The Macro Tourist: Inflation Is ‘The Best Long-Term Macro Risk Reward Trade Out There’…
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I have an outlier view of inflation. Contrary to the debt-will-overwhelm-us crowd, I believe the next great financial crisis will not be a deflationary shock, but a return of inflation no one is positioned for. Don’t assume I am a hyper-inflationary doomsayer though. At first the inflation will feel great. It’s not until much later will it actually cause any real problems for the economy.
Don’t bother sending me chuffed emails about how inflation will
As always, a superbly written piece by KM!
But why not Gold as an inflation hedge? Has served that very purpose for thousands of years…
While you or I or Kevin might think that long IEF “covers” short TLT, I doubt your brokerage house thinks that. So a meaningful position for “ten years” might result in a capital gain, maintaining this much margin for such a long period has material costs that aren’t discussed. In other words, a crappy idea.
Macro Man, spot on trade. Keep writing.
Future inflation or disinflation will be connected to velocity and right now the winds are suggesting continued gusts of disinflation, mixed with short (mild) inflationary breezes.
Here’s a postcard from FRED: https://fred.stlouisfed.org/graph/?g=oUXy
Here’s an old story from 2014: Indeed, during the prerecession period, for every 1 percentage point decrease in 10-year Treasury note interest rates, the velocity of the monetary base decreased 0.17 points, based on a linear regression model of the velocity onto interest rates. Since 10-year interest rates declined by about 0.5 percentage points between 2008 and 2013, the velocity of the monetary base should have decreased by about 0.085 points. But the actual velocity has gone down by 5.85 points, 69 times larger than predicted. This happened because the nominal interest rate on short-term bonds has declined essentially to zero, and, in this case, the best form of risk-free liquid asset is no longer the short-term government bonds, but money.
https://www.stlouisfed.org/on-the-economy/2014/september/what-does-money-velocity-tell-us-about-low-inflation-in-the-us
Don’t you end up paying the differential in yield between the long TIP and short IEF, about 40 bp?
If you do it in proper size that should not be an issue
Not here to determine what should be but what will be …This rings true in everything you ever you said Kevin… The timframe is what matters but then again you are a master trader so that is your edge… Thanks for your perspectives
I think I am missing something. Didn’t Mr. Muir earlier write a post stating that he trades based on the assumption that some hybrid form of M.M.T. will be adopted? Is there anything that would kill M.M.T. faster either as a monetary theory or as a policy tool quicker than inflation? If you had limited funds to gamble, would you put them to use on this maneuver or on real assets and value stocks?
His confidence that MMT will be adopted is the whole basis for this trade. Once MMT results in a level of spending that drives inflation it will be politically impossible to withdraw from those spending commitments at least in the short term. We will have at least a few years of high inflation before spending and revenues get back into sync, and likely more than a few.