I've been reading your blog for a while and found it a helpful beacon in a sea of confusing and contradictory information as I try and make sense of the world (and try and make money from sense!).
Kind regards,
Toby
London, England
Global Market Comments
May 11, 2016
Fiat Lux
Featured Trade:
(MINISTRY COMMENTS DEMOLISH THE YEN),
(FXY), (YCS),
(THE COST OF AN AGING WORLD),
(EWJ), (EWI), (EWG), (EWQ), (EWL), (EWU), (PIN)
CurrencyShares Japanese Yen ETF (FXY)
ProShares UltraShort Yen (YCS)
iShares MSCI Japan (EWJ)
iShares MSCI Italy Capped (EWI)
iShares MSCI Germany (EWG)
iShares MSCI France (EWQ)
iShares MSCI Switzerland Capped (EWL)
iShares MSCI United Kingdom (EWU)
PowerShares India ETF (PIN)
We are pretty much home free on our short position in the Japanese yen.
At this morning?s mark of $2.92 we had captured 73.33% of the maximum potential profit, earning a tidy 8.15% in only eight trading days.
As soon as this position expires on May 20, I?ll be rolling out to the June options.
Better than a poke in the eye with a sharp stick, as they say.
Rather than pay the commissions to come out here at $2.92, I am going to hang on to the May 20 expiration in eight trading days.
Yesterday, Japanese Minister of Finance, Mr. Taro Aso, said that he was ?prepared to undertake intervention? to weaken the Japanese yen.
Of course, it was a big help that someone in the ministry called me last Wednesday to give me a heads up that something like this was in the pipeline, and would be made public as soon as everyone came back to work from Japan?s Golden Week holidays.
Knowing the Finance Minister?s father back in the 1970?s when I covered Japan for The Economist magazine probably had something to do with it.
Did I mention that I was the first foreigner ever to have an office in the Japanese Ministry of Finance, just down the hall from the head guy? I remember the lack of heating and those cold, ill lit marble hallways with creaking wooden parquet floors like it was yesterday.
The news was more than enough to crush the yen and send all of the short term longs packing.
There never was a fundamental argument to own the yen whatsoever. It was technical and high frequency day traders all the way.
What else would you expect with the beleaguered country?s negative interest rates, dying economy, the worlds worst demographic outlook, and a business philosophy firmly rooted in the last century.
Did you know that 20% of the Nikkei Average listed companies are zombies with a negative net worth kept alive so they won?t default on their debt? It?s not an accounting system I have any great faith in.
Look for the move down to be just as ferocious as it was on the way up. My bet is that the yen has put in its high for the year.
Another round of aggressive quantitative easing has to be just around the corner.
If you own the ProShares Ultra Short Yen -2X ETF (YCS), keep it. We have much lower to go for the yen, and much higher to go for the (YCS).
Its All Over for the Yen
Regular readers of this letter are well aware of my fascination with demographics as a market driver.
They go a long way towards explaining if asset prices are facing a long-term structural headwind or tailwind.
The great thing about the data is that you can get precise, high quality numbers 20, or even 50 years in advance. No matter how hard governments may try, you can?t change the number of people born 20 years ago.
Ignore them at your peril. Those who failed to anticipate the coming retirement of the baby boomer generation in 2006 all found themselves horribly long and wrong in the market crash that followed shortly.
The Moody?s rating agency (MCO) has published a report predicting that the number of ?super aged? countries, those with more than 7% of their population over the age of 65, will increase from three to 13 by 2020, and 34 in 2030.
Currently, only Japan (26.4%) (EWJ), Italy (21.7%) (EWI), and Germany (EWG) are so burdened with that number of old age pensioners. France (EWQ) (18.7%), Switzerland (EWL) (18.2%), and the UK (EWU) (18.1%) are about to join the club.
The implication is that the global demographic dividend the world has enjoyed over the last 40 years is about to turn into a tax, a big one. The consequence will be lower long-term growth, possibly by 0.5%-1.0% less than we are seeing today.
This is what the bond market may already be telling us with its unimaginably subterranean rates for its long term bonds (Japan at -0.13%! Germany at 0.14%! The US at 1.75%!).
Traveling around Europe last summer, I was struck by the number of retirees I ran into. It certainly has taken the bloom off those topless beaches (I once saw one great grandmother with a walker on the beach in Barcelona).
For the list of new entrants to the super aged club, see the table below.
This is all a big deal for long-term investors.
Countries with inverted population pyramids have lots of seniors saving money, spending very little, and drawing hugely on social services.
For example, in China, the number of working age adults per senior plunges from 6 in 2020, to 4.2 in 2030, to only 2.6 by 2050!
Financial assets do very poorly in such a hostile environment. Your money doesn?t want to be anywhere near a country where diaper sales to seniors exceed those to newborns.
You want to bet your money on countries with positive demographic pyramids. They have lots of young people who are eager to work and to spend on growing families, drawing on social services little, if at all.
Fewer seniors to support keeps tax and savings rates low. This is all great for business, and therefore, risk assets.
Be careful not to rely solely on demographics when making your investment decisions. If you did that, you would have sold all your American stocks in 2006, had two great years, but then missed the tripling in markets that followed.
According to my friend, noted demographer Harry S. Dent, Jr., the US will not see a demographic tailwind until 2022.
When building a secure retirement home for yourself, you need to use all the tools in your toolbox, and not rely just on one.
A demographic headwind does not permanently doom a country to investment perdition.
The US is a prime example, where a large number of women joining the labor force, high levels of immigration, later retirement ages, and lower social service payouts all help mitigate a demographic drag.
A hyper accelerating rate of technological innovation also provides a huge cushion.
You Want to Invest in This Pyramid?
...Not This One
?If a cop follows you for 500 miles, you?re going to get a ticket,? said Oracle of Omaha, Warren Buffet, in reference to Bank of America?s many legal problems.
Global Market Comments
May 10, 2016
Fiat Lux
Featured Trade:
(MAY 11 GLOBAL STRATEGY WEBINAR),
(WHY I?M SELLING US STOCKS HERE),
(SPY), (QQQ), (IWM), (VIX), (UUP),
(GLD), (GDX), (PALL), (PPLT),
(TESTIMONIAL)
SPDR S&P 500 ETF (SPY)
PowerShares QQQ ETF (QQQ)
iShares Russell 2000 (IWM)
VOLATILITY S&P 500 (^VIX)
PowerShares DB US Dollar Bullish ETF (UUP)
SPDR Gold Shares (GLD)
VanEck Vectors Gold Miners ETF (GDX)
ETFS Physical Palladium (PALL)
ETFS Physical Platinum (PPLT)
There is a method to my madness here.
With the volatility Index (VIX) popping above $16 yesterday morning, a window briefly opened that lets us earn some extra money buying a S&P 500 SPDR?s (SPY) May, 2016 $209-$214 in-the-money vertical bear put spread.
This is because we can earn excess premium on the short $209 leg of the trade.
To lose money on this position the (SPY) has to make a run at new all time highs in the coming 9 trading days.
With the US dollar (UUP) now on a definite strengthening trend I think this is impossible.
A strong dollar diminishes the foreign earnings of the big American multinationals, major components of the S&P 500.
I think it is much more likely that stocks grind down in coming weeks to first retest the unchanged on 2016 level at $2,043, and then the 200-day moving average at $2,012.
Share prices are anything but inspirational here.
Price earnings multiples are at all time highs at 19X. The calendar is hugely negative (?Sell in May?). Soggy and heavily financially engineered Q1 earnings reports came and went with a yawn.
Huge hedge fund shorts have been covered with large losses, and no one is in a rush to jump back into the short side.
Oh, and the (SPY) is bumping up against granite like two year resistance at $210 that will take months to break through in the best case.
Did I mention that US equity mutual funds have been net sellers of stock since 2014?
This position is also a hedge against what I call ?The Dreaded Flat Line of Death? scenario. This is where the market doesn?t move AT ALL over a prolonged period of time and no one makes any money, except us.
If I am right on all of this, May will come in as the most profitable month for the Mad Hedge Fund Trader Trade Alert Service in more than a year. For new subscribers, your timing is perfect!
By the way, I noticed a surge of new subscriptions right after Nyquist won the Kentucky Derby on Saturday evening.
No doubt the new readers were spending their winnings. It looks like your assessment of investment newsletters is as good as your selection of horseflesh.
And Nyquist carried the lucky number 13. Talk about an out of consensus trade!
If you can?t do the options, buy the ProShares Short S&P 500 Short Fund ETF (SH) (click here for the prospectus at http://www.proshares.com/funds/sh.html), or the ProShares Ultra Short S&P 500 Short Fund 2X ETF (SDS) (click here for the prospectus at http://www.proshares.com/funds/sds.html).
Don?t get me wrong here. I still believe the bull market is stocks still has another 2-3 years to run. But the signs of short-term exhaustion are everywhere.
It is my job to show you how to take advantage of that fact and how to profit from nimbleness.
Time for Some Downside Protection
Go Nyquist!
First, thanks for all that you do.? To have a job that you love, and one that does so much good for so many families is a great blessing to all of us.? I am a new retiree, and a recent subscriber. I followed your posts for at least two years before pulling the trigger. Knowing that you and your group were there gave me the courage to retire?a little earlier than I would have - maybe by four or five years.
So, how do you thank someone who has given you an extra couple of years of life? Thanks for those extra years, and for the possibility of growing what we have, and might receive in the future, into something that might help our grandchildren get a good start on their educations and their lives in a few years.
Thanks,
Dave
Delta, Utah
Global Market Comments
May 9, 2016
Fiat Lux
SPECIAL RESIDENTIAL REAL ESTATE ISSUE
Featured Trade:
(HERE IS YOUR TOP PERFORMING INVESTMENT FOR THE NEXT FIVE YEARS),
(ITB), (PHM), (KBH), (DHI), (AVB), (PPS), (CPS),
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW)
iShares US Home Construction (ITB)
PulteGroup, Inc. (PHM)
KB Home (KBH)
DR Horton Inc. (DHI)
Avalonbay Communities Inc. (AVB)
Post Properties Inc. (PPS)
Cooper-Standard Holdings Inc. (CPS)
Tesla Motors, Inc. (TSLA)
ProShares Ultra MSCI Mexico Capped IMI (UMX)
iShares MSCI Mexico Capped (EWW)
Have you tried to hire a sewing machine operator lately?
I haven?t, but I have friends running major apparel companies who have (guess where I get all those tight fitting jeans?).
Guess what? There aren?t any to be had.
Since, 1990, some 77% of the American textiles workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.
Now that manufacturing is at last coming home, the race is on to find the workers to man it. Welcome to onshoring 2.0.
The development has been prompted by several seemingly unrelated events. There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low cost producer, which have killed thousands.
Today?s young consumers want to look cool, but have a clean conscience as well. That doesn?t happen when your threads are sewn together by child slave laborers working for $1 a day.
Several firms are now tapping into the high-end market where the well off are willingly paying top dollar for a well-made ?Made in America? label.
Look no further than?7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all American manufacturer (click here for their website).
As a result, wages for cut and sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for industry as a whole.
Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers. They advertise in languages with high proportions of blue-collar workers, like Spanish, Somali, and Hmong.
New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.
Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying US factories. But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.
That is a crucial advantage in today?s fast paced, high turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.
By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.
The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades. It has also been blamed for losses of US jobs, with some estimates reaching as high as 25 million.
When offshoring first started 50 years ago, it was a total no brainer.? Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.
So American electronics makers began flying overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines. After the US normalized relations with China in 1978, the action moved there and found that labor was even cheaper.
Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn?t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.
Today, it is $6,000 and $24,000 for trained technicians, with total compensation rising 20% a year. At this rate, US and Chinese wages will reach parity in about 10 years.
But wages won?t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks. Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.
Natural disasters like earthquakes, fires and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a finely tuned, incredibly complex watch.
There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the US fleet and the Chinese military playing an endless game of chicken off the coast, we are one mid air collision away from a major diplomatic incident.
Protectionism constantly threatens to boil over in the US, whether it is over the dumping of chicken feet, tires, or the latest, solar cells.
This is what the visit to the Foxcon factory by Apple?s CEO, Tim Cook, was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?
Work will come back to the US all the faster. The Chinese press was ripe with speculation that Apple induced reforms might spread to the rest of the country like wildfire.
Former General Motors (GM) CEO, Dan Akerson, told me his company was reconsidering its global production strategy in the wake of the Thai floods.
Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.
The impact of a real onshoring move on the US economy would be huge. Some economists estimate that as many as 10%-30% of the jobs lost to offshoring could return. At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.
It would add $20-60 billion in GDP per year, or up to 0.4% in economic growth per year. It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ? years?
Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low waged jobs in the world.
After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.
