Friday, October 30, 2009

For What Its Worth

Yesterday's GDP report seemed to propel the Street's economists to fits of euphoria.

Don't believe it.


The government's stimulus is drawing to its inevitable close, and with it this nascent expansion. I own very little in equities (I couple of "Big Oil" names) and am mostly in mid range bonds (7-10 year). Yes, I know that bond yields are anemic, but right now I am more concerned with return OF my capital than I am with return ON my capital. I do not believe that the risk/reward ratio of the U.S. equity markets is very attractive.

This is a time to survive. The time to make money will come, and I believe it will come when the U.S.$ carry trade gets reversed.

I met with a friend of mine yesterday who is also a substantial investor in my fund and while we were talking he asked me what will be the catalyst for the carry trade to unwind. The fact is I cannot say with certainty. Perhaps it will come from the Fed or Treasury, perhaps it will come from another Central Bank desiring to stop the US$ slide. Perhaps it will come from an increase in market interest rates (a steepening of the yield curve). Any of the above, and several other unforeseeable inputs could be the spark. The REAL question is WHEN and from WHAT LEVEL. For that, we shall just have to wait and see... and hope we recognize. As I always tell my investors: If I knew for sure, what would I need you for? I have been noodling this for nearly a year, and I believe that this is the most likely outcome:

The US$ carry trade will end in less than 18 months, perhaps as soon as 6 - 9 months. The unwinding is going to be very painful most asset classes and very positive for the US$ - but only temporarily. This will be the time to exchange US$'s for hard assets. In the mean time, it is time to not lose money.

That does not mean that I am absolutely sure of anything, just that I think this outcome has the highest probability, and no battle plan survives contact with the enemy. If the data comes in contrary, I reserve the right to change direction on a dime.

libertariananimal at Gmail






1 comment:

bureaucrat said...

The theory six months ago was that the banks were putting money into the stock and bond markets via the free money they were getting from Bernanke, essentially propping up the Dow and providing someone else to buy government debt. But if now EVERYBODY is borrowing Fed money at 0% interest, and buying buckets of Citibank and 10-year notes, a financial crash would have to be the logical outcome. One person can only stand so many people "piling on" before death is the next step. :(