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Wednesday, January 6, 2010

The 2 best trades for 2010

What are the big trades for 2010? We have two ideas...

First, we think natural gas bottomed last year and will continue a new bull market this year. Relative to oil, we think natural gas is still cheap (though not as cheap as last year, when we called the bottom). And while vast new quantities of natural gas are coming on line, power companies are switching a large number of coal-fired power plants to natural gas. As demand for electricity rebounds this year, demand for natural gas will grow faster than expected - fast enough to push prices back to more than $10 per thousand cubic feet (mcf).

Powering demand for electricity will be a surprising rebound in global economic growth. This leads to our second main prediction for 2010: much higher interest rates. We are bullish on the economy for 2010. And we are bearish on government debt of nearly every stripe, but particularly on the fixed-rate, long-dated debt of the world's largest debtor - the United States of America.

The global economy is going to boom this year, powered by soaring money supply and robust public sector deficit spending. Over the next few years, the world is going to relearn a very painful lesson about paper money and public finance. In short, paper money is inherently unstable because paper systems don't restrain lending or spending with savings. When reserves can be printed, why bother with the pain of saving money? Untethered by any market discipline, sooner or later every paper system collapses under the weight of its accumulated debts and the resulting inflation.

Likewise, when a political system (like ours) promises voters more in benefits than it collects in taxes... trouble is only a matter of time. Combining the two systems - a democracy with a heavily progressive income tax and a paper money monetary system - is a recipe for a massive financial collapse. And make no mistake, that's exactly where we are heading.

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