Now Is the Time to Get Back into the Markets

As I've blogged many times before, I view the Federal Reserve, the semi-governmental organization that manages the value of the US dollar, as having an inflationary bias, and that they will be able to create the inflation they so desire. I look for trading opportunities consistent with this perspective.

While opportunities have been a bit sparse for dollar permabears like myself in 2009, there are signs that this is coming to an end, and that dollar weakness/price inflation may be set to accelerate. Consider the evidence:

1. The US dollar index (USDX) has recently broken below a key support level.

click to enlarge

2. TLT, an ETF tracking 20+ year Treasury bonds, has fallen below a major support level.

3. The Australian dollar and the Canadian dollar have aggressively moved beyond key resistance levels against the US dollar. The chart below shows the Canadian dollar strengthening against the US dollar.

What This Means And How to Trade It

There is a school of thought which suggests that traders can make 90% of their trading wealth in 10% of market conditions; the rest of the time the trader should be in risk-averse positions designed primarily to preserve wealth. I am a proponent of this school of thought, and I mention it because I think we are in the midst of that ideal 10% of the time. Major levels have been broken, which leaves the market ripe for movement.

In terms of how to trade this, I will quickly recap the inflation trades I've noted previously:

• Gold/Silver
• Short 20+ year Treasury bonds
• Commodities
• Commodity currencies (Australian dollar, Canadian dollar)

Long gold/short 20+ year Treasury bonds has performed well thus far this year and is on track to continue doing well, in my opinion.

Key Event: Stock Market Selloff

It seems likely, in my opinion, that we will see somewhat of a stock market sell off. If this occurs, where will extra money go? Will it go into Treasury bonds, as it did in the second half of 2008 when the stock market sold off? Though I would argue the fundamentals underlying Treasury bonds are atrocious and thus do not make them an appealing investment, investors did rush back into Treasury bonds during the economic struggles of the second half of 2008. If the stock market sells off again in 2009, something that still seems quite likely, will investors once again flee to Treasuries?

Perhaps. Indeed, the historical precedent is certainly there. However, given the US' diminishing tax base, growing government expenses, and the fact that the Fed has already begun printing money to make up for the declining demand for Treasury bonds, I think this trend cannot last forever. If the US does not revise its monetary policy and/or reduce government spending, I think there is a risk of investment dollars leaving all aspects of the US economy -- private sector, public stock markets, debt markets, etc.

Disclosure: Long gold, silver, Canadian dollar.

Comments

[Roger Knights:]

"will investors once again flee to Treasuries?"

If they choose not to, gold would be an alternative that should appeal to more and more of them.

May 12 06:15 AM

[doubleguns:]

Already short term rates are plunging, long term soaring and Precious metals are climbing. It seems very apparent that someone is very risk aversive right now.

The fleeing has already started to short term treasuries and PM.

Seems most people are simply not paying attention.

May 12 07:41 AM

[History Buf...:]

Cetin,

Did you read any part of Simit's article other than the headline?


On May 12 10:26 AM Cetin Hakimoglu wrote:

> It looks like they have been successful. No deflationary spiral and
> the dollar is falling. I agree that's it's a great time to keep buying
> stocks.
>
> ----------------------...
> -I view the Federal Reserve, the semi-governmental organization that
> manages the value of the US dollar, as having an inflationary bias,
> and that they will be able to create the inflation they so desire.
> I look for trading opportunities consistent with this perspective.

May 12 12:45 PM

[History Buf...:]

Cetin,

How about this part?

"It seems likely, in my opinion, that we will see somewhat of a stock market sell off. If this occurs, where will extra money go? Will it go into Treasury bonds, as it did in the second half of 2008 when the stock market sold off? Though I would argue the fundamentals underlying Treasury bonds are atrocious and thus do not make them an appealing investment, investors did rush back into Treasury bonds during the economic struggles of the second half of 2008. If the stock market sells off again in 2009, something that still seems quite likely, will investors once again flee to Treasuries?"

"Perhaps. Indeed, the historical precedent is certainly there. However, given the US' diminishing tax base, growing government expenses, and the fact that the Fed has already begun printing money to make up for the declining demand for Treasury bonds, I think this trend cannot last forever. If the US does not revise its monetary policy and/or reduce government spending, I think there is a risk of investment dollars leaving all aspects of the US economy -- private sector, public stock markets, debt markets, etc."

On May 12 12:59 PM Cetin Hakimoglu wrote:

> I agree. The dollar is set to resume it's fall.
>
> ----------------------...
> While opportunities have been a bit sparse for dollar permabears
> like myself in 2009, there are signs that this is coming to an end,
> and that dollar weakness/price inflation may be set to accelerate.
> Consider the evidence:

May 12 01:08 PM

[AndrewBaker:]

Getting back into the market does not mean buying stocks in the context of this article. Do they teach reading at school these days?

Oh well, softs, precious metals, short treasuries and short the dollar with trading in and out of oil and natural gas and long and short financials on a day basis will keep me busy. Ah, short financials: that's back into stocks, isn't it?

May 12 02:57 PM

[Larry House:]

A 5-10% pullback in the markets would nicely improve the risk/reward ratio. Then I would commit more money to stocks. Until then, I'll wait.

May 12 04:18 PM

[DONE_SONZ:]

If the US does not revise its monetary policy and/or reduce government spending, I think there is a risk of investment dollars leaving all aspects of the US economy -- private sector, public stock markets, debt markets, etc.
-Raising rates would cause debt defaults faster.

May 13 06:53 AM