The Market Outlook for the Week Ahead, or Visibility is Poor

I have a pretty good view from my home on a mountaintop in San Francisco.

To the west, I can see through the Golden Gate Bridge all the way out to the Farallon Islands 20 miles off the coast. To the south, there is Stanford’s Hoover Tower and all of Silicon Valley. In the winter I can look east and see the snow-covered High Sierras 200 miles away.

However, during last year’s wildfires, I couldn’t see a thing. Visibility ended at 100 yards, the cars parked outside were covered in ash, and I could barely breathe. We were all confined indoors.

I kind of feel that’s the way the stock market is right now. You can’t see a thing, so it’s better to stay indoors.

Not only are market gyrations subject to unpredictable and random, out-of-the-blue influences. The old playbook about cross market correlations and how asset classes respond at different points of the economic cycle doesn’t work either.

The good news is that August is over, the second worth trading month of the year. The bad news? September is the WORST trading month of the year!

So, what does a trader do on the first day of the worst investment month of the year?


That’s what I’ll be doing, waiting for the next cataclysmic collapse to buy or the next euphoric bubble to sell short. Until then, I’ll be sitting tight. Just running my existing long/short trading book, I’ll be up 3.4% by the September 20 option expiration date in 15 trading days.

There is one BIG positive for the economy that no one is talking about. The home ATM is open for business, and open like it’s never been open before.

The thirty-year fixed rate mortgage rate is now at 3.56%, 10 basis points over a decade low and 20 basis points above an all-time low (see the chart below). There are currently $9.4 trillion of outstanding home mortgages in the US. Some $5 trillion is in Fannie Mae and Freddie Mac conforming loans, some 90% of which have interest rates higher than the current market.

If just ten million of these mortgages refinance obtaining an average of $4,560 in annual savings each, that will amount to a de facto tax cut of $456 billion per year, not an inconsequential amount. And Goldman Sachs thinks we could be in for as much as 37 million refis. It could be enough to offset the negative impact of the trade war.

As for the past week, it seemed like a disaster a day.

Trump ordered all US companies out of China. Like you can reverse 40 years’ worth of trillions of dollars of investment with a Tweet. If they did, an iPhone would cost $10,000 and your low-end laptop $15,000. An escalation of the trade war is the last thing your 401k wanted to hear. Kiss that early retirement goodbye.

Oil crashed (USO) on trade war escalation, with the industry now seeing a recession as a sure thing. Russian cheating on quotas is pouring the fat on the fire creating a massive supply glut in the face of shrinking demand. Take a long nap before considering any energy investment (XLE). The long-term charts show they are all going to zero.

Prime Minister Boris Johnson suspended Parliament, prompting a free fall in the pound. It’s to keep Parliament from blocking his hard Brexit, where it would certainly loose by a landslide. It’s all up to the Queen now, the monarch, not the rock group.

The yield inversion is deepening, with the US Treasury selling two-year notes today at a 1.56% yield, with ten-year yield closing at 1.45%. And that’s with the Treasury selling a total of a gob smacking $113 billion worth of bonds last week, which should have driven rates UP! US ten-year TIPS now showing negative interest rates.

Company stock buy backs are fading. That’s a big deal as corporations retiring their own shares have been the biggest buyers in the market for the past two years. As if you needed another reason for downside risk.

US 15% tariffs hit on Sunday, and the Chinese paused in retaliation. Christmas is about to get more expensive. Many large retailers won’t make it until the new year. Keep selling short Macy’s (M) on rallies.

Bond yields hit new lows, at 1.44% for ten-year US Treasury bonds. The next stop is zero. Fixed income markets are saying that a recession is imminent. “Inversion” will be the world of the year for 2019. Go refi that home if you can get a banker on the phone!

There is no way out of the next recession, says hedge fund titan Ray Dalio. With global rates below zero, you can’t cut to stimulate business. You can’t do any more quantitative easing either, as the world is already glutted with paper. This is the trap Japan has been caught in for the last 30 years. It is all sobering food for thought.

US growth slowed with the second reading of the Q2 GDP marked down from 2.1% to 2.0%. The downturn has continued since the economy peaked 18 months ago. Q3 will be much worse when the trade war and earnings downgrades hit big time. And then there’s the soaring deficit. Sow the wind, reap the whirlwind.

US Consumer Sentiment took a dive from 98.4 to 89.8 in August. Has the spending boom just peaked? If so, we’re all toast. The “tariff cliff” is already taking its toll.

The Mad Hedge Trader Alert Service has posted its best month in two years. Some 22 or the last 23 round trips, or 95.6%, have been profitable, generating one of the biggest performance jumps in our 12-year history.

My Global Trading Dispatch has hit a new all-time high of 334.48% and my year-to-date shot up to +34.35%. My ten-year average annualized profit bobbed up to +34.30%. 

I raked in an envious 16.01% in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

As long as the Volatility Index (VIX) stays above $20, deep in-the-money options spreads are offering free money. I am now 60% invested, 40% long big tech and 20% short Walmart (WMT) and the Russell 2000, with 20% in cash. It rarely gets this easy.

The coming week will be all about jobs, jobs, jobs.

Monday, September 2, markets were closed for the US Labor Day.

Today, Tuesday, September 3 at 10:00 AM, the August ISM Purchasing Manager’s Index is out.

On Wednesday, September 4, at 2:00 PM, the Fed Beige Book for July is published.

On Thursday, September 5 at 8:30 AM EST, the Weekly Jobless Claims are printed. At 10:30, we learn the ADP Report for private hiring.

On Friday, September 6 at 8:30 AM, the August Nonfarm Payroll Report is printed.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I’ll be filling out the paperwork for my own home refi. JP Morgan Chase Bank (JPM) is offering the best deals, in my case a 30-year fixed rate no-cash-out jumbo loan for only 3.4%. Now where did I put that tax return?

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader









A Very Bright Spot in Real Estate

I feel obliged to reveal one corner of this bubbling market that might actually make sense.

By 2050 the population of California will soar from 39 million to 50 million, and that of the US from 320 million to 400 million, according to data released by the US Census Bureau and the CIA Fact Book (check out the two population pyramids below).

That means enormous demand for the low end of the housing market, apartments in multi-family dwellings.

Many of our new citizens will be cash-short immigrants. They will be joined by generational demand for limited rental housing by 65 million Gen Xer’s and 85 million Millennials enduring a lower standard of living than their parents and grandparents.

These people aren’t going to be living in cardboard boxes under freeway overpasses.

If you have any millennial kids of your own (I have three!), you may have noticed that they are far less acquisitive and materialistic than earlier generations.

They would rather save their money for a new iPhone than a mortgage payment. Car ownership is plunging as the “sharing” economy takes over.

This explains why the number of first time homebuyers, only 32% of the current market now, is near the lowest on record.

It’s not like they could buy if they wanted to.

Remember that this generation is almost the most indebted in history, with $1.5 trillion in student loans outstanding.

They don’t care. Coming of age since the financial crisis, to them, home ownership means falling prices, default, and bankruptcy. Bring on the “renter” generation!

The trend towards apartments also fits neatly with the downsizing needs of 85 million retiring Baby Boomers.

As they age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000 sq ft condos and eventually 100 sq. ft. rooms in assisted living facilities.

The cumulative shrinkage in demand for housing amounts to about 4 billion sq. ft. a year, the equivalent of a city the size of San Francisco.

In the aftermath of the economic collapse, rents are now rising dramatically, and vacancy rates are shrinking, boosting cash flows for apartment building owners.

Fannie Mae and Freddie Mac financing is still abundantly available at the lowest interest rates on record. Institutions combing the landscape for low volatility cash flows and limited risk are starting to pour money in.

Run the numbers on the multi-dwelling investment opportunities in your town. You’ll find that the net after-tax yields beat almost anything available in the financial markets.


Why Water Will Soon Become More Valuable Than Oil

If you think that an energy shortage is bad, it will pale in comparison to the next water crisis. So, investment in fresh water infrastructure is going to be a great recurring long-term investment theme.

One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.

Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so by heavy metals.

Some 18% of the world population lacks access to potable water and demand is expected to rise by 40% in the next 20 years.

Aquifers in the US which took nature millennia to create are approaching exhaustion, especially in Northern India and California’s Central Valley. While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost of water to consumers.

While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in highly concentrated form.

The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the 2008 US stimulus package was similarly spent.

It says a lot that when I went to the University of California at Berkeley School of Engineering to research this piece. Most of the experts in the field had already been retained by major hedge funds!

At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW) which has appreciated by 14% since the October low.

You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR).

Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.





WaterfallThe New Liquid Gold?

Whatever Happened to the Great Depression Debt?

When I was a little kid in the early 1950s, my grandfather used to endlessly rail against Franklin Delano Roosevelt.

The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died in the wool Republican, said the former president was a dictator and a traitor to his class who trampled the constitution with complete disregard.

Republican presidential candidates Hoover, Landon, and Dewey would have done much better jobs.

What was worse, FDR had run up such enormous debts during the Great Depression that would not only ruin my life but also my children’s.

As a six-year-old, this disturbed me deeply as it appeared that just out of diapers my life was already pointless.

Grandpa continued his ranting until a three-pack a day Lucky Strike non-filter habit finally killed him in 1977.

He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer, even though during the war they referred to them as “coffin nails.”

He was stubborn as a mule to the end. And you wonder whom I got it from?

What my grandfather’s comments did do was spark in me a lifetime interest in the government bond market, not only ours, but everyone else’s around the world.

So, whatever happened to the despised future destroying Roosevelt debt?

In short, it went to money heaven.

And here, I like to use the old movie analogy. Remember, when someone walked into a diner in those old black and white flicks? Check out the prices on the menu on the wall. It says “Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.”

That is where the Roosevelt debt went.

By the time the 20 and 30-year Treasury bonds issued in the 1930s came due, WWII, Korea, and Vietnam happened, and the great inflation that followed.

The purchasing power of the dollar cratered, falling roughly 90%. Coffee is now $1.00, a hamburger at MacDonald’s is $5.00, and a cheap steak at Outback costs $12.00.

The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.

Who paid for this free lunch? Bond owners who received minimal, and often negative, real inflation-adjusted returns on fixed income investments for three decades.

In the end, it was the risk avoiders who picked up the tab. This is why bonds became known as “certificates of confiscation” during the seventies.

This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, creating inflation, and then repaying the debt in devalued future paper money.

This is one of the main reasons why we have governments and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.

Ever wonder how the new impoverished United States paid for the Revolutionary War?

It issued paper money by the bale which dropped in purchasing power by two thirds by the end of the conflict in 1783. The British helped too by flooding the country with counterfeit paper Continental money.

Bondholders can expect to receive a long series of rude awakenings sometime in the future.

No wonder Bill Gross, the former head of bond giant PIMCO says he got ashes in his stocking for Christmas last year.

The scary thing is that eventually, we will enter a new 30-year bear market for bonds that last all the way until 2049. However, after last month’s frenetic spike-up in bond prices, and down in bond yields, that is looking more like a 2022 than a 2019 position.

This is certainly what the demographics are saying which predicts an inflationary blow off in decades to come that could take short term Treasury yields to a nosebleed 12% high once more.

That scenario has the leveraged short Treasury bond ETF (TBT) which has just cratered down to $31, leap to $46, and then soaring all the way to $200.

If you wonder how yields could get that high in a decade, consider one important fact.

The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 12% of the total outstanding.

Unfortunately, both countries have already entered very negative demographic pyramids which will forestall any future large purchases of foreign bonds. They are going to need the money at home to care for burgeoning populations of old age pensioners.

So who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI.

There is a lesson to be learned today from the demise of the Roosevelt debt.

It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra-low interest rates and spending it all.

With real, inflation-adjusted 10-year Treasury bonds now posting negative yields, they have a free pass to do so.

In effect, the government never has to pay back the money. But they do have the ability to reap immediate benefits such as through stimulating the economy with greatly increased infrastructure spending.

Heaven knows we need it.

If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target.

Here is my shopping list:

$1 trillion – new Interstate freeway system
$1 trillion – additional infrastructure repairs and maintenance
$1 trillion – conversion of our energy system to solar
$1 trillion – construction of a rural broadband network
$1 trillion – investment in R&D for everything

The projects above would create 5 million new jobs quickly. Who would pay for all of this in terms of lost purchasing power? Today’s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese.

How did my life turn out? Was it ruined as my grandfather predicted?

Actually, I did pretty well for myself as did the rest of my generation, the baby boomers.

My kids did OK too. One son just got a job at Google, another is teaching at a government university in China, and my daughter is working on a Ph.D. at the University of California.

Not too shabby.

Grandpa was always a better historian than a forecaster but did have the last laugh. He made a fortune in real estate betting correctly on the inflation that always follows big borrowing binges.

You know the five acres that sit under the Bellagio Hotel in Las Vegas today? That’s the land he bought in 1945 for $500. He sold it 32 years later for $10 million.

Not too shabby either.




Not Too Shabby for $500

America’s Demographic Time Bomb

With the report this week that America’s birthrate has fallen to a new multi decade low of 1.77 children per family, it is time to once again visit the issue of demographics.

They’re just not making Americans anymore, at least not as fast as they used to. That is far below the replacement rate of 2.1 children per family.

This has long term dire implications for the economy.

You can never underestimate the importance of demographics in shaping investment trends, so I thought I’d pass on these two highly instructive maps.

The first shows a picture of the world drawn in terms of the population of children, while the second illustrates the globe in terms of its 100-year olds.

Notice that China and India dominate the children’s map. Kids turn into consumers in 20 years, stay healthy for a long time, and power economic growth.

The US, Japan, and Europe shrink to a fraction of their actual size on the children’s map, so economic growth is in a secular downtrend there.

There is more bad news for the developed world on the centenarian’s map, which show these countries ballooning in size to grotesque, unnatural proportions.

This means higher social security and medical costs, plunging productivity, and falling GDP growth. If you wonder where our mediocre 2% annual growth rate came from, this is a big cause.

The bottom line is that you want to own equities and local currencies of emerging market countries, and avoid developed countries like the plague.

This is why we saw tenfold returns from some emerging markets (EEM) over the past ten years, and why there is an irresistible force pushing their currencies upward (CYB) over the long term.

Use any major meltdowns this year to increase your exposure to emerging markets (EEM), as I will.

Would You Rather Own Them?

Or Them?


Is There a Bitcoin in Your Future?

I often am asked at lunches and speaking engagements whether people should be investing in bitcoin. My answer was always that it was a scam and to be avoided at all costs.

I was vindicated when the value of the online cryptocurrency collapsed 74% from its peak, from $1,230 to $320 to the US dollar.

After all, why should an arbitrarily valued currency, like bitcoin, be worth more than any other, like the US dollar?

I really hope the pizza parlor in New York City that sold a pizza for 8 bitcoins years ago unloaded their proceeds before the crash.

After some major security upgrades, the cryptocurrency has since rallied back up to $670.

Then Marc Andreessen, of leading venture capital firm, Andreessen Horowitz, made some comments the other day that piqued my interest.

He said that he was a major investor in several parts of the bitcoin ecosystem. He thought it had a great long-term future and he was especially interested in bitcoin infrastructure plays.

Smelling a rare opportunity to smash my own preconceived notions, biases, and prejudices, I started making a few phone calls around Silicon Valley.

It wasn?t long before someone put me in touch with Mr. Celso Pitta, the CEO of BTCJam. BTCJam is the world?s first peer-to-peer bitcoin lending company and they are paving the way for alternative crypto-currency investing.

What I learned from him was fascinating.

Long considered a ?gold for nerds? and ?online gold?, the financial community is in fact taking bitcoins seriously. Recently, the US Treasury and the Department of Homeland Security held a conference in Florida to bring the industry into its anti-money laundering payments standards.

Where do bitcoins come from? Bitcoins are ?mined? by computers. Every couple of minutes the bitcoin network releases an algorithm and the computer that solves the algorithm first, receives the bitcoin.

They are created from scratch by bitcoin ?miners? who exchange them for local currencies to cover their own costs and compensation for the bitcoin infrastructure.

Bitcoins are a completely decentralized, transparent, and digitally traded currency. Some predict that cryptocurrencies like bitcoin may replace traditional fiat paper currencies in the near future.

In the end, bitcoins are just a giant global payment ledger balanced out by debtors and creditors. As it is electronic, it can be sent and administered for free.

BTCJam has created from scratch a global online marketplace of borrowers and lenders in over 180 countries. Go to their site ( and you will find a parade of borrowers from around the planet looking to take out loans and bitcoin lenders looking to invest. Look at the individual players and it is clear that they are young and tech savvy.

Each potential borrower lists the details for their loan, along with a host of personal information. The purposes cited I found included a new transmission for a broken down car in England, a vacation to Japan and the start up of many small business. It also seems a lot of young Americans are seeking to consolidate student loans.

Once a user signs up, BTCJam subjects every application to its credit evaluation software, which examines more than 300 different parameters.

BTCJam uses traditional data that banks use such as personal identification, banking confirmation, and income verification, but they also use a host of other resources such as: LinkedIn, Facebook, PayPal, and eBay accounts.

Believe it or not, a person with 1000 Facebook friends has a much better credit standing and a lower default rate than someone with only 1 friend.

Customers are then given an ?A? to ?E? rating based on their loan algorithm. This software was developed by CEO Pitta, a native of Brazil, who boasts a heavy background in artificial intelligence and facial recognition software.

The company is taking advantage of the void of lending resources in emerging nations; frequently, these people can only turn to loan sharks and other risky loan sources.

Large international banks are reluctant to invest in these places because of the local currency risk. When a loan on BTCJam is fully funded, the borrowers convert their bitcoin into local currencies to spend in the local economy.

Remember how the poorest countries leapfrogged telephone landlines and went straight to cell phones 20 years ago? Well, the same thing is now happening in consumer credit through peer-to-peer lending.

Many developing countries suffer from the complete lack of credit rating agencies. There, every client is considered high risk, and lending is priced according to the standards of the worst borrowers.

Credit card interest rates run as high as 200% in Brazil, 90% in Mexico, and are well into double digits in Indonesia and the Philippines. Overall, they average 175% in the BRICS. As a result, the rates charged by BTCJam seem like a bargain by comparison.

When borrowers sign up at BTCJam and input all their information, they are given a suggested interest rate. They then have the choice to set their monthly interest rate as high or low as they want.

Loans that follow the suggested interest rate are more likely to be funded quickly by investors. Over time, the loan is gradually paid back in full by the borrower as they convert their money back into bitcoin.

Now for the lender side of the equation. BTCJam has investors from all over the world: they attract people that already have bitcoins and are looking for returns on their bitcoins. They also bring in lenders who are new to bitcoin and buy a few for the purpose of investing in BTCJam.

Lenders are completely free to choose which loans they want to invest in and how much they want to invest. Interest rates vary based on the risk profile of the borrower. They range all the way from 14% for the highest quality ?A+? borrowers to 100% for the low-end ?E-? hopefuls.

BTCJam is a bitcoin-only platform: lenders invest bitcoin and borrowers receive bitcoin. Borrowers have the option to link their loan to USD, which helps them avoid the risk of volatility long term. This enables them to lock in the bitcoin price at the time they receive the loan.

BTCJam lists every outstanding loan, and the investors connected to that individual. There is an online discussion on the potential advantages and disadvantages of each borrower. Some of the comments are quite funny. Others are downright rude.

It gets better: BTCJam will soon introduce automatic investments. Lenders will then have the opportunity to set specific criteria such as: the amount they want to invest, which asset class they want to invest in, and for how long. This will significantly enhance the use of the website and lenders will never have to miss out on good loans.

Pitta told me that globally, the total loan portfolio has a 10% default rate. But if you focus on only their ?A? rated customers, that rate plunges to a mere 1.8%. This is in the same ballpark as the largest US consumer lenders.

Do the math with high yields and a non-payment rate this low, and you can easily see that risk sophisticated and tolerant depositors will do these loans all day long.

The peer-to-peer lending model is one of the fastest growing corners of the financial industry. The giant Credit Ease in China is the largest, with a $9 billion loan portfolio. They are followed by the $3-$4 billion Lending Club. The UK has Zopa, with a $1 billion loan book.

This all compares to total credit card debt for the US alone of $1 trillion. Clearly, there is an enormous, high cost, low return, entrenched market to be explored here.

The entire bitcoin story did get tarnished by the bankruptcy of Mt. Gox operation in Japan, which went under with $60 million in liabilities. They claimed they were the victims of the hackers.

Industry insiders say that incompetent management, inferior software, and lax controls are much more likely culprits. These
are common transgressions in every start up industry.

Which brings me to BTCJam?s own business model, which recently obtained several million in seed capital from venture capitalists, like Ribbit Capital and the Founders Club.

They are poised to eat the lunches of emerging nation banks, which have always ignored, overcharged, or abused their local customers. It all seems to me ripe ground for disruption.

I think it is safe to say that in 20 years, the global financial system will be unrecognizable from what it is today. Ultimately, Bitcoin and BTCJam may have a large influence in the transition from traditional currencies to an all out system of online money.


Loans by Location


Why Water Will Soon Become More Valuable Than Oil

If you think that an energy shortage was bad, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long-term investment theme.

One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.

Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles.

In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so.

Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.

Aquifers in the US, which took nature millennia to create, are approaching exhaustion, especially in California?s Central Valley.

While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost of water to consumers.?

While it may take 16 pounds of grain to produce a pound of beef,?it takes a staggering 2,416 gallons of water?to do the same. Beef exports are really a way of shipping water abroad in highly concentrated form.

The UN says that $11 billion a year is needed for water infrastructure investment and $15 billion of the 2008 US stimulus package was similarly spent.

It says a lot that when I went to the University of California at Berkeley’s School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!

At the top of the shopping list to participate here would be the Guggenheim S&P Global Water Index ETF (CGW).

You can also check out the PowerShares Water Resources Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VEOEY), Tetra-Tech (TTEK) and Pentair (PNR).

Bonus Question:? Which country has the world?s greatest water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.

cgw pho fiw

WaterfallThe New Liquid Gold?

China?s View of China

I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace, who imparted to me some iconoclastic, out-of-consensus views on China?s position in the world today.

He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $5,800, compared to $48,000 in the US.

We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.

China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede.

China?s military is entirely devoted to controlling its own people which make US concerns about their recent build up laughable.

All of Asia?s progress, to date, has been built on selling to the US market. Take us out, and they?re nowhere.

With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.

There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more, because there is no social safety net.

Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return.

Ever heard of a Chinese unemployment office or jobs program?

Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries.

The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.

As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world.

After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for four decades, and you feel this vibrating from everything around you.

I?ll consider what Minxin Pei said next time I contemplate going back into the China (FXI) and emerging markets (EEM).

fxi baba bidu jd

China - ParadeChina: Not All It?s Cracked Up to Be

America?s Demographic Collapse and Your Stock Portfolio

As a long term observer of America?s demographic picture, I was shocked to hear of a recent report from the US Census Bureau (click here for the website).

The US 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.

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

At the end of 2012, there were 316,128,839 Americans. This accounts for 4.4% of the global population of 7,137,577,750, which was up 1.1%. If the growth rate remained the same, there are more than 317 million of us by now.

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, like Portugal (-0.29%) and Japan (-0.20%) (click here for the website).

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%.

The obvious cause here was the weakness of the US economy. There is a high correlation between economic health and fertility a year later.

So we can only hope that the modest improvement in the economy this year will send 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, rapid price hikes, and a housing boom.

Corporate profits go through the roof, as does the stock market. 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.

The new data suggests that the next ?roaring twenties? could extend into the 2030?s and beyond.

California was the most populous state, with over 38 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 prediction of population trends is becoming vastly more complicated, thanks to the increasingly minestronelike makeup of the US people.

By 2040 no single group will be a majority. That is already the case in San Francisco, and will be true for the entire State of California by 2020.

America will come to resemble other, much smaller multiethnic societies, like Singapore, South Africa, England, Israel, and Switzerland. This explains much about the current state of politics in the US.

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 is why gerrymandering (redistricting) is such a big deal there, with the white establishment battling to hang on to 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 standards of living, this is increasingly becoming a luxury reserved for a prosperous elite.

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

Those who do procreate 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 cost of child rearing has soared to $241,080 per child now. Rocketing college costs are another barrier, with 70% of high school grads at least starting some higher education.

I was a bargain as a kid, costing my parents only a tenth of that. I went to Boy Scouts and Little League baseball, each of which cost $1 a month. A full scholarship covered by 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 masters degrees, 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.

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 in 16 states, 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 one million children over the last 30 years, 95% of whom select 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 that water polo players are particularly favored).

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

There was a time when I could usually identify the people standing next to me on San Francisco BART trains. 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 brides. Sushi, hot tubs and Volkswagens quickly followed.

The problem is that the US 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 sizable Korean, and later, Iranian communities in Los Angeles, a Vietnamese one in Louisiana, a Somali enclave in Minneapolis, and a 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 US. Have 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.

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


Marriage & Divorce

Marrying Later

ChildrenIgnore Demographics at Your Portfolio?s Peril

Mixing with the 1% at Pebble Beach

On the right was my friend?s 1958 Ferrari Testa Rossa Scaglietta. On my left was a 1929 Dusenberg Murphy convertible sedan with a V-12 engine. I just walked past a 1914 Rolls Royce Silver Ghost Portholme Alpine Tourer.

Yes, it?s August in Pebble Beach, California, and that can only mean one thing. It?s time for another Concourse d? Elegance car show.

This is my annual opportunity to mix with my fellow 1%, hobnob with movie stars, and chitchat with the ultra wealthy, fanatically devoted to restoring ancient cars to pristine condition.

Held on the 18th fairway of the famed Pebble Beach golf course, Concourse d? Elegance has been held every year since 1950.

It was a largely local affair until the 1990?s, when wealth started concentrating at the top with a ferocious pace, minting billionaires by the hundreds.

Then the big-ticket sponsors started pouring in, turning it into a luxury global event.

Everywhere you look, you find promotions from Rolex, Flexjet, Davidoff Cigars, Osprey of London, Dom Perignon, and a dozen California vineyards. Every carmaker of note in the world is there in force.

Prices for anything the 1% bought skyrocketed accordingly, especially those for classic cars. Some of the price increases have been astronomical.

Comedian, Jay Leno, once told me that he was bid $10 million for a vehicle he paid $11,000 for during the early nineties. ?What has done better than that in the stock market,? he asked, ?Apple or Google??

Rich Europeans, Asians, and Australians now actually fly their cars to the event in the hope of snagging a much coveted ?Best in Show? prize.

Winners see the value of their ride double overnight as well as? the prestige that goes along with it. Even getting your car into the contest is a big deal. Of the 700 applications, only 200 cars were allowed to compete.

The 2014 prize went to a silver 1954 Ferrari 375MM Scaglietti Coupe, originally built for Italian neorealism filmmaker Roberto Rossellini, husband to the starlet, Igrid Bergman.

The car was owned by Robert Shirley, the former president of Microsoft, who carried out a loving, no expenses spared, ground up restoration after the car had been in pieces for 25 years.

I have to confess a personal weakness for this pastime, given my love of history, technology, and understanding manufacturing processes.

I was a member of the Rolls Royce Club in England for 20 years, and learned a lot about this very expensive hobby. The monthly newsletter used to run pieces on arcane topics, like ?How to Rebuild Your Phantom II Gearbox,? and ?Prewar Hydraulic Systems for Beginners.?

After a two-decade search, I decided not to buy one. Rolls Royce?s don?t appreciate that much, rising in value more or less with the rate of inflation. In other words, they are a lot like bonds.

Because they are so well made, 70% of those ever built are still running. You would have done much better investing in a prewar racing Bentley, or a postwar Ferrari racecar, if capital gains were your priority.

Besides, you don?t dare drive any of these masterpieces on public roads. Your insurance won?t cover it, and heaven help you if you get hit by someone driving while texting.

The other problem is that I am too big to fit into one. Vintage cars were designed when buyers were physically much smaller than today. Adjustable seats were a postwar invention, and I didn?t want to damage a vehicle?s historical integrity by drilling into the chassis to move the seat back.

Every year, the contest opens up special categories of vehicles to highlight certain marquees.

Last year saw classes for the Tatra, a bizarre, prewar Czechoslovakian company, and the Ruxton, a luxury car that disappeared during the Great Depression. Maserati was featured because of its 100-year anniversary.

Turn of the century steam cars were also a focus, a favorite of Jay Leno. The first car owned by a US president was a steam powered White Model M touring car that parked in front of the White House during the administration of William Howard Taft.

The auction house, Bonham?s, takes advantage of the Pebble Beach confab to hold its vintage car auction of the year, where record prices are often set.

Last year?s big earner was a 1962 Ferrari 250 GTO Berlinetta, which sold for $38 million, the highest prices ever paid for a car.

That beats the $30 million a 1954 Mercedes Benz W196 F1 sold for last year, a Grand Prix winner. Buyers? names are usually kept secret, for security reasons, or to avoid embarrassment (he paid what for that car?).

I spent a pleasant morning strolling around the historic links, bumping into old friends, talking technical details with the owners, and taking in the magnificent scenery of the California coast.

Some contestants really get into it, donning period dress to match the ages of their cars. So you?re constantly bumping into women wearing florid Edwardian hats, Art Deco dresses from the Roaring Twenties, or those killer stiletto heels from the fifties.

As for me, I was wearing a blue blazer and Panama hat favored by the judges, which seems to be timeless.

Reading the biographies of the judges was fascinating, and constitutes today?s automotive royalty.? They could be easily spotted with their telltale clipboards looking under hoods and going over every vehicle with a fine tooth comb.

Points are awarded for originality, authenticity and, of course, perfection. Extra kudos are awarded to those who rescue a historically significant vehicle from a barn, a junkyard, a forgotten garage, or an obscure museum. Some cars even had their original tool kits and jacks.

Owners stood back apprehensively.

The design chiefs of every major auto manufacture were there. So were heads of the major auto museums, like the Harrah?s collection in Reno, Nevada; the Mercedes Museum in Stuttgart; and the Petersen Automotive Museum in Los Angeles, created by the founder of Hot Rod and Motor Trend magazines.

A few racing legends were grading entries, including Sir Moss Sterling and Sir Jackie Stewart.

I had a dinner appointment with one judge, Franz von Holzhausen, who designed my Tesla Model S-1. But his wife had a baby that morning, so I dined with the head of production instead (more on that in a future piece).

If all of this appeals to you, the record sale price for a car is expected to be broken again next year. That?s when the actor Steve McQueen?s 1967 Ferrari 275 GTB/4 comes up for sale. Insiders say it should top $50 million.

I once owned McQueen?s home. Do you think it?s too early for me to get a bid in?


Ferrari 375 MM Scaglietti Coupe? ?Best of Show?


MercedesThe Next Decade?s Mercedes


John Thomas - Duesenberg

Center Headlight

TatrasCheck out This Cool Tatra


MaseratiThe Scenery is Magnificent


Rolls-RoyceSo, Which One is the Trophy?


Ferrari 250A $38 Million Ride


Mercedes Benz W 196F1This One Cost Only $30 Million


John Thomas - BeachOut Of The Traffic Jam at Last!