This whole project for me started with a response to an article here on seeking alpha. An article by Paco got me going this morning. He is pretty down on the market and wants to short Treasuries and buy gold and silver. He is scared of inflation and warns people to stay away from stocks etc because we are printing money at a voracious rate. It got me thinking about some of the more fundamental misconceptions that people have about our economic system.
What is the fundamental nature of our global economy ? How do we value something and how can I capitalize on this reality ? Has this most recent economic crisis somehow changed the rules or the nature of how people organize themselves for productive capacity?
The first time I bought gold as an investment was around the time of Katrina. For so much of my trading career gold just stunk. I learned about GLD and this whole world of ETF's. Then I started to look back at the major moves that have made me money or lost me money. Eight out of ten times these periods were driven by political events. Whether natural disasters, rockets red glare, Mullahs or militants so much of my winners or losers were driven by politics.
Back in March I started to load up on equities again. I had hedged my positions using QID's and the Dog back in the later part of 2007. I really didn't get short I just tried to mangle hedge the positions that I had. Miraculously my math worked out and I didn't lose money on the way down. I started to take off my hedge starting after the election and then into the new year February and March. I was early and did it a little each month. It hurt a little but I was long again by the end of February and I was in good shape with about 40% of my portfolio in cash as I started to load up in March.
I then went on a buying spree BTU, GE, DOW, COSWF, and a new world for me -- international ETF's. China, India and Russia, IIF, PIN, TRF, and some china dragon thing. Commodity ETFs,GLD, SLV, DBB. Financials UYG, C, BAC. Tech-- MSFT, INTC et al. It has all worked to one extent or another -- but now the rub.
So much of what I have done was really driven by confidence in government. I got short when it became obvious to all including a popular stock commentor that Bush and the boys really "know nothing !" I got long with Mr. Cool and a competent transition. So I have been trying to figure out what to do with the current market conditions and all these positions I have acquired. I was searching for some trend to follow. And then came Paco's article.
Am I really dealing with economics or politics? Paco would have me in a bunker, counting bullets, buying puts, and counting cans of cling peaches. And I can understand where Paco is coming from. We have and are printing a LOT of money. Inflation to fight deflation - I can trade on that -- lets get some GLD, SLV, and get greasy with oil right ? But wait if we are a global economy --- my India position went up 23% in a day they " outlawed communism " -- then inflation could hit everywhere ? My Russia fund went through the roof the other day because of oil prices -- oh they price oil in dollars -- can you say sick dollar ? Well if it ( inflation ) hits everywhere than we have inflation relative to what ? Commodities alone -- but who really controls commodities ? Who really prices them -- we do ? I don't know -- I read this article in the Economist how China was buying up farm land -- why ?
Apparently during the last run up in commodities the price of grain and rice got so bad that India and some other countries forbid their export -- because of domestic need. China would not have been able to buy what they needed at any price. So China and some Gulf states started to cut deals to grow grains and palm oil in Africa and rice in SEA countries. New economic mercantilism ? They are bringing in their own workers and the stuff is all for export ! What is driving this economic action is political reality -- feeding your people first.
Then there is all this talk about GM's pending bankruptcy and the governments involvement in stabilizing GM and getting them out of bankruptcy in 90 days. And the reality is I am buying UYG because I know that Obama won't allow another Lehman brothers. He is going to feed his people first.... he likes riding in Air Force One for weekend trips for dinner and a show !! So what am I really trading ? I am trading faith in governments. India's rejection of the last vestigas of communism -- I am betting on the Congress party being able to jam through Capitalism with only an outrageous amount of corruption -- as opposed to an unacceptable amount -- see Africa.
In the end I have to make a decision about the coming inflation. Will Obama and Bernacke be able to fight the coming inflation ? If things do get ugly what will my positions in gold silver oil grains etc mean anything if individual counties withdraw from the markets and secure there own supply of commodities privately?
This inflation may not be like the 70's -- the world is much more interconnected. The recovery may have already begun in China, India, and Russia. And if so don't we actually want inflation ? Isn't inflation a sign of economic growth ? Is it governments job to balance inflation growth and economic creation ? If so am I really only trading instruments that reflect peoples belief in governments ? If so, how do I position for politics ????