Pack your portfolios with agricultural plays like Potash (POT), Mosaic (MOS), and Agrium (AGU) if Dr. Paul Ehrlich is just partially right about the impending collapse in the world's food supply. You might even throw in long positions in wheat (WEAT), corn (CORN), soybeans (SOYB), and rice.
The never dull and often controversial Stanford biology professor told me he expects that global warming is leading to significant changes in world weather patterns that will cause droughts in some of the largest food producing areas, causing massive famines. Food prices will skyrocket, and billions could die.
At greatest risk are the big rice producing areas in South Asia, which depend on glacial run off from the Himalayas. If the glaciers melt, this crucial supply of fresh water will disappear. California faces a similar problem if the Sierra snowpack fails to show up in sufficient quantities, as it has for the past two years.
Rising sea levels displacing 500 million people in low-lying coastal areas is another big problem. One of the 80-year-old professor's early books The Population Bomb was required reading for me in college in 1970, and I used to drive up from Los Angeles to the San Francisco Bay area just to hear his lectures (followed by the obligatory side trip to the Haight-Ashbury).
Other big risks to the economy are the threat of a third world nuclear war caused by population pressures, and global plagues facilitated by a widespread growth of intercontinental transportation and globalization. And I won't get into the threat of a giant solar flare frying our electrical grid.
?Super consumption? in the US needs to be reined in where the population is growing the fastest. If the world adopts an American standard of living, we need four more Earths to supply the needed natural resources. We must to raise the price of all forms of carbon, preferably through taxes, but cap and trade will work too. Population control is the answer to all of these problems, which is best achieved by giving women an education, jobs, and rights, and has already worked well in Europe and Japan.
This morning, Bank of America paid out a five cent quarterly dividend, which works out to an annualized yield of 1.18% and the shares will open this morning trading ex.
For those of you who have wisely followed my Trade Alert to buy the Bank of America (BAC) December, 2014 $15-$16 vertical bull call spread, good for you. As of last night, you were showing a profit of 0.88% on the position.
However, there is a chance that the short side of the trade, the December, 2014 $16 calls were exercised against you before the opening this morning. If that is the case, you would have been informed by your broker by email and immediate action is required on your part to avoid unnecessary risk.
The options traded on US exchanges and referred to in my Trade Alerts are American style, meaning that they can be exercised at any time by the owner. This is in contrast to European style options, which can only be exercised on the expiration day. The vertical option spreads that I have been recommending for the past year are composed of a deep in-the-money long strike price plus a short portion at a nearer money strike price.
When stocks have high dividends, there is a chance that the near money option you are short, the December, 2014 $16 calls, gets exercised against you by the owner.
This requires you to deliver the stock equivalent of the option you are short, plus any quarterly dividends that are due. Don?t worry, because your long position perfectly hedges you against any principal risk in this situation.
However, you will be liable for the five-cent dividend, which works out to $5 for every call option you are short. If you executed the full 110 contracts recommended in my Trade Alert that works out to $550 (100 shares per option X $.05 dividend X 110 contracts). You then need to email or call your broker back immediately informing him that you want to exercise your remaining long option position to meet your assigned short position.
This should completely close out your position and leave you with about half your remaining profit. This is not an automatic process and requires action on your part!
It also means that you get your margin back, plus your profit, the next day, and don?t have to run the position another two weeks into expiration. That means you are free to use the money to put on new trades. Assignments are made on a random basis by an exchange computer, and can happen any day. You may get exercised, or you may not. Exercise means the owner of the option that you are short completely loses the entire premium on his call.
Dividends have to be pretty high to make such a move economic, usually at least over 3% on an annual rate. But these days, markets are so efficient that traders, or their machines, will exercise options for a single penny profit.
In fact, there are now some dedicated hedge funds and independent individual options traders that specialize in buying up calls the day before and ex dividend day to capture a tiny 29 basis point gross overnight profit. That is before execution expenses.
It hardly seems worth it to me, but I guess what they lack in size, they make up in volume. Hey, you do what you can do to earn a living. Surprise assignments create a risk for option spread owners in a couple of ways. If you don?t check your email every day, you might not be aware that you have been assigned.
Alternatively, such emails sometimes get lost, or hung up in local servers or spam filters, which occasionally happens to readers of my own letter.
Then, you are left with the long side deep out-of-the-money call without on offsetting short position. You are now unhedged. This means you will have a substantially higher margin requirement, and is the equivalent of going outright long the stock in large size.
Suddenly, you are playing a totally different game, and not one I recommended. If the stock rises, then you could be in for a windfall profit. But if it falls, you could take a big hit. Guess which way the stock usually goes.
Better to completely avoid this situation at all cost and not take the chance. You are probably not set up to do this type of trading. If you don?t have the cash in your account to cover this, you could get a margin call. If you ignore this call as well, your broker will close out your position at market without your permission.
It could produce some disconcerting communications from your broker. They generally hate issuing margin calls, and could well close your account if it is too small to bother with, as they create regulatory issues. In order to get belt and braces coverage on this issue, it is best to call your broker and find out exactly what are their assignment policies and procedures. Believe it or not, some are still in the Stone Age, and have yet to automate the assignment process or give notice by email.
An ounce of prevention could be worth a pound of cure here. You can?t believe how irresponsible some of these people can be. The phone calls are free. Consider all this a cost of doing business, or a frictional execution cost. In-the-money options are still a great strategy. But you should be aware of all the ins and outs to get the most benefit.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/10/John-Thomas2-e1412947546239.jpg400290Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-12-03 09:20:512014-12-03 09:20:51A Special Note on Exercised Bank of America Options
Now we learn that the Ebola virus has been riding New York?s ?A? train subway line since October 21!
That is what we have learned from the physician from Doctors Without Borders, now locked up in the Ebola Ward at Manhattan?s Bellevue Hospital, just returned from treating victims in the West African country of Guinea. His girlfriend and some close friends have been rounded up and are now undergoing 21 day isolation treatment.
As for the 100,000 people who have ridden the ?A? train since, we?ll just have to wait and see. And the Uber drive involved, who knows?
The doctor also went bowling in Brooklyn before he checked himself into the hospital. That will almost certainly signal the death of this much-loved recreation. Who knows where those fingers have been that used that 16 pound ball last?
Looks like I?ll never top my lifetime best of a 200 score.
As a long in the tooth trader of most of the world?s major markets, I can tell you to use every Ebola induced market swoon as a buying opportunity. To explain why, I have to delve into my dark and murky past.
Back in the early 1970?s, the well-connected head of the Biology Department at the University of Southern California got me a summer job at the Nuclear Test Site in Nevada.
Some 60 miles north of Las Vegas on lonely US Highway 95, I found four recreational vehicles parked on the right side of the road in the middle of nowhere, the place of business, one of the world?s oldest profession.
But where were the customers? From there, a dirt road headed east and disappeared over a distant mountain range. The road was not on the map.
An hour latter I found myself in Mercury, Nevada, then inside Nellis Air Force base, the mythical ?Area 51.? Baking in 120-degree heat and filled with hundreds of WWII era Quonset huts, Mercury Nevada was one of the most forlorn parts of the world. The sole recreational facility was the swimming pool, which was particularly popular with the coed graduate students after midnight.
My heavy math background got me a job to work on the ultra top secret Neutron Bomb project, although I didn?t find out that?s what is was for another decade. This is where ?yield? didn?t mean interest paid, but ?millions killed.?
Because I came from a biology department I was particularly popular with the biowarfare guys, who were also there in force. My area of expertise was tropical diseases.
I was often invited to lunch at the commissary so they could pick my brain for potential new vectors. Yes, the subject of Ebola came up, as the kill rate was an attractively high 50%. But it was dismissed because the transmissibility is so poor. You can?t rely on a bioweapon that requires you to hug your enemy.
In the end, the flu virus was settled on as the most effective agent. It is airborne, and the virus reproduces every hour. It has also been field-tested. During the great 1918-1919 Spanish Flu pandemic, 100 million died around the world, mostly those in their teens and twenties, including a couple of great aunts of mine.
Best of all, it naturally originates in China, where contact between humans and pigs is the greatest on the planet. That?s where our viruses combine to form new organisms. You?d never be able to tell the difference between a bioattack and the real thing.
Since then, the US has created hundreds of synthetic viruses and stockpiled their vaccines. The Chinese have created thousands. For more depth on this, click here for ?Will SynBio Save or Destroy the World?.
Which brings us all to where we are today. Why do we have a fixation, not only with Ebola, but ISIL, Russia, China, and the Ukraine as well?
I blame it all on the 24 hour news cycle, a monster with a voracious appetite that has to be constantly fed. Never mind that much of what they pump out is speculation, or is just plain untrue.
The financial media are the worst of all. On market down days they parade out their collection of perma bears. On the up days the perma pulls get the spotlight. Listen to all the advice and you end up buying the up days and selling the down days.
It is a perfect money destruction machine. Too many individual investors run through entire 401k?s and IRA?s before they figure this out, if ever.
I know when many readers see a news flash, they wonder ?Gee, should I sell?? I know people in New York who have become so nervous about Ebola, they have quit shaking hands with people.
I?m a little different.
One moron actually predicted that there would be 300,000 Ebola cases in Liberia by the end of the year. One of the purposes of this newsletter is to separate out fact from fiction, the wheat from the chaff. I take great pleasure in using an Ebola induced market dump to get you to load up on S&P 500 (SPY) calls spreads, as I have done.
I?ll tell you what the stock market thinks about Ebola. The two who caught the disease after the initial fatality are cured. The 48 who came into contact with him are also out of their 21 days quarantine period. So far the US has suffered one fatality from the dread virus, but boasts 330 million survivors.
There was a time in our history when we were flooded with thousands of disease carrying immigrants. They carried everything from black plague to smallpox, cholera, dengue fever, malaria, and tuberculosis.
What the government did then was quarantine all suspected carriers to Angle Island in San Francisco Bay and Ellis Island in New York harbor, until the doctors gave them the all clear. The new quarantine procedures hark back to that day.
You are not going to get the Ebola Virus. Earnings are the primary market focus here, not an African virus. Keep your eye on the ball, and don?t get distracted.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/10/Ebola-Virus-e1414246615403.jpg266400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-27 01:05:582014-10-27 01:05:58The Truth about Ebola
With the International Energy Agency cutting global consumption by 200,000 barrels a day in 2014 and 300,000 barrels a day in 2015, all eyes were on the oil market today. I had to slap myself when I saw the $81 handle for West Texas intermediate, it had gotten so cheap so fast.
Virtually every stock market analyst has been puzzled by the seeming immunity of stock markets to the good news of collapsing oil prices (USO), (DIG), (DUG) this year.
In fact, stocks and crude have been tracking almost one to one on the downside. The charts below, sent by a friend at JP Morgan, go a long way towards explaining this apparent dichotomy.
The first shows the number of barrels of oil needed to generate a unit of GDP, which has been steady declining for 30 years. The second reveals the percentage of hourly earnings required to buy a gallon of gasoline in the US, which has been mostly flat for three decades, although it has recently started to spike upwards.
The bottom line is that conservation, the roll out of more fuel-efficient vehicles and hybrids, and the growth of alternatives, are all having their desired effect.
Notice how small all the new cars on the road are these days, many of which get 40 mpg with conventional gasoline engines. As for my own household, it has gone all-electric.
Developed countries are getting six times more GDP growth per unit of oil than in the past, while emerging economies are getting a fourfold improvement.
The world is gradually weaning itself off of the oil economy. But the operative word here is ?gradually?, and it will probably take another two decades before we can bid farewell to Texas tea, at least for transportation purposes.
It took 150 years for America to build its oil infrastructure. Don?t expect it to disappear in 10 or 20 years. Those outside the oil industry are totally unaware how massive the industry is that has to move around our country?s 18.8 million barrels a day, refine it into usable products, and get it to the end individual, industrial and government consumer.
Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-15 01:03:582014-10-15 01:03:58Oil Isn't What It Used to Be
It looks we are going to have to start watching the appalling Zombie shows on TV and in the movies. That is so we can gain tips on how to survive the coming Apocalypse that will unfold when the Ebola virus escapes Texas and spreads nationally.
I?m not worried. I?m actually pretty good with a bow and arrow.
Thank you United Airlines!
I happy to report that the total return for my followers so far in 2014 has topped 35%, compared to a pitiful 1% gain for the Dow Average during the same period.
In September, my paid Trade Alert followers have posted a blockbuster 5.01% in gains. This is on the heels of a red-hot August, when readers took in a blistering 5.86% profit.
The nearly four year return is now at an amazing 157.8%, compared to a far more modest increase for the Dow Average during the same period of only 37%.
That brings my averaged annualized return up to 39.7%. Not bad in this zero interest rate world. It appears better to reach for capital gains than the paltry yields out there.
This has been the profit since my groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.
It has been pedal to the metal on the short side for me since the Alibaba IPO debuted on September 19. I have seen this time and again over four decades of trading.
Wall Street gets so greedy, and takes out so much money for itself, there is nothing left for the rest of us poor traders and investors. They literally kill the goose that lays the golden egg. Share prices have nowhere left to go but downward.
Add to that Apple?s iPhone 6 launch on September 8 and the market had nothing left to look for. The end result has been the worst trading conditions in two years. However, my double short positions in the S&P 500 (SPY) and the Russell 2000 (IWM) provided the lifeboat I needed.
The one long stock position I did have, in Tesla (TSLA), is profitable, thanks to a constant drip, drip of leaks about the imminent release of the Model X SUV. The Internet is also burgeoning with rumors concerning details about the $40,000 next generation Tesla 3, which will enable the company to take over the world, at least the automotive part.
Finally, after spending two months touring dreary economic prospects on the Continent, I doubled up my short positions in the Euro (FXE), (EUO).
Those positions came home big time when the European Central Bank adopted my view and implanted an aggressive program of quantitative easing and interest rate cuts. Hint: we are now only one week into five more years of Euro QE!
The only position I have currently bedeviling me is a premature short in the Treasury bond market in the form of the ProShares Ultra Short 20+ Treasury ETF (TBT). Still, I only have a 40 basis point hickey there.
Against seven remaining profitable positions, I?ll take that all day long. And I plan to double up on the (TBT) when the timing is ripe.
Quite a few followers were able to move fast enough to cash in on the move. To read the plaudits yourself, please go to my testimonials page by clicking here. They are all real, and new ones come in almost every day.
Watch this space, because the crack team at Mad Hedge Fund Trader has more new products and services cooking in the oven. You?ll hear about them as soon as they are out of beta testing.
The coming year promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere by the end of 2014.
Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, and 67.45% in 2013.
Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. ?It includes?Global Trading Dispatch?(my trade alert service and daily newsletter). You get a real-time trading portfolio, an enormous research database, and live biweekly strategy webinars. You also get Jim Parker?s?Mad Day Trader?service and?The Opening Bell with Jim Parker.
To subscribe, please go to my website at?www.madhedgefundtrader.com, click on ?Memberships? located on the second tier of tabs.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/John-Thomas4.jpg325331Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-03 01:05:282014-10-03 01:05:28Mad Hedge Fund Trader Tops 30% Gain in 2014
A number of analysts, and even some of those in the real estate industry, thought that there would never be a recovery in residential real estate. Long time readers of this letter know too well that I went hugely negative on the sector in late 2005, when I unloaded all of my holdings.
However, I believe that ?forever? may be on the extreme side. Personally, I believe there will be great opportunities in real estate starting in 2030.
Let's back up for a second and review where the great bull market of 1950-2007 came from. That's when a mere 50 million members of the ?greatest generation?, those born from 1920 to 1945, were chased by 80 million baby boomers born from 1946-1962. There was a chronic shortage of housing, with the extra 30 million never hesitating to borrow more to pay higher prices.
When my parents got married in 1948, they were only able to land a dingy apartment in a crummy Los Angeles neighborhood because my dad was an ex-Marine. This is where our suburbs came from.
Since 2005, the tables have turned. There are now 80 million baby boomers attempting to unload dwellings on 65 million generation Xer's who earn less than their parents, marking down prices as fast as they can.
As a result, the Federal Reserve thinks that 30% of American homeowners either have negative equity, or less than 10% equity, which amounts to nearly zero after you take out sales commissions and closing costs. That comes to 42 million homes. Don't count on selling your house to your kids, especially if they are still living rent-free in the basement.
The good news is that the next bull market in housing starts in 8 years. That's when 85 million Millennials, those born from 1988 to yesterday, start competing to buy homes from only 65 million gen Xer's. The next interest rate spike will probably knock another 25% off real estate prices. Think 1982 again.
Fannie Mae and Freddie Mac will be long gone, meaning that the 30-year conventional mortgage will cease to exist. All future home purchases will be financed with adjustable rate mortgages, forcing homebuyers to assume interest rate risk, as they already do in most of the developed world.
With the US budget deficit problems persisting beyond the horizon, the home mortgage interest deduction is an endangered species, and its demise will chop another 10% off home values.
For you Millennials just graduating from college now, this is a best-case scenario. It gives you 8 years to save up the substantial down payment banks will require by then. People will, no doubt, tell you that you are crazy, that renting is the only safe thing to do, and that home ownership is for suckers. That's what people told me when I bought my first New York coop in 1982 at one-tenth its current market price.
Just remember to sell by 2060, because that's when the next intergenerational residential real estate collapse is expected to ensue. That will leave the next, yet to be named generation, holding the bag, as your grandparents are now.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/03/House-Fire.jpg242360Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-01 09:28:072014-10-01 09:28:07The Real Estate Market in 2030
If you want to delve into the case against the long-term future of US Treasury bonds in all their darkness, consider these arguments.
The US has not had a history of excessive debt since the Revolutionary War, except during WWII, when it briefly exceeded 100% of GDP.
That abruptly changed in 2001, when George W. Bush took office. In short order, the new president implemented massive tax cuts, provided expanded Medicare benefits for seniors, and launched two wars, causing budget deficits to explode at the fastest rate in history.
To accomplish this, strict ?pay as you go? rules enforced by the previous Clinton administration were scrapped. The net net was to double the national debt to $10.5 trillion in a mere eight years.
Another $6.5 trillion in Keynesian reflationary deficit spending by President Obama since then has taken matters from bad to worse. The Congressional Budget Office is now forecasting that, with the current spending trajectory and the 2010 tax compromise, total debt will reach $23 trillion by 2020, or some 130% of today?s GDP, 1.6 times the WWII peak.
By then, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. What?s more, these figures greatly understate the severity of the problem.
They do not include another $9 trillion in debts guaranteed by the federal government, such as bonds issued by home mortgage providers, Fannie Mae and Freddie Mac. State and local governments owe another $3 trillion. Double interest rates, a certainty if wages finally start to rise and our debt service burden doubles as well.
It is unlikely that the warring parties in Congress will kiss and make up anytime soon, especially if we continue with a gridlocked congress after the November midterm elections. It is therefore likely that the capital markets will emerge as the sole source of any fiscal discipline, with the return of the ?bond vigilantes? to US shores after their prolonged sojourn in Europe. If you don?t believe me, just look at how bond owners have fared this week. Ouch!
Since foreign investors hold 50% of our debt, policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo. They could enforce a cut back in defense spending from the current annual $700 billion by simply refusing to buy anymore of our bonds.
The outcome will permanently lower standards of living for middle class Americans and reduce our influence on the global stage.
But don?t get mad about our national debt debacle, get even. Make a killing profiting from the coming collapse of the US Treasury market through buying the leveraged short Treasury bond ETF, the (TBT). Just pick your entry point carefully so you don?t get shaken out in a correction.
Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-19 01:03:462014-09-19 01:03:46The Structural Bear Case for Treasury Bonds
So, you thought I was lounging around Europe this summer, sipping Champagne and working on my tan?
Well, I confess that I did do some of that.
The sad fact is that I spent most of the summer engineering a major, ground up rebuild of my website, and an expansion of our services. By the time I got home, I felt like I needed a vacation.
My loyal and hard working staff, spread around the world, has been putting the pedal to the metal as well. In fact, they worked straight through the weekend getting the new site up and working.
Thanks team!
The first thing you will notice on the new site is its sleek, elegant, almost minimalist design. The drop down menus have been reorganized and concentrated, inviting a more pleasant user experience. There will be video testimonials from existing users. And yes, you?ll find my ugly mug is larger and ever present.
A new architecture and server upgrade enable much faster loading times for pages and search results. A ticker cloud reveals the symbols from the most commonly posted securities. Our recent performance and trade history will be in your face, something we are quite proud of. Security will also get substantially beefed up.
Many of the new changes will be internal to the site and address our relationship with Google. Let?s just call it ?Magic?.
Suffice it to say, it will be much easier to find us when searching arcane terms like ?Treasury bond short.? Since it appears that half of you are now reading my letter on your smart phones, we have optimized the site for viewing on iPhones and iPads.
This is only the beginning of a million dollar investment I am making in my own business that will unfold over the coming year. As we are approaching our seventh anniversary, we find that we are not only one of the oldest and largest trade mentoring services out there, but also the best performing.
Nowhere else will you find an investment newsletter that publishes audited performance of its recommendations on a daily basis. It?s something we are happy to wear on our sleeve. Our competitors don?t offer this because they reliably lose money for their clients year after year. Better to hide in the darkness.
New products and services will be rolling out in coming months. Next up, I will produce a series of training videos on topics like ?How to Execute a Trade Alert,? ?How to Put On a Call Spread? and ?Introduction to Risk Management?. Coming travel videos will include Rome, Barcelona, Zermatt, Geneva and The Pebble Beach Concourse d? Elegance.
I first launched this business in 2007 after reading ?Websites for Dummies? and teaching myself basic website design. Some friends of mine also provided me with Google?s patent for its search engine. That enabled me to design a site that would grow astronomically, which it has done. Being right helps too.
The new site is a distant descendant from that early effort.
Once again I want to thank your for your encouragement and support. We will never stop making this a better service.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/John-Thomas6.jpg387296Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-08 01:05:112014-09-08 01:05:11Welcome to My New Website
The world is about to suffer an acute shortage of equity capital over the next eight years, which could total $12.3 trillion. That is the conclusion of the McKinsey Global Institute, an affiliate of McKinsey &Co., a great well of long-term economic thinking which I have been drawing from for the last 40 years.
The cause of the coming debacle is quite simple. Investable assets in the emerging world with minimal experience in equity investment are growing four times faster than those in the developed world. While developed countries own 80% of the world?s $196 trillion in assets today, that share is expected to decline to 64% by 2020.
This means that, by far, the greatest growth in assets will be in countries where managers have the least experience in equity investment.
Aging populations wind down equity investment as they get older, shifting an ever-larger share of their assets into bonds and cash. The rise of defined contribution plans shifts a greater focus on fixed income investments.
More money is going into hedge funds and private equities. The regulatory burden of Dodd-Frank is scaring many banks out of the stock brokerage into safer managed alternatives. When stocks aren?t being ?sold?, no one buys them.
Anyone who has ever tried to sell equities to emerging market investors, like myself, can tell you the challenges they run up against. Much of the region?s assets are controlled by quasi-governmental institutions with a much greater debt orientation.
Equity issuance is very expensive and tightly regulated. Corporate transparency and government oversight is a joke. No one believes the figures that are coming out of China.
Minority shareholders have no say and few rights, with annual meetings often over in an hour. There also is a long cultural tradition of keeping your wealth tied up in gold and silver instead of paper assets. No surprise then, that most emerging market investors view equities as riskier and more speculative than they are in the West and would rather keep their money elsewhere.
A long-term shortage of equity capital will force companies to use more leverage, which will create greater volatility in earnings and share prices. A smaller equity cushion will lead to a higher frequency of bankruptcies during hard times.
High growth companies, such as in technology, will have a particularly hard time raising capital, and IPO markets could dry up from the lack of money.
The net result of these anti-equity trends is that yields will have to rise substantially to become more competitive with bonds. Companies can achieve this by either raising dividends or buying back shares. This, they seem to be doing in spades these days.
This may be the reason behind soaring dividend yields globally over the last several years. The price of admission for equity capital hungry corporations is going up, big time. The $1 trillion plus equity requirements of troubled European banks only exacerbate this situation.
The only way around this crisis is for investment banks to greatly step up their marketing efforts in the emerging markets, especially in China. The Middle Kingdom?s investable assets are expected to soar 328% from $19.8 trillion to $65 trillion by 2020.
That will make it one of the world?s largest markets for investment products in a very short time. Major firms, like Morgan Stanley, Goldman Sachs, JP Morgan, Sogen and UBS have already made massive investments in the region to boost business there.
To read the McKinsey piece in full, please click here.
Better start learning Mandarin if you want to stay in the brokerage business.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Brokers.jpg232298Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-08 01:04:022020-10-12 08:53:41Beware the Coming Equity Famine
If demographics is destiny, then America?s future looks bleak. At least, that is the inevitable conclusion if demographics is your only consideration.
I have long been a fan of demographic investing, which creates opportunities for traders to execute on what I call ?intergenerational arbitrage?.? When the numbers of the middle aged are falling, risk markets plunge. Front run this data by two years, and you have a great predictor of stock market tops and bottoms that outperforms most investment industry strategists.
You can distill this even further by calculating the percentage of the population that is in the 45-49 age bracket, according to my friend, demographics guru Harry S. Dent, Jr.
The reasons for this are quite simple. The last five years of child rearing are the most expensive. Think of all that pricey sports equipment, tutoring, braces, first cars, first car wrecks, and the higher insurance rates that go with it.
Older kids need more running room, which demands larger houses with more amenities. No wonder it seems that dad is writing a check or whipping out a credit card every five seconds. I know, because I have five kids of my own. As long as dad is in spending mode, stock and real estate prices rise handsomely, as do most other asset classes. Dad, you?re basically one giant ATM.
As soon as kids flee the nest, this spending grinds to a juddering halt. Adults entering their fifties cut back spending dramatically and become prolific savers. Empty nesters also start downsizing their housing requirements, unwilling to pay for those empty bedrooms, which in effect, become expensive storage facilities.
This is highly deflationary and causes a substantial slowdown in GDP growth.? That is why the stock and real estate markets began their slide in 2007, while it was off to the races for the Treasury bond market.
The data for the US is not looking so hot right now. Americans aged 45-49 peaked in 2009 at 23% of the population. According to US census data, this group then began a 13-year decline to only 19% by 2022. This was a major reason why I ran huge shorts across all ?RISK ON? assets six years ago, which proved highly profitable.
You can take this strategy and apply it globally with terrific results. Not only do these spending patterns apply globally, they also back test with a high degree of accuracy. Simply determine when the 45-49 age bracket is peaking for every country and you can develop a highly reliable timetable for when and where to invest.
Instead of poring through gigabytes of government census data to cheery pick investment opportunities, my friends at HSBC Global Research, strategists Daniel Grosvenor and Gary Evans, have already done the work for you. They have developed a table ranking investable countries based on when the 34-54 age group peaks?a far larger set of parameters that captures generational changes.
The numbers explain a lot of what is going on in the world today. I have reproduced it below. From it, I have drawn the following conclusions:
* The US (SPY) peaked in 2001 when our first ?lost decade? began.
*Japan (EWJ) peaked in 1990, heralding 20 years of falling asset prices, giving you a nice back test.
*Much of developed Europe, including Switzerland (EWL), the UK (EWU), and Germany (EWG), followed in the late 2,000?s and the current sovereign debt debacle started shortly thereafter.
*South Korea (EWY), an important G-20 ?emerged? market with the world?s lowest birth rate peaked in 2010.
*China (FXI) topped in 2011, explaining why we have seen three years of dreadful stock market performance despite torrid economic growth. It has been our consumers driving their GDP, not theirs.
*The ?PIIGS? countries of Portugal, Italy (EWI), Ireland (EIRL), Greece (GREK), and Spain (EWP) don?t peak until the end of this decade. That means you could see some ballistic stock market performances if the debt debacle is dealt with in the near future.
*The outlook for other emerging markets, like Russia (RSX), Indonesia (IDX), Poland (EPOL), Turkey (TUR), Brazil (EWZ), and India (PIN) is quite good, with spending by the middle age not peaking for 15-33 years.
*Which country will have the biggest demographic push for the next 38 years? Israel (EIS), which will not see consumer spending max out until 2050. Better start stocking up on things Israelis buy.
Like all models, this one is not perfect, as its predictions can get derailed by a number of extraneous factors. Rapidly lengthening life spans could redefine ?middle age?. Personally, I?m hoping 60 is the new 40.
Immigration could starve some countries of young workers (like Japan), while adding them to others (like Australia). Foreign capital flows in a globalized world can accelerate or slow down demographic trends. The new ?RISK ON/RISK OFF? cycle can also have a clouding effect.
So why am I so bullish now? Because demographics is just one tool in the cabinet. Dozens of other economic, social, and political factors drive the financials markets.
My theory is that Ben Bernanke got a hold of the best selling book, The Great Crash Ahead: Strategies for a World Turned Upside Down, by Harry S. Dent, Jr. and Rodney Johnson, and thought to himself, ?Yikes, I better do whatever I can to offset this demographic drag or we?ll all be toast.?
Thus, followed his ultra low interest rate policy and unending waves of quantitative easing. So far, Ben has been pretty successful.
What?s more, Ben?s replacement, my friend Janet Yellen, will carry on Ben?s mission to stave off a demographic disaster until 2022. Then the demographic headwind veers to a tailwind, setting the stage for the return of the ?Roaring Twenties.?
To buy Harry Dent?s insightful tome at discount Amazon pricing, please click here.
In the meantime, I?m going to be checking out the shares of the matzo manufacturer down the street.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/11/Matzos.jpg327321Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-05 01:03:032014-09-05 01:03:03Demographics as Destiny
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