Guest Post: This Strip Is G rated

Tyler Durden's picture

Submitted by Yves Lamoureux of Macquarie Private Wealth

This Strip Is G rated

If you believed in deflation and loaded up with treasury strips then you recently cashed in a year-to-date return of more than 25%. I did warn about the coming bond rally here:

I argued that bonds would outperform stocks and suggested using overweight positions with leverage; a long treasury strip could do just that. One reason to be bullish on long treasuries was the change in behaviour observed when I wrote this in October 2009.

“It’s become clear that investors’ attitudes are changing and the new normal is not to invest one’s savings in stocks; rather, that money is flowing to bonds.”

If you read this now, after the fact, then you really suffered from paradigm paralysis; of course, everyone has 20/20 vision in retrospect.

I will now argue that deflation is unsustainable. It will only come in the form of sudden deleveraging shocks. I do think that the bulk of deflation has passed. It is now more of a mindset, rather than a fact.

We are in disinflation and moving toward slow and selective inflation of assets. It does not mean that gold is your best bet. In fact, it is not. I also think that we are headed into a multiyear top with respect to corporate bonds.

Severe bouts of upcoming disinflation might act to slow certain trends, but I am convinced that it will not fundamentally change supply issues of what we invest in.

I did recommend buying the CRB index at the low under 200 in early 2002 and kept our documented suggestion. It should tell you that we are always hard asset buyers in one form or another. I do intend on having adequate immunization, which is one of my criticisms of managers in 2007 and 2009.

What most people don’t understand is that treasuries are the only diversifier left. They are not only a play on interest rates but insurance as well. I saw a huge opportunity to profit from bad behaviour where all players were short duration. It was almost a ubiquitous giant naked short creating a perfect mismatch.

Disinflation conditions will create a market boom for stocks, since it reflects claims on real assets. If one was long duration bonds, would it be adequate to now be long duration stocks? The problem with this has to do with the unstoppable flow out of stocks. I did warn about a lot of participants and the move to bonds in 2009. Don’t be caught flat footed; they really are leaving stocks.

Another issue has to do with liquidity, where remaining players cannot continue absorbing the stocks that retail sells them indefinitely. I would like to see some kind of event accelerating the process, so we can get to a selling climax. I suggest that a buy and hold period would ensue.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Macquarie Private Wealth Inc. (MPW). Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete.  However, neither the author nor MPW makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Past performance may not be repeated.  Information may be available to MPW which is not reflected herein.  This report is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. Commissions, trailing commissions, management fees/expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, their values will change and past performance may not be repeated. Links to other web sites or references to products, services or publications other than those of Macquarie Private Wealth Inc. (MPW) on this Web Site do not imply the endorsement or approval of such web sites, products, services or publications by MPW. MPW makes no representations or warranties with respect to, and is not responsible or liable for, these web sites products, services or publications. No entity within the Macquarie Group of Companies is registered as a bank or an authorized foreign bank in Canada under the Bank Act, S.C. 1991, c. 46 and no entity within the Macquarie Group of Companies is regulated in Canada as a financial institution, bank holding company or an insurance holding company. Macquarie Bank Limited ABN 46 008 583 542 (MBL) is a company incorporated in Australia and authorized under the Banking Act 1959 (Australia) to conduct banking business in Australia. MBL is not authorized to conduct business in Canada. No entity within the Macquarie Group of Companies other than MBL is an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Australia), and their obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any other Macquarie Group company. Macquarie Private Wealth Inc. is a member of the Canadian Investor Protection Fund and IIROC.

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DarkMath's picture

"It does not mean that gold is your best bet. In fact, it is not."

I'm all ears....please enlighten me...what will outperform Gold in the next 10 years?

Oquities's picture

i think he's suggesting a selling climax in equities will bring bargains and that seemingly will not also happen in gold.  as to his next-to-last paragraph, i'm still trying to figure out what he's saying there.

DarkMath's picture

So wait for the selling climax in equities...I guess I should wait for the big red neon sign that says Market Bottomed Here.



midtowng's picture

I believe the gold bull market will end some time this decade, but not in the next year or two.

RockyRacoon's picture

Everybody has differing opinions on that.

Here are two articles with different conclusions using the same graphs!

Pick your poison, triple top or cup-and-handle...

Precious Metals Equity Index Forms Triple Top

Technical Targets for Gold, Silver, and the Gold Stocks

prophet's picture

POT and probably about a thousand other securities.


FLETCH's picture

i think he means that gold is not immune to deflationary forces, with the caveat that the currency is not destroyed in the process

spartan117's picture

Treasurys, bitches!  Er, I mean, Treasuries...

citationneeded's picture

Does this assume that the Equities Markets return to their historical purpose of asset capital allocation rather than its current incarnation?

Vampyroteuthis infernalis's picture

That will return only after the corporations are truly profitable.

yabs's picture

how come 6this nonce thinks deflation has ended?

its hardly even started

spartan117's picture

Two health insurers in California just raised their premiums by 19% and %16, I believe. I'm still waiting for deflation.

doolittlegeorge's picture

no shit.  and my reading material for the week is pretty simple:  hospitalists and "remimbursements."  The line that stood out was "United Healthcare's unpopularity has actually fallen among doctors from 92% to a mere 68%."  I think we may have reached a technical level here and am looking for arbitrage opportunties going forward.  Needless to say "rising reimbursement rates are a possible culprit."

Rainman's picture

Health insurance premiums have little to do with inflation and everything to do with extortion. It's the Obama put. Disregard.

Traianus Augustus's picture

He called stocks "real assets"...that's hilarious!!!  Based on what?! Fundamentals!!!  No stop it!!! I can't stand it anymore LMFAO!!!

doolittlegeorge's picture

it's because "when they go to do you."

yabs's picture

he mentions the term reAL ASSET and stocks in one sentence

sorry this guy is full of shit

should I sell Gold then and buy stocks in BA a 'real" asset

traderjoe's picture

Treasuries might be a good trade. But they will NEVER pay off. You wanna bet the US Gobermint can pay its obligations over the next 10/30 years in today's dollars? Without hyper-inflation or some sort of default? Did he call Treasuries some sort of insurance?

Shorting Treasuries for the long-haul (and not just for a trade) is also non-sensical - unless you can use the proceeds to buy something not in $'s. Otherwise you get paid back in the toilet paper dollar. 

Oquities's picture

stockholders in companies with little/no debt are claimants to the real assets, if any, those companies own.  being careful about goodwill and intangibles vs. plant and equipment, etc. of course.

ShowMeTheTime's picture

His history and documented calls are pretty good..

doolittlegeorge's picture

timing is important as Treasuries were getting clobbered since December, 2008--"right up to the point at which they soared."  A tradeable rally?  If you're Bill Gross maybe and needless to say "he owns the Casino."  Still "good market calls are greatly appreciated" although you would think "treasuries are a fairly well covered asset class on Wall Street."  Nothing like surprises, no?

bart.naf's picture

Indeed, his calls have been quite good.


"I saw a huge opportunity to profit from bad behaviour"

Nothing like seeing money laying around and picking it up...

old_turk's picture

'His history and documented calls are pretty good..'


It is but within context, but it appears (at least to me) he's way early on his 'deleveraging ist kaput' call.  He's probably spot on disinflation scenario, once the capitulation and abhorance of all things equity has been reached.

Just not yet ....

bmusic's picture

I'm also a little confused about what he's suggesting.  It seems like he's suggesting, selling Treasuries and buying Commodities (other than Gold).  It also seems like he's suggesting buying equities following some type of event driven crash.

Does this sound right?

RockyRacoon's picture

Yes or no, probably or maybe, could be or not.

Either way, I ain't buying.  Going for the gold.


goldsaver's picture

OT, what happened to the DOW rally on "good employment news"? Hmmm... Guess we wil have to wait until 45 seconds before close to see it really hum.


Cognitive Dissonance's picture

The market wants to sell down. The Ponzi wants to buy all those who wish to sell. Pretty soon the Ponzi will be playing with itself. Hope it feels real good because it's going to be real ugly.

RockyRacoon's picture

...Ponzi will be playing with itself

Charles Ponzi would be shocked at your language.

Burnsy's picture

Disinflation conditions will create a market boom for stocks, since it reflects claims on real assets.


This statement is strange to me. While stocks are indeed claims on real assets (those are the stocks I want to own, anyway)-I don't see a period of controlled disinflation in the cards. Rather deflationary pressures followed by inflationary pressures, in which stocks with claims on real assets(e.g. oil, gold) should benefit. Can somebody explain his reasoning to me on this one? If he means buy after a severe downturn in anticipation of stimulus pressures causing (at least temporary) asset price reflation, I agree...

tmosley's picture

So disinflation won't cause corporates to default on their bonds?

Counterparty risk is the word in this market.  If you have assets that are exposed, you will lose them.  If you have assets that are not, you will keep them.  It's as simple as that.

Playing around in a burning building is fun, and looting can be profitable, until the building falls in on you, or a G-man shoots you for looting (what, you never heard of a "windfall tax"?).

web bot's picture

Look... these video gamers sit behind screens and robots, so this is nothing more than a video game for them. Blow something up, no problem, you get multiple lives. Simply go to another part of the game and collect more points from the system (that means you and me) to cover.

They're in god mode most of the time... so they are immune from the inconveniences of life.

TWORIVER's picture

And on we go to 1250 SP 500 despite another chapter of, " how the world will end today."

web bot's picture

I would like to see the rationale for dismissing inflation - ahem, I mean hyperinflation.

If you are a day trader, then this stuff's worth licking up. If you have a longer term horizon, longer than the tip of your nose, then I'd be cautious, very cautious.

We have an unstoppable deficit with no end in sight and a European debt problem that is on again, off again... something in any other time period would have people screaming up and down about.

Welcome to the new normal.

web bot's picture


Just how much time do we really have until we have a USD crisis?

cjbosk's picture

My guess is that we see inflation and deflation simultaneously.  Inflation in necessities i.e food, energy, etc. and deflation in big ticket items like appliances, televisions, shittery...

Hard to get hyperinflation however, when there's absolutely zero velocity to the dollars being printed.  Like throwing money in a burning trash can. 

Japanification bitchez!


RockyRacoon's picture

Hard to get hyperinflation however, when there's absolutely zero velocity to the dollars being printed.

Are you sure that is the definition of hyperinflation?

Anybody want to jump in on that one?

Let em push you around's picture

That sounds about right to me.  They'll have to figure out what items are backstopped by inexorable human need and price gouge us all on these select items. 

I am also a bit confused on how disinflation is going to be a boon for stocks because they represent ownership in real assets.  I was under the impression that that reason was the excuse for why stocks can go up under INFLATION.  Besides, it seems to me that this system of ours is already DOA and will finally kick the bucket once their is too much blood in its dead adrenaline-veins, so I don't see how a slowdown in the "progress" of inflation bodes well either.

Tic tock's picture

The conditions are here for Hyperinflation: and they're also primed for Deflation- we would know that if the actual numbers were forthcoming. We can tell that the numbers are, in fact, that bad because there is no inch given to a deflation-like scenario being propogated; which would be normal - for those confused, Hyperinflation, loss of confidence )in Uncle Sam paying Treasury coupons) and Deflation, collapse in US consumer and business earning power. ...the author makes the point that deflation, relating to stocks, seems to have largely gone out of the window...because there's a lot of capital based upon that pool and thus there is a policy at the highest level of the stock market consistently finding buying support. 

The question is, what are the ramifications of this policy? ..I feel that the supply of dollars into this equities rise is funding the spending of a section of the population. Looking at auto sales worldwide, Fiat, Ford, Peugeot , sales are flat on 2009 and the market is down overall 17.6% from last year while Audi, Porsche, Rolls, Mercs are showing spectacular strength.. huh! Fleet sales are making the difference for the economy sector and in a big way- I smell deferred purchase. But the point is that the absolute consumer numbers are down heavily, whereas the well-paid, the government contractors, the people who have money to manage, they've been able to eke a better income.

Most people are going to have less money going forward which is Fed is in an intersting position with regards to this: it is responsible for sorting out this mess, it needs to be able to measure the problem and we don't believe that it has taken steps to find these. The only policy it is pursuing is, by it's nature, a short-term, small-scale consumption effect. Though it can run the program for as long and as large as it would like to, it remains unlikely that the market will ever be convinced that this represents a meaningful structural wealth shift. Which is what, y'know, when the housing market nationwide collapses and thousands of banks are insolvent and employment is structurally deficient, energy costs are uncertain, is what the market is looking for.

This is getting a bit long, but in conclusion I just want to say this is the child trying to copy the parent: the Fed wants to support the entire economy- in the old days, govt.s could provide communications, power, food and then leave populations to go off and make their own little niche and expected that they would be content left to themselves -while the high and mighty would get on in business, generating knowledge, selling arms, whatever. Now, Democracies around the world have been made in the image of the US and these do not permit for the little people to live underneath and secure away from the interests of powerful, profit-seeking organizations... if the Fed can see that what it would like to do, is the same as other post-imperial administrations, that in itself would be quite welcome.         

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