U.K. Credit Watch: Inflation by Any Other Name?

Many Seeking Alpha authors including myself have been predicting inflation for the past several months and recommending hard asset strategies/short Treasury (TBT, PST, TYO, RYJUX) to prepare for the inflation we saw coming. Our detractors ridiculed us and pointed out the embarrassing fact that the U.S. is suffering from deflation right now, not inflation. The S&P placed the UK on Credit Watch Wednesday and brought the whole issue into blinding focus for me. I am long TBT and Wednesday (Jan 20) saw TBT value decline because the Fed threatened to buy more Treasuries at the long end of the maturity spectrum with electronic fiat money created out of thin air. Then in a flash the S&P Ratings Service rescued me by placing UK government bonds on Credit Watch.

So maybe Seeking Alpha authors were really saying this: The U.S. government is imprudently borrowing or printing too much money and there has to be a bad effect from that somewhere. If Obama and Geithner can spend 2 trillion they don’t have in 2009 with no bad effects whatsoever, then the rest of us missed something fundamental. Maybe the bad effect from deficit spending is inflation (with a lag), maybe that bad effect is higher interest rates, maybe the bad effect is a falling gdp, but there must be a bad effect somewhere. And then, from out of the blue, the S&P Ratings Service gave our thoughts voice. The S&P said some amount of government spending is excessive, and the UK has stepped over the line.

So our vindication did not come from some future Bureau of Labor Statistics announcement that core inflation was 5% instead of the expected 3%. The S&P Ratings Service has served the market notice that some amount of government deficit spending is excessive. Those of us who chose the bad effect of inflation were in the right neighborhood (short treasury ETFs) when causality struck, and we were rewarded. I think the S&P Credit Watch is a watershed event with far reaching implications for currency markets (bad for the dollar/pound), the future of interest rates (up), and it now forces governments to think of solutions other than printing and/or borrowing more money to solve economic problems.

Disclosure: The author is long TBT. The author has no position in any of the other ETFs mentioned.