Bond king Bill Gross who manages Pimco, the world's largest bond fund had the same stagflation bet and shorted U.S. Treasurys but he hasn't doubled down he has thrown in the towel.
"Mr Gross emptied his $244 billion Total Return Fund of US government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco’s flagship fund ranked 501th out of 589 bond funds in its category."
“Do I wish I had more Treasurys? Yeah, that’s pretty obvious,” Mr Gross told the Financial Times last week, adding: “I get that it was my/our mistake in thinking that the US economy can chug along at 2 percent real growth rates. It doesn’t look like it can.”
As the bondholders are driving policy so much these days both here in the U.S. and in Europe it's interesting to see that they have hurt themselves with their illusions too. Yet Rogers continues to argue for a bearish position on Treasurys. He claims that there will be stagflation "worse than the 70s." Of course everything is always about the 70s with these guys. For them that is the ultimate nightmare scenario rather than what should be-the 1930s. At least Ben Bernanke is a student of the right decade.
Again I feel like Mick Jagger in again asking for a little sympathy for the Devil, at least the Devil for people like Rogers, Gross, Greenspan and Volcker. Inflation is not the fiend of all economic history. As I've written about previously the 1970s America was not the worst time and place to have ever lived, indeed, in many ways today is far worse and even the last decade-the early 2000s-was in many ways worse. It was the best of times it was the worst of times: it all comes down to who you are. In the 70s it was a nightmare scenario for bondholders and creditors but in many ways it was quite decent for the average American. Much better than it is today. True there were gas lines, which sucked. But on the other hand there were affordable student loans.
For my piece on the 70s and the Right wing "inordinate fear" of them please see
Another thing to keep in mind about the 70s: median wages were higher than they've ever been since. The 70s comparison doesn't work at all. It has already been show time and again-for reference see Krugman, or Gauti Eggertsson or any competent economist-that in a high debt and deflationary environment like we're are in now inflation is not a concern-another good place to start of course is Irving Fischer who argues that all crises like this are defined more than anything by those two elements of high indebtedness and deflation.
The 70s are just not even remotely comparable to today's environment, The Depression is more certainly. Yet the most comparable environment for us now may be 90s Japan. Japan never went into a full depression-the aggressive actions for monetary and fiscal policy in 2008 may have saved us from this too. But the example of Japan shows that a long term contraction of a previously healthy economy is possible.
And yet Rogers dismisses this. "In the case of Japan, despite massive monetary easing, government bond yields have continued to fall. On Friday, 10-year yields were close to just 1 percent. But Rogers is convinced that the U.S. experience will be different from Japan's."
"A difference is when Japan did that they were the largest creditor nation in the world, America is the largest debtor nation - not just in the world - but in the history of the world and the U.S. dollar has been - and is the world's reserve currency. So there are some factors that might not keep the interest rate down in the U.S."
I don't see how these differences change anything. What he says about us as the largest debtors as compared to Japan as the largest creditor is true of course. But the fact that the U.S. dollar is the world's reserve currency should help us not hurt us: it should make countries less rather than more willing to drop us. Even with our debtor status where are investors going to go? Do you think Euro debt is safer than American debt? Japan? We still have comparative advantage.
Then again the Treasury market should be the guide. Immediately after S&P's downgrade, Treasury yields fell. U.S. Treasurys remain the safest investment in the world-also with the weakest return but that's what the bond guys want.