My investment plan for this business cycle

Every inflation cycle is different.

Following is my plan for this business cycle.

In the initial stage of inflation -
1. Refinance to a 30 year fixed rate loan at a rate below 5%
2. Buy some of following assets - precious metals, emerging market equities and currencies, Asia, commodities, natural resource companies, some too big to fail banks, healthy American industrial companies, and some junk bonds and prime rate funds. Keep some cash. Subscribe to Barrons.

Intermediate stage of inflation -
After the fed raises interest rates for the first time, become a momentum trader. Subscribe to a momentum trading newspaper like Investor's Business Daily and cancel Barrons. Trade with tight stop losses.

Terminal stage of inflation-
After the fed raises rates by at least 2%, start preparing for deflation and reversal of dollar carry trade. Take profits of assets acquired in the initial stage of inflation. Raise cash. If treasuries are above 5%, start nibbling them. Even if treasuries remain in a secular bear market longer than the business cycle, they will provide a risk free arbitrage due to existing mortgage. Subscribe to Barrons again.

Remember also that markets work through deception.

What is your plan? Please share in the comments section.

Three stages of inflation

Every inflation eventually leads to a deflation. There are three stages of inflation.

The initial stage of inflation overlaps with the previous deflation.
People are unsure about their investments and some think that deflation will continue. Value investors perform best in the initial stage of inflation. People who take cheap loans also win. Credit starts to flow to sectors where fundamentals are the best. Every inflationary cycle is different.

In the intermediate stage of inflation, credit continues to flow to sectors where credit is already flowing. The reason is that it is easiest to pay off the debt with a profit if more debt is taken after you have taken debt and more people buy the same assets that you bought. Momentum traders perform best in the intermediate stage of inflation. Technical analysts are mostly momentum traders. When people talk about inflation proofing their portfolio, they usually refer to only the intermediate stage where they see constantly rising prices. That is a mistake because inflation has a full cycle with profit opportunities in each stage.

In the terminal stage of inflation, every talks about investing. People who missed the boom of last few years want to jump in. There are new acronyms. Very soon inflation will be over and deflation will follow. There will be tightness of money.
Cash will soon be king. Risk averse people who hold cash and government bonds win. When deflation takes hold, some bold and prudent short sellers have a party time.

Unfortunately, it is hard to know which stage of the inflation cycle we are in exactly. But we only need to be approximate and more right than wrong to make money in the longer run.

Game of money

Wealth is not a zero-sum game but money is a zero-sum game without a perfect strategy. In fact, we can argue that it is a negative sum game because wall street and the government take their cut in the zero sum game. In a game like tic-tac-toe, a perfect strategy exists and if you follow that strategy, you cannot loose. Games like poker and chess do not have a known perfect strategy. But, that does not mean that good strategies do not exist. Strategy must be adjusted according to the moves of other players. The most important players in the money game are the central bank and the government. The strategy must be adjusted according to their moves. When you go to a casino, you have an option of not playing and keeping the money in your pocket. But what if the casino takes away a portion of your money every hour that you do not play? Then, you will be forced to play in the casino just to break even. Welcome to the casino where the government takes away your money through inflation even if you do not play.