'He who lives upon hope will die fasting,' said Benjamin Franklin.
Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Las Vegas at 12:00 noon on Friday, January 27, 2012. A three course lunch will be followed by a PowerPoint presentation and an extended question and answer period.
I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be tossed at you to keep your ears ringing for a week. Tickets are available for $243.
I?ll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets. The event will be held at a major hotel on the Las Vegas strip. Details will be emailed directly to you with your confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please click on ?Luncheons? along the top banner.
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Often while searching for a piece of data through Google, I stumble across something else which is far more interesting. That is how I found the table below of international savings rates.
Why should you care? Because countries with high savings rates tend to have strong economies and great stock markets, since there is plenty of excess cash available to pour into investments. Those with low savings rates suffer from weak economies and poor stock markets, because of a shortage of available capital. When the American savings rate dropped below zero in the latter part of the last decade, it set off emergency alarms for me that a collapse of the financial markets was on the horizon.
During the last four decades, I have watched Japan's savings rates plunge from 16% to 2.8%, and you know the result for markets there. When it approaches zero, that will be the time to short the JGB's, the yen, and the Nikkei stock index. The only country that doesn't fit this analysis is Australia, with a mere 2.5% savings rate, but boasts a positively virile stock market and currency. The resource boom there is skewing things towards under saving and over consumption.
By the way, the outlook for the US, with its still miserable 3.9% savings rate, does not look great when considering this benchmark. Don't expect a runaway bull market anywhere savings rates are low and falling. What are savings rates telling us are the best countries in which to invest? China, 38%, India, 34.7%, and Turkey, 19.5%.
Australia? 2.5%
Japan? 2.8%
USA? 3.9%
Brazil? 6.8%
Britain? 7.0%
Germany? 11.7%
Ireland? 12.3%
Switzerland? 14.3%
Turkey? 19.5%
India? 34.7%
China? 38%
In their century long coverage of exotic places, cultures, and practices, National Geographic Magazine inadvertently sheds light on broad global trends that deeply affect the rest of us. Plus, the pictures are great. A recent issue celebrated the approach of the world's population to 7 billion, and the implications therein.
Long time readers of this letter know that demographic issues will be one of the most important drivers of all asset prices for the rest of our lives. The magazine expects that population will reach 9 billion by 2045, the earliest date that I have seen so far. Can the planet take the strain? Early religious leaders often cast Armageddon and Revelations in terms of an exploding population exhausting all resources, leaving the living to envy the dead. They may not be far wrong.
A number of developments have postponed the final day of reckoning, including the development of antibiotics, the green revolution, DDT, and birth control pills. Since 1952, life expectancy in India has expanded from 38 years to 64. In China, it has ratcheted up from 41 years to 73. These miracles of modern science explain how our population has soared from 3 billion in a mere 40 years.
The education of the masses may be our only salvation. Leave a married woman at home, and she has eight kids, as our great grandparents did, half of which died. Educate her, and she goes out and gets a job to raise her family's standard of living, limiting her child bearing to one or two. This is known as the ?demographic transition.?
While it occurred over four generations in the developed world, it is happening today in a single generation in much of Asia and Latin America. As a result, fertility around the world is crashing. The US is hovering at just below the replacement rate of 2.1 children per family, thanks to immigration. But China has plummeted to 1.5, Europe is at 1.4, and South Korea has plunged as low as 1.15.
Population pressures are expected to lead to increasing civil strife and resource wars. Some attribute the genocide in Rwanda in 1999, which killed 800,000, as the bloody result of overpopulation.
If you think that the upcoming energy shortage is going to be 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. 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 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.
Every time the price of oil spikes, we learn vast amounts of information about the global reach of this indispensable commodity. It's like taking a non-core elective in geology at college. So I was fascinated when I found the chart of relative sector winners and losers below.
No surprise that energy does best from sky high crude prices. It is followed by telecommunications and health care. You would also expect consumer discretionary stocks to take it on the nose, as high energy prices almost always lead to a cyclical downturn in the economy. Who is the worst performer of all? Europe, which makes the recent weakness even more understandable.
Europe Will be the Biggest Loser from High Oil Prices
?Apple will never be a consumer products company,? said John Sculley, the Apple CEO who fired Steve Jobs in 1985. Today Apple is the world?s largest and most profitable consumer products company.
Come join me for the Mad Hedge Fund Trader?s Global Strategy Seminar, which I will be conducting in Beverly Hills at 1:30 pm on Monday, January 23, 2012. A 45 minute PowerPoint asset class review will be followed by an open discussion on the crucial issues facing investors today. Coffee and snacks will be made available. The bar will open at 4:30 when we get into the really heavy stuff.
I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $195.
I?ll be arriving early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The event will be held at a Beverly Hills venue that will be emailed directly to you with your confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store here and click on ?Beverly Hills.?
I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my eleven month return on capital comes close to 1,000%. I also like buying flood insurance in the middle of the summer when the forecast here in California is for endless days of sunshine. That is what we are facing now with the volatility index (VIX) where premiums have just broken under 20%, a six month low. The profits you can realize are spectacular.
The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index, which has been melting since the ?RISK OFF? trade peaked in early October. You may know of this from the talking heads, beginners, and newbies who call this the ?Fear Index?. Long term followers of my Trade Alert Service profited handsomely after I urged them to sell short this index with the heady altitude of 47%.
For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation. You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?
For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story. Class dismissed.
The (VIX) is expressed in terms of the annualized movement in the S&P 500. So today?s (VIX) of $19 means that the market expects the index to move 5.5%, or 72 S&P 500 points, over the next 30 days. You get this by calculating $19/3.46 = 5.5%, where the square root of 12 months is 3.46. The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 5.5%, you make a profit on your long (VIX) positions.
Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 5.5% range. I am going into this detail because I always get a million questions whenever I raise this subject with volatility deprived investors.
It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.
But wait, there?s more. Now, erase the blackboard and start all over. Why should you care? If you buy the (VIX) here at $19, you are picking up a derivative at a nice oversold level. Only prolonged, ?buy and hold? bull markets see volatility stay under $20 for any appreciable amount of time.
If you are a trader you can buy the (VIX) somewhere under $20 and expect an easy double sometime this year. If you are a long term investor, pick up some (VIX) for downside protection of your long term core holdings. A bet that euphoria doesn?t go on forever and that someday something bad will happen somewhere in the world seems like a good idea here.
The conspiracy theorists will love this one. Buried deep in the bowels of the 2,000 page health care bill was a new requirement for gold dealers to file Form 1099's for all retail sales by individuals over $600. Specifically, the measure can be found in section 9006 of the Patient Protection and Affordability Act of 2010.
For foreign readers unencumbered by such concerns, Internal Revenue Service Form 1099's are required to report miscellaneous income associated with services rendered by independent contractors and self-employed individuals. The IRS has long despised the barbaric relic (GLD) as an ideal medium to make invisible large transactions. Did you ever wonder what happened to $500, $1,000, $5,000, and $10,000 bills?
Although the Federal Reserve claims on their website that they were withdrawn because of lack of use, the word at the time was that they disappeared to clamp down on money laundering operations by the mafia. In fact, the goal was to flush out income from the rest of us. Dan Lundgren, a republican from California's 3rd congressional district, a rural gerrymander east of Sacramento that includes the gold bearing Sierras, has introduced legislation to repeal the requirement, claiming that it places an unaffordable burden on small business.
Even the IRS is doubtful that it can initially deal with the tidal wave of paper that the measure would create. Currency trivia question of the day: whose picture was engraved on the $10,000 bill? You guessed it, Salmon P. Chase, Abraham Lincoln's Secretary of the Treasury.
Ever Wonder Where The $10,000 Bill Went?