A lean, mean, wealth destruction machine

One of the wonders of humanity, aside from opposable thumbs, is the ability to stick with bad decisions over a long time. And nowhere is this illustrated better than with the startling success of the ProShares Short 20+ Year Treasury ETF (TBF).

Unknown photographer, 1933
John Maynard Keynes

The fund aims to move in the opposite direction opposite of most bond funds. It’s a basic bet that interest rates will rise, because bond prices fall when interest rates rise. At the moment, it has $868 million in assets, despite having lost an average 10.82% a year since its inception in August 2009.

What’s remarkable is how much money keeps flowing into the fund. The past five years — during which time the fund has lost an average 8.75% a year — investors have poured a net $1.1 billion into the fund.

Now, betting on a rise in long-term interest rates would have made eminent sense at nearly any point in the past five years. After all, the bellwether 10-year Treasury note currently yields 2.09%, which, at least by modern standards, is lower than an ant’s sneakers. Don’t interest rates have to rise?

Sadly, no. Think of interest rates as the price of money. People demand higher interest rates when they think inflation will rise, because inflation erodes the purchasing power of money. The consumer price index, the government’s main gauge of inflation, actually fell 0.1% in August, and has risen just 0.2% the past 12 months. Strip out food and energy, and inflation is running at a modest 1.8%.

You really can’t get a good wage/price spiral going without an increase in wages, and that’s just not happening. How long could this go on? Ask someone in Japan. In the words of John Kenneth Galbraith, markets can remain irrational longer than you can remain solvent. Rather than argue with market, it’s better to take your loss and have money to fight another day


2 thoughts on “A lean, mean, wealth destruction machine

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