For now it looks like the inflation bugs have the upper hand.
Gold and commodities are soaring, Congress is calling for Geithner’s head, and all the commentary seems to be about oceans of liquidity driving markets higher.
The TIPs market is the latest red-flag. The real yields on short-term inflation-protected bonds issued by the Treasury have all gone negative. That means that buyers are locking in a yield to maturity that is less than the inflation rate on TIPs shorter than five years.
Either there’s an inflation panic out there, or there’s not enough bonds to go around. I’d guess it’s a little bit of both. In the short-run, Treasury could actually earn money by issuing a scad-load of short TIPs and T-Bills. Think of it—being paid to borrow! I don’t see why they shouldn’t get paid for satisfying the market’s irrational demands.
In the medium-term, the gold and commodities rally seems to be a bet that the dollar will fall. But it’s not clear to me that participants have thought this one through very well.
For the greenback to fall, it has to fall against something. Europe? They’re as weak as we are. Japan? Please. That leaves China. Yes, China is facing pressure to appreciate the Yuan, which would cause some inflation here. But China’s leaders are facing a lot of other pressures, too. And the approval of the G-20 leaders is probably pretty low on their list.
Gold’s rise this year reminds me of the oil boom last summer: buyers buying because buyers are buying. Bubbles like this rarely end happily.
Douglas R. Tengdin, CFA
Chief Investment Officer
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