Simit Patel

How Investors Can Profit from the Coming Bear Market in Bonds

Hi doubleguns,

Thanks for your comments. If the Fed raises rates to increase demand for bonds, that will have the effect of tightening the money supply. technically speaking, tightening the money supply is deflation.

i expect, though, that demand for the US dollar will still decline and will do so faster than supply for dollars declines, and thus i would still expect a weaker dollar even if we have monetary deflation. ultimately, though, i am expecting the fed to buy most of the bonds, and thus for most deficit spending to be inflationary as the fed will just print money to buy the bonds.

there are, however, those who believe we will see ongoing deflation and dollar strengthening. the rationale is that the fed will raise rates to increase demand for treasuries, which will increase demand for US dollars and a higher yield will increase investors willingness to hold dollars. so it depends on how you view things. my personal view is that the fed will end up buying most of these bonds which will prove to be inflationary, and that even if the fed tries to raise rates, demand for US dollars will continue to decline, so i am expecting dollar devaluation, and will look for opportunities to trade accordingly (i make entry decisions based on when price movement begins to confirm fundamental economics).

hope that makes sense. :)


On Nov 05 06:28 PM doubleguns wrote:

> Simit, My straight forward question is when the bond is deflating
> is every thing else inflating? Sorry I sometimes cant think and type
> at the same time.

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.

Capital Flight Into Yen Is Path of Least Resistance

excellent, excellent analysis. i am short USDJPY though was expecting a bounce off 95; fortunately for me it broke through that, although i am still somewhat expecting a retracement. yen is clearly the path of least resistance and i don't foresee that changing at least until the bull markets in gold and silver resume. even when those do resume i think yen bullishness will still be a favorable wager for the next 4 years.

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.

For a Fork in the Road, a Barbell Portfolio

Volcker is correct in his assessment that inflation is the real concern, but he is hitting the crack pipe a little too hard if he thinks the Fed is doing the right thing. The Fed's behavior is inflationary and it is doing its best to force banks to lend in an environment where there are not creditworthy borrowers. When we see massive inflation over the next four years it will become apparent how bad the Fed's behavior is.

The Japanese Yen is the ultimate play for those torn between inflation and deflation; regardless of whether you are an inflationist or a deflationist, going long Yen and short US dollars can make sense. For those who know the game is inflation, though, gold and silver are where it's at.

The Physics of Money

this is looking at the economy from the perspective of the credit crunch, the real story though remains the double deficit -- a budget deficit (govt spending more than it takes in) and trade deficit (imports greater than exports). the budget deficit in particular is problematic and is growing. let us remember social spending is going to increase and the tax base is diminishing due to deflationary forces.

put another way the US is like a guy with a small income that is getting smaller that is spending more and more on his credit card. eventually, he won't be able to find a debt buyer. that's another way we can go inflationary very quickly, because the debt will be printed away. this is even more likely when one considers the argument that bond prices are set to collapse (www.moneyweek.com/inve...).

oil will go from $50 to $200 within 36 months. precious metals are where it's at.

Why Gold Will Rocket

no doubt the case for gold is bullish. the fiat currencies as we know them are coming to an end. i think gold could go to 645, but i don't think it will go below that. more importantly, getting physical gold is the real issue.

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.

Gold ETFs: What Went Wrong With Conventional Wisdom?

gold prices are being seriously manipulated, that is the issue. for instance there is naked shorting of the GLD ETF that is distorting prices there. there is another good article on seekingalpha about this:

seekingalpha.com/artic...

Money Supply: We're In Orbit Now

Money supply is stalled because banks aren't trusting each other enough to lend to each other. The toxic debt and bad banks need to be expelled from the market; this will restore trust. This would result in significant deflation.

Instead the Fed is trying to print its way out of this mess, and thus is choosing an inflationary depression rather than a deflationary one. This is a poor idea and will result in more economic destruction.

The Simple Explanation of Bailouts, Inflation, and Deflation

hi frobnitzem,

yes, i agree 100% regarding returning to a 100% reserve requirement with money issued by the government rather than private banks as debt. however, the money supply is exploding, and thus this will be inflationary. see the money supply growth:

nimamahdjour.blogspot....

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....

The Keating Connection

Neither Barack Obama nor John McCain have much of an understanding of the Federal Reserve's role in creating this problem, and thus neither will be able to present much of a solution.