For those of you, who like me, think the current Chinese stack market is a inflation-fueled bubble, behold FXP.

Long term trend watch:  On this week’s Outside the Box column, John Mauldin features a Niels Jensen column on how models that use normal distributions for risk management are manifestly false and should be junked in favor of those that use power law distributions (known as the "80/20 rule" to us mortals).

This theme was also hit on in two books that I have recently read, the Black Swan by Nassem Taleb and The Origin of Wealth by Eric Beinhocker.

The net effect is that hedge funds and investment banks end up taking on too much leverage because they are lead astray by their risk management models.  Leverage itself creates high levels of correlation within asset classes during times of crisis, which are in turn exacerbated by high levels of leverage, creating a "vicious cycle" like what we saw this summer during the Subprime Crisis, but also during the LTCM collapse and the 1987 stock market crash.  This theme was well explained in Richard Bookstaber’s A Demon of our own Design.

My advice at this (relatively late) stage in the business cycle: reduce leverage voluntarily, becuase not too far down the road, the market will make you do it involuntarily.

Investing watch:  Adam Michael at Minyanville makes the argument that record net longs of gold futures are actually bullish, and that we could be off the the $1,000 an ounce races if gold breaks $750, which it did briefly today, let’s see if it holds…

Business Cycle Watch:  So Citi is talking to KKR about putting together a fund to buy LBO loans.  In other words, lend KKR [4:1?] leverage so they can afford to pay an inflated price for the debt that sits on Citi’s books.  Take a smaller-than-expected loss on the LBO loans and trade it for a par loan to the new vehicle.  I quote:

However, one issue that some investors and regulators are watching carefully is whether any sales of loans will be "true" transactions, at genuine market prices – or will be conducted at artificial rates, as part of a bigger commercial transaction, to flatter bank balance sheets.

Another issue is whether the banks will be tempted to create new off-balance sheet vehicles to hold troubled assets. One banker denied the new special purpose funds could be considered off-balance sheet vehicles. "This is not an off-balance sheet technique. It is about raising a fund – something we do all the time – to buy these assets definitively…"

It’ll work as long as the First Data deal et al work out ok.  In the end, the "liquidity" that everyone has talked about is still in the market (our capital account surplus from abroad, aka "the savings glut"), its just that one of its prime transmission mechanisms, the CLO market, is temporarily shut down.  Since the capital account surplus vastly exceeds our governement deficit, the money still needs to find a home.

It should be noted that the trade deficit, and with it the capital account surplus, is shrinking.  If it closes, so does the liquidity window.

Investment Watch:  Today I bought Akamai (AKAM) for $29.44 and Comcast (CMCSA) for $24.45.  I don’t typically buy TMT stocks in my PA (no need to over-correlate my savings and my career), but I think these two beaten-down names offer pretty compelling value at these levels.  AKAM is trading with a forward PE of 17 and a projected revenue growth rate of 30%.  It may suffer from some mild margin compression due to CDN competition from Limelight and Level3, but I believe that Akamai offers a more complete toolset than those other companies and has a dominant market position.  I don’t need to tell you about the growth in broadband video…

I sold out of my long-suffering Newmont Mining (NEM).  Every other gold stock I own and have owned has done really well since I started buying them in 2003, but NEM has been dead money for a while.  Yesterday the management team basically told us to sell.  I still own FCX and GG in my slowly dwindling mining stock portfolio, both of which have done very well for me.

Full disclosure:  I own, or have owned, all of the stock mentioned here.  In addition, my firm holds a small stub of AKAM stock in an escrow from the sale of a portfolio company, Nine Systems, to AKAM last year.

I AM NOT AN INVESTMENT ADVISOR, NOR OFFERING INVESTMENT ADVICE…I AM JUST SHARING MY THOUGHTS.  PLEASE RELY ON YOUR OWN INVESTMENT RESEARCH.