From the widely circulated video of The Russia Forum panel last week, Nassim Taleb (@13:20),
"So long as you see the picture of, what's his name, Bernanke, and he still has that job, you gotta run to make sure that you are short" Treasury bonds.
Regular readers will know that I've been bullish on Treasuries and Treasuries volatility. (By the way, for the past several months there has been a Current Trades sidebar on the right side of the blog, which shows us long Ts.) Evidently, I have a friend in UK hedge fund manager Hugh Hendry, who, while chewing gum, made the point to Mark Faber,
"You're bearish on Treasuries, you're bearish on the dollar. My hero is Mr. Consensus."
Indeed! At the end of 2009, every hedge fund manager's letter was declaring an impending Treasuries rout and $2,000 gold. Don't get me wrong - I would not want to be stuck with a Treasury bond until maturity, but sentiment was totally one-sided. Specifically, as Hugh Hendry puts it,
"My fear just now is that the community of risk is very short treasuries, and is very long risk: risk assets are the hedge against inflation."
We all know that the U.S. Treasury has gotten itself into a jam with too much of the national debt now financed with short term paper.
This is a problem for two reasons. First, it creates rollover risk. Second, you can't "inflate away" debts of very short tenor, for the simple reason that your creditors will have the opportunity to demand higher coupons at frequent intervals. They see you inflating and you end up digging a deeper hole because you are rolling over debt so often!
So from Geithner and Bernanke's perspective, it must seem imperative to lengthen the average maturity of the national debt. But what the consensus doesn't appreciate is how easily this could be accomplished.
And equities crash. Remember when the 30-year Treasury rate hit 2.5%? If we start to have a sickening crash again, they can sell as many T bonds as they want.
That's when I'll be selling my Treasuries calls and buying back my equities shorts.
Disclosure: Short REG, Long REG-E, Long GGC Notes, Short GGC, Short GGC Vol. Long CPE Notes, Long Treasuries Volatility