A Politician, Pure Coincidence, and Blind Luck

Recent financial disclosures revealed Eric Cantor, the House Majority Leader, has invested in the ProShares Trust Ultrashort 20+ Year Treasury fund (Symbol TBT). TBT is an exchange-traded fund that seeks returns that are 200% inverse to the daily change in the price of long-term Treasury bonds. Simply put, this fund seeks to go up double in price whatever amount long-term Treasury bonds actually go down daily. Fund investors lose money if Treasury bonds go up, but make double the profit when Treasury bonds lose value. Therefore, anyone investing in this fund is betting that the prices of long-term Treasury bonds will drop.

This means that Eric Cantor is betting that U.S Treasury bonds will go down – and will profit handsomely if Treasury bonds plummet. Mr. Cantor has subsequently used his position of power to take actions to help ensure U.S. Treasury bonds do exactly that. By walking out on debt negotiations with Vice President Biden, by reportedly scuttling a near agreement on the debt ceiling between House Speaker Boehner and President Obama, and by continuing to refuse to compromise on anything, Mr. Cantor has helped created a scenario where he will become a lot richer after 2 August. Even if a last minute debt ceiling compromise happens to avoid a complete debt default, Mr. Cantor and his Republican colleagues have helped create enough turmoil and uncertainty to assure the U.S. credit rating will drop, causing Treasury bonds to drop. Mr. Cantor will make money regardless of the cost to the American nation and people.

It gets worse. Mr. Cantor also has invested in the one type of Treasury bond expected to go up in price because of the crisis Mr. Cantor helped create. Many economists predict soaring inflation in the near future. Causes of the expected inflation include the end of the Federal Reserve’s Quantitative Easing program. However, the inflation causes have also been attributed reduced money supply after the Republican dictated spending cuts. There will be less money in circulation because the government will spend less. Another cause is the possible debt default, which would cause interest rates to increase on almost all debt – including car loans, mortgages, credit cards, student loans and the Federal government’s debt. The government will have to pay higher interest to borrow money. However, not to worry – Mr. Cantor has sizeable investments in Treasury Inflation Protected bonds (known as TIPS), the one Treasury instrument expected to better reward investors under higher inflation. TIPS not only protect an investor from loss of principal, but also pay higher and higher interest as inflation rates go up. The higher inflation goes – the more money Mr. Cantor will receive. Mr. Cantor stands to profit financially from the higher inflation that stems from the budget cuts dictated by Mr. Cantor and his Republican colleagues and the debt-ceiling impasse Mr. Cantor and his Republican colleagues helped create.

One can argue that Mr. Cantor made sound, rational investments given the current situation in our nation. That is a fact – he did. He made great investing decisions. The average investor would be very wise right now to have money invested in an EFT that goes up twice the amount that Treasury bonds fall and in Inflation Protected bonds. The difference is that the average investor can take no actions that ensure those investments pan out handsomely. Mr. Cantor could. The average investor had no inside information about the size of budget cut demands or the progress of debt-ceiling negotiations. Mr. Cantor did. To borrow from the old Master Card ads: “The ability and knowledge to ensure the success of your own investments? Priceless!”

So – is Eric Cantor an honest politician who invests well or, a man who bets against his own country for his own personal gain? Only Mr. Cantor knows the real answer. He could simply be a man who happened to be heavily involved in the big political decisions of the day – and who, by pure coincidence and blind luck, invested in exactly the best ways to profit from them. You do believe in pure coincidence and blind luck, don’t you?