Nassim Taleb, the author of the Black Swan, has in the last couple of weeks been telling everyone who will listen that shorting US treasuries is a “no brainer” and that “every person on earth should be doing it”.
Well, is it?
We’re quite sceptical. Not because we dislike with Mr Taleb, who’s a clever man, or because we think that US treasuries are at the moment a steal of a buy. We’re worried that people are talking about sure things.
Firstly US Treasuries, at least the non-index linked variety, are “deflation plays”. If you think that inflation is going to be lower than everyone else does then you should buy US Treasuries as these are going to be undervalued as everyone else is being drawn to equities and commodities rather than the fixed returns that the US Government will offer.
We said if inflation is lower as deflation hardly ever happens. But it just did. So if you think there’s going to be deflation then you should double up on these. So why will there be inflation? Well, simply put the governments have been printing money, and if you print money you get inflation.
Like Japan. Sorry to throw the fly in the ointment, but Japan has been printing money for at least some of the 20 years it has been in depression and deflation. However the banks are sitting on this money as their assets are based on the sort of loans that looked a great idea in the boom times but look like a write down waiting to happen.
Anyone who’s read Mr Taleb’s book would know that he made his money on the markets by betting on big outliers. Deflation is one of those big outliers. To say everyone on the planet should short US Treasuries is a bit dumb, as it misses this massive outlier.