I have made absolutely no secret of my bearish position on US treasuries and the USD for some two years now. My bearish position is in essence based on the dramatic expansion of the Fed balance sheet and the seeming endless money printing efforts of the Fed. But what I have completely overlooked is the unfunded liabilities of the US Government. According to a report by Michael Chembalest of JPMorgan unfunded liabilities (or should I say "off-balance sheet" debt) increase the US Government debt by at least 8x! Perhaps this is what is in the forefront of Bill Gross' mind with his bearish outlook/position on US treasuries. Note the essence of his latest investment outlook:
“Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pockets of savers via a combination of less-observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates...It is incumbent, therefore, in order to preserve the integrity of the US Treasury Market along with its favorable global interest rates, and to promote a stable US economy, that entitlement spending be reduced, and that future liabilities be addressed in terms of healthcare and Social Security cost containment.”
Bill Gross, “Skunked”, April 2011
I think Bill Gross hits it on the head when he says that the only way out for the US is to inflate away its debt problems. This will ultimately mean a lower USD and higher yields on treasuries. I think we are looking at an inflationary hurricane/crisis in the eye. Accordingly, we are likely to see commodity prices move higher over the coming months more than the average commodity bull could "rationally dream." Position yourselves accordingly.
Disclosure: I am long DBC, TBT.