Monday, November 21, 2011

How to Make a lot of Money Right Now

You know, it’s not that hard to make a lot of money in the financial markets, no matter what you might have heard. For example, I can tell you exactly how to make a fortune in the next couple of months. Here is what you do:

First, assume that Germany will capitulate to the fervent pleas of just about every other country in Europe and agree to allow the ECB to print about a trillion euros, give or take. Never mind that the ECB and Germany have both been firmly on the record stating that this shouldn’t happen because this would be against the law (along with several other better reasons). They seem to take the position that if the central bank prints the money, then the countries with the most debt will probably spend it. Imagine that. As of last week, it appears that without a massive quantitative easing program (the central bankers' term for printing money) the whole euro experiment might go up in smoke. So go ahead and bet that policy makers will suck it up and not allow the Eurozone to fall apart. Once Mario Draghi, president of the ECB, and Angela Merkel, Chancellor of Germany, get serious about debasing the euro currency, prices for credit default swaps on bank debt and sovereign debt will plummet, yield spreads between Germany and all of the other Eurozone countries will crash, liquidity will wash over market participants like a cool breeze and equity markets around the world are going to go vertical.

But that’s not all. This week the world will turn its attention, once again, to the ongoing tragi-comedy that is the U.S. Congress, or more specifically, the Super Committee tasked with coming up with $1.3 trillion in savings in order to avoid $1.2 trillion in automatic, across-the-board spending cuts (starting in 2013, and evenly divided between defense and non-defense spending). By the time you read this post, the committee will have had to announce its verdict, so we may be a little late to get in at the absolute bottom. To make the big money you have to believe that the committee is going to shock the world and go big... really big. If the committee comes up with $3 - $4 trillion in savings based on revenue increases, entitlement spending cuts, savings from pulling out of Afghanistan, and other savings that will kick in far in the future, the market is going to love it, if for no other reason than that we will avoid another embarrassing downgrade from the rating agencies on U.S. debt. Considering the terrible year thus far, a big deal could be the perfect excuse for hedge funds to work their way into a buying panic.

So let’s review. Back up the truck, borrow money from mom, mortgage the house, leverage the portfolio, bust out the derivatives, and empty your pockets, because this is one of those times when risk takers can make a whole lot of money…. as long as the players follow the script I’ve carefully laid out for them. Of course, it’s possible that Germany and the ECB mean what they say about quantitative easing, and the Super Committee won’t get a deal done, in which case, risk takers are going to get slaughtered. U.S. economic data is looking, on average, a little better to me over the past several weeks, and the earnings season has been stronger than expected, but I just can’t get excited about being much of a buyer right now. Europe is going into recession, and I think that will put a substantial damper on the U.S. economy, which at best is going to slow along with it.

I'll let others make the big money if they have the stomach to buy in front of all of this headline risk. If they get it right, they'll be considered brilliant observers of global economic policy and shrewd and calculating risk takers. If they get it wrong, well...