Longer-term government bonds are selling off, and their yields are rising, as commodity speculation and inflation expectations have leapt over the past seven months. Central banks are throwing everything they have to maintain asset inflation because they cannot inflate wages, the necessary catalyst for sustained price inflation. At the same time, leaping yields and commodities are the undoings of an ever-more indebted economy with non-replacement birth rates. Therein perpetuates the deflationary circle that persists.
A. Gary Shilling’s latest Insight for April (behind paywall) is a deep dive into the underpinnings of inflation and deflation. For non-subscribers, some key points are summarized in the article 4 Reasons Wall Street Is Wrong on Inflation:
- Americans will continue to save their stimulus money and pay down debt.
- Wages are not rising sharply, and increasing commodity prices are temporary.
- The increase in Treasury debt will be absorbed by investors and offset by an increase in consumer savings.
Also, see Ed Yardeni’s paper Four deflationary forces keeping a lid on inflation.
Higher yields are worse for debtors but better for savers as maturing cash can roll into higher-yielding deposits that rise in price when risky assets enter their next well-earned nervous breakdown. Treasury bonds and cash preserve capital and liquidity for equity buying once highly levered markets are once more liquidating:
Shilling recommends that investors hold long-term Treasury debt. He also recommends shorting tech stocks and heavy holdings of cash.
Asked about what he’s waiting for to put his large cash allocation to work, Shilling said he’s “waiting to see if we get a blowup in the stock market.”
That could happen again to stocks that are attracting heavy speculative buying, like special-purpose acquisition companies and like GameStop and AMC did in late January. Those two stocks have since fallen sharply from their highs, though they remain well above their prices at the start of the year.
Shilling sees “inflation in those kinds of areas, not in spending for goods and services, which is a good reason there could be a major bear market in stocks.”
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