The investment options are endless: Hard assets or paper assets? High yielders or recent outperformers? To leverage or not to leverage? How much to diversify?
Many investors continue to play a panicked game of "catch-up" as broad stock holdings have remained flat for 2011, while heralded fund managers have massively outperformed by focusing on floundering Europe and ferocious runs in the price of precious metals and agriculture. Such has been the case since the bursting of the dotcom bubble a decade ago. But with mantras like "stocks for the long run" firmly ingrained in the psyches of the investing masses following a monumental multi-decade run that began in the early 1980s, most folks didn't notice 1000% gains first in oil, and more recently in gold and silver, until climactic runs began in 2007.
Despite shifts by eternally-emerging economic superpower China to trade in non-dollar denominated terms with neighboring Japan and Russia, King Dollar remains King. The global economy continues to integrate all-but-seamlessly and world reserve currency status remains in the hands of the Federal Reserve. Simultaneously, dissipating productivity across Europe and unstimulated demand in the crumbling BRICs reminds us all that the United States remains the most balanced economy in terms of creating supply and demand. The name of the game has always been, at least since the Federal Reserve Act was enacted in 1913, how many US Dollars do you have?
After a decade best described as stagflationary for developed economies, inflation expectations remain extremely high. With real wages declining quarter after quarter, political pressure mounting to address debt issues, more Americans employed by counter-productive local and federal government agencies than ever before, emerging market expansion taking a breather and recent sell offs across commodity and emerging equity markets, such expectations typify bubble behavior.
Growth can no longer be manufactured via monetary engineering at the same time the investing public expects more fuel to be thrown on the fire, leaving the stage set for Uncle Buck's impending inheritance of planet Earth.
My preferred way to play the Great Deflation is to maintain a portfolio heavy on cash and treasuries. 25% spread across gold or silver bullion and shares of leading mining companies, such as Vale (VALE) and Barrick (ABX). Aggressive investors should consider small, highly leveraged positions such as calls on Volatility (VXX) and leveraged short ETFs or stock index puts that will yield massive gains in the case of a broad sell off. The S&P 500 (SPY) ETF offers great liquidity and low options premiums. The dash for cash currently seen in various parts of Europe is not a localized phenomenon and will have a greater impact on US equity markets, as the American population is more devoted to stock ownership than any other.
Disclosure: I am long VXX.