Council of Elders

I'm not sure how I missed this when it first came out, apparently nearly three months ago. It's a panel discussion at an investing conference in Russia featuring some of my favorite minds. I can't figure out how to embed it so you'll have to visit the site.

I've mentioned before how I respect Marc Faber's views on pretty much anything; he's the moderator. Also making an appearance is Nassim Taleb who wrote the most provocative book on finance of the last decade.

Capping it off is Hugh Hendry, another personal favorite. He's unabashedly cocky, but also eloquent, witty, and extremely intelligent. The other guys are pretty blah. If you're like me and have some interest in investing and markets, this video, albeit an hour long, is like crack.

Hendry, like most contrarians, comes off as crazy much of the time, but he makes some great points:

* Everyone seems to be expecting inflation down the road and making their bets--buying gold, shorting treasuries, etc. Heck, I've even thought about buying some TBT along with gold. If everyone is making bets on inflation, it's probably not a good time to make bets on inflation.

As I see modern economies in the age of fiat currencies, deflation is not something to bet on over the long term. Any deflation will be met with absurdly low interest rates, bailouts, dollar bills from helicopters. Hendry's comment implies that, perhaps, the wiser move would be to wait for another downturn in the general stock market, at which point everyone will give up on the inflation scenario and start screaming "deflation!" and that will be the time to make large inflation bets.

I (think I) know the endgame: a bubble in commodities/gold and hyperinflation. I just have to wait till most people believe this is a crazy scenario before betting on it.

* Most people believe the Chinese economy will take over the world in a couple of decades. I believe it--it's an ancient civilization waking up from a slumber of insularity and communism that's embracing market reforms. But Hendry is the only one skeptical on China and he's asking a fundamental question: What does Chinese capitalism really look like?

We know what European capitalism looks like: slow growth social democracy. We know what Anglosphere capitalism looks like: fast growth liberal democracy with a vice for debt. We know what Japanese capitalism looks like: a system reliant on individualism trapped in a culture of conformity.

People expected Japan to take over the world in the 1980s, and as Hendry points out, people expected Argentina to take over the world at the turn of the prior century. Both nations are today way down on the list of dominant economies whereas the US has survived numerous wars, a Civil War, a Great Depression, great societal transformations, and more, and always been near the top.

So what does this authoritarian brand of Chinese capitalism really look like? We don't know yet, and according to Hendry, we shouldn't make large bets on it, especially when everyone else is.

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a lot of what passes for

a lot of what passes for capitalism in China seems to me to be more akin to corporatism, a milder version of the way the Nazi state was run from 1933 until they went to war. Centrally dominated markets, heavy political involvement, enormous corruption and state manipulation, all buttered up to go down like capitalism. I know there are some 1.2 billion hardworking Chinese who, one way or another, want to make a future for themselves, and this keeps me from completely disbelieving the idea of a truly prosperous China, but the stuff I mention here above could eventually lead to massive fiscal collapse never mind the masses.

All this is aside from the potential for enormous political instability in the near future. Maybe a tiny city state like Singapore could manage a politically repressive regime while still allowing plenty of economic freedom, but with a large country the story changes dramatically.

A little late, but: you

A little late, but: you could be right about bonds and still lose on TBT. It shares the characteristics of most leveraged ETN/ETFs in that in the long term, it won't match the underlying notional index that well. Short term, yes, but not long term.

There's a halfway good writeup of this issue at
http://www.futuresmag.com/Issues/2010/March-2010/Pages/Trading-with-leveraged-and-iinverse-ETFs.aspx?channel=29