Mushroom Cloud Trade Not Working Well

I hear the rationale for folks in cash or treasuries and I absolutely understand where they are coming from. A lot of the fundamentals are very negative and the fiscal and political situation looks like it's going to get worse before it gets better.

Who could blame you for putting all your assets into treasury bonds or cash and running for the border and bribing the border guards. But that hasn't been working well has it? You see the market going up and you want to get back in but you don't understand what went wrong in your mushroom cloud trade. Hey, you are not alone.

The problem is, the currency is denominated in dollars and the Fed has relatively good control of the currency for now. If they control the value of the currency, they control the value of the assets. If they want assets to go up to pay back debts with a deflated dollar- they can pretty much arrange for that to happen. If you hold your assets its cash or treasuries, as the dollar rises you are actually losing money. While the dollar deflates your asset that pays close to zero is losing value. If you hold your assets in risk based assets, their real value will at least stay steady if not go up. Pretty basic stuff.

Generally, if a country has a lot of debt and they can get away with deflating to pay back debts they will do so. Has any country in history that has had the option to deflate not done so?

What am I looking for to know the Fed is out of rope and the mushroom cloud trade to work? I want to see rates rise. When rates rise without tightening from the Fed, that's a sign "the camel has been milked". At that point, a larger cash position makes more sense. Right now, you have the Fed and the Chinese working together to make dollars available world wide and it's hard to fight both the Feds and the Chinese at the same time.

It's why I've been short treasuries. This is a long term bet and it may not come in to play for some time. I am okay with that, I can wait. It's not as if the bet has a lot of downside from here.

When will it pay off? My bet is that this will occur when the S&P hits around 1200/1250 which is my target for next March. With risk assets at that level, the Fed's horse will leave the barn one way or the other. If the Fed is successful we churn around at 1250 while the country pays down debt. If something goes wrong, then the mushroom cloud trade is possible.

Just to appease the disclosure gods--mildly long risked based assets (Financials, tech, gold and gold miners, short long term US Treasuries).

Comments

[geohjr:]

Very brave; remember, the market can remain irrational longer than you can remain solvent.

Oct 14 01:42 PM

[logicalthought:]

>>What am I looking for to know the Fed is out of rope...(is) when rates rise without tightening from the Fed... At that point, a larger cash position makes more sense.<<

The problem is that when that happens, it will happen EXTREMELY quickly. So, the second that Treasury auction fails, you'd better be in front of a screen and hitting the "sell" button, because a few hours later, the market could be down 5%, and a few days later, it could be down 20%.

<<Right now, you have the Fed and the Chinese working together to make dollars available world wide...<<

Huh? Waht are you talking about re. the Chinese? The Chinese are undoubtedly NOT "working with the Fed" and, in fact, are getting increasingly pissed about what's going on with the dollar.

>>It's why I've been short treasuries... It's not as if the bet has a lot of downside from here.<<

Who the hell knows? Logically, you should be right, but the Japanese drove their 10-year yields down to around 50 basis points (!!!) as recently as 2003 or so.

Oct 14 01:52 PM

[Roger Knights:]

"The problem is that when that happens, it will happen EXTREMELY quickly."

Right--when the roof falls in, there's little time to get to the exit.

Oct 14 03:44 PM

[phdinsuntan...:]

"the Fed has relatively good control of the currency for now"
"If you hold your assets its cash or treasuries, as the dollar rises you are actually losing money."

no happy comments, also if the Fed is under control they will call coleagues overseas to buy long bonds and u will be fryed

logicalthought, check RMB/USD and use your mind ok?

Oct 15 05:43 AM