Inflation and a Virtuous Barbell

May 26, 2026 | For a while now, we have been alluding to a “barbell” strategy for our investments at WGA LLC that is anchored in precious metals and real estate, in terms of value protection, but balanced with an aggressive strategy toward fiat gains on the stock market and income from high quality fixed income exposure in REIT common and preferred, and unsecured debt.

In a system where tax avoidance is a national aspiration, the currency must inflate continuously and at varying rates to accommodate the Treasury’s cash needs. Last week in "The Wrap," we noted that real gasoline prices, adjusted for inflation, are actually quite low.

We also predicted that inflation could touch double digit rates later this year as a result of the US-Israeli war with Iran, but the big driver of inflation remains the federal debt. As we wrote in “Inflated: Money, Debt and the American Dream” in 2025:

“Over the decades, the political will to collect taxes in the United States has failed, often because conservative politicians think (wrongly) that depriving the Treasury of revenue will somehow slow federal spending. If Democrats tend to be too enamored of demand-side policies and debt, Republicans tend to have a nineteenth-century view of money and markets that is entirely antiquated. What the Civil War proved and the New Deal and subsequent decades confirmed, a legal tender fiat currency and Treasury emissions are interchangeable. But when American individuals or corporations avoid taxes, they are essentially forcing the Treasury to borrow.”

Our missive last week (“What Does a Smaller Fed Balance Sheet Mean for Inflation & Interest Rates?”) caused more than a few questions from our readers. The key factor to consider when the Fed is buying Treasury securities (or MBS during the Yellen and Powell FOMC is the duration represented by these assets. Why? 

When the Fed buys securities, the duration “disappears” inside the magical confines of the system open market account (SOMA). As a result, there is less duration available for private investors. If interest rates are stable, lower duration means asset prices rise and market yields fall as investors compete for a scarce asset. But what happens if interest rates fall dramatically as the Fed buys securities and new issuance surges?

Think of duration as the average time in years that it takes to return principal and interest to an investor, thus higher levels of aggregate market duration generally means lower prices for securities. During COVID, the FOMC pushed interest rates down to zero, unleashing a tidal wave of new securities issuance with very low coupons and very long durations. 

In 2021, the Fed began to raise ST interest rates, causing new bond issuance to slow and coupons to rise. The change left the Fed and many banks insolvent. The Fed allowed its balance sheet to shrink for barely four years until December 2025, forcing banking system deposits to contract. The massive Treasury deficit as well as the net-sales of MBS by the Fed helped to push LT interest rates higher in 2026 even as duration measured in years was falling. But the fact remains that the average GNMA MBS coupon rate is just over 4% today

Source: Ginnie Mae

Market duration measured by the Bloomberg U.S. Aggregate Bond Index dipped as low as 3.63 years in March 2009 and rose to as high as 6.69 years at the end of 2021. Although immediately following COVID the Fed was buying $7 trillion in securities and sequestering this duration inside the SOMA, the overall duration of the US bond market actually rose. Trillions in new private securities were issued with very low coupons as illustrated by the chart above showing $2 trillion in GNMA MBS by coupon rate.

Once the Fed raised interest rates in 2021, however, duration fell dramatically, causing bond prices to rise sharply. More recently, the relentless increase in outstanding public debt and the fact that the Fed is no longer buying MBS has forced LT yields higher during 2026. As a result of changes in the bond market, Weitz Investments notes, roughly half of the U.S. bond market does not appear in the Bloomberg Agg Index today. Lower coupons and higher duration means a more volatile bond market.

Below we discuss some of our investments over the past five years, what has worked and what had not, and our view of the future The results are often surprising but also show that our basic thesis about balancing value investing with opportunistic speculation in fiat assets such as stocks and fixed income has kept us ahead of the curve and the crowd. In a system that continuously devalues its currency, the prudent investor is forced into an active strategy to defend value.  

We start the discussion with a foundation in financials, government debt and credit, enhanced with our later focus in nonbank finance and residential mortgages, and most recently in vehicles for gaining exposure to precious metals and commodity producers more generally. As the excesses of the progressive state that has existed since the New Deal and WWII become more pronounced, Americans are forced to adopt more sophisticated methods to defend real value – like hoarding high value goods for resale in the future.

Years ago, we worked as a consultant in Mexico for the US Export Import Bank and a number of private companies. We witnessed first hand how the average individual hedged against the double digit inflation that was commonplace at that time south of the border. Cargo planes fitted out with extra wide doors loaded up on new home appliances in Laredo, TX, then flew to airports in Mexico where the appliances were sold for cash right on the tarmac. The buyers would store the new appliances for a year or more, then sell the item for cash at a much appreciated value. The mentality of inflation was ingrained in Mexico 50 years ago and is becoming ingrained in the US today.

The Virtuous Barbell

Want to read more?

Subscribe to theinstitutionalriskanalyst.com to keep reading this exclusive post.

Subscribe Now