Simit Patel

An Investor's Guide to Hyperinflation

Thanks to all who took the time to respond. A couple of points I wanted to make in light of some of the comments:

1. Yes, I have made wrong calls before. I have never claimed to be perfect and in my opinion, any trader who expects to be right 100% of the time has a poor strategy.

2. With that said, you can see my trade record here: www.informedtrades.com... . I have posted double digit returns since 2006. While there is always room for improvement, my track record has outperformed most, and has beat the rate of inflation as well, thus generating net positive returns.

3. To say I have been dead wrong on all my calls, and that I am the ultimate contrarian indicator, is simply false. The primary call I have made since the beginning of this year is long gold/short 20+ year Treasuries. GLD is up 8.16% for the year with TLT down 12.92% this year. I have also been a big advocate of silver, which is up 21.52% this year. These have been my primary calls. Though I would not play Treasuries due to Fed intervention, I am confident that these trends will continue.

I post all my trades as I make them, and I note all my stop-losses, on my site at the link provided above. You can see my long-term calls on gold, silver, and Treasuries in my commentary on SeekingAlpha and on InformedTrades.com.

Thanks again for all the comments.

What the Conflict in Gaza Means for Financial Markets

Likewise, I would find it abhorrent and negligent in my responsibilities to not understand how geopolitics affects my wealth and my personal financial obligations, which in turn impact my ability to make a better world.


On Jan 12 10:15 PM Razors Edge wrote:

> Welcome to the circus. This little neighborhood conflict will be
> over soon and it is not going to affect anthing but Hamas ability
> to influence. If there was anyone going to get involved further (Iran?)
> they should have done it earlier. It will be over in a very short
> time. Now if Israel can control itself afterwords at the same time
> protecting it's citizens we can get back to some sanity in the world.
> I find it abhorant to even discuss an investment opportunity when
> people are dying on both sides.

Money Supply Indicator Supports Deflation Argument

@doubleguns, yes, i would think gold and silver eagles would be factored in if we use MZM as our money supply indicator, as they are redeemable by cash. i believe, however, we are seeing price suppression in the metals market, and thus these coins are not being given their fair value when redeemed for cash. to the extent we are seeing this type of price suppression MZM is probably less deflationary than it seems.

How to Construct a Deflation Proof Portfolio

@ellen, yes no doubt -- i'm still a buyer of precious metals, especially physical ones where we are seeing a shortage and it is difficult to get delivery. hard to justify from trading perspective as we are in a deflationary environment, but from an investing perspective, i think delivery of precious metals is a great idea -- a good insurance policy at the very least.

@patio, demand for US dollars is a key issue as well. right now we are seeing money supply contract and demand for US dollars rising (thus the rise in treasuries and US dollar), though i doubt that will continue. if we see a decline in US dollars and a decline in demand for US dollars, i think we will see stagflation, which will be characterized by declining US bond and equities markets, a weak dollar, rising commodities and precious metals, and rising CPI.

@yblarrr, yes no doubt -- though i think it is quite likely we still have room to go. :)

@sunseeker, this is why i am generally not a fan of US markets. too much regulation makes it impossible to play. unfortunately regulation is a worldwide occurrence. still, i favor opportunities in the forex market, as well as in asia.

How to Construct a Deflation Proof Portfolio

@DaveW, thanks for the good words, glad you are finding the articles useful. i am primarily a currencies and commodities trader, but in general i am not in and out of the markets on a daily basis. my 3-4 year outlook is inflationary, so wherever i see inflationary opportunities i trade there and stay there until the trend looks deflationary. so there is a ton of volatility on the yen now but i will stick with it until momentum shifts on the daily chart. i use moving averages as my primary momentum indicator.

@siempresuamor, yes i am expecting congress to put restrictions on many of these inverse ETFs....surprised they haven't done so already. successful speculators though are too ripe of a target for blame, unjustified as it may be, so i would suspect inverse ETF traders to be a target.

@Smarty_Pants, i hear what you are saying. i think the asian ETFs (asian stocks, bonds, and currencies) are good for traditional style investing in this deflation. though gold remains my favorite long-term pick, i think gold holders will be the biggest winners over the next 5 years.

First Comes Deflation, Then Comes Inflation

@JasonC, you raise valid points, though demand for dollar is dropping as well, as will be evidenced by the horrible fundamentals of the US dollar. the US economy's big productive asset was financials. as US financials fall and as deflationary forces create a world in which fewer and fewer assets are denominated in US dollars, demand for US dollars will fall. falling demand, coupled with inflationary supply side actions by the fed, will result in massive inflation.

Randy_H and css1971 noted that deflation can last a while. this is quite right. however, i think the budget deficits are what is going to really bring on inflation sooner rather than later. the US' income is falling, it is only a matter of time before it will not be able to sell more debt, at which point expansion of the money supply is the only way the debts will be repaid. i think we will see inflation resume in 2009.

the other factor to consider is central banks decreasing US dollar reserves, which i think will be a by product of the double deficit and corresponding decreased demand for US dollars. this would suggest inflation even if US banks are not able to lend to US consumers as dollars overseas will be unloaded.

Dollar Goes Down Along with Bailout Plan

there are a number of differences between this depression and the last one, though the biggest one is the lack of a gold standard. that is why the previous depression was deflationary, and why this one will be inflationary. there is no mechanism to restrict the central bank from inflating the money supply to death, and every indication is that they seem to be interested in doing just that.

interestingly, though, i think if you priced all assets in gold, this depression would be deflationary as well. so perhaps it depends on what currency you are using when asking whether the depression is inflationary or deflationary.


On Sep 30 12:58 PM Muddling Investor wrote:

> Last time we had Great Depression, we had deflation. Why would we
> have inflation now? Credit is frozen, how do you get money to inflate?
> It's ridiculous. Just look at the dollar strength against all currencies
> yesterday and today.
>
> Disclosure: long UUP.

Time for Global Coordinated Easing

Great article Kathy! You're the best!!! :D

While I am anticipating the Fed to cut -- Fed funds futures are already pricing in a 50bps cut -- I think it would be a terrible move economically, and will only result in dragging out this bear market for a longer period of time, just like the Fed's interventionist policies in the late 20s early 30s dragged out The Great Depression. The government's non-stop interventionist policy is preventing the market from undergoing a natural contraction after Greenspan's follies created an overexpanded money supply. Further inflation of the money supply will only exacerbate the problem.

But yes, looks like a rate cut is coming, and looks like USD short is in the cards. USDJPY is the pair to short, though the gold rally is just getting started....