Gyroscopic Investing

This article (quote from businessweek, it's not the entire article...I know that causes copyright issues) makes me almost certain that the next six months or so will see interest rates and commodity prices rise.  

Not changing my PP or anything, but I just love the matter-of-fact tone.



Treasuries Gain Most in a Week as Traders Cut Bets on Inflation


June 23, 2011, 2:39 AM EDT
MORE FROM BUSINESSWEEK


By Wes Goodman
June 23 (Bloomberg) -- Treasury 30-year bonds rose the most in a week on speculation the end of the Federal Reserve’s $600 billion debt-purchase program this month will depress commodity prices and slow inflation.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, shrank to 2.14 percentage points, within one basis point of the narrowest this year. The Fed said yesterday it expects inflation to subside, after the bond purchases, known as QE2 for the second round of quantitative easing, drove oil to the highest since 2008 and gold to a record.

“Inflation expectations are coming down, and that will put downward pressure on yields,”? said Yoshiyuki Suzuki, Tokyo- based head of fixed income at Fukoku Mutual Life Insurance Co., which has the equivalent of $69.6 billion in assets. “Commodity prices have peaked with the end of QE2.”? Fukoku bought Treasuries a few weeks ago, Suzuki said.

Clive wrote: My guess is that the Fed will huff and puff until they've blown back into inflation or some other means to raid savers savings in an opaque manner. Raiding directly, such as illegalising gold, or demanding x% out of everyone's savings accounts directly is their most least preferred choice.

This is my guess as well.  From their perspective, they want maximum revenue with minimal fingerprints left behind.  We've all seen some amazing things happen, though, so only time will tell.

And there's a certain poetry to the phrase "most least preferred choice". 

Clive wrote: I think the same also Adam. The treasury will/are looking to lock in at minimal longer term cost of borrowing and maximising tax revenue streams. If the government borrow from you (you buy LTT's) at 4% in a 4% inflation world, and they tax back 1% on the 4% they pay out in interest they're smiling. In low/negative inflation (deflation) that's a much harder trick to pull.

I wasn't even thinking along those lines, but that's a very good point.  

My thinking was less scientific.  When I hear a big wig at Mutual Life say something like "commodity prices have peaked with the end of QE2," it convinces me that exactly the opposite of what he is predicting will happen.

I'm still a fan of bonds over the next several years, but when people are saying stuff like "inflation expectations are coming down" I start to expect to see rising commodity prices and interest rates, at least for a few months.