Simit Patel

In a centrally planned economy, finding investment opportunities is primarily a matter of understanding how central planners are affecting the economy: what incentives are they creating? To whom are they transferring wealth? What industries or companies may they shut down? Answering these questions, rather than understanding supply and demand, is critical to successfully identifying speculative opportunities.

A Historical Example: The US Financial Bubble

The US financial bubble -- meaning the rise of offers a prime example of how market participants, if they are watching the right signals, can understand the incentives central planners are creating -- and can develop a wealth management strategy accordingly. Below is a timeline of how central planners created the rise of the bubble in the finance sector (as seen in the rise of XLF):

1. The Taxpayer Relief Act of 1997 helped fuel investments in housing by giving tax credits to home purchases.
2. The Gramm Leach Bliley Act of 1999 helped further consolidate commercial banks and investment banks, which contributed to the securitization of loans made by commercial banks; this securitization naturally helped fuel securities dealers in the finance industry.
3. Part of the compromise legislators made in passing the Gramm Leach Bliley Act was to strengthen the Community Reinvestment Act, which made loans more accessible to lower-income borrowers (many of whom would prove to be unable to repay loans in the years that followed)
4. The Commodity Futures Modernization Act of 2000 helped to deregulate the banking industry and allowed for the creation of unregulated credit default swaps (an insurance product); this allowed money to flow into the financial sector with fewer hindrances.
5. As the dot com bubble was collapsing, the Fed began to drastically lower its target Fed Funds Rate in 2001 and 2002. This made credit cheap and encouraged borrowing. With housing loans and more made easier and more appealing via previous legislation, and with laws passed to facilitate the securitization of these loans, the ingredients were in place to create a bubble in the US financial services industry.

As the US financial bubble illustrated, bubbles in a centrally planned economy can happen slowly. The rate at which they occur depends largely upon how quickly legislation is passed and executed, as well as how aggressive the central planners are in accomplishing their objectives.

What to Look for in Spotting a Centrally Planned Bubble

To understand where bubbles form in centrally planned economies, a few questions are worth considering:

1. Who has lobbying power? Understanding what special interests have been successful in securing legislators on their side is crucial.
2. Once we have identified the sources of lobbying power, we can watch legislation to see how their lobbying power is manifesting.
3. If a socialist economy has entered the bailout/nationalization phase -- meaning if central planning has moved from indirect influence via legislation and monetary policy to direct influence via purchases with tax dollars and/or expansion of the money supply -- it can be crucial to note which companies will receive wealth and which ones won't.

In the context of the current US economy, former venture capitalist and economist Eric Janszen has identified alternative energy as the next bubble resulting from central planning.

Next time, we'll take a look at some strategies for trading the bubble once it's been identified.

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My Links: Proud to be a Permabear, Crisis Investing Video Series, Investing in a Centrally Planned Economy, The Investor 2.0 Quest

Jerry

WOW Simit... Im amazed and impressed at the depth of your thinking.....Jerry

Simit Patel

LOL, thanks Jerry! Though I'm sure many would argue my viewpoints are fantasy-based. I disagree, of course, but hopefully those folks will chime in to share the other side of the story.

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My Links: Proud to be a Permabear, Crisis Investing Video Series, Investing in a Centrally Planned Economy, The Investor 2.0 Quest

Jerry

I dunno Simit...Peter Pan is a fantasy...Your logic seems as if it is based on historic facts.....Ive learned you can find a "professional opinion "to suit just about anything you want to hear in this world..... Im the guy that tends to listen to everything, and then make decisions based on what I think after that...and try to make a few $$$ along the way....trying to pay off the forex mansion....YUCA .25 cents....Jerry

Pluto

I'm loving this "socialist investing" series so much, I had to log in to participate. I've been following your feed for awhile, Simit.

I've been toying with the next bubble idea, myself, having used this same thinking to profit off the last one. Although I don't invest in equities, I'm selecting Halliburton as the winner of the new stimulus. Or rather KRB as they prefer to rebrand themselves in the US.

These nation-builders win hands down on the logistics of infrastructure oversight and commodity bargaining, IMHO. And, of course, they are positioned to swallow the treasury whole as they have done for the past eight years.

So, how to play it without direct investment? I suppose commodities will come into play since there seems to be a lot of infrastructure investing going on all over the world. Which ones will lead the way, I wonder?

Jerry

Hello Pluto... I would also like to hear more about your thoughts on this Socialist happenings...and how you hope to profit from it .....any thoughts will be appreciated....Jerry

Simit Patel

Hey Pluto, glad to hear you're finding the articles useful. And good to see you registered! If there any other lurkers, I encourage you all to register and join in on the discussion as well.

I haven't looked too deeply at Halliburton or KBR, though I think the logic is compelling (though like you I'm not an equities person either, at least not in our current environment). I've been meaning to do more research and look at some of these "nation building" companies more extensively. I think Bechtel, Raytheon, Lockheed Martin are a few of the companies that could fall in this category as well. And judging by the rising military budget, the foreign aid packages Obama has planned, and the growing influence of the World Bank/IMF, I think these companies could do very well, doubly so if the political environment remains relatively unchanged.

Well, I've been bullish on oil for an embarrassingly long time, though I'm still thinking oil is way underpriced. I'm focused 100% on metals and currencies at this point, though if I had a larger portfolio and needed to diversify more I'd probably be looking to get into oil -- especially when the technicals line up and show bullish momentum is back.

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My Links: Proud to be a Permabear, Crisis Investing Video Series, Investing in a Centrally Planned Economy, The Investor 2.0 Quest

Simit Patel

Just wanted to drop a link to an article on Jesse's Cafe Americain that I thought might be relevant:

Jesse's Café Américain: China Is Shopping the World for Miners and Commodities

China is looking to get in on base metals for its infrastructure needs. DBB is an ETF for base metals that I like from a fundamental perspective, though it has not been performing that well thus far in 2009, so it might not be time yet for momentum traders -- though buy and holders may find the fact that it's at its hovering near its 52 week low to be compelling.

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My Links: Proud to be a Permabear, Crisis Investing Video Series, Investing in a Centrally Planned Economy, The Investor 2.0 Quest

Jerry

Hello again Simit...is this an example of China following thru on their intent to "NOT" purchase USSA debt anymore ???...Jerry

Simit Patel

Hey Jerry,

Possibly, I can see it as another signpost in that direction. Interestingly, China recently asked for a guarantee that the dollar would not be devalued.

China's in a tough spot, no doubt.

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My Links: Proud to be a Permabear, Crisis Investing Video Series, Investing in a Centrally Planned Economy, The Investor 2.0 Quest