Trader Vic: The Government Is Hypocritical About Regulation

May. 3.10 | About: WisdomTree Continuous (GCC)

Victor "Trader Vic" Sperandeo, a widely known commodities trader, author, and head of Alpha Financial Technologies, talked to Index Universe's Contributing Editor Cinthia Murphy about current regulatory efforts that are aimed at doing everything from slowing down ETF launches that use derivatives to keeping speculators in check in commodities markets. Having survived more than a dozen bull and bear markets, Sperandeo says all these efforts are part of a federal scheme to eradicate freedom, and investors need to brace for hyperinflation down the line as the government keeps printing money to pay the bills ...

This article originally appeared in its entirety on IndexUniverse.com. It is reprinted here with permission.

There's been a lot of movement on the regulatory front. Recently the SEC decided to freeze applications for all ETFs that rely on derivatives. Is that a valid issue? I don't think that's the issue. If you look at leveraged ETFs, they are indebted, so the costs associated with them should be clearly disclosed, but that's usually spelled out in a prospectus. So as long as there are fee disclosures, we are OK. The thing is that these geared strategies use derivatives to expand leverage, and that has a cost. The key to this entire discussion is the accurate disclosure of those costs. There are no inherent risks with derivatives that warrant protection. The derivative sellers merely mirror what's going on in the market and the ETF has collateral to put up. Having said that, it's a fair criticism that mutual funds and businesses in general do try to hide costs. That's not inherently wrong, but people are entitled to know how much they have to pay and what they are paying for. It's really a simple fix: Define and simplify what it is that it costs to own these derivative instruments. So, it's not about risk, but about cost disclosure.

So, is the SEC move a smoke screen for something else?

The issue here is that the Obama administration is trying to take profits out of everything. Look at the recent health care reform; look at what they did to the student loan programs where they got in between banks and students. Look at the financial reform they are working on. It all leads to cherry-picking [the bigger companies] and it eliminates any profit incentives. The government doesn't want people to make money, they want to make the money. This is a socialist process; it's all about control. If you believe in capitalism, this is insane.

Speculators have gotten a really bad rap recently, and are said to be the reason behind the CFTC's position limits campaign in the commodities markets. What do you make of that issue?

It's, again, about control. The government is working to restrict people's ability to hedge away the risk of inflation. In the 1930s the government confiscated all the gold for a low price. Back then we were on the gold standard and we were forced to turn in all the assets because gold ownership was restricted. It was the government taking control, which inevitably led to much higher gold prices, and everyone got screwed while the government pocketed the difference.

The reality is that while the government claims that by limiting positions it will stop the speculative rising of prices in commodities, it has no intention of keeping prices in check. It simply wants to make sure that the profits that come with price hikes end up in their pockets and not in investors'. It's terribly hypocritical, not to mention that position limits will drive business offshore. It will restrict the ability of pension funds, endowments and individuals to hedge their exposure against inflation.

It sounds like you don't see any of these measures as beneficial to the marketplace. What do you think the government hopes to accomplish if it is hindering growth?

This is an ideological battle. People in our administration know all these things, but they don't care. They believe in social justice, in egalitarianism. They don't believe in capitalism. This is an ideological concept, not an economic one. The problem is that we are selling our souls to the devil. Everything you exchange for something else with the government puts them in control. They then own you.

Let me preface this by saying that the Republicans did a horrible, horrible job and they deserved to lose. They allowed the collapse of the system; they let Lehman fail. Why did they save Bear Sterns and not Lehman? That, I never got a good answer to. The fall of Lehman allowed AIG to fail. In essence, what our current government is doing here is exercising more power over individuals, and that curbs growth.

If you look at economies that want to grow, they allow people to create wealth. People with wealth invest back, through venture capitalists, in new businesses as opposed to simply putting the money away in savings and letting the government eat up its share.

Look at China: They are a communist country with a far more capitalistic economic system right now than ours. China wants to create wealth so that people can start up businesses, hire other people and grow the economy. The opposite of that spectrum is Cuba, where the burden of taxes and government intervention has that country in one of the worst economic conditions in the globe.

Here in the U.S., there are too many uncertainties right now surrounding just how far the government's hand is going to reach down in our pockets. If you want to start a business, you can't project your costs ahead, which means you will most likely not be able to get equity capital from a venture capitalist, who in turn will take his/her business elsewhere.

But big businesses, the Googles of life, they will always get the money. It's the small businesses that are in trouble and it's the small businesses that can drive economic growth. The Obama administration, as it has said in the past, wants people to sacrifice as we strive for egalitarianism.

These measures, you said, trim people's ability to hedge against inflation. Is inflation in the cards?

I don't think we are headed to inflation in the short run. We are headed to hyperinflation. It has nothing to do with cost pressures, but it has to do with the loss of confidence in the government. If lenders back away from lending money to a government, that government will most likely resort to printing.

Last year, 44 percent of all of the U.S. government expenses were paid with borrowed money. This year, that number is 40 percent. When you borrow 40 percent of all that you spend for a long period of time, especially with low growth rates, lenders might start to walk away. And that will lead bond buyers to back away and the government will have to print money.

Once we lose confidence that the government will pay lenders back, we get into a 1920s-Germany-style printing problem. In many respects, we are worse off than Greece because no one can bail out the U.S.

How do you build a portfolio under these current conditions?

I'm a big believer in precious metals. Keep in mind that in times of hyperinflation, you don't need to own a lot of precious metals because they go up a lot. Look at gold's current prices: The only reason they are so high is because people are using gold to hedge their exposure. So, 5 to 10 percent of a portfolio allocated to precious metals is enough.

I would also have as much as 20 percent in various equities and maybe 5 percent in short-term T-bills because they adjust quickly in an environment of rising interest rates. I would also own corporate bonds and currencies, primarily the Aussie and the Canadian dollar as well as the Swiss franc.

And I would include a diversified portfolio of foreign securities. Of course I would also own oil futures, especially now after the Gulf spill accident, which will hinder our ability to drill. And I suggest owning managed futures. But ultimately, the key to a portfolio is hedges, and to be conservative.