I’m not trying to scare anybody but I have a premonition that something is about to break. The relentless move higher in the dollar and the ten year treasury yield is tightening global financial conditions on a daily basis. The vise grip is being squeezed; the frog is approaching the boiling point.
Central banks around the world – led by the Fed – are tightening in a tone deaf manner. Of course spiraling inflation is a menace but by administering so much medicine the Fed risks killing the patient in the attempt to cure it. The well known Finance Professor Jeremy Siegel – normally a calm academic – had a terrific rant against Powell’s policy on CNBC’s Fast Money last Friday.
If I’m correct the real risk now is not inflation but deflation. If something breaks the gears of the economic machine will become entangled and come to a standstill. Prices in the real economy as well as financial markets will fall – as in fact they already are.
Based on this analysis I have sold all of my precious metals positions and accumulated a sizable stake in long term treasuries via the TLT ETF – an extremely contrarian trade. In the event of deflation long term interest rates will come down quickly – and materially – and the price of TLT will go up. To me it is reminiscent of the trade the great Michael Steinhardt made in a similar moment more than 40 years ago which he described at the beginning of his autobiography No Bull.