Ricks Picks

Inflation, Deflation, and Our Very Confident Bet in T-Bonds


I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend.  About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.  As Myers noted, every penny of very debt must eventually be paid – if not by the borrower, then by the lender. So far, lenders have hung tough on their terms, and although a recklessly expansive monetary policy has cut mortgage debtors in particular some slack, there is no reason to think private lenders will let homeowners skip free when the second stage of the housing collapse that began in 2007 begins anew. Deflation-wise, this is where the rubber will meet the road, drawing irresistible power from the inevitable implosion of the quadrillion dollar Ponzi scheme popularly known as “derivatives.”

I’ll concede that while hyperinflation seems at least possible somewhere down the road, the current state of the global economy could not make it much clearer that we are going to pass through a ruinously deflationary phase first. Even then, a hyperinflation would not be driven by wage pressures or rising prices, or even by a further increase in the money supply, but by the epiphany of the dollar’s worthlessness.  This is fundamentally true even now, as some have long recognized, but it does not seem to be on the minds of most investors. Far more urgent is their dawning realization that the central banks’ main battle, especially in Europe at the moment, is against deflation rather than inflation. Under the circumstances, T-Bonds prices can be expected to keep rising, and yields to keep falling,  if: 1) Europe continues to sink into recession-or-worse; and/or, 2) U.S. stocks have entered a bear market; and/or 3) the U.S. economy slides into recession-or-worse; and/or 4) some horrific geopolitical crisis – Ebola, even – causes capital to flee to the ostensible safety of U.S. Treasury paper.  As readers must surely realize, all of these things could happen more or less simultaneously, making the T-Bond bet even more attractive.

Sentiment to Die for…

How attractive?  Below are the recent observations of my good friend Doug Behnfield, whom I invariably introduce here as, hands-down, “the Smartest Financial Advisor/Guy I Know.”  Although bullish sentiment toward stocks is at very scary extremes, he notes, the opposite holds true for long-term investment grade bonds: “The financial press is overwhelmingly bearish on the bond market and the belief that interest rates have nowhere to go but up is practically universal,” Doug wrote in a recent letter to clients. “The two things that have changed since the beginning of the year are that these extremes in sentiment have expanded significantly and long-term investment grade bonds have significantly outperformed stocks. In fact, large capitalization stocks as measured by the S&P500 were up 8.34% year to date (YTD) ending in September (Q3), and small capitalization stocks as measured by the Russell 2000 were down 4.41%. On the other hand, the UBS Universe of Closed-end Municipal Bond Funds was up 15.2% and 30 year AAA Municipal bonds were up 12.75%. 30 year Treasury Bonds were up 18% and 30 year 0% Coupon Treasury Strips were up 34% (also performance YTD ending in Q3). No sense being smug, considering how much worse bonds performed than stocks last year, but the contrary nature of sentiment seems to have started working at the beginning of this year and if that is the case, this trend could last for quite a while.”

A Simple Strategy

Yes, Doug had a lousy year in 2013, when T-Bonds corrected severely. But the previous five years were stellar, and 2014 could conceivably be his best year yet. For our part, Rick’s Picks has been recommending bullish option spreads in TLT, an ETF vehicle that correlates with price moment in long-term bonds.  The spreads have been easy winners and are simple to do. To further reduce risk, we roll them forward each week, cumulatively harvesting time premium from the short side of the spread.  If you’d like to learn more about this tactic, consider taking a free trial subscription that would give you access to a chat room where you can talk with subscribers who have traded the spreads themselves.  Our original strategy has turned out to have been too conservative, since TLT’s rally has been steeper than we’d anticipated. The initial idea was that the bet would become increasingly lucrative as the global economy slipped into coma. Bearish as we’ve been on the economy, we didn’t see its collapse happening quite yet. But evidence is accumulating that the process may already have begun.  If so, now would be a good time to jump aggressively into Treasuries (and also to bet against junk bonds. The vehicle we are using for this sort trade is an ETF with the symbol JNK.)  To  access the 24/7 virtual room and all of Rick’s trading “touts” and services, click here.

Comments on this entry are closed.

Traveler October 17, 2014, 6:28 am

will just say that Nigeria has done a bang up job of shutting down ebola in their country. so far. which is really something when considering what a densely populated craphole Lagos is (20m in that city alone). on the other hand, they do something Obama won’t do: they patrol and control all their access points with great alacrity.

Farmer October 17, 2014, 9:33 am

Don’t kid yourself Traveler. It is a virtual certainty that Ebola has already jumped regional borders in West Africa but is not being reported in the news. The borders in Africa are extremely porous and in many cases are meaningless as tribal boundaries take precedence over political maps.

It should surprise nobody that the kind of bad news associated with a pandemic might be suppressed as long as possible as efforts are madly made behind the scenes to stamp out the spread before it becomes a news event.

The governments here are utterly terrified of the prospect of rising infection rates after seeing the havoc that was created on the three countries that have been hardest hit. The economies of West Africa have almost literally collapsed in the period of just a few short months.

Part of the reason is that foreign investors fled along with their money while tourism dropped to almost zero. The real impacts though were felt on the ground as most of the transport sector including taxis and buses ground to a halt, restaurants were closed and almost all events that involved large groups of people were shelved.

So hotels are sitting empty, clubs and bars have shut down even in the capital, meetings and conferences were cancelled and sporting events are not being attended. The expected outcome is a disaster in the making and entails mass (and very rapid) unemployment and a loss of incomes which therefore is manifest in an overnight crash in tax revenues.

This is the picture of an extreme shock to those economies which were already struggling but it is also presenting the specter of political disaster in the making as the worlds fastest growing countries by GDP face the prospect of a rapid unexpected slowdown.

Keep in mind that 6 of the 10 fastest growing economies on the planet are all in Africa and you will appreciate how much apprehension the political class is now contending with as Ebola threatens to unwind decades of transformative policies and efforts directed at poverty alleviation.

As these countries have made rapid progress in integrating with the global economy in recent years and have in many cases reached high levels of employment relative to the past, they now face an unexpectedly gloomy and uncertain future.

And that is why nobody will be too quick to report a case of Ebola being detected at their airports or in their hospitals. A single case such as Nigeria detected is enough to send capital, tourists and common sense fleeing. Fear is very high right now.

There is an old expression “Don’t believe everything you read” that must be reconstituted to account for the events precipitated by the potential for a pandemic on the rise. These days it is just as important to appreciate what you are NOT being told.

Ebola wrecks economies. When it is detected that news will be suppressed.

I believe it is already far more widespread than is being reported and it has affected many more countries outside Africa than we currently know about. China has recorded zero cases yet they have more nationals on the ground here than most Western countries combined.

Do you believe they have seen no cases in Shanghai yet?

Farmer October 17, 2014, 11:11 am

The following New York times article on the topic of Ebola is sobering and should be read by all. Survival rates in West Africa have now dropped to 30% according to medical teams on the ground. This disease has clearly become the most urgent public health issue of the last century and it will require an unprecedented international response if we are to contain the problem now. Personally, I am bewildered at how many comments I have read online that suggest doubt and apathy about this situation. Maybe that is an outcome of news overload and the public is shutting down or questioning if this is even real. It is clear some don’t want to hear another word on the topic after having been bombarded in the past by fear oriented news surrounding SARS and the various Bird Flu’s that never resulted in the death tolls that were predicted. And yet here we have a situation where not only are the worst expectations materializing but we are now in a situation where field experts will tell us in no uncertain terms the problem has ALREADY spun out of control. Astonishing. I suppose this is denial at work.

New Ebola Cases May Soon Reach 10,000 a Week, Officials Predict

Farmer October 17, 2014, 4:09 am

I also read that WSJ article from John Hilsenrath but I thought it skirted the threats that are really implied by an economic deflation. The problem we face now is that debts will grow increasingly difficult to service and government revenues will decline if inflation is really out of the equation. Asset prices meanwhile can vary widely both up and down….but the burden of debts created in the pursuit of those assets will persist and live on. The implications are defaults must arise to correct the imbalance or debts must be extinguished from a declining income base. Either way, the deflation just becomes self reinforcing and must therefore play itself out to its natural conclusion as creditors and debtors alike slowly winnow their way through the maze of what assets are real and what are just fiction. Suddenly collateral matters again for all parties. It might not be so bad though were it not for the fact the debt Ponzi is a global affair. We should start seeing the first cracks in 2015 as sovereign debt problems return to the fore against a backdrop of rising taxation and a scramble for cash that pits household spending against the needs of governments.

Other Paul October 17, 2014, 5:43 pm

Good summary on WSJ article.
I have never understood the ramifications of a derivative meltdown. In my years of lerking on this site I’ve never learned the financial and economic cataclysms that will befall the world from the meltdown. Anyone who questions the hows and whys usually is personally berated for not “getting it.”
May I ask the real world impacts of a meltdown?
1. Besides some or all derivative traders losing their a$$es, will my bank close?
2. Will my Walmart go belly up?
3. Will my SS check not be automatically deposited?
4. In case of the end of the world as we know it, why won’t solutions to the Great Recession, like backstopping all savings accounts, work again? Tens of millions of people live on the government dole now. Why not more?
To solidify my becoming a target, I’ll add that Gary’s financial optimism has been a way to riches for 5 years. You can argue with his politics, but not his correct calls on the direction of stock prices.
Thanks, Rick, for providing this excellent forum for ideas.

Jason S October 17, 2014, 8:51 pm

In answer to your questions:
1. Will your bank close, no, probably not but it will likely be nationalized since every bank in the US (if not the world) will technically be under capitalized and therefore bankrupt. The US will likely not be able to borrow enough money to bail them out and have to take them over directly and infuse newly created money. This lack of bank solvency and credibility will lead to answering question #2

2. Wal-Mart and every other shopping outlet relies on just in time inventory (JIT). Their computers tell them they are low on widgets today and they order them from overseas to be here in four or five days. The way commerce works is that a producer in say India wants to sell his widgets to Wal-Mart and he will go to his bank to get a bankers’ acceptance. This acceptance is assurance that once the widgets are delivered he is guaranteed to get paid. The Indian bank issues it believing that Wal-Mart’s American bank is good for the money upon delivery. If there is no faith in the other bank then the acceptance wont be issued and odds are high the producer in India wont load his widgets on the ship or plane.

I have it from reliable sources that we were at most 48 hours away from that occurring in 2008 and that is why TARP was pushed into place. Imagine walking into most any store and seeing the shelves going bare in a day or two. Panic.

3 & 4. The SS money will likely be there or created on the spot to be there but I am not sure what it will buy. In the scenario of the derivatives market folding and mass insolvency, odds are pretty good that no one will trust currency since it is backed by nothing other than the promise to pay. If this occurs it will usher in a severe global economic slowdown and even if the governments of the world act in unison to pay people not to work, money is a substitute for labor/earnings from work. If no one is working but the governments are creating money on top of what has been borrowed people will not value the money all that much since there is significantly less labor/earnings from work that backs it. This will likely result in the inflation that some people are expecting but only after the tremendous deflation that comes with the derivative bubble popping (as Rick foresees). Both will act as a one-two punch to level us. Deflation will reduce the value of our assets or take them from us as in bankruptcy/foreclosure and then inflation will strip us of purchasing power of any residual earnings we may have.

tommyd October 16, 2014, 8:00 pm

“Greek PM tries to restore calm after market upheaval”
“After seeing the stock market fall 6.25 percent and the yield on 10-year bonds rise to as high as 7.85 percent….”

Doesn’t matter, but I wonder if a air gap rise in UST’s interest rates will be a result of a flight to safety or junk bond bait…..? Good call Rick……

Jason S October 15, 2014, 9:54 pm

Regarding the growing signs of deflation, for those of you who look at gold as an inflation hedge, James Montier (GMO fund and one of the brightest people I read) wrote a white paper indicating that gold historically works much better as a deflation hedge than an inflation hedge. Go to figure 19 in the paper.


The opposite argument has been made — persuasively, I’d say, and more than once — although I can’t recall the source(s). It would appear that although gold holds its purchasing power in deflationary times, we shouldn’t expect prices to go to the moon while the real burden of debt is close to asphyxiating the global economy. RA

Jason S October 16, 2014, 4:39 pm

If people want to read the paper, the link takes you to GMO’s website. It will require you to create a username and password to access the site. It is free. Go to research and commentary along the top menu and then to research by author on the left and pull up James Montier. It is the “No Silver Bullets for Investing” paper.

Farmer October 15, 2014, 4:44 pm

“Although the futures have sold off hard after spiking spectacularly in the early going, the rally has affirmed the flight-to-safety concept in spades. U.S. Bonds are where the world’s investors will turn when it’s time to circle the wagons”. — RA
Man, that was a good call on Treasuries, Rick. I should have listened to you more closely when you wrote and talked about it some weeks back.

Too late to kick myself in the arse now (or is it!) but this one has been running almost 3 weeks straight doing almost nothing but up, up and up some more.

The dollar itself was probably our guide as it warned of looming losses on US equity markets that first began in late September. We might have expected as much as the termination of each prior round of QE has thus far been met with consequences of one sort or another.

But is the soaring dollar in conjunction with Treasuries on the rise telling us in no uncertain terms that the market has finally made a decision that thousands of bloggers and writers have been unable to come to grips with?

To wit…..that deflation is our fate and we had better start preparing for it now? I kind of think so. Maybe the inflationistas and hyper-inflation advocates will finally settle down and stop being so obnoxious about their point of view!

mario October 15, 2014, 4:36 pm

….coincidental that tonight’s rollercoaster spikes meet marketwatch’s site being down right now due to technical difficulties… that hasn’t ever happened in all my years of watching these markets.

John Jay October 15, 2014, 4:28 pm

That was some awesome, old time volatility in ZB/ZN this morning!
I would say panic driven short covering, but who would be crazy enough to be massively short bonds?
Momentum scalpers putting on every contract they can afford to make a fortune in 75 minutes?
A stunning round trip in any case.

Rick Ackerman October 15, 2014, 4:58 pm

The whole stupid world — the one that has been bracing for “inflation” for about the last 20 years — is de facto short T-Bonds, JJ. It should be obvious by now that the coming, global unwind — out of stocks/everything, into U.S. Treasurys — will make this morning’s T-Bond rally look like the warm-up it was.

mava October 15, 2014, 6:38 pm

Depending on the definition, I am still waiting for inflation. I define it traditionally. Inflation to me is an increase in quantity of money (in our case an increase in worthless counterfeit fiat notes that the treasury spills onto the unsuspecting public).

I am aware that you, RA, define it differently. For instance, your definition of deflation is “Increase in the Burden of Debt”. I am assuming here, that accordingly, your definition of Inflation is then “Decrease in the Burden of Debt”.

IIRC ! Correct me, if I am wrong.

Trying to think of it, and not wanting to thread water pointlessly, I have stumbled on to the fact that I cannot define “debt burden” meaningfully. All the dictionaries define it simply as “debt”.

Assuming that you mean “When it is suddenly becomes harder to pay back debt that was previously acquired, everything else being equal (such as income), then such change in condition could be called a deflation”.


John Jay October 15, 2014, 7:17 pm

From 142^13 to 148 for ZB now at 145^16.
From 127^7.5 to 130^17 for ZN now at 129^12.

On monthly charts I only see about 6 moves of that magnitude since 1994.
And it is only the middle of the second week in October!
I suspect something big happened somewhere.

Farmer October 14, 2014, 3:50 pm

The one notable thing I might say about bonds today is that it struck me that when Bill Gross departed Pimco that he knew, or his good instincts were telling him, that a whole lot of trouble was coming to the industry in 2015. Maybe it was just the prospect of rate hikes that set off the alarm bells but we know one thing, if the bond portfolio there really does blow up on bad news from the Fed that Bill Gross will not be the one wearing the rotten eggs. His departure was what I call a signalling event. It was a statement that we should perhaps heed.

Jason S October 14, 2014, 5:41 pm

Farmer, I am not sure if that is it. Gross would have retired instead of moving to a different firm to continue bond managing if he saw the end of the bond game coming. I think his move had everything to do with hubris and control. Janus is known for letting their managers manage and not whipping them like dead ponies after a quarter of poor performance.

Farmer October 14, 2014, 8:34 pm

We will only know for certain after the fact I suppose. I believe we will get a 1/4 point rate increase between April and June. Nothing too much. Just a nudge perhaps but something that will remind people rates don’t always fall nor can they fall in perpetuity. I also think it will be stimulative as the threat of rate increases (even if follow through is slow) will drive new borrowing and send some folks rushing to lock in mortgages or buy new homes. In fact I think the impacts could be significant and will be one of the reasons behind a Fed decision to do what most think is impossible. The idea conveniently reinforces the idea that the economy is stronger than it appears. There is a fairly strong link between rising rates and an economy that is expanding so perhaps it is a psychological effect that might promote the borrowing needed to renew growth in the money supply. Just a theory of course. We will have to wait and see.

Jason S October 15, 2014, 8:47 pm

Farmer, I hope you are right. While that 1/4 pt rise would likely cause stock markets to swoon, it would indicate that the Fed is at least being a little bit authentic rather than 100% political.

However, I do think that what we will get is further rate declines, more QE and promises of more rate declines. This will continue until investors call their bluff and remind them that zero minus zero is still zero and that you cant go lower than that no matter how much BS you spew out of your mouth.

Buster October 14, 2014, 7:50 am

Understanding the satanic age….

Whether it’s the financial system, political, religious, legal, food, military, or health system, it’s all the same formula.
Follow the money……

Buster October 15, 2014, 8:13 am

The Quest to cure cancer Part 2:


Exposing some of the conflicts of interest present in our Corporate Fascist model system. Money & power are at odds with humanity.

Buster October 16, 2014, 8:15 am

Part 3:

Includes interesting details about good old Monsanto.

mario October 14, 2014, 4:37 am

Well Rick it seems to me that when the supposedly most knowledgeable disease prevention & control people on the planet know well in advance they are receiving an Ebola patient in Texas and despite all that knowledge and precaution, not to mention the high personal motivation to be sure to follow protocol, yet one of them still somehow manages to catch the disease from the patient, that is seriously scary stuff…

On interest rates, I’m with you, I’ll stick to my guns from 3 years ago….U.S. based interest rates are not going significantly up for a very very very long time and indeed may well continue downward toward that magic zero number… I’ll let other people concern themselves with how the powers up above manage that hat trick…

Cheers, Mario


We could have guessed that some particularly nutty strain of political correctness would dictate that we greet passengers from Liberia with open arms — “and please pardon the hazmat suit!” RA

Farmer October 14, 2014, 3:45 pm

I agree with you Mario. I too wondered how it was possible that one sick patient could still cause one additional infection despite well developed protocols and protective clothing.

We cannot know exactly what happened but the similarity of that incident to the hundreds of medical personal made sick or who became fatalities in West Africa is already a familiar story.

Is there something we are not being told about this disease?

There is sure no comfort in knowing that *only* one Ebola infection was caused by an error or oversight on the part of a worker. But maybe it was not an employee problem at all. More to the point, I suspect that the transmission mechanism are still not entirely understood.

What I recently found most alarming was the chart of Ebola growth that was published by the New England Journal of Medicine. Over the past 9 months it has begun to take the shape of a classic parabola which means that the disease is now growing exponentially.

Some people might actually take comfort in that. Those of us who follow market bubbles and perhaps understand these kinds of charts better than most will know that what goes up always comes down. That is to suggest that the chart formation may already be indicating the moment in time when the disease will burn itself out or be brought under control.

Unfortunately it is not that simple.

I suspect that by year end the chart form will actually take a hockey stick pattern and go vertical which means it can keep rising as long as there are people who have not been infected. The disease will only burn itself out in other words when there are not any hosts left to be carriers within the affected regions.

My theory is supported by a recent study published by the Center for Disease Control – CDC wherein they have computer modeled the expansion of infection rates in West Africa based on existing trends and data. They have also calculated for known under-reporting of casualty rates (linked below).

Estimating the Future Number of Cases – Ebola Epidemic

Here is a quote from that article:

“Total Ebola cases in Liberia and Sierra Leone combined are doubling approximately every 20 days. Cases in Liberia are doubling every 15–20 days, and those in Sierra Leone are doubling every 30–40 days
Extrapolating trends to January 20, 2015, without additional interventions or changes in community behavior (e.g., notable reductions in unsafe burial practices), the model also estimates that Liberia and Sierra Leone will have approximately 550,000 Ebola cases. This number jumps to 1.4 million when corrected for under reporting.”

Got that? Almost a million and a half cases potential in the 144 days between August 29, 2014 and January 20, 2015 which is the calculation period.

What they have not attempted to do is extrapolate an infection rate beyond that date however it is easy to conclude that the risk of transmission to other countries via travel will also grow exponentially as a considerable portion of the regional population will by early 2015 have already become infected.

So how much extra risk is expected? Well, the combined populations of Sierra Leone, Guinea and Liberia is 20 million which means, according to the CDC numbers, that they will have sustained a casualty rate of 7% of their collective populations and a fatality rate as high as 700,000 people before January 2015 is out.

There was a second chart that was in the New England Journal of Medicine article that I found even more amazing. It reflected dispersion rates across the region that showed the illness was extremely widespread in both urban and rural areas.

That will come as cold comfort to those who think they are safe in remote unpopulated areas of the country. Perhaps the only assurance one has of not contracting this illness is that they have absolutely zero contact with other people.

Have a look for yourselves at both the charts and dispersion rates if you have any doubts about the seriousness of this outbreak. The short version of the article will open initially. Drop down to the bottom and click on “Read full article” to view their graphics and the details.

Ebola Virus Disease in West Africa — The First 9 Months of the Epidemic and Forward Projections

My point here should be obvious. This sickness does indeed portend a global pandemic is now in the making and it is one that will not readily be contained. It is urgent that flights out of that region be halted if there is to be a hope that Ebola will burn itself out in West Africa before setting itself on the rest of the globe.

Jackson October 14, 2014, 2:26 am

Funny, someone who I respect, Antal Fekete, has also said long ago that the bond market would keep going, going, going, like the energizer bunny. So far he, (and you) have been correct over the matter while the gloom and doomers have suffered great embarrassment.

I guess at this point it’s only a matter of time. Time might play out like rip van winkle on this matter. It’s possible that those with gray hair may never see the collapse of all things as we know it.

mava October 14, 2014, 5:33 am

A.F., yes! I like that too.
He also says that low interest rate environment will hollow all capital in this country. I beliive that.

Rick Ackerman October 14, 2014, 8:17 am

I don’t mind keeping company with the likes of Fekete, not at all. I assume his rationale was the same as mine, since the number of variables that could conceivably drive a bull market in T-Bonds is quite limited.

Hidden Pivot Graduate
Help Page

Click here
for a help page needed as a Hidden Pivot Graduate.

Keep Your
Skills Current

Click here
for a special deal for graduates of the Hidden Pivot Course who want to stay on the cutting edge


Start a Subscription
Lost my password

Seminar Information page.

Tuesday, August 20, 2019

The consistent accuracy of Rick Ackerman’s forecasts is well known in the trading world, where his Hidden Pivot Method has achieved cult status. Rick’s proprietary trading/forecasting system is easy to learn, probably because he majored in English, not rocket science. Just one simple but powerful trick -- managing the risk of an ongoing trade with stop-losses based on ‘impulse legs’ – can be grasped in three minutes and put to profitable use immediately. Quite a few of his students will tell you that using ‘impulsive stops’ has paid for the course many times over.

Another secret Rick will share with you, “camouflage trading,” takes more time to master, but once you get the hang of it trading will never be the same. The technique entails identifying ultra-low-risk trade set-ups on, say, the one-minute bar chart, and then initiating trades in places where competition tends to be thin.

Most important of all, Rick will teach you how to develop market instincts (aka “horse sense”) by observing the markets each day from the fixed vantage point that only a rigorously disciplined trading system can provide.

The three-hour Hidden Pivot Course is offered live each month. If it’s more convenient, you can take it in recorded form at your leisure, as many times as you like. The course fee includes “live” trading sessions (as opposed to hypothetical ‘chalk-talk’) every Wednesday morning, access to hundreds of recorded hours of tutorial sessions, and access to an online library that will help you achieve black-belt mastery of Hidden Pivot trading techniques.

The next webinar will be held on Tuesday, August 20. Click below to register or get more information.

Knowledge Base Link