Long Treasury Bonds vs. Short (Deflation vs. Inflation)

 |  Includes: TBT, TLT
by: David Stallard

The conventional wisdom seems to be that we are heading into inflationary times due to both monetary policy (effectively printing more $$) and fiscal policy (deficit spending); HOWEVER, I just ran across a recent analysis from Hoisington Investment Management Co., a fixed- income manager of $4B+ for large institutional investors (corporations, governments, insurance companies, endowment funds, foundations, etc.) based in Austin, Texas. For reasons outlined in their 5 page quarterly newsletter (publicly available from their website), Hoisington opines that deflation is the likely scenario over the next decade, not inflation … which of course has significant ramifications for both the economy and the investment markets.

They argue that the slow “velocity” of money will prevent inflationary times, i.e., even though the money supply is being dramatically increased, it largely is not being spent in the real economy … printing excess dollars only matters if it trickles down to consumers who actually spend those dollars. Hoisington believes that we are facing a period like 1874-94 USA, 1929-41 USA and 1998-2008 Japan -- all deflationary periods, as opposed to our relatively frequent normal business cycle recessions.
On one hand, I’m always attracted to opinions that defy conventional wisdom (especially if they come from my home state of Texas), but, on the other hand, I recognize that this firm’s sole business is managing large fixed income (bond) portfolios -- which of course benefit from deflation and do poorly in inflationary times -- so they probably have an inherent bias favoring deflation.
It does give me some pause before jumping onto the inflation bandwagon.
Disclosure: No positions