Saved By Zero

Stretched by fewer
Thoughts that leave me
Chasing after
My dreams disown me
--The Fixx

The hallmark of deflationary periods is risk aversion. As deleveraging proceeds, prices of risky assets are pushed lower, and folks seek shelter in assets considered 'safe.'

The safest asset on the planet is currently perceived as short term US T-bills. Because of the US Dollar's reserve currency status (and the understanding that the US government will almost certainly print dollars to pay debt rather than default), short term US government obligations have garnered a supreme safety rating.

Over the past few months, investors around the world have poured into T-bills such that the yield on these instruments is effectively zero. This means that folks are willing to sacrifice any return on their money in exchange for return of their money.

While it's easy to marvel at the oddity of this phenomenon, it's quite consistent with the capital preservation mindset surrounding deflationary periods. Similar situations were observed in the US during the 1930s and in Japan during the 1990s.

Although risk averse behavior is a natural collective response to a previous period of extreme leveraging and risk taking, governments don't see it that way. In an over-leveraged world dependent on ever increasing consumer buying and consumption to keep the wheels on the wagon, deflation is a bureaucrat's worst nightmare.

At some point, the massive monetary stimulus being poured into the system by governments to combat deflation will likely gain traction. When precisely that will occur is anyone's guess. Some believe it will take years; others think that it will be soon.

Personally, I've been in the 'many years of deflation' camp. However, governments around the world are moving much quicker and more boldly than even I had anticipated. This is causing me to reassess just how quickly we may be facing a nightmare situation directly opposite our current predicament: global hyperinflation.

Three month T-bill yields should serve as a canary in the coal mine. When short rates reverse higher, then the inflationary game is likely on.

Meanwhile, I'm slowly adding to my commodity positions, particularly gold and silver, at these depressed deflationary prices as a means of protection against an inflationary future--whenever it may come.

positions in gold and silver