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I've been sitting out the market in Vanguard's Treasury money market fund.

Bernanke's decision to make a bigger-than-expected cut in short-term interest rates just weeks after he publicly worried about inflation was the incident that finally proved to me that we really are in a new era and that they don't call him "Helicopter Ben" for nothing. In the 1950s-1990s, you could count on the Fed to maintain positive short-term interest rates. Any time inflation went up, interest rates would follow suit. Thus, Treasury Bills were a hedge against inflation. But the Fed of the 20th century has turned the financial landscape into a bizarre Alice In Wonderland world where Treasury Bills can lose purchasing power. We have already seen Greenspan drop interest rates to near 0 in 2002-2004. As the credit crisis continues to unfold, Bernanke will keep dropping interest rates, which I think will approach 0% like they did during Greenspan's big loosening. Inflation has been picking up over the last several years, but so much hanky-panky has been thrown into the CPI and PPI calculations that you can't make an apples-to-apples comparison with 20th century inflation rates.

I've now put nearly half of my portfolio in Japan. I think the Land of the Rising Sun will become the Land of the Rising Markets. According to the Economist's Big Mac Index of Purchasing Power Parity, the Japanese yen is undervalued because a Big Mac is cheaper in yen than in US dollars. That's quite a feat given that Japan doesn't produce much beef, and beef is normally expensive in Japan. The yen is cheap because of extremely low interest rates and the excessive use of the carry trade. So many people, hedge funds, and institutions are borrowing yen (thus effectively short-selling it) to speculate in higher-yielding assets elsewhere in the world. Eventually, something has to happen to disrupt the carry trade. Paying back those loans requires buying yen, which will mean more demand (and thus higher prices) for the yen.

Japan also has the cheapest stock market in the world. The small caps are cheaper than the big caps. Everyone gave up Japan for dead years ago. The old story is that Japan never recovered from the recession of 1990 and is a basket case. However, I think it has to turn around sooner or later.

Thus, I've put 2/3 of my Japanese portfolio in the Wisdomtree Small Cap Dividend Fund ETF (symbol DFJ) and 1/3 of my Japanese portfolio in the CurrencyShares Japan Trust (symbol FXY).

Now that I've loaded up on Japanese investments, you'll probably want to short-sell these ETFs. After all, I'm a dumb Britney Spears fan, and dumb Britney Spears fans are supposed to make bad financial market predictions.
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