The world’s greatest short is available to you.

Laymen are quick to joke about making money by shorting some asset that is in trouble. In reality, shorts are quite complicated and surprisingly risky. For one thing, the max profit you could make is limited—becasue the asset you are shorting can only go to zero, not below. But the amount you can LOSE is unlimited.

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Selling an asset short has transaction costs. And you’d better make sure your counterparty will pay if he loses. Finally, shorts, are, well, short-term. You not only have to be right about the asset falling in value, you also have to know when.

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You want a short? I’ll give you the short to end all shorts. This is similar to my telling you what a great “you win or the other guy loses” investment current pennies and nickels are.

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I keep telling readers here to buy the most expensive principal residence they can safely afford and that it should have a mortgage. The latter is the short.

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What are we shorting? The purchasing power of the United States Dollar. What goes down when inflation (loss of purchasing power) goes up? The value of bonds. E.g., SVB investing in Treasurys.

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Can you short Treasurys? Yeah, the complex future options stuff I described above. Let me tell you about another bond where the short is infinitely simpler and better: mortgage bonds.

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When you get a home mortgage, you have issued a bond to the lender. You have to pay it back with interest. The lender is the bond holder, just as SVB was the bond holder of the Treasurys that fell in value. If there is inflation after you get your mortgage, it falls in value. That is from the perspective of the lender/bond owner.

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From YOUR perspective as the issuer/borrower, the purchasing power of the dollars you need to send the lender has fallen. If you adjust the balance you owe and your monthly payment for inflation. you will find that the amount you owe has fallen, the dollar value of your home has arisen, the amount of your equity has increased as a result of both of those things. The real value of your monthly payments also goes down by the month. You are financially better off in REAL (adjusted for inflation) terms because of the inflation that you shorted.

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Treasurys are better than corporate bonds because they are not callable. Corporate bonds typically ARE callable. Home mortgages are callable. That means, if and when market interest rates fall, the borrower will refinance the loan to get the lower rate. Uncallable bonds, like Treasurys, actually rise in value when market interest rates fall. Home mortgage borrowers just refinance.

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So being a home mortgage borrower is a NO-LOSE situation. If market rates fall, you refi. If they go up, your mortgage balance and monthly payment falls in real terms. There are no prepayment penalties or lock-ins in home mortgages. The uncallable situation with Treasurys is an example of a lock-in.

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Interest rates on home mortgages are relatively low. They are sort of guaranteed by the federal government against default is why. Also, in some cases, you can deduct your home mortgage interest and property taxes. The rates can be fixed and usually are. Home mortgages are also 30 years and self-amortizing. Most other loan types are shorter term often with balloon payments and have variable rates that adjust rapidly to market rates. Many other loan types have margin calls if the value of the asset pledged as security falls.

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For all other loan types, you are generally personally liable on the loan. In two states—AZ and CA—there is an anti-deficiency judgement statute that means the lender cannot go after your other assets or income if you default. They can only foreclose. Many other states have one-action laws that make the lender choose between foreclosing OR going after you personally. HECM mortgages are nonrecourse.

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A HECM is also a sort of life estate. No matter what—other than moving out for a year or more or not taking care of the house including insuring it, you can live there forever, or until you die, whichever comes first. Try doing that with a Treasury option short.

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All states other than NJ let you keep some of your home equity if you go bankrupt. In seven states and DC, you get to keep ALL your equity in bankruptcy. Try doing that with a Treasury bond.

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Also, when you apply for college financing or Medicaid, your home equity does NOT count against you. Try asking that they ignore the value of bonds you own.

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Nickels and pennies are the world’s greatest commodity investments, because they can go up in melt-value, but not down in fiat value. In similar fashion, a home mortgage is the world’s greatest short if you believe that the USD will inflate.
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