Trade Alert: Betting On Lower Interest Rates

A contrarian trade that may seem obvious in hindsight.

A Contrarian Position (For Now)

The Consumer Price Index came in hot this month. Gold is flirting with its all time high. Seems like an odd time to bet on lower inflation (and, by extension, lower interest rates), but there’s the rationale I offered in a ZeroHedge post on Friday:

• The beginning of the end of The Russia-Ukraine War. War, and geopolitical uncertainty are traditionally bullish for gold. This week, we got intimations of the the opposite. President Trump and President Putin spoke by phone, and Russia and the United States agreed to exchange prisoners and to begin negotiating an end to the war in Europe. The Trump administration already conceded that the Ukraine would not be admitted to NATO, U.S. troops would not serve as peacekeepers there, and any peacekeepers stationed between Russia and the U.S. would not be covered by NATO's Article 5.

• More olive branches from President Trump. President Trump said he'd like to see Russia back in the G-7 (it was called the G-8 at the time), and he planned to propose to both President Putin and President Xi of China that all three countries cut their military spending in half.

• Major steps to cut U.S. federal spending. All else equal, more government spending means more inflation, which can be bullish for gold. This week saw some steps in the opposite direction: Elon Musk's Department of Government Efficiency continued to identify government waste, and the Trump administration began massive layoffs of government employees.

• RFK Jr. confirmed as Secretary of Health and Human Services. A lot of federal spending goes to managing chronic diseases, and Robert Kennedy, Jr. as HHS Secretary intends to take steps to reduce America's chronic disease burden.

I should have included deportations, which will be disinflationary as well, by lowering housing demand in the U.S. Along similar lines, there were reports this weekend that the Trump DOJ is aggressively prosecuting Paycheck Protection Program (PPP) load fraud (of which, there appears to have been a lot). And of course, we just had negotiations between American and Russian delegations in Saudi Arabia, led by Secretary of State Rubio and Foreign Minister Lavrov.

Our trade today is a bet that interest rates will be lower in two years than they are today (because inflation will be lower). If we’re right on this one, our maximum upside will be about 400%; if we’re wrong, our maximum downside will be 100%.

Details below.

Betting On Lower Interest Rates