- Treasuries crashing. They're artificially high right now -- the way oil was in mid-2008. This "Bond Bubble" will likely burst.
- U.S. stock market rally -- if the bond market falls. This will increase investors' confidence and their appetite for risk.
- The U.S. Dollar will lose value. As international investors seek higher rewards, money will flow out of the low yielding, but safe haven of U.S. Treasuries, and back to growing economies such as China. Therefore, the current demand for USD will diminish, its value will fall and inflation rises.
- Dropping Yen. Like U.S. treasuries, the value of the Yen is unsustainably high. Investors, such as hedge funds, seeking higher returns will leverage their trades using the Japanese currency. They will use the Yen to purchase high risk/reward assets, such as foreign indexes or hard assets, such as gold. This creates a huge supply of the Japanese currency on the global market, so its value falls.
- Rising Australian Dollar. Australia is a major gold exporter and benefits from higher prices. Gold is the traditional "anti-inflation" hedge, and investors may drive prices up as inflation increases. Australia is also rich in clean coal deposits -- and China wants clean coal to meet green energy demand. China will buy Australian coal -- and will need Australian Dollars to do it. "That means you can buy the Australian Dollar as a China play or a U.S. inflationary hedge," Mr. McDonell says.
- Buy the Australian Dollar. "The market will be flooded with Yen, and it will devalue quickly," Mr. McDonell says. The Australian Dollar will benefit from a rise in gold, increased investor appetite for risk and a high yield currently at 4.25%
- Buy the Dow and the S&P 500. The U.S. Stock Index may have hit bottom, mutual funds will start rebuilding their portfolios and hedge funds will decrease their short selling.
- Sell the 10-Year T-Note. As the credit markets free up, banks will begin lending, mortgage defaults will decrease, consumer confidence will increase, consumer spending will return and the stock market will rally on the notion of future corporate profits. The effect of this will be a bearish bond market and higher interest rates.
Contact Information: Contact: Itay Engelman Sommerfield Communications (212) 255-8386 itay@sommerfield.com