Old violins are playing the last waltz!

I concede that some bubbles outside the US seem to be even more blown up than the US economic (notably excessive consumption) and financial market bubble (in particular excessive debt).

But, as I explained before, when one bubble after the other is gradually deflating, to play the last few asset classes that increase in value (London properties, Chinese equities and other emerging markets and their currencies) becomes increasingly dangerous.

Playing violins

As a sign of how far the global asset bubble has already matured is the recent launch of a hedge fund that invests in old violins. And according to Florian Leonhard, a London based violin dealer and restorer, it is 'financially a dead-secure long term investment' with a target of returning 8% to 12% per year!

Therefore, as indicated in recent reports, I would lighten up on positions in asset markets, which are extremely extended and where the risks seem to outweigh the returns. The number of assets, which are still rising, is narrowing and it appears that one inflated asset class after another is gradually no longer appreciating.

As an example, the Dow Jones Transportation Average and the Russell 2000 Index are both below their February 2007 (pre-correction) peak. In fact, I believe that some short positions could be initiated.

Stronger US dollar

This is the point I have tried to make before. The only way the US dollar can strengthen is to have relatively tight money in the US, which then has negative implications for asset markets.

So, whereas I really cannot be a US dollar bull for the long term, near-term, additional dollar strength may pressure the stock market further. Therefore, investors could consider shorting some index futures or to purchase of some ETFs, which move inversely to the stock indices ((however, not recommended for the faint hearted).

There are several ETFs, which move inverse (opposite direction) to the various indices. The Ultra Short S&P500 ProShares (SDS), correspond to 200% the inverse performance of the S&P500. The Short Dow 30 ProShares (DOG) the Short MidCap 400 ProShares (MYY), the Short QQQ ProShares (PSQ), and the Short S&P500 ProShares (SH) all move in the opposite direction of the respective indices.

Metals correcting

For more conservative investors, I continue to recommend the purchase of US treasury bills for now. Precious metals are correcting and a favorable entry point will present itself sometime in the next three months.

I should like to emphasize that each investor must decide for himself how much risk he can take given his particular financial condition and under consideration of his entire exposure to the various asset markets. Obviously, I can not be each reader's personal financial planner.