In the feverish madness of 2020 and 2021, the powers that be – governments and central banks – decided that maybe modern monetary theory works and used it to guide their policies. They kicked their printing presses into high gear, churning out fantastical amounts of money and buying Debt with a fervor that would have made the Weimar Republic blush. Thus, as the great Ray Dalio elegantly put it, the ‘Great Wealth Transfer’ was born – a seismic shift in fortunes from the public coffers and the hapless bondholders straight into the laps of the private sector.

(Source: FRED)

Now, in a normal world, the Federal Reserve tightening its monetary policy would be like someone turning off the music at a wild party. But, we’re not in a normal world anymore, are we? The private sector, buoyed by the windfall from this wealth transfer, shrugged off the Fed’s tightening with the indifference, so far. Only now is net private saving normalizing. There is still some way to go before the current tightening suffocates the private sector.

(Source: FRED)

The net result? Businesses and households swimming in a pool of unexpected prosperity while the government stands by. Unemployment is low, wages are up, and the private sector’s net worth is reaching stratospheric heights. And the government? Well, it’s nursing a financial hangover that could bring it to its knees.

Of course, you may be wondering, surely this can’t be sustainable? Well, you’re right. While the government’s rapidly deteriorating financial health might not seem like a problem now, it’s like a slow-burning fuse on a powder keg. As debt servicing and other budget costs continue to spiral upwards, we may find ourselves caught in a self-perpetuating debt vortex, with the specter of mass currency debasement lurking ominously on the horizon.

So, what’s in store for us, you ask? The way the current debt edifice stands, we can count on the government to keep running up sizeable deficits at an ever-increasing pace, pushing us closer and closer to those dreaded market-imposed debt limits. And when that happens, central banks may be left with no choice but to hit the panic button and start printing even more money and buying even more debt, pushing Inflation up, while keeping rates low. I have said it before, it’s a reenactment of the post 1945 all over again, a great reset.

What to do here?

We’ve spent a good amount of time prattling about why this tightening debacle hasn’t yet sent us all to the poor house, and how our mountainous debt is priming us for fiscal dominance. That’s when the rules of the game get flipped, where higher interest rates actually fan the flames of the economy instead of pouring water on it, all thanks to our lofty debt and deficit levels. Sounds insane, right? But we’re likely already frolicking in this fiscal dominion, where U.S. deficits big enough could offset the Fed’s tightening.

With the financial storm clouds brewing, the U.S. finds itself between depression or inflation. If you ask me, our power brokers would rather have inflation. In this context, Gold and Bitcoin, they’re becoming interesting choices not just because they’re shiny or tech-sexy, but by a sheer process of elimination of other asset classes.

Now, let’s bring Billy Ackman into the picture, just waltzed into this inflation waltz. Bill agrees, we’ve got a bunch of reasons lined up for inflation to jump up a notch, everything from this messy de-globalization, pricey defense tabs, the energy transition boogie, entitlement growth, and workers finding their bargaining backbone.

Ackman also chats about long-term U.S. Treasury bonds, crying they’re overbought. He sees a bond buffet coming up because of fat deficits, Uncle Sam’s odd financing strategy, and Japan letting go of its Yield Curve Control (YCC).

And then he pitches this curveball – if long-term inflation dances up to 3% from 2%, he reckons the 30-year U.S. Treasury yield could hop up to 5.5%. And that’s enough for Bill to bet against long-term bonds. The lad is also singing praises about the asymmetry in this trade’s risk and reward.

Now, here’s where Billy and I see things a bit differently. His reasons for shorting long-term bonds, well, they’re the same ones I’d use to go long. If he’s so convinced that the supply-demand tango in bonds will shoot rates higher, then surely, the Fed will have to swing into action with yield curve control, anchoring long-term rates. It’s not that I’m saying Bill’s got it all wrong, just that he might be right for a while before he’s not. But hey, maybe that’s all it takes to rake in the big bucks, while playing the consensus like a fiddle.

All-in all, the TLT trade is becoming so deafening that it only improves the odds for Gold and Bitcoin. When the chorus gets this loud, wouldn’t you rather just sidestep the cacophony and snuggle up with some solid, hard assets?

Now, doesn’t that sound like a fun ride? Buckle up, folks, it’s about to get bumpy.