Dear all Subscribers,

First I have to apologize that the last newsletter was delayed for a week.  Some of you may have received last week's newletter last week while the rest just received it as late as yesterday.  This was caused by the system not being able to perform it's scheduled tasks properly.  As of this typing I believe it is fixed.  Please enjoy this week's newsletter.

Gold, Bond and US Dollar Puzzle

This week we have experienced a lot of pain on Wall Street and gold dropped faster than an elevator.  What that gives is a stronger US dollar and marginally higher bond prices.  Gold has rallied for a long time and has outperformed the stock market since year 2000 and it is due for a sizable correction for a long time.  As my previous newsletter stated that gold is topping out by observing from the model and this week it just happened that way.  It happened so quickly and severely which means most of the holders are not long term investors but speculators.  When something is speculated a healthy bull will shake out the last speculator so that the next run will be in place while a healthy bull tends to reward the true believers and punish short term speculators.  I don't think we will see a new bull run in Gold soon for at least a couple of months and I believe this is no different than in the year 2008.

 

Projections Based on Past Observation

Let’s look at the bubbles since the 90s:
1995 – 2000 (~6  yrs) Stock Market Bubble
2000 – 2006 (~6  yrs) Housing Bubble
2006 – 2011 (~6  yrs) Bond Bubble

Here is my projection:
2011 – 2016 (~6  yrs) Currency Bubble
2016 – 2022 (~6 yrs) Commodity Bubble

 

What Would be the Next Best Trade?

How to define a bubble?  I believe when the fundamental value is cut off from the actual value then that’s what creates a bubble.  As Jim Rogers mentioned in his previous interviews, shorting bonds would be one of the best trades in the history and that’s what we are morphing into this era.  In year 2000 shorting stocks and long with housing was one of the best trades of the century; and in year 2006 shorting housing and long bonds was a best trade as well.  So what would be the next best trade which would last for years?

 

Short Bonds and Long US Dollar or Other Currencies

This time I truly believe shorting bonds and going long on currencies will be the next best trade.  What makes everybody including countries in the world chasing US dollar or other major currencies?  The high default rate of high grade bonds may trigger a servere bond crisis provided the interest rate is at the lowest in the history.  Everybody would like to liquidate their investment in bonds and seek another safe heaven - Cash.  It is because the risk doesn't judge the return as in the investment 101.  A bear stock market also adds up to the fuel.  People would think holding cash would be the best bet because the two major investment vehicles - Stocks and Bonds are broken provided that commodity will be affected by people seeking cash accordingly.  Bond bubble pop doesn't mean it has no effect on the other asset classes as the bears are still crawling over the housing and stock market.  We might experience volatility, dropping and appreciation; however the major actors would be bonds and currencies.

 

Technical Hint Sight

What I am going to observe is the monthly trend of bonds and US dollar.  The monthly trend of US dollar have just recently reversed to the upside (we still need a confirmation next week which is the end of month) so we should keep an eye on it as it may start forming an upward trend that last for years.  Next we should keep an eye on bonds (TLT) is the symbol that I usually check.  The monthly trend is still upward so it hasn’t happened yet.  However it makes sense for US dollar to form the trend first and as bond holders start unloading we will see US dollar appreciate.  As US dollar appreciates (against fundamental since Fed will print more money and raise the debt ceiling) and become the next bubble as well as other currencies since other countries will print money as well.  We might see bond liquidation pretty soon.
 

I will keep up and monitor these two major asset classes and see if my projection really happens.

Have a nice weekend.
Raymond Tsang aka Nameless Hero