Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Saturday, August 12, 2006

The Financial Markets and Global Economic Rebalancing

The Rebalancing Trade has had a pretty amazing run of late. Here's the recent performance of a leveraged, mostly-short account that makes up part of my rebalancing hedge strategy:
That account is balanced against another account that is mostly long and unleveraged. Combined, the accounts constitute the rebalancing trade, which has been working since November, about the time I estimate the global economic rebalancing proces reached an important turning point:
Some important disclaimers:
1. There has been a lot of luck involved, as well as a lot of time spent researching individual stocks, some active contrarian trading and a little bit of sector rotation. These results are a very crude gage of the overall rebalancing strategy.
2. Usually when I have a run of good fortune like this, it is quickly followed by a period of getting knocked on my behind by the markets. With that in mind, I reduce the overall risk and leverage in the accounts when they are having a good run. If anything, recent success should be viewed as a predictor of imminent failure in the markets.
3. The size of the accounts is relatively insignificant. I'm not rich, and I'm sure I'd be doing much worse if I had to manage millions of dollars over the long term. If I was managing a large amount of money, I wouldn't be sharing my thoughts on the markets for that matter.
4. I don't encourage anyone to try and duplicate my trading strategies. The stock market has a way of making sure the masses lose out. The more people trying to play the rebalancing trade, the more likely it is to fail.

That said, I believe that my recent good fortune adds evidence to the idea that the rebalancing process is well underway. I think that the markets have been demonstrating this strongly over the past 3 or 4 months and the charts above provide evidence for the main ideas of this blog.

In the 8+ years I've been trading stocks, there have been periods of time when I believe the markets have been moving away from what I consider to be reasonable valuations and periods of time when I think the markets have been moving toward reasonable valuations. That holds true for the market as a whole, as well as for individual sectors. As the rebalancing process still has a long way to go, I think it likely that the rebalancing trade will continue to work on some level.

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