More metagame information…

I am not a good value player since I do not have the skills to analyze stocks, but who cares? I suppose “short beta” will be simple and effective equities strategy. Do you have any equity shorts that would outperform that has more complexity than simply “short beta”. (Of course XLF, IWM, an XLY would outperform because they have a higher beta than other stocks.)

Do you think other markets have decoupled yet. Does it make any difference to short the DAX, FTSE, or Nikkei anymore, or the correlations in for most developed market equity indices is one. But I think Japan, Australia, and Canada are starting to decouple, along with other emerging markets.

Currencies:
Regarding your views on currencies… what do you think about the dollar?

I think there will be a new paradigm where the dollar (and pound) will replace yen as funding currencies for carry trades (to fund bets on CAD and AUD as I think CAD might increase interest rates eventually). Bernanke isn’t going to raise interest rates for a long time (maybe when actual inflation kicks in and the money actually tickles down). Bernanke’s printing press would increase the upside for that type of trade.

I am bearish on the pound as a deflationary trade. I suppose GB would not receive any capital inflows, and they would have enormous trade deficits since their manufacturing base has been ruined. Also, it is in a “balance sheet recession” where companies seek to minimize debt, not maximize profit. So, capital would not be attracted to English equity since the returns on capital will be low when everyone is deleveraging, and people are not eagar to spend. Also, unlike the dollar and yen, not a lot of loans are taken out in the pound.

And let’s not forget, that the North Sea Oil has peaked too.

Thoughts on BRL, CAD, AUD? I think they might suffer short term negative volatility, but they are nice long term bets.

Bonds:

I do not think going long on bonds is a good trade from a risk/reward perspective (but you didn’t recommend that). Do you think people will seek the safety of nominal protection and a low interest pay (especially on high duration products which are more sensitive to interest rate changes)? Or that discount rates on paper currency would go up as people become less certain that the value of the currency (not its scarcity as the money could be in a black hole) would fall due to hyperinflation or default (even during a period of deflation)? The current steep yield curve supports the hypothesis of increasing discount rates on long term assets.

I said this before on another blog:

The bond market (and Bernanke’s manipulation) still seems to be betting against a recovery or inflation (despite what the inflationists on Seeking Alpha are saying). Do you think a 210 bp for 5 years is pricing in a recovery or inflation. 2.10% yield is not enough to protect against inflation? 210 bp for 5 years is a very high opportunity cost if one expects the returns on capital to be higher.

It would be more tempting to put on a long position when perceptions significanly diverge from reality. (Which doesn’t seem to be the case.) Initiating equity shorts now seems to be a better risk/reward than going long (with leverage) on Treasuries now.

Do you have any commentary on what the Treasury market is pricing in?

4/06/09 US Treasury yields

3 mon: 18 bp
2: 96
5: 205
10: 316
30: 410

I like 10 year German Bonds as my favorite sovereign bond long.

Precious metals:

I am not a gold bug, but in order to understand why gold is a “good” investment, we need to understand why gold wasn’t a good investment. Long story short, Volcker when he restricted money supply and let the market set short term rates, defeated inflation. Also, wage inflation did not happen during the Greenspan era, and that made the elites happy to hold stocks (since profits were going up, and costs remained stable) instead of gold. Central bankers were perceived as competent then. And then you have a credit bubble caused by excess risk taking and the Fed more or less denied it. I suppose gold will keep its “Fed incompetence premium” for a long time during a deflation. It has nothing to do with the argument that gold is an inflation hedge (but it is a hyperinflation hedge, and just about everything is too such as copper.)

I think silver, over the long run (maybe not really long run as we might reach the technological singularity and that might solve all our problems), would outperform gold. I think silver has more upside, with the downside being a littler greater than gold.