only come in the form of sudden deleveraging shocks. I do think that the bulk of deflation has passed. It is now more of a mindset, rather than a fact.
We are in disinflation and moving toward slow and selective inflation of assets. It does not mean that gold is your best bet. In fact, it is not. I also think that we are headed into a multiyear top with respect to corporate bonds.
Severe bouts of upcoming disinflation might act to slow certain trends, but I am convinced that it will not fundamentally change supply issues of what we invest in.
I did recommend buying the CRB index at the low under 200 in early 2002 and kept our documented suggestion. It should tell you that we are always hard asset buyers in one form or another. I do intend on having adequate immunization, which is one of my criticisms of managers in 2007 and 2009.
What most people don’t understand is that treasuries are the only diversifier left. They are not only a play on interest rates but insurance as well. I saw a huge opportunity to profit from bad behaviour where all players were short duration. It was almost a ubiquitous giant naked short creating a perfect mismatch.
Disinflation conditions will create a market boom for stocks, since it reflects claims on real assets. If one was long duration bonds, would it be adequate to now be long duration stocks? The problem with this has to do with the unstoppable flow out of stocks. I did warn about a lot of participants and the move to bonds in 2009. Don’t be caught flat footed; they really are leaving stocks.
Another issue has to do with liquidity, where remaining players cannot continue absorbing the stocks that retail sells them indefinitely. I would like to see some kind of event accelerating the process, so we can get to a selling climax. I suggest that a buy and hold period would ensue.
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