I’m skeptical of the economy and this administration. For an economy to grow in the long run, it needs to be more productive and efficient. The government is throwing trilllions of dollars at unproductive measures (entitlements, bridges to nowhere, etc.) and attempting to fund this by taxing and hurting productive measures (small businesses, profitable multi-nationals), etc. I don’t see our economy doing well in the long run.

However, to make money, it’s important to guess correctly how we’ll slow. If it’s deflation, with asset prices crumbling, shorting the market and buying government bonds is the way to go. This would be a repeat of what happened last fall, when the market crashed and the 30 year T-bill went below 3%.

Many don’t think it will be deflation, rather an inflationary depression. The reason for this is that that the government is hell bent on reflating the economy. It is taking on huge deficits…who will pay them? Scared investors like in the fall? That may have worked then, but how will it fund $2 trillion deficits going in the future? China/Japan have their own problems and we can’t rely on them. Thus, the T-bill should go up in yield (so shorting government bonds would be the play since you would be betting the government would have to pay a higher percentage than they would now to bond investors).

If this happens, the crowding out effect takes place. No small business can get a loan since a bank would rather loan money to the federal government at 10% than loan to a small business at 13%, and few small business can afford to pay that even. To stop this, the government may buy back its own bonds with money its printing, which would result in inflation. In this case, the bets are to short government bonds and buy commodities. Stocks in commodity companies would do well.

As you can see, they are very different playbooks. In pure deflation, you buy government bonds since you think the panic from investors will cause bond rates to go down. In inflation, you short them. In deflation, you sell commodities. Inflation, you buy them.

I’m bearish and lean towards inflation, but recognize I may very well be wrong and it could be deflation. I just don’t think the government will let a deflationary spiral take hold; it is too much in everyone’s interests for the pain to be felt through inflation than deflation.