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Trade!

Doubling down on the long bond.

Buy 50% position in 30-yr Treasury bond.

This brings me up to a maximum position on the long bond.

Why? First, the Fed announced $600 billion of QE2. This does dilute dollars thirty year from now. However, in the short-term, the Fed will have to buy longer term bonds rather than short-terms to get any lowering of interest rates. Short-term rates are already at record lows. So if the Fed buys anything, they buy the long bond.

Second, there is a distinction between devaluation and inflation. In an academic sense (whether right or wrong, bear with me here), inflation is a function of final demand. Devaluation is what the Fed is conducting now. This is why commodity prices are soaring despite the fact that consumer spending is flat, and global demand for commodities is down from the 2007-08 peak.

And where is that demand going to come from? Dave Rosenberg reports that the shadow housing inventory is at 107 months. That's nine years. Nine! So if the economy takes nine years to stabilize, then getting paid back in 30 years doesn't look so bad to me.

Finally, there's the knee-jerk pattern. For as long as I can remember, the knee-jerk reaction to any Fed announcement has been counter to the trend that ensued over the next month or two. Right now, a 4% coupon looks mighty tasty to me.


Disclosure: long 30-year Treasury bonds