To The Moon

Sun April 9

The Fed Reserve saw fit to keep rates at 0% for well over a decade (since 2008). We have a generation of young financial professionals who have never had to contend with rates. Rates have simply been nonexistent. Our entire economy reconfigured itself to 0% cost of capital. Companies could fund themselves with free money and turn around and purchase their shares. Executives have made fortunes from stock incentive programs. Shareholders don’t complain since the stock prices keep rising. Massive bubbles have formed in real estate, credit, and stocks. Never underestimate the financial bubble formation potential of 15 years with 0% rates.

Fast forward to today. Stocks act like they want to break out to the upside. Market rates have been dropping (witness the surge into short Treasuries). Remember that rates anticipate levels of credit demand. Dropping short rates anticipate dropping credit demand. This all foreshadows a healthy recession. These bubbles are far too large from incessant central bank stimulus. Get ready for across the board pain. Yes the dollar is losing fans worldwide and specifically in the petro world. De-dollarization will take time however. Short rate relief will not likely match longer rates which are more affected by inflation. I think our economy delevers (unfortunately along with the western world economy). This road show could get ugly.

So what to do? BILS are still providing some decent risk free yield. Precious metals have begun to show life. The dollar has started to roll over. If that continues, gold (which is priced in dollars) will continue to benefit. Miners (GDX, GDXJ, SIL, SILJ) are my favorite ETF plays. Oil should hold above 70 especially since Saudi Arabia is cutting production. No one want sub 70 oil, especially Russia. ETFs are a good way to play oil (UCO, USO, XLE, ERX). There are options on all these stocks. Weekly expirations are a handy way to accumulate shares with short term naked put sales. More aggressive plays can use futures (ZB, GC, SI, CL). As I have said in prior posts, there is no shame in sitting this out in BILS (or your favorite equivalent) until the tea leaves settle. The smartest traders are the ones who maintain enough capital to play another day.