The Tale of Two Investors

What kind of investor are you? I was particularly struck by this tug-of-war between two distinctly different types of investment mindsets among my friends that I met last week. On one hand, scores of my buddies are keeping their eye on the ball – the massively bearish fundamentals on the economy and on the other hand, many of my friends seem eager to make money right now. Standing on the sidelines and watching other profits in these bear market bounces is driving them crazy.

In case you hadn't noticed: Over the past year of financial turmoil, the "safe haven" premium of precious metals has offered about as much support as a rubber ducky in a tsunami. Despite a string of powerful rallies, silver and gold remain well below their March 2008 peaks. It goes without saying that the greatest opportunities in precious metals were not had by those who played the "disaster hedge" card; but rather by those who timed the trends as they developed, regardless of the fundamental backdrop.
Bob Prechter is in the latter group. Amidst the buzz and whirl of the most bullish backdrop in precious metals' recent history, gold and silver prices soared to new, all-time highs and calls for a "New Gold Rush" and "$30 Silver" flooded the mainstream airwaves. Yet Bob alerted subscribers to an approaching top in the March 14, 2008 Elliott Wave Theorist.

On the other hand, the Federal Reserve’s balance sheet has exploded, with total reserve bank assets now standing at $2.079 trillion. This same time last year, total assets stood at $1.181 trillion. Such a huge reserve certainly has the potential to catalyze inflation (indeed a hyperinflation), but only if the Fed Chairman Bernanke liquidates the assets that make up the reserve accounts. Simply put, there is no inflation if the Federal Reserve refuses to turn those assets into cash and dump that cash into the economy.

In deflation, you would expect a relatively flat curve, but it's been steepening not because of inflationary pressures. Those who view it as a green shoot for recovery and future inflation do not understand why the curve has steepened so much and so fast. This country's recent fiscal policies have necessitated a massive debt, and the resulting Treasury sales are simply overwhelming the bond market. What should be a flat curve -- fitting the deflationary cycle we are in -- is artificially steep due to the lack of demand for long-dated Treasuries at auction. There has been no demand from foreigners for the long bond at 4% or 4.5%.

In short, I believe the easy gains have already been made, and the losses on any downside move could be very sharp and swift, erasing any profits that have piled up, especially those who have been loading up with high beta stocks. I think there are serious asset classes de-leveraging, hence you could ended with higher vulnerability if the market makes a move back toward lower levels (a high possibility, in my opinion) or once investors come back to the grim reality that economic conditions have not yet improved much at all.