Bubble Trouble

My biggest learning over the past month has been that a many guys in the investment world could predict the recent stock market fall. That means the future direction after this correction would be severe.

The second big question I kept getting asked these days is how does one play the budget.

My answer is hold cash and short the market on ever high.

My entire hypothesis flows from two thoughts on the stimulas package in the US economy and its effect on the interest rates and with it currency flows and world trade and asset prices. With this hypothesis we are already in a bubble situation.

1. If the economy has surely recovered from the recession then interest rates would need to go up in order control the inflationery position and the US FED would need to withdraw the stimulas package else it would create an asset buble in stocks, commodities and property as cheap money would be avaliable in the system to splash over all assets.

However if it increases interest rates there would be a fall in consumer confidence which will pull down consumer spending and with it industrial production and the entire GDP. If GDP falls the job creation in the economy would be delayed.

2. If the economy has still not recoverd from the recession then the US FED would stick to its cheap money policy. Given the low interest rates scenario this money would be pushed into equities, commodities and property. This increase in asset prices would make them unaffoardable and expensive to justify the current valuation.

This would result in the fall in global asset prices and with it consumer confidence and spending and GDP.

We are currently in scenario 1. The world economy is slowly withdrawing the stimulas and we would see the repercussions in the months to come.

The above hypothesis is also supported by the fact that the last quatere US GDP increase has entirely been due to inventory build up in the system in anticipation of future consumer spending.

We are surely going to fall. When is a question of time. And we would know that in April / May when a $ 51bn of soverign debt of Greece comes for repayment. We can surely expect a default on this count.