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First with Financial Comment from Arabia

Shorting central banks a winning strategy over time

with 2 comments

Federal Reserve BuildingBetting against a central bank that is holding back market forces has been a clever way for investors to make money over the years. They typically try to prop up a currency, for example, until markets force a devaluation.

Jim Rogers in his book ‘Investment Biker’ concludes that backing the real economy against a central bank is always a winning strategy. His former hedge fund partner George Soros famously made a billion betting against the Bank of England in late 1992.

Interest rate suppression

So if we are to be bold investors today then we should be investing against the global central banks and their artificial suppression of interest rates. This is already producing massive distortions in asset markets with stocks surging 50-80 per cent in a global economy significantly smaller than a year ago and with poor growth prospects.

Further down the line will come general price inflation, and that is generally the point at which central banks will start to raise interest rates. It will be too late to prevent this inflation but handled correctly this might stop it getting out of hand.

Some top hedge fund managers believe the first signs of inflation will start to appear within six to twelve months and that within three years the US will have roaring 12 per cent inflation.

Perhaps then the dilemma is not whether to short central banks in some fashion, but only when to do so. Jump out too soon and you miss the stock rally. Put shorts on too quickly and you will be squeezed if the rally continues.

Actually central banks in Australia and Norway have already raised interest rates. But it would take some kind of crisis in the bond market to force the US into action, or a series of governments following India and converting dollars into gold.

Gold and silver

In the meantime, buying gold and silver is a future precaution against higher rates of inflation. And with gold and silver supply so constrained there is a good argument for buying sooner rather than later, when the price will have gone up.

Will stock markets in general prove a good hedge against inflation? Well, if you refer to the chapter on the Paradox of Inflation in Dr. Marc Faber’s classic ‘Tomorrow’s Gold’ you will learn that stocks tend to become extremely cheap under inflationary conditions. So with the exception of gold and silver stocks, is that the place to go?

However, any true contrarian with an eye for history should know that backing the central banks is a losing strategy over time, and that bets on the real economy come out on top. Shorting the S&P Financials would seem to be a good starting point.

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Written by Peter Cooper

November 8, 2009 at 12:15 pm

2 Responses

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  1. yes it did – you would have shorted the market for 20 years!

    Do you even understand how expensive it is to short something given margin costs.

    Ed Note: I believe the expression means to take short positions, not to hold one continuously, that would indeed be foolish.

    Tom

    November 9, 2009 at 5:50 pm

  2. Nice theory but clearly did not work out in Japan.

    Editor’s Note: yes it did – you would have shorted the market for 20 years!

    Senta

    November 8, 2009 at 10:48 pm


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