The Market Outlook for the Week Ahead

Ahhhh…the wonders of global excess liquidity.

Last week saw senior-level felony convictions, the real estate and auto industries rolling over and playing dead, rising inflation, escalating trade wars, sagging exports. It’s as if an entire flock of black swans landed on the markets.

And what did stocks do? Rocket to new all-time highs, Of course! What, are you, some kind of dummy? Didn’t you get the memo? With $50 trillion of global excess liquidity spawned by a decade of quantitative easing, of course stocks will go straight up, forever!

Until they don’t.

Even my favorite, Apple (AAPL) blasted through to new highs at $219 after an analyst raised his target to $245. You may recall me loading the boat with Apple calls during the February meltdown when the shares hit $150.

My target for Apple this year was $200, which I then raised to $220. Am I going to raise my target again? No. As my late mentor, Barton Biggs used to say, “Always leave the last 10% for the next guy.”

It kind of makes my own split adjusted cost of Apple shares of 50 cents, which I picked up in 1998, look pretty good. Yup. That double bottom on the charts at 40 cents said it all.

I used the strength to increase my cash position from 80% to 90%, unloading my long position in Walt Disney options at cost. That leaves me with a single short position in bonds (TLT), which have to see yield on the 10-year U.S. Treasury bond market to fall below 2.67% in three weeks before I lose money.

I am even focusing a sharp eye on the Volatility Index (VIX) for a trade alert this week. If you buy the January 2019 (VXX) $40 calls at $2.90 and the ETF rises 25 points to its April high of $54, these calls would rocket by 382% to $14.00. Sounds like a trade to me! Then I can say thank you very much to Mr. Market, thumb my nose at him, and then take off for the rest of the year. TA-TA!

In the meantime, much of industrial America is getting ready to shut down. Tariffs on 50% of all Chinese imports come into force in September. It turns out that you can’t make anything in the U.S. without the millions of little Chinese parts you’ve never heard of, which also have no U.S. equivalent.

Factories will have to either pass their costs on to consumers in a deflationary economy or shut down. What the administration has done is offset a tax cut with a tax increase in the form of higher import taxes. It was not supposed to work out like that.

The bond rally has pared back my August performance to a dead even at 0.02%. My 2018 year-to-date performance has pulled back to 24.84% and my nine-year return appreciated to 301.31%. The Averaged Annualized Return stands at 34.76%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 32.24%.

This coming week will be real estate dominated on the data front.

On Monday, August 27, at 10:30 AM EST, we obtain the Dallas Fed Manufacturing Survey.

On Tuesday, August 28, at 9:00 AM EST, we get the June S&P CoreLogic Case-Shiller National Home Price Index. Will we start to see the price falls that more current data are already showing?

On Wednesday, August 29, at 10:00 AM EST, we learn July Pending Home Sales, which lately have been weak.

Thursday, August 30, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 2,000 last week to 210,000.

On Friday, August 31, at 10:00 AM EST, we get Chicago Purchasing Managers Index for July. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, I think I’ll pop over to the Pebble Beach Concours d'Elegance vintage car show this weekend and place a bid on Ferris Bueller’s red 1962 Ferrari GT California. It’s actually a Hollywood custom chassis built around a Ford engine. I can’t afford a real vintage Ferrari GTO, one of which is expected to sell for an eye-popping $60 million this weekend.

Good luck and good trading.

 

 

 

 

 

 

 

 

Why the Dow is Going to 120,000

For years, I have been predicting that a new Golden Age was setting up for America, a repeat of the Roaring Twenties. The response I received was that I was a permabull, a nut job, or a conman simply trying to sell more newsletters.

Now some strategists are finally starting to agree with me. They too are recognizing that a ganging up of three generations of investment preferences will combine to drive markets higher during the 2020s, much higher.

How high are we talking? How about a Dow Average of 120,000 by 2030, up another 465% from here? That is a 20-fold gain from the March 2009 bottom.

It’s all about demographics, which are creating an epic structural shortage of stocks. I’m talking about the 80 million Baby Boomers, 65 million from Generation X, and now 85 million Millennials. Add the three generations together and you end up with a staggering 230 million investors chasing stocks, the most in history, perhaps by a factor of two.

Oh, and by the way, the number of shares out there to buy is actually shrinking, thanks to a record $1 trillion in corporate stock buybacks.

I’m not talking pie in the sky stuff here. Such ballistic moves have happened many times in history. And I am not talking about the 17th century tulip bubble. They have happened in my lifetime. From August 1982 until April 2000 the Dow Average rose, you guessed it, exactly 20 times, from 600 to 12,000, when the Dotcom bubble popped.

What have the Millennials been buying? I know many, like my kids, their friends, and the many new Millennials who have recently been subscribing to the Diary of a Mad Hedge Fund Trader. Yes, it seems you can learn new tricks from an old dog. But they are a different kind of investor.

Like all of us, they buy companies they know, work for, and are comfortable with. During my Dad’s generation that meant loading your portfolio with U.S. Steel (X), IBM (IBM), and General Motors (GM).

For my generation that meant buying Microsoft (MSFT), Intel (INTC), and Dell Computer (DELL).

For Millennials that means focusing on Netflix (NFLX), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL).

That’s why these four stocks account for some 40% of this year’s 7% gain. Oh yes, and they bought a few Bitcoin along the way too, to their eternal grief.

There is one catch to this hyper-bullish scenario. Somewhere on the way to the next market apex at Dow 120,000 in 2030 we need to squeeze in a recession. That is increasingly becoming a topic of market discussion.

The consensus now is that an impending inverted yield curve will force a recession sometime between August 2019 to August 2020. Throwing fat on the fire will be a one-time only tax break and deficit spending that burns out sometime in 2019. These will be a major factor in U.S. corporate earnings growth dramatically slowing down from 26% today to 5% next year.

Bear markets in stocks historically precede recessions by an average of seven months so that puts the next peak in top prices taking place between February 2019 to February 2020.

When I get a better read on precise dates and market levels, you’ll be the first to know.

To read my full research piece on the topic please click here to read “Get Ready for the Coming Golden Age.” 

 

 

Dow 1982-2000 Up 20 Times in 18 Years

 

 

Dow 2009-Today Up 4.3 Times in 9 Years So Far

 

Why Doctor Copper is Waving a Red Flag

One of my responsibilities as a global strategist is to talk about how cheap stocks are at market bottoms, and how expensive they are at market tops. In all honesty I have to tell you that 9 ½ years into a bull market, we are now much closer to a top than a bottom.

If Dr. Copper has anything to say about it the global economy is already in a recession. Since the June peak, trade wars have taken the red metal down a gut-punching 22.7%. The world’s largest copper producer Freeport-McMoRan (FCX), a Carl Icahn favorite, is off an eye-popping 30.6% during the same period.

Should we be running around with our hair on fire?  Is it time to throw up on our shoes? I don’t think so…not yet anyway.

Dr. Copper achieved its vaunted status as a leading indicator of economic cycles for the simple reason that everyone uses copper. Building and construction took up 43% of the supply in 2017, followed by electronics (19%) and transportation equipment (17%).

China is far and away the world’s largest consumer of copper. In 2017, it bought 48% of total world output. However, red flags there are flying everywhere.

Back in the 2000s, when China was building a “Rome a Day,” demand for copper seemed limitless. Since then, Chinese construction has fallen to a low ebb as the greatest infrastructure build-out in history came to completion.

China has steadily moved from an export-oriented to a services-driven economy, further eroding the need for copper. I warned investors of this seven years ago. That is why the Mad Hedge Fund Trader has issued virtually NO commodities-based Trade Alerts since then.

Before the last financial crisis Chinese banks accepted copper ingots as collateral for business loans. That practice is now banned.

In the second quarter, nonperforming loans at Chinese banks notched their biggest rise in more than a decade, according to research from Capital Economics. Corporate bond defaults are on the rise, and earlier this week, official reports showed Chinese investment growth, which has long been a driver of the economy, fell to its lowest level since the late 1990s.

The pressure on the Chinese economy is beginning to take its toll in other places, too. China’s currency, the renminbi, has fallen more than 9% against the dollar in the past six months, and China’s CSI 300 index of blue chip stocks is off 19% this year.

The net effect of all of this has been to dilute the predictive power of copper. Copper may no longer deserve its PhD in economics, perhaps only a master’s degree or an associate of arts.

Copper is not alone in predicting imminent economic disaster. Oil (USO) has also been shouting the same. Texas tea has fallen by 15.8% since copper began its swan dive two months ago.

For sure, oil has been falling for its own reasons. Iran has sidestepped American sanctions by selling its oil directly to China, and there is nothing the U.S. can do about it. Every year, global GDP growth needs less oil to grow than before thanks to alternative energy sources and conservation.  A recent bout of OPEC quota cheating hasn’t helped either.

As any market strategist will tell you, falling copper and oil prices are not what sustainable bull markets in stocks are made of. I’m not saying a crash will happen tomorrow.

Personally, I believe that the bull market should spill into 2019. But when corporate earnings growth downshifts from 26% to 5% YOY, as it will in Q1 2019, watch out below!

 

 

 

 

 

 

 

The Big Trade War Victim

Profiting from America’s Demographic Collapse

Demographics is destiny.

If you ignore it as an investor, you will be constantly behind the investing curve wondering why your performance is so bad.

Get ahead of it, and people will think you are a genius.

I figured all this out when I was about 20.

I realized then, back in 1972, that if I could just get ahead of the baby boomer generation everything magically seemed to work.

Buy what boomers want to buy next, and the world will be your oyster.

That strategy is still working today.

Back then, that meant buying residential real estate in California and New York, which has since risen in value 100-fold, and more once the generous tax breaks of home ownership are added in.

Now it means investing in health care and big pharma.

Except now, there is a new crowd in town: The Millennials.

As a long-term observer of America’s demographic picture, I was shocked to hear of a recent report from the U.S. Census Bureau (click here for the link).

The U.S. population grew by a scant 0.72% in 2012, the lowest since 1942.

You can’t start or expand a family when an essential partner in the process is off fighting WWII, and there were 17 million of them back then.

This is far below the 2.09% replacement rate that the country was holding onto only a few years ago.

At the end of 2016, there were 323.1 million Americans. This accounts for 4.3.08% of the global population of 7.5 billion, which was up 1.1%.

This places American population growth at the bottom of the international sweepstakes, down with Italy (0.32%), Germany (0.11%), and Poland (0.02%).

According to the World Bank, 22 countries suffered population declines, such as Portugal (-0.29%) and Japan (-0.20%) (click here for the link).

The tiny Sultanate of Oman, one of my old stomping grounds as a military pilot, enjoys the planet’s highest growth rate at 9.13%.

But then it helps if you have four wives.

The obvious cause here of America’s demographic dilemma was the recent weakness of the U.S. economy. There is a high correlation between economic health and fertility a year later.

So, we can only hope that the improvement in the economy this year sent more to the maternity ward.

If it doesn’t, it could be great news for your investment portfolio. Fewer births today translate into a shortage of workers in 20 years. That brings rising wages, flying inflation, and rapid price hikes. And stock markets love inflation because companies can pass costs onto consumers, while bond holders can’t.

Corporate profits go through the roof, as do share prices. It also produces fewer relying on government services in 40 years, which makes it easier for the government to balance the budget.

This Goldilocks scenario is already scheduled for the coming decade of the 2020s, when a 15-year demographic headwind flips to a tailwind, thanks to the coming demise of the “baby boomer” generation, now a big cost to the economy.

Demise, that is, except for me. As long as I hike 10 miles a day I’ll probably live forever.

The new data suggest that the coming “roaring twenties” could extend well into the 2030s and beyond.

California was the most populous state, with more than 39 million, followed by Texas and New York. Two states saw population declines, Maine and West Virginia, where the collapse of the coal industry is sucking the life out of local businesses.

Parsing through the report, it is clear that predictions of population trends are becoming vastly more complicated, thanks to the increasingly minestrone-like makeup of the U.S. people.

By 2040 no single racial group will be in a majority in the U.S. That is already the case for the entire state of California now. Hispanics now account for 38% of the population of the Golden State, followed by Caucasians at 37%.

America will come to resemble other, much smaller multiethnic societies, such as Singapore, South Africa, England, and Israel. This explains much about the current state of politics in the U.S. today.

Texas saw the greatest increase in population, with a jump of 387,397, to 26,020,000, as people flock in to take advantage of the big increase in local government hiring there.

Some 80% of new Texans were Hispanic and black, confirming my belief that the Lone Star State will become the next battleground in presidential elections.

This no doubt explains the recent rise of the white nationalist movement and the election of Donald Trump.

Single ethnic groups historically will only lose their majority with a fight.

This is why gerrymandering (redistricting) is such a big deal there, with the white establishment battling to hang onto power at any cost.

Further complicating any serious analysis is the rapid decline of the traditional American nuclear family, where married parents live with their children.

With a vast concentration of wealth at the top, and a long-term decline of middle-class earnings, this is increasingly becoming a luxury of a prosperous elite.

As a result, the country’s birthrate has declined by half since 1960.

Those who do are having fewer kids, the average family size dropping from three to two. In 1964, the final year of the baby boom, 36% of Americans were under the age of 18.

Today, that figure is just 23.5%, and is expected to fall to 21% by 2050. Only 80% of women have children now, compared to 90% in the 1970s.

One possible explanation is that the full, end-to-end cost of child-rearing has soared to $241,080 per child now.

I was a bargain as a kid, costing my parents only a tenth of that. Rocketing college costs are another barrier, with 70% of high school grads at least starting some higher education.

I went to Boy Scouts and Little League baseball, each of which cost $1 a month. A full scholarship covered my college expenses.

When I look at the checks I have written for my own children for ski lessons, soccer, youth sailing, braces, international travel, and assorted master’s degrees and PhDs, I recoil in horror.

Fewer women are following that old adage of “marriage before carriage.” Some 41% of children are born out of wedlock, up 400% in 40 years.

It is definitely an education and class driven divide. Only 10% of college-educated mothers are still single, compared to 57% for those with a high school education or less.

It is a truism in the science of demographics that educated women have fewer children. It makes possible careers that enable them to bring home paychecks instead of babies, which husbands prefer.

Blame Roe versus Wade, the Equal Rights Act, and Title Nine, but every social reform benefiting women of the past half-century has helped send the birthrate plummeting.

More women wearing the pants in the family hurts the fertility rate as well, as they are unable, or unwilling, to bear the large families of yore. The share of families where women are the primary breadwinners has leapt from 11% to 40% since 1960.

When couples do marry, they are sometimes of the same sex, now that gay marriage is legal, further muddying traditional data sources.

Some 2 million children are now being raised by gay parents. In fact, there is a gay baby boom underway, which those in the community call the “gayby” boom.”

All female couples have produced 1 million children over the past 30 years, 95% of whom select for blond-haired, blue eyed, Aryan sperm donors who are over six feet tall ($40 a shot for donors if you guys are interested and live walking distance from UC Berkeley).

I’m told by the sources that know that water polo players are particularly favored.

The numbers are so large that it is impacting the makeup of the U.S. population.

There was a time when I could usually identify the people standing next to me on San Francisco cable cars. That time has long passed. Now I don’t have a clue.

Whenever we go to war, we become our enemy to a modest degree, both as a people and a culture.

After WWII, 50,000 German and 50,000 Japanese wives were brought home as war prizes. Sushi, hot tubs, Toyotas, and Volkswagens quickly followed.

The problem is that the U.S. has invaded another 20 countries since 1945 and is now maintaining a military presence in 140. That generates a hell of a lot of green cards.

This has spawned sizeable Korean, and later, Iranian communities in Los Angeles, a Vietnamese one in Louisiana, a Somali enclave in Minneapolis, and large minority of Afghans in San Jose.

The fall of the Soviet Union in 1992 unleashed another dozen Eastern European ethnic groups and languages on the U.S. Haven’t you noticed the proliferation of Arab fast food restaurants in your neighborhood since we sent 20 divisions to the Middle East?

What all this means is that the grand experiment called the United States is entering a new phase.

Different ethnic, racial, religious, and even political groups are blending with each other to create a population unseen in the history of the world, with untold economic consequences.

It is also setting up an example for other countries to follow.

Get your investment portfolio out in front of it, and you could prosper mightily.

 

 

 

Ignore Demographics at Your Portfolio’s Peril

July 5, 2018 - Quote of the Day

"It is difficult to get a man to understand something when his salary depends upon his not understanding it," said the Pulitzer Price winning author, Upton Sinclair."

 

Who Says There Aren't Any Good Jobs?

While recently winging my way across the South Pacific last year, I spotted an unusual job offer:

WANTED: Social worker, tax-free salary of $60,000 with free accommodation and transportation, no experience necessary, must be flexible and self-sufficient.

With the unemployment rate at 3.1%, but much of the job growth at the minimum wage level, I was amazed that they were even advertising for such a job. Usually such plum positions get farmed out to a close relative of the hiring officials involved.

Intrigued, I read on.

To apply, you first had to fly to Auckland, New Zealand, then catch a flight to Tahiti. After that you must endure another long flight to the remote Gambier Islands, then charter a boat for a 36-hour voyage.

Once there, you had to row ashore to a hidden cove on the island, as there was no dock, or even a beach.

It turns out that the job of a lifetime is on remote Pitcairn Island, some 2,700 miles ENE of New Zealand, home to the modern descendants of the mutineers of the HMS Bounty.

History buffs will recall that in 1790, Fletcher Christian led a rebellion against the tyrannical Captain William Bligh, casting him adrift in a lifeboat.

He then kidnapped several Tahitian women and disappeared off the face of the earth. When he stumbled across Pitcairn, which was absent from any contemporary charts, he burned the ship to avoid detection.

A lost, off-course British ship didn't find the island until some 40 years later, only to find that Christian had been killed for his involvement in a love triangle decades earlier.

The job is not without its challenges. There is one doctor, and electric power is switched on only 10 hours a day. Supply ships visit every three months. The local language is a blend of 18th century English and Tahitian called Pitkern, for which there is no dictionary.

Previous workers have a history of going native. Oh, and 10% of the island's 54 residents are registered sex offenders, due to its long history of incest.

The next time someone you know complains about being unable to find a job, just tell them they are not looking hard enough, and to brush up on their Pitkern.

For more on the jobs situation, please click here to visit my website.

 

 

How to Avoid Ponzi Schemes

I spent a sad and depressing, but highly instructional evening with psychologist Stephen Greenspan, who lost most of his personal fortune with Bernie Madoff.

The University of Connecticut psychology professor had poured the bulk of his savings into Sandra Mansky's Tremont feeder fund, receiving convincing trade confirms and rock-solid custody statements from the Bank of New York.

This is a particularly bitter pill for Greenspan to take, because he is an internationally known authority on Ponzi schemes, and published a book entitled Annals of Gullibility-Why We Get Duped and How to Avoid It.

It is a veritable history of scams, starting with Eve's subterfuge to get Adam to eat the apple, to the Trojan horse and the Pied Piper, up to more modern-day cons in religion, politics, science, medicine, and yes, personal investments.

Madoff's genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable.

In the 1920s, the original Ponzi promised his Boston area Italian immigrant customers a 50% return every 45 days. My suspicious grandmother wisely passed on an invitation to join the plan.

Madoff also feigned exclusivity, often turning potential investors down, leading them to become even more desirous of joining his club.

For a deeper look into Greenspan's fascinating, but expensively learned observations and analysis, go to his website.

 

There Are No Gurus

If there was ever an argument that you should rely on independent newsletters for guidance about financial markets, such as The Diary of a Mad Hedge Fund Trader, and not traditional brokerage houses, take a look at the chart below from JP Morgan.

It shows that despite all of the reforms passed after the dotcom crash, less than 3% of broker reports come with "sell" or "hold/sell" ratings.

If an investment bank's analyst dislikes a stock, they will simply drop coverage or lose the file behind the radiator, rather than lose potentially lucrative business or risk potential lawsuits.

If individual investors are going to have a prayer of keeping their heads above water in the "new normal," it will only be through studying truly unbiased sources and drawing their own conclusions.

Despite many pretenders, there are no real "gurus" out there, no matter how hard you look.

If this reality is too hard to face, get used to the 0.01% you are earning in your money market fund, or the 2.51% you get with ten-year Treasury bonds.

These ultra-low short rates are going to be around for a while.

Percent of S&P 500

Guru-1There Are No Real Gurus

A Cow Based Economics Lesson

SOCIALISM
You have 2 cows.
You give one to your neighbor.

COMMUNISM
You have 2 cows.
The State takes both and gives you some watered down milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk at an inflated price.

NAZISM
You have 2 cows.
The State takes both and sends you to a concentration camp.

BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk away.

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income, but worry about your cholesterol level and blood pressure.

ROYAL BANK OF SCOTLAND (VENTURE) CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the non tax treaty offshore bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.

The milk rights of the six cows are transferred via an anonymous intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull. You are lauded as a titan of free market capitalism.

SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.

AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.
PETA sues you and pickets your office.

A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows. And you have a fabulous time doing all this.
The world is shocked.

A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk.
You then create a clever cow cartoon image called a Cowkimona and market it worldwide. Then your stock crashes.

AN ITALIAN CORPORATION
You have two really fine, stylish cows which cost a fortune, but you don't know where they are.
You decide to have lunch with a fine bottle of Antinori, and top it all off with a potent grappa and double espresso.

A SWISS CORPORATION
You have 5000 cows. None of them belong to you.
You charge the owners for storing them.
The US IRS launches a criminal investigation, and arrests every Swiss banker when they go shopping in New York.

A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment, and high bovine productivity.
You arrest the newsman who reported the real situation. Then your stock crashes.

AN INDIAN CORPORATION
You have two cows.
You worship them, and feed them all your garbage.

A BRITISH CORPORATION
You have two cows.
Both are mad, but drink great beer.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No one believes you, so they bomb the ** out of you and invade your country.
You still have no cows, but at least you are now a Democracy.

AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers at the barby to celebrate.

A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive.
But no one cares because you are in New Zealand.

HappyCow

Don't Get Scammed by the Mutual Funds

How many mutual funds would you guess outperformed the stock market since the bull run started almost nine years ago?

If you guessed 1,000, 100 or even 10, you would be dead wrong and even off by miles. In actual fact, not a single mutual fund has beaten the market since 2009.

Remember all those expensive, slickly produced TV ads boasting market beating ratings and top quartiles?

You know, the ones that show an incredibly good looking, but aging couple walking hand in hand into the sunset on a deserted beach?

They are all just so much bunk. The funds mentioned rarely quote performance beyond one or two years.

Like my college math professor used to tell me, "Statistics are like a bikini bathing suit. What they reveal is fascinating, but what they conceal is essential."

Recently, the New York Times studied the performance of 2,862 actively managed domestic stock mutual funds since 2009. It carried out a simple quantitative analysis, looking at how many managers stayed in the top performance quartile every year.

Their final conclusion: zero.

It gets worse.

It is very rare for a manager to stay in the top quartile for more than one year. All too often, last year's hero is this year's goat.

The harsh lesson here is that investing with your foot on the gas pedal and your eyes on the rear view mirror is certain to get you into a fatal crash.

The Times did uncover two funds that stayed at the top for an impressive five years. They turned out to be small cap energy funds that took inordinate amounts of risk to achieve these numbers and have since lost money.

The reasons for the woeful under performance are legion. Management fees are sky high and grasping. Hidden costs are everywhere. Read the fine print in the prospectus, as I do, and you would be shocked, truly shocked.

Real talent is in short supply in the mutual fund industry, with all the real brains decamping to start their own 2%/20% hedge funds. The inside joke among hedge fund managers is that employment at a mutual fund is proof positive that you are a lousy manager.

Let's go back to those glitzy TV ads, which cost millions to produce. If you are a mutual fund investor you are paying for all of those too. They are made at the expense of a lower return on investment on your money.

And those sexy performance numbers? They benefit from a huge survivor bias. As soon as fund performance starts to tank, the managers close it, lest it pollute the numbers of other funds in the same family.

The number of funds with good, honest 20-year records can almost be counted on one hand.

Now let me depress you even more.

An industry performance this poor under performs random chance. That means chimpanzees throwing darts at the stock pages of the Wall Street Journal would generate a higher investment return than the entire mutual fund industry combined.

So much for all of those Harvard MBAs!

Are you ready to throw your empty beer can at the TV set yet?

If you think all of this stuff should be illegal, you are probably right. But since you watch TV, then you have probably been trained like a barking seal to oppose the regulation that would reign these people in.

This is what the attempt to kill the Dodd-Frank financial regulation bill was all about. The mutual fund industry complains bitterly that they are over regulated and spend millions on lobbyists to get themselves off the hook. By the way, these expenses also come out of your fund performance.

These are all reasons why the Mad Hedge Fund Trader is able to generate such high performance numbers year in and year out.

I am not charging you with any of my overhead. I am not jacking up your commissions. Nor am I selling your order flow to high frequency traders for a tidy sum so they can front run you.

Being a small operation, I'll tell you what I don't have. I lack an investment banking department telling me I have to recommend a stock so we can get the management of their next stock issue or a sweet M&A deal.

I am absent a trading desk telling me I have to move this block of stock before the prices drop and my bonus gets cut.

And I am completely missing a boss screaming at me that if I don't get my orders up, my wife would have to become a prostitute to support our family (yes, some asshole sales manager actually told me that once. I later heard he died of a heart attack).

You just need to pay me a low, flat, annual fee, and I'm done. I don't need any more. It's up to you to search out the best deal you can get on executions.

Don't even think about trying to give me your money to manage. I don't want it.

This is why the overwhelming bulk of investors are better off investing in the cheapest Vanguard index fund they can find, diversifying holdings among a small number of major asset classes, and then rebalancing once a year (click here for my "Buy and Forget Portfolio").

Welcome to the brave new world.

ChimpBut We're In the Top Quartile!