Before the election, I highlighted the continued inflationary pressure the policies of either candidate might introduce, possibly hampering hopes for rates to decline to the historically low levels consumers, investors, and home buyers enjoyed between 2008 and 2023. Many may have begun to feel those levels were “normal,” yet they are well below the longer-term average. Even now, with 10-year rates at 4.56%, while certainly much higher than the average since the beginning of the Great Financial Crisis and the heterodox monetary and fiscal responses that were introduced (depicted by the green line), they are still well below the longer term average over the past 60-plus years. Investors were greeted with unpleasant inflation data on Tuesday. CPI (the “Consumer Price Index”), a commonly used inflation benchmark, although not the Federal Reserve’s preferred measure, came in hotter than expected. Food and energy are essential to consumers, but economists frequently exclude them from the data because commodity prices tend to introduce volatility. Ignoring those, the annual CPI is 3.3% – well above the Federal Reserve’s stated 2% inflation target. Thursday’s PPI (Producer Price Index) measures the average change over time in the selling prices received by domestic producers for their output, again excluding food and energy. The reported 0.3% was spot-on consensus estimates. Thinking Wednesday’s inflation concerns were overblown, longer-dated Treasuries are now rallying. The trade: TLT In an article just before last year’s election, citing continued inflationary pressures, we highlighted a bearish February 14th put spread in iShares 20+ Treasury Bond ETF (TLT) , the ETF that tracks long-term Treasuries. (As rates rise, the value of TLT decreases.) That trade has been profitable, but it expires Friday. So the question now is, do I still believe we face inflationary pressures, or, like bond buyers today, did the PPI data make me more sanguine? Unfortunately, my concerns about inflation persist. The “new” Trump administration’s DOGE (Department of Government Efficiency) appears to be trying to move quickly to identify and eliminate waste, fraud, and abuse. According to gao.gov , the scale and scope of waste, fraud, and abuse in US government spending are breathtaking. According to estimates from the nonpartisan Congressional Watchdog, improper payments alone have likely exceeded $2.7 trillion since 2003. A report released last year estimated fraud at between $233 billion and $521 billion annually. To comprehend how big a number that is, consider that according to IRS data, the bottom 75% of US income taxpayers paid a total of $274 billion in income taxes in 2022 (the most recent summary available). The bottom 90% paid $599 billion. So, if improvements in government efficiency would reduce inflation, and the newly formed Department of Government Efficiency is identifying massive savings, why am I still concerned about inflation? Three reasons. Identifying waste, fraud, and abuse is one thing. Congress and the Treasury Department have known about it for years, and little has been done to correct it. The cuts the Trump Administration is attempting are already facing lawsuits. The President acknowledged that because they are complying with a court order, the government is continuing to make payments they know are improper. Elected officials come and go; bureaucracies are forever. Tariffs — Although the earliest proposed tariffs appeared to be negotiating tactics to help enforce border security, the threat of more significant tariffs affecting many more countries still looms. It has been suggested that some CPI/PPI data may result from companies lifting prices in anticipation of future tariffs. The deficit – As big as a half trillion in waste fraud and abuse in government spending – is, the deficit is much more significant: ~ $2 trillion, nearly 6.7% of GDP. Ideally, it should be 3% of GDP or less. A sustainable path would be 3% or less, assuming 3% annual economic growth. We don’t need $500 billion in savings. Assuming tax rates remain the same, we need $1.1 trillion in savings, and arguably the best place to find those savings, the Pentagon, is virtually impenetrable from an accounting point of view. TLT 1Y mountain iShares 20+ Year Treasury Bond, TLT Investors who remain skeptical that the government can get its fiscal house in order and, therefore, wish to maintain a neutral to bearish bond posture with a TLT put spread. I’ve provided an example below: Buy TLT Apr. 30 $90 put Sell TLT Apr. 30 $84 put DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
A hedge for investors skeptical the government can cut inflation and spending enough to lower rates