The Great Divide / Or Doc DoLittle's Push-Me-Pull-You

Over the past ten years there has been pretty much a consensus among the smart money about where their assets should be put.

In the late nineties, it was bailing out from the dot.con silliness. At the beginning of this century, it was gold, silver, other commodities, and currencies other than the dollar. During the last half of 2007 and all of 2008 to the beginning of 2009, it was shorting various financial markets, this many times being the US stock markets.

Guido was in these trends, in no small part due to discussions or otherwise learning what this smart money has said.

Today however, the smart money is divided. On one side is the billionaire and hedge fund manager John Paulson who currently may have 50% of the assets he manages in gold. On the opposite side are people like someone called Mr. Practical who has his money in American dollars. People like Robert Prechter of the Elliot Wave advisory service and Mike Shedlock, an economic / market commentator, would seem also  to agree with Mr. Practical. A very astute investor acquaintance of mine would seem to entirely agree with Mr. Paulson.

News commentators  have implied the reason for Mr Paulson's gold bet seems to be his belief that inflation will start accelerating. But Paulson has never commented or elucidated about this. The only thing known about his holdings is what his quarterly required SEC filings report.

As for Mr. Prechter and Mish Shedlock, they basically think we are in a deflation which will get worse.

But that may miss the point. My own opinion is that John Paulson is in gold because he thinks there is a currency crisis coming, which is another way of saying a dollar debacle. Mr. Practical has written on Minyanville.com that he thinks the dollar will increase by 40% relative to other foreign currencies. The gist of his reason is that there will be a massive debt deleveraging that will destroy dollars faster than the Federal Reserve can increase them. Consequent with this debt deleveraging supposedly will be a demand for dollars to pay off the debt being deleveraged, and a reduction in the supply of dollars which will increase their value.

Both Mr. Paulson and Mr. Practical are not to be taken lightly. Over the past few years they have had stupendous returns putting their money where their mouth is. < Or rather in Mr. Paulson's case what positions he has to report to the SEC >

Where does Guido stand on this?

Quite candidly I am trying to figure that out. In my mind there is no question that we will have a much worse financial market crash then 2008 and a dollar debacle eventually. The big question is when and in what order. Perhaps Mr.Paulson and  Mr. Practical are both partially right. That is both events might occur simultaneously in the near future and in certain degrees.  As I recall, something similar might have occurred in 1933. There was a worldwide currency crisis, I think, then the Federal Reserve was forced to raise interest rates, and  then the bottom fell out of the US stock markets and the world literally crashed. I do know for sure that momentarily in 1933 US Treasury Bill rates briefly peaked over 20%. And no that is not a mistype.

If you're in the financial markets, and really this means everybody even if you just have an American dollar bank account, this is the important issue at the moment. A currency crisis, dollar crashing. Or a dollar soaring and the stock markets crashing. Personally I think a dollar collapse will most likely cause a stock market crash. But who knows, perhaps everyone would think this inflationary and bid up the stock markets to unimaginable highs. Likewise massive debt deleverging might cause a dollar collapse because everyone might bail out of dollars, i.e. dollar debt, and buy gold or other currencies.

There are myrid other possibilities I could conjure. The only certain fact is no one really knows for sure.

Events like this usually happen quite suddenly and when you least expect. The important thing is to know what to do and be prepared. Unfortunately I suspect this is going to be easier said then done. It wouldn't at all surprise me if we had a confusing mix of both scenarios creating indecision about which way to move. Sort of like General Mack with Napoleon at Ulm.

Hopefully I will have more to say about this in the future. The question and it's answer are very crucial.

"Plan ahead, or you will find trouble at your doorstep." - Confucius.