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Big Bets Gone Sideways

Market in Upward Trend

The upward stock market trend remains firmly intact. All major technical indicators are strengthening, thereby lowering the probability of a correction or pullback. From a fundamental perspective, the macro indicators strongly suggests a resurging American and global economy. So why do I remain such a skeptic?

It's a good question.  I believe the answer lies in the fact that while all signs point to a cyclical uptrend and possible stock market boom over the next few quarters, many signs also point to a secular downtrend once we've worked through our cycle of fiscal and monetary stimulus and are left with the largest public debt hangover in our history. Like a Toyota with a sudden acceleration problem, we seem to be careening towards an inevitable crash against an ever higher wall of deficits.

What really puzzles me now is the lack of reaction in the bond market to what must be an eventual wave of inflation as countries around the world monetize their debt. A case in point is the exchange traded fund TBT, which is an ultra-short for the long bond. While I've been building a position in TBT thinking that it should soon break out, it's been going in the opposite direction, albeit in very small steps.

This trade reminds me of the trade I always used to make towards the end of the housing bubble. Every few months or so, when I believed the bubble must inevitably burst, I would open up options positions on the short side of Centex (one of America's largest homebuilders). And every few months or so, I would lose a little bit of money. Eventually, that bubble burst; and when it did, being on the short side of the housing market was one of the quickest ways to print your own money that the stock market ever invented.

My point and then is that sometimes there are big macro bets that are "when" trades and not "if" trades. What I mean by this is that shorting the long bond is not a question of “if bond yields rise” any more but simply a matter of when the growing mountain of world debt and money catches up with the inflation rate.

My bigger point then is that if stock market participants are rational and they know that at some point that interest rates are going to spike sharply and choke off both the economy and the stock market, they should be rational enough not to get sucked in too far to any short-term bullish upward move of the stock market. The clear danger of being sucked in is being caught in the market when the trend aggressively turns. So maybe that is one of the big reasons why despite all of bullish signs in the stock market and economy, the market remains characterized by low volume and small progressive steps rather than any big breakouts.

If all these ruminations appear to make me a stock market coward, well then so be it. But I do think that most of the money that's going to be made over the next few years -- and the next few decades -- are going to be on big macro bets. And the biggest bet of all is going to be shorting the bond market.

These thoughts also lead me to my other big bet, that on a reevaluation upwards of the Chinese yuan. In this regard, and let me put this in a very delicate manner, I can't believe how stupid and ball-less the Obama administration is. Throw in naïve while you're at it.

What is the source of this rant? The fact that our Lilliputian Treasury Secretary Timothy Geithner has cut a deal with the Chinese to allow them to engage in only the tiniest of revaluations. Memo to Tim: with the yuan undervalued by 30 to 40% or more, a 2% revaluation by the Chinese will have little or no impact on the ability of manufacturers in America to fairly compete with the mercantilist Dragon. You sir, are stupid, stupid, stupid, stupid, stupid, stupid, stupid, stupid, and stupid. And ball-less, too.

The fact of the matter is the best jobs program for America is not building a mountain of debt through fiscal and monetary stimulus but rather engaging in constructive trade reform with China. At the top of the list of such reform is a fairly valued currency. Until this is finally and fully understood in the White House and on Capitol Hill, long-term economic prosperity will elude this great nation.