US crisis soon? Shorting corporate/government bonds. Plus some reflections.

As I've mentioned last year, the US experiences a recession every 5-6 years on average in the 20th and 21st century. The last crisis was in 2008 and supposedly ended soon after that. If history is of any indication, the US should be overdue for a recession soon. I do not know in what form the crisis will take shape. Maybe it will be carnage in the corporate bond market. Maybe it will be a loss of confidence in the Fed. Maybe it will be a loss of confidence in the economy. Maybe it will be a crisis in the financial sector again, where banks have accumulated more than $2 trillion of bonds - ticking-time bombs.

Whatever it is, my game plan is to short US corporate bonds. I am currently looking to long the SJB, which is an inverse ETF based on the HYG, another ETF that tracks US junk corporate bonds. SJB moves in the opposite direction to HYG. If I am right, the US junk bond sector should be one of the most - if not the most - vulnerable part of the financial market. 6 years of zero interest rates have pushed speculators looking for yields. They are attracted to these questionable bonds because of the high yields. HYG holds about 1020 junk corporate bonds. My initial research has provided evidence that there is too much hot air in this area. I should start shorting these bonds (by buying an inverse ETF) pretty soon - possibly within this month or the next - once I've done enough research. I should be holding this ETF for a few years, or at least until the bubble bursts.

What about US government bond? Amusingly, this bubble has stayed inflated for quite some time. It has been built up over 30 years. It is crazy that in recent years, people will lend money to the US government for 1-3 decades for a tiny amount of interest, when the Fed is printing money like crazy and the USD is losing value against real goods so fast. I've shorted the US 30-year bonds around March/April 2013 (http://silvernjin.blogspot.sg/2013/03/sell-us-long-term-bonds.html). As luck would have it, I shorted right at the top. Till today, even though it has rallied somewhat, it is still some percentage points below where I first shorted it. I've covered this particular position some time last year. It was quite apparent that the market has not come around to perceiving US government bonds as being dangerous. In fact, people are still throwing the word "risk-free" and "safest asset" around with regards to these bonds.

My guess is that people will continue to have this perception for some time to come. So what I will do is to wait for the next crisis to hit the US. The US government bonds will probably rally as investors flock to "safety". These bonds will probably stay high for a number of months as the crisis unfolds, during which I plan to accumulate a sizeable amount of short positions on them.

Exciting times lies ahead for myself. This will not be the case for a lot of market participants because they will never see this coming. They have learnt nothing much from history. Or as Jim Rogers says, right now there is a bunch of fresh college graduates who think that the situation now is normal. But it is not. It is artificial. A huge bubble pumped up by years of profligate spending and money printing. These policies never worked in history. They always give a temporary short-term boost to the financial markets, while the underlying economy rots. The most unfortunate part of this debacle is that the middle class and the poor in America lose out. This is also the case for most parts of the world.

I have tried in the past few years to bring this to people's attention. I knew I am not going to change things, which is why I started this as an informal blog and had no intention to show this to the world other than the people around me. Not many people will listen. This blog is just an avenue to put down my thoughts. I have nothing against people who do not listen. What I am unhappy with are those investors and traders whom I've argued against over the years (and I've done a ton of arguments. Sometimes an argument on youtube runs to 150 comments, for example), who have advanced the flawed theories that the media feeds us. It is a detriment to society and possibly the people around them. People who trusted them. It is fine if it is an honest mistake. But what irks me is their stubbornness to ideas that they've never heard before. it is very hard to change their way of thinking. It is hard to show them that these economic policies will prove to be disastrous. It is hard to show them that there isn't only one way to invest. A lot of people I've argued with think only in terms of weeks and months ahead in terms of their trading, which is fine. But it becomes a problem when they then apply their own ideas (about how trading/investing ought to be done) onto serious, long-term investors like myself. And worst of all - and this is always the case - my arguments against them don't last long, because they always resort to personal insults and name-callings. In truth, they have very little material to argue against me. I stick to making proper arguments though. It always works. They will disappear from the comments section after a while.

I've once been guilty of putting down short-term trading too. But I learnt fast and changed tack quickly. I accept that trading can make (and lose) one tons of money in the short-term, but whether most (not all) people can sustain a good run for the long-term or even the medium term remains very questionable. I myself am looking to set up an "opportunity fund" to be used for short-term trading (or rather, speculation for me) - although I suspect that the way I will trade will be very different from others. We will see whether that works out for me.

My exasperation with people not being open-minded to these ideas probably made me more aggressive in my arguments, and increasingly, my style of argument puts people very much on the defensive, which makes them even more resistant to receiving new ideas. I've learnt a lot from Jim Rogers in the way he presents himself and his case. Maybe age has made him more mellow, for I am sure that he was just as "hot-headed" when he was younger. But what a fabulously smart investor. I have a ton of respect for him.

In any case, I've long ago decided that I will just enjoy myself arguing with people as I do my research and wait for my investments to come to fruition. It has been a very fine journey, and I have no doubt that it will get way more exciting in the years to come!