Betting Against Obama Can Be Tough
I’m not going to bother writing about why Obama and the Democrats are terrible for the economy. Practically half of what is written is about that, whereas the other half seriously believes we are on the road to economic recovery, solutions for social and healthcare issues, and a grand new society where dogs and cats hold hands and sing “Kumbaya” together. Between these two sides, I’m betting with the bitter old man skeptics of this administration. I believe we are in for some more pain soon enough due to the anti-business policies of Washington and our out-of-control deficit.
But being a bear can be tough. As I see it, there are three major bearish bets that could be made:
1. Betting against treasuries directly. This is primarily betting against the deficits. This is one of my major positions, and needless to say, it’s been a pretty good past couple of weeks for me. Global appetite to fund Washington’s never-ending deficits is souring quickly. The Chinese won’t buy our long-term notes, domestic savings are not nearly enough, and there isn’t any fiscal sanity on the horizon, given the outlook for Medicare and Social Security. Of course, as long term rates rise, the Fed may (emphasis on may) just start printing money and buying the long-term notes, pushing yields down. Most would agree this would only work for the short-term.
But unfortunately, timing matters a lot in this case. In my opinion, the best way for the retail investor to bet against treasuries is to short the TLT (if your broker is able to borrow the shares, which he may not) and buy put options for the TLT. Options are obviously time sensitive.
The TBT, the double inverse of the TLT, is not a good play. If you look at any inverse ETF, the volatility and leverage kills these returns because down days (for the ETF in this case, positive days for the TLT) get weighted more than negative days. Just look at the SKF (the double inverse of the financials) going all the way back to the markets peak in October 2007. If you put all your money betting against financials (leveraged I might add), you would think you would make a fortune. Wrong. You’re down 40%, about as bad as the rest of us average chumps. Thus, betting against treasuries for your average investor means finding shares to short that are difficult to find or buying options, not a fun game.
2. You could short the market. I think this is a good play in the short to medium term but not the long term. I do believe the Fed will monetize the deficits more (errr quantitative easing). If they don’t do it, Pelosi will somehow manage to make it happen. This will spark inflation, which drives everything up in price, including stocks. Inflation means cash is trash, and shorting a stock partially means the cash you get from selling the stock is worth something.
Of course, the Fed may not monetize or it may do a very light amount. The Fed may suddenly become huge inflation hawks, which would make shorting the market a good bet in the face of depression-like combo of high interest rates and a weak economy.
3. You could buy gold, silver, and other inflation hedges. This is betting that debt monetization happens. If there is no monetization though, and instead it is just economic stagnation, these positions will likely stagnate as well. They may even go down in value. In silver’s case, the precious metal absolutely crashed during the deflationary scare in the fall.
My guess is long-term interest rates will rise and stocks will fall in the short to medium term, so 1&2 are good bets for now. I think gold/silver may even go up during this mess due to dollar devaluation, general fear, and fear of monetization. Once the Fed really starts to step on the gas (or the S&P 500 hits the 500-600 range), it’s time to cover all those stock shorts and go into full gear inflation mode.
Disclosure: Long SLV, GLD, and mining stocks. Short TLT. Short SSO and various consumer discretionary companies.