My plan for this business cycle

My working assumption is that the new business cycle that began in 2020 will be similar to 2003-2007 business cycle.  In September of 2020, I went overweight on commodity stocks, base metal stocks, oil and natural gas, farmland sand agriculture stocks, REITs and home builder stocks and emerging market stocks.  This business cycle should be a weak dollar cycle.

Prescient post from 2009 revisited

https://inflationresistant.blogspot.com/2009/05/inflation-proof-investments.html

I wrote about three stages of inflation in 2009. Sometimes, you have to read your own younger self. I wrote that in the final stage of inflation, there will be new acronyms. Indeed, it was FANG this time. Business cycle is finally coming to an end. All three stages of inflation are over and hopefully, you did well in first two stages and are surviving the final stage.

Today, I will write about bear market.  Bear market takes its toll in three vicious ways -
1) Downward spiral of prices. While most people focus on where prices will bottom, they underestimate the stealthy impact of two other ways. They are discussed below.
2) Duration of bear market. This is most lethal and underestimated by people, who are looking to be next Warren Buffet and jump in too early. Bear markets can last months and years. As the saying goes, Markets can stay irrational longer than you can stay solvent.
3) When the next bull does arrive, it is tepid for a long duration. and people do not believe it. It is likely to start in asset classes that was not widely held in the last bull market and therefore holders of the last bull market will not be made even. 

What if we had a bull market and nobody came?

Public has not been participating in this relentless rising market. Yet the markets have been rising on back of central bank buying and corporate buybacks. Until there is a death cross (50 dma crosses below 200 dma), this is still a good market to trade up. Buy the dips and sell the rallies.

Indian government blames the hoarders for inflation but not the central bank

The new Indian government is back to old tricks. They are trying to blame the hoarders for rise in vegetable prices. When stock prices rose five fold between 2004-2008, did you ever hear the term stock hoarder? When real estate prices went through the roof, did you ever hear the term real estate hoarder?

When you print money, it goes into financial assets initially and financial assets become a bubble. If the central bank does not allow financial assets to deflate during an eventual recession, the economy goes into stagflation where commodity prices eventually rise faster than financial assets. What people want is that stocks and real estate should rise 100 fold but commodity prices should not rise at all. That is a mathematical impossibility.  Prices of food items will rise in India even if you destroy all the storage and outlaw hoarding. There is no difference between a hoarder and stock investor. They are both in essence momentum traders. In a money printing environment, prices would rise regardless.
If you want to end inflation, stop money printing. And stop blaming the hoarder. Prices have been rising for sixty years, ever since silver coinage was removed. Could anyone have hoarded onions for six decades? Also, why are milk prices rising? Are cows hoarding the milk? 

Where are we in the business cycle?

We are in a late business cycle. This is when momentum traders make money. Early part of the business cycle is when you can be a value oriented long term business cycle and later part is when you have to be a momentum trader with tight stop losses. It's still too early to go short. However selloffs in treasury bonds can also be looked at buying opportunity.

The Hindu trinity and the separation of powers into legislative, executive and judiciary

The Indian trinity consists of Brahma, Vishnu and Shiva. Brahma, the creator of laws, is the legislative branch. Vishnu is the executive branch of the government. Shiva is the judicial branch of the government. Brahma has only one temple left. The legislative branch loses all it's power over time. Shiva, the judicial branch, retains some influence. But it is the executive branch or Vishnu that emerged as the most powerful deity over time. An interventionist Vishnu took incarnations of different animal and human forms and tried to set things right. But that did not prevent the kaliyuga or dark ages from happening.

As the American democracy matures, these are things to ponder over.

Surveillance state no longer a conspiracy theory...........

http://www.youtube.com/watch?v=UL8q0xv8gUY

Wasn't in 1984 but in 2014. Welcome to Obamanation where Snowden goes to jail but Corzine goes free.

Every post (including this one) is being recorded for eternity by NSA. And google, yahoo, facebook, apple, microsoft are all involved.

In Cyprus, bond holders made whole but not insured depositors

More evil solutions in Cyprus

Ordinarily, you would expect shareholders to be wiped out first, followed by preferred shareholders  and then bondholders. And only then should uninsured depositors be touched. The insured depositors should pay only when the insurance provider becomes bankrupt. Or at least, that is what the law was before the weekend. But in socialism, the only law is what a dozen bureaucrats decide to do.  Is it also possible that the German and French banks sold CDS on Cypriot bonds? And they do not want to pay. So, eurocrat socialists will just make up the new laws as they  help mega German and French banks. Ordinary Cypriots are paying for it. 

Of course, there is always a law of unintended consequences. There will be bank runs all around the Southern Europe and a lot of scared money will be flocking to USD.   US markets may hold up a little longer as it absorbs capital fleeing from the evil clutches of Brussels. 

ISDA gets some sense and says CDS will trigger

ISDA Says Greece In Default, CDS Will Trigger

Finally, ISDA gets some sense and states that Greece has defaulted and CDS will trigger. It was obvious to everyone else that any other ruling would have shut the CDS markets down as I had blogged recently here ISDA insults our intelligence.

Cyclical Bull is still riding high

The cyclical bull is not over yet. Money managers who learnt that they have to side step the cyclical bear in 2008 are like the generals fighting the last war. They will have to come back into this market and this will take the market a lot higher.
Bulls will get to do one more victory lap. And after that, it will be all over. The cyclical bear will take time to form and will be very slow but brutal. So, time is now again to trade momentum but keep taking your profits.

Why is Jon Corzine not in Jail?

MF Global stole hundreds of millions of dollars from customers. Will Jon Corzine go to jail? No, he is well connected. He is doing fundraisers for President Obama. Will anyone go to jail for Solyndra? No, they are well connected. Will anyone resign in the US govt. for supplying deadly weapons to the Mexican drug cartels? No, they are well connected.

Occupy Wall Street communists are angry with the rich. For them, it does not matter how the 1% became rich. Did they steal customer's money like Jon Corzine or did they become rich through honest work like Steve Jobs? It does not matter to the Occupy Wall Street. They only understand rich versus poor. They do not understand honest versus dishonest. How long will a society survive with such morals?

Where is the rage against Jon Corzine?

ISDA insults our intelligence

Why is a 50% haircut for Greek debt not a credit event? ISDA can think that we are all idiots but markets know better. Sovereign CDS markets will be shut down by the markets and interest rates on bonds by weak European countries will rise. The euro-crisis is about to become much worse. The whole thing would have been so funny if it wasn't so tragic.

Time now to trade momentum

The crack-up boom has begun. Interest rates are still kept at zero by the fed.
We are two years into the business cycle.

Time to trade momentum is upon us. In the middle business cycle, there is no point in being a contrarian. I am taking profits slowly from earlier investments. From tomorrow, I will also be trading momentum with tight stop losses.

A crack-up boom or bust

About 3 trillion in short term debt will roll over this year for the US government. Add another 1.5 trillion of revenue deficit to it. About 4.5 trillion will need to financed this year. Good luck trying to get that financed in the market at interest rates near zero. This game is getting interesting. If fed monetizes a large part of it, US will be in a crackup boom. If it lets interest rates rise and lets markets finance it, the economy will go into tailspin. It's possible that it will try a combination of both. That will still lead to a massive crackup boom in certain sectors, followed by a bust few years down the line. But the early part of the crack up boom always feels good.

It's going to be a rocky ride. I am fastening my seat belts.

Indonesia, 1998 and Egypt, 2011

What really happened in Indonesia before the overthrow of Suharto?
What really happened in Egypt before 2011 before the overthrow of Mubarak?

There was a stock market boom driven by loose monetary policy rather than fundamentals.
When the bust came, food prices were high and currency was in crisis. In the new business cycle, money was no longer going into stocks but rather into daily food items.

Did you know that Egypt was the best performing stock market in the world in 2005 and it did well in years previous to the financial crisis?

Egypt stock market returns in 2005

Pakistan to enter hyperinflation in next few years

After Zimbabwe, it appears that it is Pakistan's turn to enter hyperinflation.
The budget is double the revenue. It is unsustainable. Army gets bulk of the budget and
is a state within a state. Spending cuts cannot happen. The economy is in a downward spiral. The fall of Pakistani Rupee will only accelerate and hyperinflation will be obvious in the next few years.

Investment Strategy

I am sharing my investment strategy. Please share yours.

My investment strategy -
A business cycle lasts 4-7 years. Go long on certain assets at beginning of the business cycle. After 3 years into the cycle, start selling those assets slowly and raise cash. As the fed raises interest rates, slowly buy government bonds. By buying bonds, you are just front-running the fed because fed will be buying it when the recession hits. Keep selling the assets and raising cash as the cycle matures.
Watch for credit contraction. Once you are sure that we are in credit contraction, go short with some money for extra points. But cover your shorts every 1-2 days.

When fed has done lowering rates, sell the bonds. Slowly, start buying certain assets.

Every business cycle is different. So, you may have to buy different assets in different business cycles. Also, you don't have to be exact in your timing. Just approximate.

Goldman Sachs Has First Quarter With No Trading Loss

Goldman Sachs Has First Quarter With No Trading Loss

"May 10 (Bloomberg) -- Goldman Sachs Group Inc.’s traders made money every single day of the first quarter, a feat the firm has never accomplished before. "

Every single day. That's right - every single day.
Can random walk theorist professors give tuition refund to the MBAs manufactured in the assembly line? This should be proof enough of market manipulation for the nay sayers. I won't hold my breadth.

Chinese Hyperinfaltion:1939-1950

Origins of the Chinese hyperinflation

To preserve confidence in the new currency, the Decree contained provisions to establish a “Currency Stabilization Fund.” The Fund was to buy and sell foreign exchange in order to keep the exchange rate of the Chinese currency approximately constant relative to certain foreign currencies. The Decree also contained provisions to alter the function of the Central Bank. Instead of merely being an arm of the Nationalist Treasury, the Central Bank was to become a “banker’s bank” distinct from the Nationalist Treasury.[17] Also, the Decree maintained that “plans of financial readjustment have been made whereby the National Budget will be balanced.”[18] And, according to Finance Minister Kung, “The government is determined to avoid inflation . . . .”[19]

The wording of the Decree was the government’s attempt to quell fears of inflation. Chinese newspapers ran editorials assuring the public that the Nationalists had nothing but the best intentions for the Chinese economy, and the move to a paper currency was heralded by economists around the world as a step toward a modern banking system. But, despite the provisions of the Decree, the Central Bank was never removed from the Treasury’s control. Even more fraudulent was the assurance that the budget would be balanced. Indeed, the government deficit increased in the years following the currency reform.

In retrospect, Kung’s statement seems like a cruel joke on the Chinese people. The currency reform destroyed the private banking system which had served the Chinese economy well, and placed control of the currency in the hands of a corrupt and inept government. Inflation began almost immediately. Eventually the inflation became so severe that it helped bring about the collapse of the Nationalist regime. Thus, monopoly power over the currency proved fatal to the Chinese economy, since the inflation that Kung was “determined to avoid” occurred with a severity and length unparalleled in history.

Bernankeism in Rome

Inflation and the Fall of the Roman Empire

Now, what were the consequences of inflation? One of the odd things about inflation is, in the Roman Empire, that while the state survived — the Roman state was not destroyed by inflation — what was destroyed by inflation was the freedom of the Roman people. Particularly, the first victim was their economic freedom.

Rome had basically a laissez-faire concept of state/economy relations. Except in emergencies, which were usually related to war, the Roman government generally followed a policy of free trade and minimal restriction on the economic activities of its population. But now under the pressure of this need to pay the troops and under the pressure of inflation, the liberty of the people began to be seriously eroded — and very rapidly.