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Category Archives: market plays

In spite of all of Apple’s recent success and the launch of the new batch of iPhones andiPads, Android is still the top dog – and more so now than ever before. Google’s semi-open source OS topped out at 81.3 percent of total market share in Q3 according to Strategy Analytics.

Posted via a mobile Android device.

It seems to me that given the current economic conditions, shorting indexes like the Russel 2000 can prove a wise move. Here is the chart for the highly liquid etf IWM for the past 6 months.

IWM etf 6 month chart

With views like these:

“Employment won’t come back because the unvarying source of employment recovery — small business — is flat on its back. The credit crunch for small business (with bankruptcies up 44% year on year) keeps getting worse”, David Goldman.

Take a look at the following chart showing lending by major banks:

bank lending
Further, consider the following:

“The health care bill (as Goldman Sachs observes) will put onerous requirements on the two out of five small businesses that do not presently have a health care plan and thus discourage future hiring”. Source.

Indeed, it seems quite reasonable to short the Russell 2000 in the event of a slight overall market correction, which is likely for various reasons including the following: consumer spending, downward revision of GDP, talk of ending the stimulus, unemployment…

Shorting the Russell 2000 has seldom been easier. To do so, it is only necessary to buy shares in the inverse etf TWM (Ultra Short Russell 2000). Six month chart here:

A good play might be waiting till January of 2010 is upon us, and if signs emerge showing that IWM has failed to hold above $62, buying TWM and monitoring the movement of IWM. It is quite possible that IWM could fall to near $56, a low it made in early Nov of 2009. In such an event, TWM is likely to trade from around $26 to around $34, roughly a 20% gain. This play should be watched carefully and treated with proper stops, should it be necessary to exit promptly; fortunately, the leveraged etf TWM is highly liquid also.

Matt Stiles, who writes at, who also happens to identify with the Austrian school of economics, argues why these hyperinflation fears are way overblown, and why we won’t see a Zimbabwe scenario here:

It is often said that we live with a “fiat currency” or with “paper money.” This is not entirely accurate. A very small portion of our total supply of money and credit is in the form of physical currency. It depends on how you count it, but regardless, it is under 10% of the total. This is what differentiates our monetary system with that of Zimbabwe or Weimar Germany circa 1920’s. Their economies were based on nearly 100% physical currency because nobody would accept the promises of government in order to issue credit.

The vast majority of our money supply is in the form of electronic credit. Electronic credit can be destroyed, while physical notes issued by a central bank cannot. This is why deflation is possible in a credit based monetary system, but not in a paper based monetary system.

All in all, the central banks are not nearly as powerful as they’d have you believe. The amount of the total money supply that is controlled by them is minimal. They won’t tell you that. They’d prefer you to think that just by them moving their lips they can affect the entire economy’s decision making processes. It simply ain’t so.

This begs the question: why is gold going up? Who knows. It has a mind of it’s own. But if it really only moved due to inflation concerns, it wouldn’t have declined 75% over two inflationary decades (80’s, 90’s) would it? If inflationary concerns were real, we would see TIP yields rising along with the gold price. They’re not. We’d also be seeing other typical inflation hedges rising – like property prices. That is obviously not the case. A better explanation is that gold is rising because of increased instability.

Will the U.S. Dollar collapse?

Closely tied to the belief in imminent hyperinflation and a skyrocketing gold price is the misplaced belief that the U.S. Dollar is on the brink of collapse. Essentially, they are one and the same. Many of my arguments against hyperinflation are the same against a dollar collapse. But there is even more evidence stacked against such an occurrence.

Ultimately, the Dollar will end up at zero – but that is not going to happen any time soon, and I would argue is likely decades away. Until then, the massive amounts of deleveraging will increase our appetite for dollars to pay back debt. There is too much credit in the system, and as we rid ourselves of it slowly, we need to acquire dollars. A large portion of the credit derivatives I mentioned above are denominated in dollars even though the underlying asset may be priced in another currency. This is a theoretical short position on the dollar. A “carry trade” in other words. It must be unwound, just like the Yen carry trade.

This is what is meant when we call the U.S. Dollar the world’s “reserve currency.” Most people hear the word “reserve” and automatically conclude that because many other countries hold the dollar as their primary currency in their foreign exchange “reserves,” that is what is meant by “reserve currency.” It is not. Total foreign exchange reserves of dollars are far smaller than total foreign credit contracts denominated in U.S. Dollars (reserves worldwide are “only” ~4.6 Trillion). It is the reserve currency because it is the default currency for international trade and commerce in general. In order for that to change, 100’s of trillions in contracts would need to be re-written. Not practical.

As such, demand for U.S. Dollars will persist.

Additionally, the U.S. Dollar is not alone in its state of affairs with an overindebted government and central bank getting itself in all sorts of trouble. In fact, nearly every other currency has the same issues facing it. And even though the numbers aren’t quite as dire elsewhere, they are far more likely to collapse than the U.S. Dollar due to the reserve status. Fair? No. But neither is life.

In summary, there are many multiples more debt than capital in the world economy. Debt is being liquidated and will continue to do so until it reaches a sustainable level relative to capital. The process of this debt liquidation puts a higher value on dollars relative to debt, thus ensuring an oversupply of dollars is impossible.