History Lesson from Niall Ferguson

A couple of months ago, Niall Ferguson was asked to speak at the Ninth Annual Niarchos Lecture. Niall Ferguson is a famous historian from Harvard. He has written many books like the following: The Cash Nexus, War of the World, and The Ascent of Money: A Financial History of the World. When he speaks people listen; here are some of the points of interest from his speech (most bullet points taken directly word-for-word from Niall himself):

• There is a suddenness to things when they go wrong in finance
• Canada is one country that is NOT involved with the extraordinary debt increase that most of the rest of the world is experiencing
• Crises of either war or internal politics (sometimes both), drove investors to sell bonds and therefore to drive up the yields on the bonds
• Exploding deficits to pay for the war and surging public debts caused an increase in risk in the eyes of investors
• It is striking the way in which very suddenly confidence can be lost in a country
• Ken Rogoff made the point that 90% debt-to-GDP is the threshold after which public debt tends to be associated with problems of low growth or high inflation, usually both (currently we are at 89% debt-to-GDP)
  
• Italy is much less vulnerable than Greece in the respect that most Italian debt, like most Japanese debt, is held by natives; it's not actually held by foreigners
• In the months ahead, look for debt default synonyms like repudiation, standstill, moratorium, restructuring, rescheduling, etc...Don't be fooled by the language, it still equates to debt default
  
• US treasuries are a safe haven the way Pearl Harbor was a safe haven in 1941; safe but not for much longer
• Favorite cartoon: Chinese sub threatens the US Navy. The Chinese submarine captain is says, "Turn around or we sell all our T-bills!"
• When you're spending more on your debt than on your army or your navy, it's all over as a great power
• It's not a thousand years that separates imperial zenith from imperial oblivion. It's really a very, very short ride from the top to the bottom
  

Casino Bet With Odds In Your Favor

The money making trade (in the short term 3 - 6 months) with the odds in your favor is shorting the stock market, and profiting from the decline that could be heading our way at the end of this year and into 2010.

Why would this be a good trade? Below are my top 3 reasons.

Reason #1:

Based on the last ten years, the "January Effect" has led to stock declines nine out of the last ten years. Much selling occurs in the final week of December and into the month of January. All this selling, causes stock prices to pull back a bit. Below is a chart to illustrate the January Effect over the past decade.


Reason #2:

As of late there has been a strong inverse correlation between the dollar and the stock market. If the dollar increases in value the stock market decreases and vice-versa. As such, the dollar has been losing much value as of late, and a short term dollar rally might be in the cards.


Reason #3:

The appetite for risk is going to lessen because of what is happening around the world. There is Dubai defaulting on their debt, which is not too significant if it was an isolated event that did not affect other parts of the world. Greece just recently received a debt downgrade from Moody's, and the Baltic area in general is experiencing many economic and social issues because of the huge deficits they have. Also, Spain just received a debt downgrade from Moody's. These occurrences are not isolated to the countries with which they happen, there will be worldwide effects from these issues with debt whether it is big or small.