Are you wondering how to understand the manic-depressive investment world that we have? I think it's about two things: innovation and devaluation. Innovation, because the only way to stay ahead in this sluggish economy is to have a superior product. Then there is devaluation, becuase the government is printing money to devalue the currency in the face of credit deleveraging.

Now that we've defined the two most prominent features of the market, you should ask yourself how you take advantage of this. The concept I've been thinking about for a while is a concept of a “Innovation-Devaluation” barbell. In bond investing, a barbell is a split between short-and-long dated maturities. I think we have a new barbell here: One that balances investments in innovation with those for inflation protection.

The innovation portion of the barbell portfolio is superior growth companies, because you need innovative companies that are outperforming in a lackluster economy. The devaluation protection half of the barbell is precious metals, because you need your gold and silver as protection against excessive government money printing. That is the way your outperform inflation

This seems to be the feature of the current market. A wide range of small-to-medium growth companies have been on a tear, at the same time as the precious metals make new highs. Meanwhile, the plain-vanilla S&P is underperforming. In other words, if you were invested in the middle-of-the-road S&P Index, you are getting crushed by the technology/precious metals barbell.

I believe this is happening because the markets are smelling a return to inflation and money is pouring into instruments that investors believe will outperform inflation in a lackluster economy. Maybe it's the “stagflation” play: Fast-growth technology and precious metals fit the bill, as the precious metals serve as a natural hedge to the market, and they are in a secular trend of outperforming the S&P.

Don't believe me? Look at the charts below. These are all stocks that have been mentioned at one point or another on this site, and they fit the bill of being in either of the two baskets of our barbell: 1) innovative growth companies or 2) precious metals.

Will this trend last? I think so. Looking out to 2011, there will be a premium placed on growth, innovation, and inflation-protection. But be patient -- I think a serious correction is coming. Many of these stocks have run far and fast and you could get them cheaper. It will pay to wait off until after the election in case we get the typical fall market swoon.