Global Market Comments
August 24, 2018
Fiat Lux
Featured Trade:
(AUGUST 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(BIDU), (BABA), (VIX), (EEM), (SPY), (GLD), (GDX), (BITCOIN),
(SQM), (HD), (TBT), (JWN), (AMZN), (USO), (NFLX), (PIN),
(TAKING A BITE OUT OF STEALTH INFLATION)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 22 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: How do you think the trade talks will resolve?
A: There will be no resolution this next round of trade talks. China has sent only their most hawkish negotiators who believe that China has done nothing wrong, so don’t expect results any time soon.
Also, because of the arrests in Washington, China is more inclined to just wait out Donald Trump, whether that’s 6 months or 6 1/2 years. They believe they have the upper hand now, sensing weakness in Washington, and in any case, many of the American requests are ridiculous.
Trade talks will likely overhang the market for the rest of this year and you don’t want to go running back into those China Tech plays, like Alibaba (BABA) and Baidu (BIDU) too soon. However, they are offering fantastic value at these levels.
Q: Will the Washington political storm bring down the market?
A: No, it won’t. Even in the case of impeachment, all that will happen is the market will stall and go sideways for a while until it’s over. The market went straight up during the Clinton impeachment, but that was during the tail end of the Dotcom Boom.
Q: Is Alibaba oversold here at 177?
A: Absolutely, it is a great buy. There is a double in this stock over the long term. But, be prepared for more volatility until the trade wars end, especially with China, which could be quite some time.
Q: What would you do with the Volatility Index (VIX) now?
A: Buy at 11 and buy more at 10. It’s a great hedge against your existing long portfolio. It’s at $12 right now.
Q: Are the emerging markets (EEM) a place to be again right now or do you see more carnage?
A: I see more carnage. As long as the dollar is strong, U.S. interest rates are rising, and we have trade wars, the worst victims of all of that are emerging markets as you can see in the charts. Anything emerging market, whether you’re looking at the stocks, bonds or currency, has been a disaster.
Q: Is it time to go short or neutral in the S&P 500 (SPY)?
A: Keep a minimal long just so you have some participation if the slow-motion melt-up continues, but that is it. I’m keeping risks to a minimum now. I only really have one position to prove that I’m not dead or retired. If it were up to me I’d be 100% cash right now.
Q: Would you buy Bitcoin here around $6,500?
A: No, I would not. There still is a 50/50 chance that Bitcoin goes to zero. It’s looking more and more like a Ponzi scheme every day. If we do break the $6,000 level again, look for $4,000 very quickly. Overall, there are too many better fish to fry.
Q: Is it time to buy gold (GLD) and gold miners (GDX)?
A: No, as long as the U.S. is raising interest rates, you don’t want to go anywhere near the precious metals. No yield plays do well in the current environment, and gold is part of that.
Q: What do you think about Lithium?
A: Lithium has been dragged down all year, just like the rest of the commodities. You would think that with rising electric car production around the world, and with Tesla building a second Gigafactory in Nevada, there would be a high demand for Lithium.
But, it turns out Lithium is not that rare; it’s actually one of the most common elements in the world. What is rare is cheap labor and the lack of environmental controls in the processing.
However, it’s not a terrible idea to buy a position in Sociedad Química y Minera (SQM), the major Chilean Lithium producer, but only if you have a nice long-term view, like well into next year. (SQM) was an old favorite of mine during the last commodity boom, when we caught a few doubles. (Check our research data base).
Q: How can the U.S. debt be resolved? Or can we continue on indefinitely with this level of debt?
A: Actually, we can go on indefinitely with this level of debt; what we can’t do is keep adding a trillion dollars a year, which the current federal budget is guaranteed to deliver. At some point the government will crowd out private borrowers, including you and me, out of the market, which will eventually cause the next recession.
Q: Time to rotate out of stocks?
A: Not yet; all we have to do is rotate out of one kind of stock into another, i.e. out of technology and into consumer staple and value stocks. We will still get that performance, but remember we are 9.5 years into what is probably a 10-year bull market.
So, keep the positions small, rotate when the sector changes, and you’ll still make money. But, let's face it the S&P 500 isn’t 600 anymore, it’s 2,800 and the pickings are going to get a lot slimmer from here on out. Watch the movie but stay close to the exit to escape the coming flash fire.
Q: What kind of time frame does Amazon (AMZN) double?
A: The only question is whether it happens now or on the other side of the next recession. We can assume five years for sure.
Q: More upside to Home Depot (HD)?
A: Absolutely, yes. The high home prices lead to increases in home remodeling, and now that Orchard Hardware has gone out of business, all that business has gone to Home Depot. Home Depot just went over $204 a couple days ago.
Q: Do you still like India (PIN)?
A: If you want to pick an emerging market to enter, that’s the one. It’s a Hedge Fund favorite and has the largest potential for growth.
Q: What about oil stocks (USO)?
A: You don’t want to touch them at all; they look terrible. Wait for Texas tea to fall to $60 at the very least.
Q: What would you do with Netflix (NFLX)?
A: I would probably start scaling into buy right here. If you held a gun to my head, the one trade I would do now would be a deep in the money call spread in Netflix, now that they’ve had their $100 drop. And I can’t wait to see how the final season of House of Cards ends!
Q: If yields are going up, why are utilities doing so well?
A: Yields are going down right now, for the short term. We’ve backed off from 3.05% all the way to 2.81%; that’s why you’re getting this rally in the yield plays, but I think it will be a very short-lived event.
Q: Do you see retail stocks remaining strong from now through Christmas?
A: I don’t see this as part of the Christmas move going on right now; I think it’s a rotation into laggard plays, and it’s also very stock specific. Stocks like Nordstrom (JWN) and Target (TGT) are doing well, for instance, while others are getting slaughtered. I would be careful with which stocks you get into.
Good luck and good trading
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader
Global Market Comments
August 10, 2018
Fiat Lux
Featured Trade:
(AUGUST 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TBT), (PIN), (ISRG), (EDIT), (MU), (LRCX), (NVDA),
(FXE), (FXA), (FXY), (BOTZ), (VALE), (TSLA), (AMZN),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader August 8 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: What should I do about my (SPY) $290-295 put spread?
A: That is fairly close to the money, so it is a high-risk trade. If you feel like carrying a lot of risk, keep it. If you want to sleep better at night, I would get out on the next dip. The market has 100 reasons to go down and two to go up, the possible end of trade wars and continuing excess global liquidity, and the market is focusing on the two for now.
Q: What are your thoughts on the ProShares Ultra Short Treasury Bond Fund (TBT)?
A: Short term, it's a sell. Long term it's a buy. It's possible we could get a breakout in the bond market here, at the 3% yield level. If that happens, you could get another five points quickly in the TBT. J.P. Morgan's Jamie Diamond thinks we could hit a 5% yield in a year. I think that's high but we are definitely headed in that direction.
Q: What are your thoughts on the India ETF (PIN)?
A: It goes higher. It's been the best-performing emerging market, and a major hedge fund long for the last five years. The basic story is that India is the next China. Indicia is the next big infrastructure build-out. Once India gets regulatory issues out of the way, look for more continued performance.
Q: What are your thoughts on Intuitive Surgical (ISRG)?
A: Intuitive is a kind of microcosm in the market right now. It's trading well above a significant support level, which happens to be $508. I don't typically like Intuitive Surgical stock because the options are very inefficient, and therefore very pricey. I think, at this point, there is a bigger possibility of it breaking down than continuing to head higher. In other words, it's overbought. Buy long term, the sector has a giant tailwind behind it with 80 million retiring baby boomers.
Q: What are your thoughts on the entire chip sector, including Micron (MU), Lam Research (LRCX) and NVIDIA (NVDA)?
A: NVIDIA is the top of the value chain in the entire sector, and it looks like it wants to break to a new high. My target is $300 by the end of the year, from the current $240s. I think the same will happen with Lam Research (LRCX), which just had a massive rally. All three of these have major China businesses; China buys 80% of its chips from the U.S. You can do these in order in the value chain; the lowest value-added company is Micron, followed by Lam Research, followed by NVIDIA, and the performance reflects all of that. So, I think until we get out of the trade wars, Micron will be mired down here. Once it ends, look for it to get a very sharp upside move. Lam is already starting to make its move and so is NVIDIA. Long term, Lam and NVIDIA have doubles in them, so it's not a bad place to buy right here.
Q: You once recommended the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) which is now down 10%, one of your few misses. Keep or sell?
A: Keep. It's had the same correction as the rest of Technology. All corrections in Technology are short term in nature--the long-term bull story is still there. (BOTZ) is a huge play on artificial intelligence and automation, so that is going to be with us for a long time, it's just enduring a temporary short-term correction right now, and I would keep it.
Q: What do you have to say about the CRISPR stocks like Editas Medicine Inc. (EDIT)?
A: The whole sector got slammed by a single report that said CRISPR causes cancer, which is complete nonsense. So, I would use this sell-off to increase your current positions. I certainly wouldn't be selling down here.
Q: What could soften the strong dollar?
A: Only one thing: a recession in the U.S. and an end to the interest-raising cycle, which is at least a year off, maybe two. Keep buying the U.S. dollar and selling the currencies (FXE), (FXY), (FXA) until then.
Q: What are your thoughts on Baidu and Alibaba?
A: I thought China tech would get dragged down by the trade wars, but they behaved just as well as our tech companies, so I'd be buying them on dips here. Again, if we do win the trade wars, these Chinese tech companies could rocket. The fundamental stories for all of them is fantastic anyway, so it's a good long-term hold.
Q: Have you looked at Companhia Vale do Rio Doce (VALE)? (A major iron ore producer)
A: No, I've kind of ignored commodities all this year, because it's such a terrible place to be. If we had a red-hot economy, globally you would want to own commodities, but as long as the recovery now is limited to only the U.S., it's not enough to keep the commodity space going. So, I would take your profits up here.
Q: With Tesla (TSLA) up $100 in two weeks should I sell?
A: Absolute. If the $420 buyout goes through you have $40 of upside. If it doesn't, you have $140 of downside. It's a risk/reward that drives like a Ford Pinto.
Q: How long will it take global QE (quantitative easing) to unwind?
A: At least 10 years. While we ended our QE four years ago, Europe and Japan are still continuing theirs. That's why stocks keep going up and bonds won't go down. There is too much cash in the world to sell anything.
Q: Apple (AAPL)won the race to be the first $1 trillion company. Who will win the race to be the first $2 trillion company?
A: No doubt it is will be Amazon (AMZN). It has a half dozen major sectors that are growing gangbusters, like Amazon Web Services. Food and health care are big targets going forward. They could also buy one of the big ticket selling companies to get into that business, like Ticketmaster.
Good Luck and Good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 25, 2018
Fiat Lux
Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(MAY 23 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (SPY), (TSLA), (EEM), (USO), (NVDA),
(GILD), (GE), (PIN), (GLD), (XOM), (FCX), (VIX)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader May 23 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Would you short Tesla here?
A: Tesla (TSLA) is on the verge of making the big leap to mass production, so they're in somewhat of an in-between time from a profit point of view, and the burden of proof is on them. Elon Musk is notorious for squeezing shorts. I would not want to bet him.
Musk has been successfully squeezing shorts for 10 years now, from the time the stock was at $16.50 all the way up to $392. So, I would not short Tesla. Buy the car but don't play in the stock; it's really a venture capital play that happens to have a stock listing because so many people are willing to back his vision of a carbon-free economy.
Q: What is your takeaway on the China trade war situation?
A: The Chinese said "no," and that is positive for economic growth. Anything that enhances international trade is good for growth and good for the stock market; anything that damages international trade is bad for corporate earnings and bad for the stock market. So, the China win in the trade war is essentially positive, but I don't think we'll see that reflected in stock prices until the end of the year.
Q: What do you think about Gilead Sciences?
A: I don't really want to touch Gilead (GILD), or the entire sector, for that matter. We shouldn't be seeing such a poor performance at this point in the market. Health care has been dead for a long time, and you would have expected a rally based purely on fundamentals; they are delivering good earnings, it's just not reflected in the price action of the stocks. I think with no new money going into the market, there's nothing to push up other sectors; it's really become a "technology on and off" market. Health care doesn't fit anywhere in that world.
Q: Do you still like Nvidia?
A: I love Nvidia (NVDA). The chip sector still has another year to go. Nvidia has the high value-added product, and I'm looking for $300 dollars a share sometime this year/next year. The reason the stock hasn't really been moving is that it's over-owned; too many people know about the Nvidia story, which continues to go "gangbusters," so to speak. The chairman has also put out negative comments on short-term inventories, which have been a drag.
Q: Treasuries (TLT) are over 3%. Will they go over 3.5% by then end of this year?
A: I would say yes. Since that is only 50 basis points away from the current market, I would say it's a pretty good bet. So, if you get any good entry points you can do LEAPS going out to next year, betting that Treasuries will not only be below $116 by the end of the year, but they'll probably be below 110. And that would give you a very good high return LEAP with a yield of 50% in the next, say 8 months. By the way, if the Treasury yield rises to 4% that takes the (TLT) down to $98!
Q: Any chance General Electric will be acquired this year?
A: Absolutely not. General Electric (GE) worth far more if you break it up into individual pieces and sell them. Some parts are very profitable like jet engines and Baker Hughes, while other parts, like their medical insurance exposure, are awful.
Q: What do you see about the India ETF?
A: The one I follow is the PowerShares India Portfolio ETF (PIN) and we love it long term. Short term, they can take some pain with the rest of the emerging markets.
Q: What should I do with my January 2019 Gold calls?
A: I would sell them. It's not worth hanging on to here with too many other better things to do in stocks.
Q: Would you continue to hold ExxonMobile?
A: I would not. If you were lucky enough to get in at the bottom on ExxonMobile (XOM). I would be taking profits here. I'm not sure how long this energy rally will last, especially if the global economic slowdown continues.
Q: Is Freeport-McMoRan (FCX) a buy?
A: Yes, but only buy the dip in the recent range, so you don't get stopped out when the price goes against you. Commodities are the best performing asset class this year and that should continue.
Q: How high is oil (USO) headed?
A: I think we're probably peaking out short of $80 a barrel currently unless we get a major geopolitical event. Then it could go up to $100 very quickly and trigger a recession.
Q: Are you looking to buy the Volatility Index here?
A: Buy the next dip, but the trick with (VIX) is buying after it sits on a bottom for about five days. You also want to buy it when stocks (SPY) are at the top of a range, like yesterday.
Q: How long do you think the market will be range-bound for?
A: My bet is at least three months, and possibly four or five. We should start to anticipate the outcome of the midterm congressional elections in September/October; that's when you get your upside breakout.
Q: Is Gold (GLD) not worth buying since Bitcoin has taken over market share from Gold buyers?
A: Essentially, yes. That's probably why you're not getting these big spikes in Gold like you're used to. Instead, you're getting them in Bitcoin. Bitcoin is clearly stealing Gold's thunder. That's a major reason why we haven't been chasing Gold this year.
Q: After the emerging market sell-off, is it a good time to go in?
A: No, I think the emerging market (EEM) sell-off is being created by rising interest rates and a strong dollar. I don't see that ending anytime soon. In a year let's take another look in emerging markets. By then overnight Fed funds should be at 2.50% to 2.75%.
Featured Trade:
Below please find subscribers Q&A for the Mad Hedge Fund Trader April Global Strategy Webinar with my guest co-host Mike Pisani of Smart Option Trading.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Are you out of Alphabet (GOOGL) and Microsoft (MSFT)?
A. I'm out of Alphabet and I'm in Microsoft, but only for the very short term. I'm waiting for another big meltdown day to go back and buy everything back because I think the FANGs and technology in general are still in a secular bull market.
Q. Are Advanced Micro Devices (AMD) and NVIDIA (NVDA) affected by the underperformance of Bitcoin?
A. They are. Bitcoin has been an important part of the chip story for the last two years because mining, or the creation of bitcoins, creates enormous demand for chips to do the processing. I think selling in bitcoin is over for the time being. You had a $25 billion in capital gains taxes that had to be paid by April 15.
People were paying those bills by selling their bitcoins. That's over now, and bitcoin is rallied about 30% since Tax Day because of that. So, yes, bitcoin is getting so big that it is starting to affect the chip sector meaningfully. That is another reason why we see secular long-term growth in the entire chip sector.
Mike Pisani: Interesting take on bitcoin today, and I've been with you on it. I think the worst of it is over; it's going to go. Today is the largest volume day we've seen on it so far. We're up over 15,500 contracts traded.
Q: If you're 100% cash, is now a good time to commit funds to the equity market?
A. Franz, I would say nein. Absolutely not. 2009 was the time to commit funds to the equity market. If you're 100% cash now I would stay out for the next six months. We may get a good entry point over the summer or the fall. I'll let you know when that happens because I will be jumping back in myself.
But right now, a week ahead of the worst six months of equity investment of the year, I would stay away and do research instead. Read your Mad Hedge Fund Trader letters. Build a list of names that you're going to buy on the next meltdown and practice buying meltdowns with your practice account, which doesn't use real money.
There's a lot of things you can get ready to do for the next leg up in the bull market, but buying right now, NO! I would put that in the category of, "Is it time to start shorting bonds question?" that we got a few minutes ago.
Q: Why did tech stocks sell off when they have great earnings results?
A: It's called, "Buy the rumor, sell the news." So many people already own the stocks and were expecting good earnings that there was no surprise when they were announced. These are some of the most over-owned stocks in history.
Everybody in the world owns them. Many people have multiple weightings in them, so when we enter a high-risk macro environment, which we have now, you want to get rid of the most over-owned stocks. That is exactly why all of these stocks that have had great runs are selling off, even though they have great earnings report.
Q: Are financials a good play here with interest rates rising though 3%?
A. Normally I would say yes. However, the macro background for the general market are so negative they are overwhelming any positive fundamentals specific to individual sectors like banks and stocks like Citigroup (C). By the way, financials all reported great results and got killed, so that is why I bailed out of my (C) position this morning at around cost. If you throw the best news in the world on a stock and it won't go up, it's time to get out of there.
Q: Would an unleveraged inverse ETF like the ProShares Short S&P 500 ETF (SH) be good at a spike even now?
A. Yes, but when I say spike up better expect at least 20 (SPY) points or 1,000 Dow points. All these downside ETFs are great but you've got to get in at the right price. You know as they say in trading school, the profit is always made on the "BUY" and not on the "SELL."
So, if you can get on one of these super spikes up on the short side that is a great trade. So is the ProShares Ultra Short ETF (SDS) if you want to do the 2X leverage short fund. We've recently started doing this every month. We've been shorting (SPY)s and buying (VIX) on every one of these spikes up, and it's been working like a charm.
Q: Here's the best question of the day. Your timing has been perfect says Mary in Chicago, Ill.
A: Well, I'll take that kind of question all day long. Thank you very much. You're too nice to do that.
Q: Richard is asking would you buy an NVIDIA (NVDA) LEAP?
A: I would wait for meltdown days. Remember this is a market that gives you lots of meltdown days. Just wait for the next presidential tweet and you might get another 600-700-point dip in the markets. Those are the days you buy LEAPS. You don't have to get buy writing Trade Alerts like I do. You can just enter a limit order in your account. Put it as a stupidly low level to "BUY" and you may get hit. And that's where you really make the big money in this kind of market.
Q: Is there a good one- or two-month trade in Amazon?
A: Yeah, Paul, with this volatility you can pick a big winner like Amazon and you know to buy the 250-point dips and sell the rallies. These ranges are so wide now that even a beginner can make money. So, I would say you have to wait until after tomorrow on Amazon and let them get their earnings out. We know they're going to be great. They're doing home deliveries now to your car.
Q: Can long bond interest rates go up to 4%, and if that happens what would the market do?
A: Yes, they can go up to 4%, and I expect them to probably do that next year. What will it do to the market? Answer: Cause a bear market and a recession. Is that answer clear enough? My bet is that interest rates cap in this cycle much lower than they did in past cycles, maybe 4%-5%. We have been used to zero cost of money for so long that a move to 4% would be like stabbing somebody in the chest. People are much less able to deal with rising rates than they ever have been in the past, so watch this space.
Q: Should I buy the ProShares Ultra Short Treasury ETF (TBT) or the iShares 20+ Year Treasury Bond Fund (TLT)?
A: Brad, it's really is a leverage question for you. The (TLT) is 1X; the TBT is 2X, so I would be taking profits on the (TBT) here and then buying a couple of points lower. Or if you want to keep it for the long term you can but remember the cost of carry on the TBT is around 7% a year.
Q: Yves in Paris, France is asking: What possible scenario will you see material wage growth that could lead to higher inflation?
A: We're starting to see that now with the ultra-low unemployment rates. People are having great difficulty hiring anyone in technology. But at the minimum wage level there seems to be plenty of supply. The other possibility is that the cost of everything else goes up but wages, because technology is replacing jobs so fast there may never be any increase in wages.
So, we will get inflation, but nothing like the inflation we saw in the past driven by rising wages, commodity prices, oil prices, and interest rates. Yes, money is a commodity, which can add quite a lot to the cost of leveraged companies like airlines, REITs, and so on.
Q: Will rising interest rates force the US dollar up?
A. The answer is yes! It has been a long time coming, but if rates continue to rise from here, you can expect that to lead to a continuously rising dollar and falling foreign currencies, and that will become a major drag on the economy and corporate earnings going forward.
Q: When is a good time to buy TIPS?
A: Just like your Treasury bond short, I would buy Treasury Inflation Protected Securities (TIPS) on the next rally in bond prices (TLT) and dip in yields. That will give you a decent entry point. That said, TIPS have been a horrible performer for the last 10 years because there has just been no inflation. A lot of people just keep TIPS as a hedge in their portfolio and it just costs them money every year.
Q: Which could blow up, Brad wants to know, TBT or TLT?
A: The easy answer there is probably neither. But if I had to pick between the two, the (TBT) would be the one to blow up because it's a 2X and has a lot less liquidity. So, I can't image in what world has (TBT) blowing up, but then I don't watch zombie TV shows either.
Q: I think US equities are expensive. Are emerging markets (EEM) or Europe (HEDJ) a better bet for the rest of the year?
A: I would say yes. Because if interest rates here in the US go higher that means a stronger dollar. That means a weaker US stock market. Because US companies are punished by a rising dollar. And European and Asian companies benefit from a rising dollar and falling home currencies, so that makes Europe the first choice of any of the global markets.
Q: Does oil going to $100 have a chance of bringing down the US economy?
A: Absolutely yes. If oil prices don't start to slow down, they will start having a big impact on the economy because that means rising prices for any energy consumer, which is you and me.
With no ability to offset that by rising prices of your products that would put a squeeze on any oil consuming industry, which is why things like the transports and consumer staples have been performing so poorly. If we get to $100, then you're really looking at a full-on recession and bear market for stocks. By bear market I mean down 25% or more in stocks.
Q: How do you see the India ETF?
A: We like it. India is the No. 1 pick of any hedge fund investor in emerging markets, and the ETF you can buy there is the PowerShares India Portfolio ETF (PIN).
When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks.
I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide.
Aggressive population control measures where underway, and strict quotas were in force. Everyone was taking their grandmother in to get sterilized.
Some 38 years later, and the subcontinent is poised to overtake China's white hot growth rate.
My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country's total GDP is only a quarter of China's $6 trillion, its growth could exceed that in the Middle Kingdom as early as 2018.
Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly.
India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.
But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it's going to be.
The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.
A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage.
When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000.
That's why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.
India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world.
Even though it has recently been terminated, China's 30-year-old ???one child??? policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.
There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the People's Congress in 2013 could lead to posturing and political instability, which the markets could find unsettling.
India is the world's largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization than took place 20 years ago.
I have been a big fan of India for a long time, and not just because they constantly help me fix my computers, make my travel reservations, and tell me how to work my new altimeter watch.
In August, I recommended Tata Motors (TTM), and it has gone up in a straight line since, instantly making it one of my top picks of the year. On the next decent dip take a look at the Indian ETF's (INP), (PIN), and (EPI).
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 
