Until late January I was aggressively long gold and commodity stocks believing that the Fed would be able to confront any economic downturn by printing more money which would immediately cause lots of inflation and rising asset prices.

The fact of the matter is that the Fed has printed very few dollars in recent years and the primary growth in money supply has been fueled by credit growth. But if we are facing trillions of dollars of credit losses then we will not see any credit growth, but rather credit contraction as the bad debt is written off and banks try to preserve equity.

It’s true the Fed can combat this credit contraction by creating enough money, but until now very little money has been printed. Any amounts of cash or treasuries that the Fed has lent out in excess of what it owns on its balance sheet, has been borrowed from the markets. That is, the Fed’s balance sheet has not grown although its composition has changed. And the federal government’s $150 billion stimulus amounts to a drop in the bucket compared to the credit losses.

Simply put the Fed and the government are one step behind the ball and I fear it could take a couple of years before they are able to create enough inflation to stem the losses. That means that the high inflationary environment that is very bullish for gold and other commodities may not appear for awhile. Instead a deflationary panic could ensue causing resource stocks to plummet.

So I have sold most of my stocks keeping only the few I like the most. I have not sold any of my shares in Altius Minerals (TSX: ALS). I am also keeping a few of my very favorite junior exploration stocks. I have purchased the Elements Rogers International Commodity Agriculture ETN (AMEX: RJA) because I think agriculture can still do well in this kind of environment. I am also in the process of buying physical gold.

I have sold everything else including PICO Holdings (Nasdaq: PICO), which I wrote extensively about recently. I like PICO’s water business in the long-run, but in the short-run it is very dependent on homebuilding and municipal spending. PICO has a book value of $28 per share so there isn’t much downside risk, but during market panics you can never tell, which is why I am selling.

I am aggressively shorting financials through the ProShares UltraShort Financial ETF (AMEX: SKF) and I am shorting Washington Mutual (NYSE: WM), which I think is on the path to bankruptcy unless it gets taken over. Also, I have written put options on MBIA (NYSE:MBI) with a strike price of $10. The total value of my shorts is equal to about 40% of the value of my longs.

Eventually, I believe the Fed will create enough money to cause inflation to sky-rocket and I will be significantly overweight resource stocks again. However, the key to being a successful speculator is knowing when to pull in your reins and not make risky bets. I think that time is upon us.