The Wall Street Journal put on a full-court press of inflation blather yesterday, shilling the Fed and a mainstream consensus that higher prices for everything loom in our future. Here’s one of the headlines from Wednesday’s edition: ‘Yes, Central Banks Can Create Inflation. Just Ask Argentina”. And here’s the headline I would offer in response: ‘No, Central Banks Cannot Create Inflation. Just Ask Europe and Japan’. The other headline, atop a column by one Ken Brown, read as follows: ‘No One Believes It, but Inflation Is a Pretty Good Bet’. In response, I offer the chart above. If inflation were coming, the long-term bond would reflect it with a bearish chart (bond yields correlate inversely with price). Does the chart look bearish? Not hardly. Even to someone who knows nothing about charts, T-bond futures look like they are headed to the moon.
Huge Potential for Bond Bulls
I’ve been predicting for years that interest rates on 30-year U.S. Bonds, currently around 2.70%, are headed to 1.64% or lower. If so, the futures contract shown in the chart is bound most immediately for 186^15. This implies that anyone betting on inflation, as Mr. Brown has suggested, is going to get killed. Betting on deflation, on other hand, offers some of the juiciest odds that can be found in the investment world. If interest rates were to fall below 2% as I’ve been predicting, the capital gains potential of T-Bonds is enormous — on the order of 20% or more per year if the drop occurs over the next 18-24 months.
Here’s another headline from yesterday’s Journal: ‘Fed Signals No Rush to Raise Rates’. Now there’s an understatement. The Journal embarrasses itself when it implies that a rate hike is still possible. When the Fed tried to pretend it could walk the walk a couple of months ago, raising administered rates by a token 25 basis points, it set off a panic in global markets that could conceivably have snowballed into a crash like the one in 2007-08. We’re that close. Under the circumstances, talk of a rate hike is about the stupidest thing I’ve ever heard.