Tuesday

Which Path Are We Taking: Japan, Zimbabwe or Argentina?

Post a Comment June 8, 2010 – 12:27 am |   | Permalink |  Print This Post |

So which path will we take?

Japan: - slow and painful deflation. Policy: bail everything out.

Zimbabwe: - hyperinflation. Policy: print print print!

Argentina: - acute deflation then inflation. Policy: default.

At this point in time, we are ruling Zimbabwe out. I dont think policy makers are that blind to follow that path. We think the Japan scenario is the most likely outcome at this point in time. The BEST thing to do, of course, is to take the bitter pill now. Let everything that has been poorly run go down, and as Jim Rogers says, the competent will take over the incompetent and things will improve. From a trading perspective, if an announcement is made tomorrow that PIIGS are defaulting, we will leave our shorts in until a point where everyone is bearish, then try to catch a falling knife by going long (kids, do not try this at home). Markets recover by few hundred percent post default in the subsequent years. Simply because the burden of debt is not there to weigh the business down for years on end. Japan is still struggling to pay off the interest of the debt (forget about the principal!).

So, back to our trades and indicator. Markets are very peculiar at the moment. “Peculiar” is subjective and because we cannot see the future and have a bias. Despite markets going down significantly, our indicators remain overbought. Personally, we are beginning to FEEL (yes, its emotion based) that markets should rally. However, our indicators have not moved one bit! What could it be??? 1. BIG CRASH ahead? 2. Indicators are lagging, ie it will come down soon before markets rally 3. Indicators are wrong and we can throw it out the window (definitely not, since this indicator helped us pick the top - we shorted like a mad man when the dax was 6200 with put options).

Strategy:

Those who follow will know our final conclusion to our trades can NEVER pick the bottom or tops ie it’s always “wrong” if you want to wipe the slate clean. One of our rules of trading is : always leave the icing for the next trader.

We think markets will have another drop, simply because our indicator is still unscathed. Which is worrying. The magnitude of the fall does not have to be proportionate with the drop in our indicator - but if that was anything to go by markets still have a LONG way down. We are concern even though we are right - just the thought of the possible depth of the abyss before us. We will start taking profits on our shorts after this big fall. If the big fall does not happen, we will start to hedge with some longs in undervalued companies and lesser affected markets fundamentally.