Monday, September 22, 2008

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 the creation of a lot of new US Dollars and the monetization of a huge amount of bad debts. The effects are inflation, a weaker dollar, higher bond yields, higher commodity prices and (eventually) higher stock prices (but not before further declines and volatility in the short and intermediate term). This will occur after a deflationary recession... Right now it does not have much verisimilitude, but as the monetization theory eventually increases in dominance, one would want to be long Asian currencies vs the USD (Yuan, JPY, AUD), long commodities (gold, oil, etc), short treasury bonds, and eventually long equities (after a further drop in the short and intermediate term) - the trend for equities is presently down but that will likely change in the future as money leaves the bond market. -John Bardacino

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