I have to confess, I'm a tad neurotic, constantly assimilating tons of information in order to form what I believe are wise investment decisions. Over time, I have come to realize that there is an information highway today that hands you whatever your natural biases permit you to filter and believe. I'm trying to make sense of all the turmoil in the world, everywhere I turn I'm reading "BUBBLE" -- US Stock Market Bubble, Emerging Markets Bubble, China Bubble, Gold Bubble, US Bond Bubble, Emerging Markets Bond Bubble, International Trade Accounts Bubble. If I believed all these bubbles should happen in the near term future, then I might as well get out of the investing world altogether -- sell everything I own, get my tent, my rations, and head for the wilderness to fend for myself.

George Soros hit the nail on the head with his Theory of Reflexivity. We live not in a world of reality, but perception. Market actions are based upon imperfect information or misconceptions which feed a seemingly endless cycle of actions, feedback, and further mis-actions, until, lo and behold, a catalyst, a black swan event if you will, causes the cycle to come to an abrupt and violent halt. Soros cites the recent financial debacle, with the proliferation of off- balance sheet complex financial derivatives and consequent collapse of the financial world as such an event.

Before you dismiss Soros as some sort of quack, you might want to realize that he has made a tremendous fortune putting his theory into practical use. And, for the most part, textbook economists can kiss Adam Smith's price equilibrium theory with its scissors of demand and supply good bye. And our departure from true market theory is only going to accelerate as we transcend into a new realm of Sovereign State Domination.

Well, so much for theory. I have to function as a trader, I have no choice, I have a fixed portfolio I have to grow to survive. So I've tried to put my take on all the bubble talk, for my own trading plan, and here it is:

1) US Stock Market

Recently, Mohamed El-Erian, CEO and co-CIO of PIMCO, stated in Bloomberg that an “orderly” withdrawal of stimulus measures has already wrongly been priced into the market. This means that Wall Street projections for 2010 are overly optimistic and prices will subsequently slump. ( El-Erian Says Retreat in Stocks Will Worsen as Economy Slumps ) . And looking at the latest charts of our Economy, I see nothing to suggest that we have approached an organic domestic growth that will sustain the market. Money supply is growing at an alarming rate, but credit at all levels remains frozen. The velocity of money is frozen at Arctic levels. Capacity remains at low levels, and more worrisome is that exports, our only hope for salvation have continued to shrink over the period the dollar has fallen. The Consumer is still in retrenchment. So how can an economy who's viability depends on consumption grow under these circumstances? The stock market should reflect this doom.

However, given the new reality of sovereign intervention, I take an outlook of not necessarily a collapse, or bubble, but a substantial stock market correction, followed by a market that is increasingly moved (manipulated?) by our politicians (TARP, regulatory reform, taxation, Treasury Auctions, etc.). So I'm taking the posture in the stock market today of avoiding any long equity positions (including most commodities ETF's), and I'll enter day or swing trades only at very attractive risk/reward ratios.I don't, and never have been a good short artist, so I tend to stay on the sidelines when the going gets rough. But I would not rule out shorting if the market is calling for it.

2) US Bond Market

Last October, I heard much talk of a pending "bond bubble". A bond bubble is predicated on two considerations: 1) Inflation will rise, raising the interest rates on bonds (which reflect expected inflation + risk return), which will in turn lower the value of existing bond holdings. The effect is more pronounced on longer term bonds, which are more highly leveraged to inflation risks. 2) Credit conditions could deteriorate which potentially causing a collapse in the bond market and ensuing real losses in bond holdings.

I took a bet in October that this talk was premature, and entered heavily into PIMCO's Bond Fund (PTRAX), several TIPS Funds (Inflation Protected Treasury Securities), and I have been rewarded very well for the decision.

Today I do not see inflation or Fed rate policies as an issue during at least the next several months. But today I became very concerned about being heavily weighted in US Bonds, after reading that Moody's, doing an about- face, warns that the US Credit Rating is now at risk ( US Credit Rating at Risk, Moody's Warns ). Bill Gross, fund manager of PTRAX, has already started the weaning process from US debt holdings, as he has increased his holdings of emerging markets sovereign debt.

Here's more fuel firing my concerns:

Global Stock Market Investors should bet against some Fannie Mae and Freddie Mac securities because of the prepayment risk for those trading above par, said Jim Shallcross, who oversees $12 billion at Declaration Management & Research LLC. Mortgage-bond buyers paying more than face value may incur losses if the securities get repaid faster than expected, cutting the value of the premium coupons as some principal is returned at par.

John Mauldin, in his newsletter, Thoughts from the Frontline, quoted verbatum: "The Fed has said it will exit quantitative easing (QE) at the end of March. But what if mortgage rates rise? Where do we find $1 trillion (plus!!!) in US savings to fund the deficit, assuming foreigners buy about $400 billion? By definition, savings and foreign investment and the federal deficit must add up to zero.....How can we run 10% of GDP deficits if the Fed does not print money (as they did by buying Fannie and Freddie paper, which became treasuries, as I outlined last week)? That would require almost a 10% savings rate - with it all ending up in treasuries. How can that happen? Really?"

A bond bubble is a possibility --  I'm not seeing it in the charts, but the political realities we face today say it's real.

So today, I will probably dispose of a large portion of my bond holdings, taking the gains I have booked. I may leave one smaller PTRAX fund in a 401K, just for long term income, since I am of retirement age, but I'm watching this situation closely. Any future bond holdings may be directed toward emerging markets.

3) Global Equities and Bond Markets:

No doubt about it, the opportunities lie in the Emerging Markets today, which are export oriented and heavily commodity oriented. Combine that with the implied currency arbitrage on your holdings (assuming the dollar coninues a long term down trend), and you can get some nice gains. However, these holdings are very volatile and subject to bubble, as well as the credit worthiness of some sovereignties.

According to El-Erian, in his outlook entitled: NEW NORMAL  --- global markets will revert to a "new normal" with lower growth expectations in general, higher unemployment, and increased burden sharing and influence of sovereignties.

El-Erian, who also manages PIMCO's global and emerging markets bond funds, is telling me there is select opportunity in emerging markets equities as well as a emerging markets bonds. But he recently expressed a lot of caution with the situation in Greece, suggesting that is is much larger than the recent Dubai debacle. El-Erian stated: "If unaccompanied by extraordinary external assistance, it would entail such contractionary fiscal measures as to raise legitimate socio-political problems" (El-Erian, Viewpoints, Jan. 2010).

So here's how I'm playing Emerging Markets: I'm swing trading select emerging markets ETF's with very strong and positive 20, 50, and 100 day moving averages --  I buy as the ETF breaks either below the 20 and or 50 day moving average and then returns back upward through the average. I sell the ETF when the CCI (20) breaks through +100 (or (+200 in certain cases) and shows "overbought". By selecting the proper ETF's with good volatility but a strong solid uptrend, I have been able to get some good quick returns 4 % to 13% in several weeks . Of course, I get out of these altogether if the primary trend reverses.

I also own several Emerging Markets Bond funds, and I'll sell if I see a deterioration in the emerging market bonds markets.

4) China

Recently Jim Chanos created quite a controversy by suggesting that China a a bubble in the making. Contrary opinions argue that China's numbers are actually UNDERSTATED, due to underground economies and suspect data.( No, China Will Absolutely not Collapse).

There is also a prominent argument circulating which posits that since China holds trillions of dollars of US debt in its reserves, it has the buffer and capacity to withstand a bubble economy and markets.

But this argument is suspect. According to China Financial Markets, twice before in modern history have nations amassed huge reserves only to be followed by long periods of sub-par economic and market performance. The first time was in the late 20's, when the US accumulated what Keynes described as "all the bullion in the world". The second time was during the late 1980's, when Japan accumulated huge global reserves. In both cases, these countries' markets followed with sub-par performance for decades.

My posture towards China at the moment is very cautious. I'm aware of the recent increase in banking reserve requirements over concern for an overheated real estate market. I only perform day (or short swing) trading on China stocks. These positions are relatively small, gambling money for me. I own no China ETFs. However, I'm always prospecting for opportunities and I'll jump on them as they arise.

4) Gold

Bubble? Sorry, I can't see it long term. I've written much about gold in the past, so let me just briefly sum up my beliefs. Gold serves in many roles: jewelry, currency and store of wealth, investment, industrial commodity. Approximately two thirds of gold demand is for its role in jewelry. As emerging economies become wealthier, and middle classes grow, jewelry demand will continue to grow. It will also continue to have appeal as an investment and as an industrial commodity.

But the real reason that I'm excited about the long term prospects of gold, is that virtually every country in the world is massively inflating with fiat currencies. No economy has ever survived massive currency inflation over time. Gold is the only commodity that is universally accepted as a currency. I'm in the camp of Paul Tudor Jones and Soros on this. Tudor's econometric model expressed that gold is 20% undervalued over the next 24 month period. The model takes into consideration real rates on the price of gold, inflation, and M2 growth. Tudor expects the velocity of money to rise over the next two years, enhancing the bullish case for gold.

Yesterday the markets were hugely down, and GLD plummeted to $104.5 -- I took the opportunity to buy some (I recently sold my GLD holdings near the peak for a +17% gain). My charts suggest we could go as low as $98 on GLD, and if that happens, I'll double my current position.

This is where I'm at today. In the future, I would like to address the huge current accounts imbalance in the US and its implications for us. I would also like to look at the state of the US today and compare it to another country which defaulted on its debt, Argentina, to see if we can draw ant meaningful comparisons. In both of these cases, as always, I am trying to relate it back to the real world to see how it relates to my trading.