First Move

I posted my first trade based on the ideas that I have been (slowly outlining above), I am listing my general positions here (but not the specifics) for tracking purposes (yours and mine).  Today I went short (via puts) on United Health Groups stock (UNH ticker).  This is not financial advice, this is simply my position and my reasoning.  My actual advice is don't take financial advice from random people on the internet.  A little bit of my positional reasoning to follow.

My current thoughts on how bubbles are created in the US is functionally a Cantillon feedback loop (for lack of a better term).  As the Fed expands the money supply in the aftermath of a recession there will be some sector of the economy that is situated to benefit from this more than the others.  One possible reason for why an industry would have greater profit potential would be a recent shifting of regulations meaning there is a new profit space to be explored and the means to do it.  Three factors then compliment each other to push up the desirability of investing in the sector.  First is the higher profit potential, the second is that there are underused resources in the economy as it comes out of recession, and third you have the Cantillon effects.  Money naturally flows faster towards areas where there is more profit potential and so any new money* that enters the system is more beneficial to these sectors than other ones, and the sector gets first crack at the unused resources.

This gives you the initial growth period, but it also allows you to overshoot the "natural" total growth that an industry would see.  Each new dollar that is created disproportionately benefits the particular sector and so the sector has an outside boost for as long as the Fed is loosening.  From my point of view the Fed is functionally loosening until the Yield Curve starts to invert.  The curve inversion strongly coincides with the early signs of issues within the bubble.  The 2006 inversion was just before the sudden decline in new housing starts and the 2000 inversion was just before the sudden decline in the NASDAQ.

This general explanation has two advantages over other discussions of the Yield Curve that I have seen.  It can be used to explain why the recession typically starts 6-8 quarters after the inversion and it can explain why the bubble does not reflate when rates are cut.  The latter point is often ignored, as the Fed was cutting interest rates in July of 2007 and in November of 2000, both ahead of the beginning of the recession.  

*using the term loosely here