The Trade of the Century is Setting Up

How about if I told you there was a relatively low-risk trade setting up that offered a 500% return? Would it help if I told you it was in the world’s most liquid market?

So, I bet you’re thinking the latest small cap technology stocks, Bitcoin, vintage cars, or collectable French postage stamps.

In reality, I’m talking about the US Treasury bond market.

I’m not saying you should add this position right now. Nor am I advocating that you bet the ranch on this one. But there is one hell of a trade setting up in the bond market over the next year or so.

Let’s go through what Albert Einstein used to call a “thought experiment.”

Today, the United States Treasury Bond Fund (TLT) is trading at a four-year high at $143. If you go a mere $20 out-of-the-money, you can buy the (TLT) January 2021 $120-$123 vertical bear put spread for 50 cents.

If interest rates rocket from today’s 1.61% to back up to 2.85% and the (TLT) collapses from $143 down to $120 by January 22, 2021, the value of this position will soar from 50 cents to $3.00, a net gain of 500%.

This is not some pie-in-the-sky, Armageddon type scenario. This in fact was the level of interest rates that prevailed only nine months ago in December. The nice thing about seeing interest rates on the way down, you always get to revisit them again on the way up.

I’m not saying these are the strikes or the expirations dates you should be targeting. By the time the (TLT) tops out, it could be trading at $200, and you should be targeting the January 2022 $177-$180 vertical bear put spread.

I can pretty much guarantee you that when the (TLT) skyrockets to $200, celebrity commentators on CNBC, analysts at JP Morgan, and strategists at Seeking Alpha will be running around with their hair on fire screaming that the next stop is at $300. That’s always how things end.

Not only that, you might get the chance to put these on for several months in a row, in which case you will have multiple 500% gains in a row lining up.

Like I said, there is one heck of a trade setting up. All you have to do is be patient.




How to Join the Early Retirement Stampede

There is a new social movement taking place which you probably haven’t heard about.

Increasing numbers of people, especially Millennials, are engineering their personal finances to make early retirement possible. I’m not talking about hanging it up at 60, 55, or even 50. I’m talking extreme early retirement, like 45, 40, or even 30!

I stumbled across a free app the other day at NerdWallet and started playing around with a compound interest calculator to see just how much you had to save on a monthly basis to make such incredible early retirements possible. What I discovered was amazing. To check it out, please click here. 
And here is the big revelation. Assuming that you started saving at the age of 20, you only need to bank $2,150 a month to reach $1 million in retirement savings by the age of 40. If you earn the country’s average wage of $60,000 a year, and you’re paying $1,000 a month in taxes, that means you only have $1,850 a month left to handle housing, health care, education, transportation, and food.

Key to becoming a savings hog is to get off the consumer spending treadmill we have all been trained to plod since birth. You don’t have to endlessly upgrade to ever larger McMansions, especially now that the SALT deductions are gone.

You don’t have to buy a new $50,000 car every three years either. Just buy a junk heap for $5,000 and run it forever. It’s amazing how much gas, insurance, maintenance, and interest payments can add up. I recommend a Toyota Corolla. They last forever.

And what is the most expensive luxury of all? Kids. Raising a child today cost a minimum of $250,000, and that assumes they don’t go to an ivy league college. I know because I have five. A lot of Millennials are downsizing to one child, or none at all, and putting that quarter-million towards their early retirement fund.

If you live here in the San Francisco Bay area, this would mean living in a cardboard box under a freeway overpass. However, an increasing number of Millennials are engaging in what I call “income/expense” arbitrage.

Earn your income in an expensive city, like San Francisco, San Jose, or New York, but live in a cheap place like Reno, NV, Charlotte, NC, or Cedar Rapids, IA. In that case, banking your $2,150 a month is a piece of cake.

Those who work online, about 25% of the bay area population now, have a particular advantage here. With a decent broadband connection, you can work anywhere.

Companies are going out of their way to facilitate this trend, requiring office attendance only on Tuesday to Thursday and permitting telecommuting on Monday and Friday. That enables distant, even interstate commutes. I have a Bay Area dentist who commutes from Santa Barbara 300 miles away every week on this schedule.

You can even do this at an international level. A couple can live like a king in Budapest, Hungary for $1,000 a month, and in a beachfront home in Albania for $500. With that kind of overhead, early retirement becomes a realistic short-term objective.

Once you retire, you will have to live on $60,000 a year, or $5,000 a month, eminently doable in most of the country, not including your social security payments or taxes. And with national health care in the US likely over the next 20 years, healthcare costs are about to fall dramatically.

Provided you don’t pursue expensive hobbies like my retired friends, such collecting vintage cars, racing horses, joining expensive golf clubs, or flying around in private jets, you should be able to live within these modest means. How about camping? That almost free!

Of course, you can’t live on the coasts for $60,000 a year. But you can do so easily in the heartland. That explains why California and New York home prices have been dead in the water for the last two years, while the Midwest is seeing a renaissance in regional home prices at one third the cost.

You don’t have to completely retire either. Instead, you could abandon the pressure cooker that is high tech today and downgrade to a small business, open a restaurant, or turn a hobby into a full-time job. (A laid-off FedEx worker I met became a fly-fishing guide and helped me catch that 24-inch trout in Nevada).

It goes without saying that if this trend continues, there are major consequences for the economy, markets, and society that boggle the mind. Greatly higher savings rates will drive prices up and yields down on all investments.

The US birthrate is already well below the replacement rate at 2.1 per couple. Drive it lower and we could get trapped in the Japan quicksand of an ever-shrinking population. That means fewer consumers and economic stagnation. Reducing working lives from 47 to only 20 years will inevitably create worker shortages, driving up wages and inflation.

There are a few problems with the ultra-early retirement strategy. The 6% return available today with relatively low-risk investments may not be available in a year or two. That would be the result of global quantitative easing that is taking interest rates down to zero everywhere.

This is crushing the investment returns for new retirees. As a result, instead of needing $1 million to generate a $60,000 annual income, you might need $2 million or more. I have been watching this happen to retirees in Japan for nearly 30 years, where interest rates have been near zero since the 1990s.

How much do you need to save each month if you want to retire at 30? Better start banking $6,050 a month. It may be time to upgrade your sleeping bag.

The Idiot’s Guide to Investing

My usual method of coping with nine hours of jet lag from Zermatt, Switzerland to San Francisco is to sit back, watch some golden oldies on the screen, and contemplate the state of the financial markets.

I just finished watching Von Ryan’s Express (1965), and Frank Sinatra got shot in the back. It was a timely movie for me to revisit because I rode the exact Italian Alpine rail lines used in the film only two days ago and recognized some of the precise scenery and rail junctions used by the filmmakers.

What would you do if I recommended an investment strategy that would cause your accountant to disown you, your inheritance-anticipating children to sue you, and your wife to file for divorce?

Chances are you would designate all my future mailings as SPAM, unfriend me on Facebook, and tear my card out of your Rolodex.

Well, here it is anyway. I’ll call it my “Ignore All Risk” portfolio. It’s really quite simple. This is all you have to do:

1) Buy stocks that have already gone up the most, boast the highest year-to-date performance, and have momentum overwhelmingly on their side. Only do what everyone else is doing. Go for the easy trade.

2) Buy stocks with the highest price earnings multiples. I’m talking mid-to-high double digits.

3) Lean towards stocks with the highest short interest, such as Tesla (TSLA) at 30% and Beyond Meat (BYND) at 20%.

4) Avoid all cryptocurrency bets, like Bitcoin. In fact, avoid all financials, period.

5) Ignore all valuations and fundamentals. Don’t waste a minute reading a single page of research, especially from an old-line legacy broker. Seeking Alpha, where none of the information is independently verified, is a far better source of information than JP Morgan (JPM).

6) Big institutions should allocate all of their assets only to their youngest traders and portfolio managers. Old farts, or anyone with any memory or experience whatsoever, should be completely ignored. A person who’s never seen a stock go down is now your best friend.

7) Oh, and there is one more thing. Go hugely overweight bonds over equities in the face of unprecedented and massive government borrowing at all-time low-interest rates.

Any professional manager pursuing an approach like this would surely get fired, lose all of their securities registrations and licenses, and get banned from the industry for life.

But there is one big offset to these career-ending consequences. They would also be the top-performing money manager of the year, beating the pants off of all competitors. Every investment they made this year worked.

They would be regarded as a trading genius on par with Paul Tudor Jones and Appaloosa’s David Tepper. If they invested their own money using this strategy, they would be so filthy rich they wouldn’t care what happened to themselves.

We are now in an environment where EVERY trade is crowded, the they in equities, fixed income, or foreign exchange. The metaphors coming to mind are legion. There are too many passengers on one side of the canoe. The lemmings are mindlessly stampeding towards a giant cliff. I could go on.

Of course, incredible excess liquidity is to blame. That is the only time both stocks AND bonds go up at the same time. The world’s central banks have been flooding the globe with cash for over a decade now. The end result has been to undervalue all assets classes, be they paper or hard. Cash is trash, especially in Japan and Europe where you have to PAY banks to take your money.

The fact is that shares with the fastest price appreciation over the past 12 months are trading at valuations that are almost 25% higher than normal.

I have traded and invested through all of this before; the Nifty Fifty of the early 1970s, the Great Japan Bubble of the 1980s, the Dotcom Bubble of the 1990s, and of course the 2007 bubble top. And there is one thing all of these market apexes have in common. They inflated a lot longer than anyone expected, sometime FOR YEARS!

You could be conservative, go into 100% cash, and just stay on the sidelines until mass group thinks, hysteria, and insanity leave the market. But that could be a very long time.

And after more than a half century in this business, there is one thing I know for sure. Traders who don’t trade, investors who don’t invest, and newsletters that don’t recommend all have one thing in common. THEY GET FIRED. Just because investing gets hard is no reason to quit the market.

The Japanese have a great expression for this: “When the fool is dancing, the greater fool is watching.” So, I’m going to start dancing away. What will it be? The cha cha, the limbo, or the Watusi?

Hmmmm. Let me see. Let me Google what everyone else is doing. While I’m at it, I think I’ll try to score some ticket to the 2020 Tokyo Olympic opening ceremony.