Here And Now: "Something To Look Forward To..."

Is it time to start preparing for the next boom-bust cycle?



I can remember sitting in a graduate economics course back in the fall of 2001 that was being taught by a very bright man, who, like our current Fed Chairman, held a degree from MIT.  However, unlike Dr. Bernanke, our professor actually understood the effects of monetary inflations....  The topic was growth in the money supply and the lagged effects that it was going to have on the economy. At that time, the various commodity indices were near multi year lows, oil was trading around $20 per barrel, gold was forming a base between 250 - 300, the US Dollar was at multi year highs and forming a top, and the stock market had begun a bear market after hitting all time highs earlier in the year.

The Real estate bubble was about to launch into full blast mode, and of course, commodity prices would then rally. The discussion centered on criticism of then Fed Chairman Greenspan and government(s) in general. We were discussing the money supply, inflation and financial bubbles. He (our professor) was discussing recent increases in the money supply and deficit spending and the effect it would have on inflation and frustratingly compared the then current situation to the early 1970's and said

Banking expert agrees - the bailout is not necessary

Banking expert Bert Ely: "I have run the numbers looking at the capacity of the industry to pay the tab. Assuming that bank insolvency losses don't get way out of line, which I don't think they will, then the industry can handle it. It's not going to be cheap, but the banks can handle it and clean up their own mess."

Read the whole interview here: http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

Bad regulations got us into this mess, congress is about to make a bad problem even worse with a bailout of Paulson's buddies on wall street.  This monstrosity can still be stopped.

Profiting from the credit crisis and bailout

So how can you profit in the future given where we are at currently in this particular boom bust sequence?
In a prior post titled "I don't trade stocks... I trade theories" I wrote the following:

"I don’t invest in financial securities, I invest in theories. At any particular present moment, the markets have embraced a certain theory, and my portfolio should be positioned to exploit the effects of that theory. As the collective of market players continually adjust the degree of truth they give to a theory, the value of your portfolio will change. It may not sound significant, but approaching money management with this mental framework is more in tune with the reality of the world. Understanding the flaws in the economic and political institutions that we live in is key to understanding what will happen to a market theory, and as a result, securities prices.
There is always a theory that is dominant, and at times the markets may change their focus between two theories that are competing for dominance. Other theories wait for their time to come, until their degree of truth (verisimilitude) rises enough for them to have an impact on prices and unseat the dominant theory."

Given the recent actions of elected and non-elected bureaucrats we will soon re-enter an attempted monetary reflation, the specifics of which I will spare you. Just be aware that it involves

Understanding the "equity market neutral" strategy

This is a convergence trading strategy that is designed to generate returns independent of what happens to the overall market.  It does this by attempting to neutralize all or most market directional risk (aka systematic risk or beta) as well as sector risk. With this strategy the focus is on

What will the bailouts do for the stock market?

The Fannie & Freddie bailouts will help with sentiment in the short run, much like the Bear Stearns bailout, as we will likely see a general rally in equities on Monday and for a few days after that. This short term correction (rally) against the long term trend may take some of the indices such as the Dow back to their long term dominant trend lines.

[caption id="" align="aligncenter" width="511" caption=" "][/caption]

One of the key elements or values (among a total of 23) that make up the mental framework through which I view the financial markets is the following:

"Maximize the utilization of inefficiencies created by governmental institutions"

To be truly successful, one must