This week, in the tradition of George Soros and Jim Rogers, I want to test the macrotrading mettle of my loyal readers. The test I offer is based on an exercise that I conducted in one of my MBA classes at UC-Irvine. And note this: I am going to offer a free copy of my Coming China Wars book to the best three entries sent into me by e-mail to try and pass this test. Here’s the way this macrotrading game works:

I am going to describe three different possible scenarios that the US and world economies are likely to experience over the next year or so. Your job is to determine whether you should be long or short or neutral with respect to a set of assets that I will identify. The reader that sends me the best matrix and best explanation for each trade will both prove his or her macro trading metal and win a free book. 

So let’s have some fun with this. Let’s start with the three scenarios:

Scenario One: The United States goes into a recession. This drags Europe into recession and slows Asia down significantly. Inflationary pressures abate. This is the “US as locomotive” scenario.

Scenario Two: The United States economy goes into her recession, inflationary pressures abate in the US, but the recession does not spread to the rest of the world. European growth is reasonably strong with mid to high inflation while Asia continues strong growth with inflationary pressures. This is the so-called “decoupling” scenario.

Scenario Three: Both the US and European economies are characterized by recession and inflation – stagflation. Asia slows down while experiencing inflation as well. This is the “stagflation” scenario.

Now here are the asset classes that we will consider: Gold, energy, and industrial metals. The United States long bond. Currency pairs for the dollar, the euro, and the Chinese yuan. Equity index funds for the US, Europe, and Asia. And finally, the US residential real estate market. 

Now here is your job: In the matrix below, please indicate whether you will be long the asset (L), short the asset (S.), or neutral with respect to the asset class (N). Now one final rule for this game: The most boxes in the matrix that shoot can be neutral is three. Here’s the matrix:

Next week, I will fill in this matrix for you based on how I would trade these three different scenarios and explain the underlying macrotrading logic behind the direction of each trade. 

I do think if you take the time to do this exercise and then check in again next week that you could learn a whole lot about your skills trading the market from a macro trading perspective.  So have fun with this.

If you want to compete for the free book, send me an e-mail with your matrix and brief explanation for each of the trades.  Note the word “brief.”  You should be able to explain all of the trades in less than one page.  And remember, you are only allowed to be neutral in three of the boxes.  Otherwise you must put in an L or a S.  Good Luck! 

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

The Market Edge Market Summary from www.marketedge.com 

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
Email  |  Website

DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.