What happens when QE2 ends? Here are my thoughts. I think that if you look at the only commodity with a PhD in economics, Dr. Copper, you're looking at a commodity that has been telling you for months that commodity prices could be topping. In my opinion, when QE2 ends, the risk-off trade should start to become profitable and sustain its profitability through the summer. Although I am a believer in Peak Oil, I think Oil Prices are extended to the upside. That said, they likely will continue to go higher until they break consumers' backs like they did in 2008.
Right now, I'm Surfing Silver and Gold for landslide profits. That said, I think that this is starting to get into bubble territory and I'm actively looking for any reason that I can find to take off the trade, at which point that I'll actively look for significant weakness and dollar ralling or perhaps the end of QE2 to establish a short position in silver, aluminum, zinc, copper, etc.
The greatest part about the silver is that it could easily double or triple, or even more, at this point. The market is incredibly small compared with the number of people who could be seeking protection from inflation. Unlike Cullen Roche, who apparently likes to stand in front of the freight train, I prefer to ride the train up the bubble and right back down.
Stocks? I think that 6 months from now they will likely be lower in the absence of QE3. The recent runup in commodity prices is indicating to me that the demand growth that we are experiencing is artificial and not actually coming from the end consumer. I'm looking at China and I think China's tightening is going to be the equivalent of dropping a swimming pool full of water on a bonfire. Emerging market stocks, commodity stocks, and oil stocks are losers in this kind of deflationary environment.
As of today, we are still in an inflationary environment. I think that the end of QE2, sometime in the next 3 months, should transition us back into a deflationary environment. The most profitable way to play this is leveraging the prevailing trend in the most volatile commodity prices. The good news is that Helicopter Ben is going to come out guns-a-blazing to fight deflation again with QE3, in all likelihood to save the too-big-to-fail banks and then the inflation trade will be back on.
Is anyone else bothered by Bank of America (BAC) taking 1/2 of its loans and marking them as bad? How about that its CFO resigned? In terms of faking it till you make it, I'm a huge fan of not marking to market in times where the markets are breaking down. That said, right now we are not experiencing a time of crisis and unprecedented fear. Look at the VIX. Future expected volatility is very low. This means put protection is cheap. My advice. Go get some.