?Unless developed economies learn to compete the old fashioned way ? by making more goods and making them better, the smart money will continue to move offshore to Asia, Brazil, and other developing economies both in the asset and the currency space. The United States, in short, needs to make things, and not paper,? said Bill Gross, the managing director and co- chief investment officer of bond giant PIMCO.
Those of you counting on getting your old union assembly line job back in Detroit can forget it.
The recent eight year forecast published by the Bureau of Labor Statistics shows that 4.19 million jobs will be gained in the US in professional and business services, followed by 4 million health care and social assistance jobs, while 1.2 million will be lost in manufacturing. This is great news for website designers, Internet entrepreneurs, registered nurses, and masseuses in California, but grim tidings for traditional metal bashers in the rust belt manufacturing states like Michigan, Indiana, and Ohio.
I?m so old now that I am no longer asked for a driver?s license to get into a night club. Instead, they ask for a carbon dating. The real challenge for we aged career advisors is that probably half of these new service jobs haven?t even been invented yet, and if they can be described, it is only in a cheesy science fiction paperback with a half dressed blond on the front cover. After all, who heard of a webmaster, a cell phone contract sales person, or a blogger 40 years ago? Where are all these jobs going to? You guessed it, China, which by my calculation, has imported 25 million jobs from the US over the past decade. You can also blame other lower waged, upstream manufacturing countries like Vietnam, where the Middle Kingdom is increasingly subcontracting its own offshoring.
These forecasts may be optimistic, because they assume that Americans can continue to claw their way up the value chain in the global economy, and not get stuck along the way, as the Japanese did in the nineties. The US desperately needs no less than 27 million new jobs to soak up natural population and immigration growth and get us back to a traditional 5% unemployment rate. The only way that is going to happen is for America to invent something new and big, and fast. Personal computers achieved this during the eighties, and the Internet did the trick in the nineties. The fact that we?ve done diddly squat since 2000 but create a giant paper chase of subprime loans and derivatives explains why job growth since then has been zero, real wage growth has been negative, and American standards of living are falling.
Alternative energy and biotechnology are two possible drivers for a new economy. Unfortunately, the last administration did everything it could to stymie progress in both these fields, coddling big oil so China could steal a lead in several alternative technologies, and starving stem cell researchers of Federal cash, ceding the lead there to others. While the current crop of politicians extol the virtues of education, the reality is that we are dumbing down our public education system and chopping budgets with a hatchet. How do we invent the next ?new? thing, while shrinking the University of California?s budget by 20% two years in a row? If my local high school can?t afford new computers, how is it going to feed Silicon Valley with computer literate work force? The US has a ?Michael Jackson? economy. It?s still living like a rock star, but hasn?t had a hit in 20 years.
China can have all the $20 a day jobs it wants. But if it accelerates its move up the value chain, as it clearly aspires to do, then America is in for even harder times. I?ll be hoping for the best, but preparing for the worst. How do you say ?unemployment check? in Mandarin?
Former stock trader, Yang Yanming, was recently executed by lethal injection for embezzling $9.52 million from Galaxy Securities during 1997 to 2003.
The move was part of a broader effort by the Mandarins in Beijing to crack down on rampant corruption in the securities industry. Yanming never revealed where the money went, according to the Beijing Evenings News, one of my daily reads. SEC take note. If we adopted similar enforcement measures here in the US, we?d save the $65,000 a year it costs to lock up miscreants like Bernie Madoff in high security facilities.
With both state and federal prosecutors now on a holy war against the securities and real estate industries, the combined savings could be huge. Some $80 billion will be spent incarcerating America?s 3 million prisoners this year. Still, the more people they execute in the Middle Kingdom, about 10,000 this year, the more they remain the same. Great for the human organ business, but not so good for white collar crime prevention.
The Western US has found a new wrinkle in the housing collapse, where homeowners are desperately struggling to cut living costs to meet the next doubling of their adjustable rate mortgage payments on their underwater houses.
Raising horses can cost more than children, so Nevadans are turning them loose to join herds of wild mustangs, to dodge the $30,000/year it costs to board and care for these voracious animals. Local populations are exploding, eating local ranchers out of house and home, who depend on public grazing lands to feed commercial livestock.
Recently, the Bureau of Land Management held hearings on where to place 25,000 excess animals. Mustangs are the feral descendents of horses which escaped the conquistadores, and there are now thought to be 30,000 running wild, down from a 19th century peak of 2 million. The BLM has another 30,000 in pens, and is making 10,000/year available for adoption at $125/each.
The problem is that many adopt ?pets? who then flip them to Canadian slaughterhouses, which cater to the odd French taste for horseflesh. To see how this works, watch Clark Gable, Marilyn Monroe, and James Dean?s last film, The Misfits.
Madeleine Pickens, the wife of famed oil trader T. Boone Pickens, has offered to take the BLM?s entire herd and put them out to pasture at an undisclosed million acre location. If there is anyone who could have an undisclosed million acres, it is Boone. I have frequently run into majestic and beautiful mustang herds over the years while camping in the remote desert (no, I don?t go to Burning Man). Reminding me that there is still some ?wild? in the ?West?, I will miss them when they are gone.
I am calling it quits for the year. And what a year it has been. Over 26 trips and 40 speaking engagements in 20 countries, I managed to log 75,000 flight miles, a distance of roughly three times around the world. Some 250,000 frequent flier miles were posted to my various accounts. Whenever I board Virgin Airlines, the crew lines up at attention and snaps off a brisk salute. Needless to say, first class, for me, is the Land of Milk and Honey.
The research I gathered was enough for me to publish 260 daily letters totaling 350,000 words. That is about half the length of Tolstoy?s War and Peace. I also managed to pump out 52 trade alerts with a success ratio of 84%. That was enough to generate a year to date return of 40.18%, compared to a feeble -2.7% for the S&P 500. According to the email traffic, many of you did much better than this. If you are into triple digits, please send me an email. I would love to get a testimonial from you. And this was a year that many professionals describe as the most difficult of their careers.
You know that when they are advertising power tools and Pajamagrams on CNBC, it is time to get out of Dodge. This morning I will be driving through on icy roads to get to the Nevada side of Lake Tahoe. There, I will consume a suitcase full of research and, after much cogitation, write my 2012 Annual Asset Review, which I will publish on January 3.
I will also be rethinking my business model, so if any of you have suggestions on how I can improve this service please send me an email at madhedgefundtrader@yahoo.com. Just put ?suggestions? in the subject line. Please forgive me in advance if I take a few hours catching some ?big air? off of Squaw Valley?s treacherous XX black runs.
The following week will find me in Chicago for my annual New Year?s strategy luncheon, which is always packed to capacity. If you are nimble enough you can still pick up some tickets before it sells out. It gets so warm at these events that I have learned to bring along a summer suit.
To get home, I have booked a first class cabin on the California Zephyr, a 48 hour Amtrak ride back to San Francisco that will carry me over the snow covered Rocky Mountains and the High Sierras. New Year?s Eve should find me clickety clacking my way across the northern Nevada desert.
Here is my reading list for that sojourn:
Steve Jobs by Walter Isaacson
That Used to Be Us by Tom Friedman
Boomerang by Michael Lewis
The Pale Criminal by Philip Kerr
Blood and Thunder: The Epic Story of Kit Carson by Hampton Sides
A Thousand Barrels a Second by Peter Tertzakian
License to Pawn by Rick Harrison
The Long Emergency by James Howard Kunstler
Back to Work by Bill Clinton
Decision Points by George W. Bush
During my absence I will be posting some of my favorite pieces from the last year. I have thousands of new subscribers who will be reading these for the first time, and many legacy readers may have missed them the first time around, or forgotten the data. I hope you find them as another useful step towards your education on the global financial markets.
Finally, I want to thank you all for an incredible year. I rode the Orient express from London to Venice. I lived in the lap of luxury at the Hotel Cipriani in Venice and at Raffles in Singapore. I had the opportunity to meet heads of state, CEO?s, top money managers, our nation?s military leaders, and even a Maori chieftain. I had the pleasure of flying the length of the Grand Canyon at low altitude, weaving my way along the Colorado River.
I really did get to rub shoulders with the high and mighty who run the world and harvest their pearls of wisdom, which I passed on to you. I logged 200 hours as a pilot flying to such diverse locations as Molycorp?s (MCP) Mountain Pass mine, the Great Barrier Reef in Australia, and Honda?s loading docks in San Francisco. I never minded the horrendous jet lag, the well deserved hangovers, or the traffic jams in China. Your subscriptions to my products and your support of my research made it all possible.
I always tell people that I am not in this for the money, and it?s true. Not a day goes by when I don?t receive an email from a grateful reader who claims that I have paid off their mortgage, a kid?s college education, a parent?s uninsured operation, or a child?s chemotherapy. They tell me that I am teaching them to fish; thus, sparing them from the frozen tasteless kind they sell at Safeway that they must wait in line to pay inflated prices. You can?t buy that kind of appreciation, not with all the money in the world.
It certainly beats the hell out of spending my retirement scoring a 98 on the local golf course. And I?ll never beat Tiger Woods, no matter how many blonds I date.
I am throwing in the towel on the (TBT) ETF, my 200% leveraged bet that Treasury bonds will fall. I am doing this partly to clear out the dogs from my portfolio so I can start the New Year with a 100% cash position. But I am also bailing because the short term fundamentals point to continued weakness in the economy, a flight to safety, deflation, and falling interest rates for long term Treasury bonds.
The dagger through the heart of this trade was the Federal Reserve?s ?twist? policy implemented in September, whereby, it bought hundreds of billions of dollars of long term bonds and sold short dated ones. I have been trying to get out ever since. But the (TBT) managed a feeble rally from $18 up to only $23, despite a huge ?RISK ON? trade that took the S&P 500 up a whopping 200 points.
This morning, the 30 year Treasury bond auction saw overwhelming demand, the bid to cover ratio hitting a stunning 11 year high. With the outlook for financial markets next year so uncertain, the demand for ?risk free? paper knows no bounds. Investors are happy to take a negative real yield for 30 years if they believe that other alternatives offer bigger potential loses.
Besides, people want to run with what?s working, both individuals and institutions.
Sure, this is insane, but after 40 years in the business, you learn that people can be insane for a really long time.
If we go into a recession next year, or even just threaten one, a 1.50% yield on the ten year Treasury is a chip shot, and it could even go as low as 1%. With that prospect looming, I don?t want to hang on to the (TBT) in the hope of cutting my losses by few points at the risk of losing many more. I really should have stopped out of this position over the summer when it broke my 10% stop loss limit. Whenever I break my own rules, it always costs me money. But for those of us who have been at this game a long time, seeing the ten year with a 1% handle is truly unbelievable.
Getting out at this level has cost my model $100,000 virtual portfolio $7,080, or 7.08%. I made far more back by hedging my (TBT) losses with gains in short positions in the Euro (FXE), the Swiss franc (FXF), the S&P 500 (SPY), and the Russell 2000 (IWM); so on a net basis, I am still way ahead of the game. That?s why they call this a ?hedge? fund. That reduces my year to date return down to 40.18%, something I?ll just have to live with. It?s better than a poke in the eye with a sharp stick.
Throwing in the Towel on the (TBT)
That is the question that was asked repeatedly by members of congress to the former senior management of the late MF Global. The response was a few feeble shrugs and I don?t knows. CNBC has been running ridiculous contests like ?Where is John Corzine??, and ?What does John Corzine want for Christmas??
The reporting on this by the media has been exaggerated and wildly inaccurate, most likely because he is a democratic billionaire, and therefore a traitor to his class. Enron?s Ken Lay and Jeffrey Skilling received kinder treatment. This is where all of the speculation of an imminent arrest is summing from. Since General Electric (GE) sold CNBC to Comcast, I noticed that the cable network has been making up more of its own news, and this is a classic example.
I know John Corzine because he tried to hire me for Goldman Sachs 25 years ago, without success. Billionaires at the end of immensely successful careers don?t break the law and tell lies just to make another billion, especially in a heavily regulated and closely watched business such as the securities industry. Those are the actions of a junior ?wanabee? rogue trader. So I?ll give you my take on the situation.
When he says he has no idea where the money is, I?m sure Corzine is telling the truth. If he did, he would be the first CEO in history to be knowledgeable about the firm?s day to day margin position. That is usually the responsibility of a mid-level bean counter who is in constant contact with the exchanges. I also don?t believe that the money was lost in a bad bet in the Eurobond market.
A company like MF Global has thousands of relationships with customers, prime brokers, and banks all over the world. Unfortunately, it fired all the people who maintained these relationships the day after the bankruptcy filing because they knew they couldn?t make the payroll. The people who knew where the money was were all sacked.
To trace the money, the bankruptcy administrators are going to have to use a third party accounting firm to trace the money with a forensic examination that will take months. My understanding is that 40,000 MF customers were divvied up among seven different futures brokers, like RJ Obrien. When cash turns up, it will be returned to the customers.
There was an immediate payout of 60% of customer funds the week of the bankruptcy. Another 12% was paid out this week after $800 million was ?found? at another bank. If you have heard nothing about your account so far, you may simply have to check a few boxes on a five page form to recover 72% of your funds.
Even if it turns out that the money was lost in the market, I still think the customers will be made whole. They are at the absolute top of the seniority chain for claims on nearly $70 billion in assets. Many more creditors are going to have to take 100% haircuts before the customers lose a penny, including stock and bond holders and commercial creditors.
If there is a shortfall, I think the CME will want to maintain its pristine record of a customer never losing money from a counterparty failure. So I think they will come up with a payoff of their own, possibly from a new insurance fund capitalized by a transaction tax.
The bottom line is that MF customers will get their money back, and most of it soon. But it could be years before they get their last penny, and they should be prepared to receive a lot of papers in the mail.
I Haven?t Got It
?You ever wonder why fund managers can?t beat the S&P 500? It?s because they?re sheep,? said Gordon Gecko in the classic film, Wall Street.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Read more
The Euro hit my yearend target today after a two cent plunge sent it down to the $1.29 handle. You can thank German Chancellor, Angela Merkel, who in the strongest possible terms, said there was no way she would consent to an increase in the size of the European bailout package.
It didn?t help that in the Federal Reserve comments today they basically ran up the white flag and admitted that there is nothing left for them to do but keep interest rates at ?exceptionally low levels? for the foreseeable future. They see moderate growth last pegged at 3%, which means they are about 1% higher than reality.? We are left to wait until January 25 for the all-powerful government agency to take longer term measures to help the economy, such are targeting unemployment rates.
I have been happily trading in an out of the Euro from the short side since April, catching almost all of the move down from $1.50, except for the last three cents. There was clearly a lot of new shorts initiated today as the euro broke multi month support levels. To say this is a crowded trade would be a vast understatement, as these new positions are being added to existing ones that are at all-time highs. A recent survey revealed that 67% of all hedge funds are currently running short positions in the Euro.
This is a crummy place to get involved, as the beleaguered European currency is now severely oversold on a short term basis. I want to wait for a four cent rally against Uncle Buck to jump back in the game again. I would be surprised if we plumbed new lows from here, but then this has been a surprising year. Wait until Q1, 2012 before we see a $1.25 print.
It would be easy to sit back and be complacent, believing that this is not our problem. But it is. A recession that Europe?s new austerity is certain to bring, will likely chip 0.5% to 1.0% off of US GDP growth in 2012. Since we are likely growing at a modest 2% rate now, we don?t have a lot to give away. Looking at an American economy that is facing death by a thousand cuts, this is one giant slash.
Auf Wiedersehen Euro!