214 THE BiG DROP
investing in Treasuries with short remaining maturities paying
higher yields.
WHOSX will perform better during a deflation scare that
is driving investors into long-term Treasuries. If this continues
— and it should until the Fed cries uncle and starts printing
again — WHOSX should continue outperforming.
Both SHY and WHOSX would perform badly if there were
a repeat of the spring 2013 “taper tantrum.” Back then, long-
term bonds sold off violently for roughly a month after Ben
Bernanke implied that the Fed would taper at some point in
the future. At the same time, SHY just held its value, and held
the promise that it wouldn’t pay interest for as long as the Fed
held rates at zero. But that episode was unusual and is unlikely
to repeat anytime soon.
And if the Fed surprises us this year and raises rates, as it’s
indicated it will, both SHY and WHOSX will do well. As the
Fed raises rates, the interest rate on SHY’s newly purchased
Treasuries with short maturities will rise... and the stock mar-
ket could crash in response to the rate hike, thereby spreading
a deflation panic into long-term Treasuries.
With SHY as a cash component in your portfolio, you can
afford to wait. If deflation prevails, your cash will be worth
more in real terms and you’ll be positioned to pick up bargains
when other investments start to crash.
If inflation takes off, you should pivot away from cash
and catch the coming inflationary wave with your other in-
vestments. This tug of war between inflation and deflation is
not close to being over and will be the prevailing investment
paradigm for some time.
In the short run, deflation is more likely. In the long run,
inflation is more likely. And the reason is that the government
has to get to inflation. It’s not working. They’re trying to get
inflation, and they’re not getting it. We’re getting deflation in
the short run. But they’re not going to quit trying.