Sunday, May 20, 2018

MAY 2018 DESERT IF THE REAL ECONOMICS INVESTMENT NEWSLETTER


THE ECONOMIC “HISTORY” OF THE FUTURE

Predicting the future is much of what investing and financial analysis is about. That is what the Author Rob spends much of his time doing, although as an options trader, his “future” is between a few hours and a few days. That is why he cannot share his investment picks online and in the newsletter. The market moves to fast for the advice to be relevant.  But the Author will share a “seat of the pants”* index ETF strategy that uses special ETFs to attempt to earn returns that aim to be two three times the index, and ETFs that aim to earn an inverse return of two to three times when the indexes fall.  

Most investment analysts take a much longer view of the future helping their clients build retirement nest eggs or savings to buy a business, pay for their kids’ college, or other worthwhile goals. This technique is called, and hopefully is, “getting rich slowly.” There are good strategies for accumulating wealth with long term methodology. Two common strategies to employ are a value-based approach consistent with Benjamin Graham and Warren Buffet. Another common strategy is growth, looking for stocks that will grow faster than the market. A great way to learn this strategy is from betterinvestor.org, often called GARP (Growth at a Reasonable Price).  There are a plethora of sources for this investment advice and assistance.

The Author’s most important investing mentor was Brad Busick from Albuquerque, NM. Bart has since passed away. Bart was incredibly knowledgeable and wise. He was also a trained musician, having earned a four-year college degree in music studies.

Bart and I once talked about how we spend so much time looking at charts and reading analyses, yet we are still often wrong. He said that all that we really need is a copy of the Wall Street Journal from one year in the future.  Always the cynic, the Author responded “yeah, but with our luck it would be a copy of the Wall Street Journal from the day after a holiday.” **

LEAVE PREDICTING THE FUTURE TO THE FUTURISTS

When we look at the “history” of predicting the future, two opposing visions emerge. One is a dystopia, a world that it beset with problems or is controlled by a dictatorship. An example of these dystopias is H.G. Wells book “The Time Machine.” In this book, Wells’ character travels far into the future to a world where a race of future humans called the Morlock’s raise the other human species, the Eloi, for food.

Wells’ vision of the future was less dystopian in his book “The Shape of Things to Come,” written in 1933. This book described the state of the world from 1933 to 2016. “The Shape of Things to Come” presented a world in economic collapse and war.

The other vision is a utopian vision, a world where human problems have been solved and humans live without conflict or need.

Are we describing Bears and Bulls? Maybe, but the situation is more usually more nuanced. So let’s take a look at some recent governmental projections. From 2001.

FILL IN THE BLANK. “IT WAS THE ____ OF TIMES, IT WAS THE _____ OF TIMES.”

In 2001, the US budget was running a surplus. The stock market was peaking in the wake of the dot.com boom. The US economy had booked four previous years of 4.4% GDP growth. It was Bill Clinton’s economy. So how do you screw that up?

In January of 2001, George W. Bush was inaugurated. The Office of Management and Budget projected a budget surplus of 800 billion in 2011. The Congressional Budget Office projected even higher surpluses.
Around the time, Alan Greenspan stated that the economy was targeted to pay off the deficit by 2010. Budget surpluses were predicted until 2030. Then came the tax cuts. And assumptions, assumptions, and more wrong assumptions.  The “history of the economic future.”

As John Mauldin states in his newsletter “Thoughts from the Frontline:”

As of January 2001, the CBO foresaw another decade of 3% real GDP growth, 3% inflation, unemployment at 5% or below, and flat-as-a-pancake interest rates. That scenario was never likely to happen, and indeed it did not. These assumptions fell apart almost immediately and the situation only worsened. But by then the assumptions had been used to justify decisions that were, for various reasons, all but irreversible.

But things went wrong right off of the line.

A.     Congress passed tax cuts that were not set off of by spending cuts. (This is standard American policy.)
B.     September 11 required massive military and security spending.
C.     The Medicare Part D Drug Benefit was enacted.
D.    The economy slipped into recession.

Slowing GDP growth drive deficits. As Mauldin says, the difference between 2% and 3% GDP growth are substantial, especially when compounded over time.  And the drop from 4% to 2% GDP growth was devastating.  And worse, lower GDP and recessions cause increases in government spending as people increase draws on public benefits.

The takeaway-small errors in spending and tax cuts have meaningful effects on budget numbers. But when these small errors are compounded by slower than projected GDP growth, the errors become mammoth.

Historically, and by historically the Author notes this involves much of the last half of the 20th century, GDP grew at an annual real rate of 3.2%. That number was generally correct until the start of the 2000s.  Economists now talk about the “new normal that is closer to 2.9%.  


In recent years, 3.2% GDP growth figure is rarely achieved. In 2017 the average GDP was 2.3%. But estimated for 2018 predict GDP growth closer to 3.0%.  But still no 3.2%.

So how do we address the “history” of the future? Although this statement might be a little broad and bearish, we cannot resist predicting the future, but the “history” of the future demonstrates we are usually been wrong. And we must recognize  growth closer to 2.8% is the new “normal” GDP growth, and estimates that exceed that growth rate are fanciful and a formula for an exploding deficit.  

MONEY MANAGEMENT BY THE TRAILER PARK BOYS***

There are classes of Exchange Traded Funds (ETFs) that are designed to track stock indices like the S&P 500, the Dow Jones Industrial Average, the NASDAQ, and other indices. We are all familiar with these funds and many of us hold large blocks of these ETFs in our portfolios.

But there are ETFs that are structured to earn double or triple the returns of these indices. They do this with leverage and other strategies. These funds are sometimes called dynamic funds.  EXAMPLES:
Ultra (2x) & UltraPro (3x) MarketCap ETFs
  • (ETF Name – Ticker – Benchmark Index)
  • Ultra QQQ – QLD – NASDAQ-100 Index
  • UltraPro QQQ – TQQQ – NASDAQ-100 Index
  • Ultra Dow30 – DDM – Dow Jones Industrial Average
  • UltraPro Dow30 – UDOW – Dow Jones Industrial Average
  • Ultra S&P500 – SSO – S&P 500 Index
  • UltraPro S&P500 – UPRO – S&P 500 Index
Direxion 2x, 3x MarketCap ETFs
  • Daily S&P 500 Bull 2x Shares – SPUU – S&P 500
  • Daily S&P 500 Bull 3x Shares – SPXL – S&P 500
  • Daily Mid Cap Bull 2x Shares – MDLL – S&P MidCap 400 Index
  • Daily Mid Cap Bull 3x – MIDU – S&P MidCap 400 Index
  • Daily Small Cap Bull 2x Shares – SMLL – Russell 2000
  • Daily Small Cap Bull 3x – TNA – Russell 2000
There are also dynamic funds that amplify returns of market sectors, commodities and bonds. 

Similarly, there are inverse funds that attempt to return positive one, two or even three times index and sectors when these sectors fall. These funds operate inversely to the indices. So if the S&P 500 goes down by one percent, the inverse fund will go down by one percent. Additionally, there are inverse funds that move two, and three times the indices. EXAMPLES:  https://www.thebalance.com/list-of-leveraged-inverse-etfs-1215227
Well, anyway, that is what they are supposed to work that way. But we will take about that later.

To take advantage of market direction that your daily trading strategy predicts, buy these funds to catch a daily market movement. Then keep a tight stop loss in place. The Authors use a one to two percent trailing stop order.  It is important to remember two things. Your prediction for the day must be correct. And do not hold them overnight. The linked article will explain these risks and some others.


Are these ETFs too good to be true? Somewhat, even if you manage to use them properly. They are definitely too good to be true if you do not understand the risks.

NEW PRODUCT LAUNCH

The Desert of the Real Strategic Investments has been working with representatives of the former Soviet states of CRIMEia and Pottsylvania and we are now unregistered foreign agents of this new investment product.  The name of the product is Uzbekisham. This investment product is a “Reversal” fund. It provides someone a positive “reversal” of fortune (reverser), while “reversing” the fortune of someone else (reversee).  (Doesn’t that always seem to happen, the “eee” gets the short end money.) It is an inverse fund depending upon who pays for it.

The fund is operated by someone, or something, known as Petrov “Potemkin Village” Vasilovitch.  The fund will hold cash assets and invest these assets in Swiss or Bermudian bank accounts. And other assets that lack transparency.

We anticipate that the product will be attractive to divorcing spouses, gamblers, business partners about to part ways, and New York attorneys that represent president trump.

The fund also offers additional services for a large fee. These additional services include banking and accounting services.  The fund can work with the reverser to establish ficticous payees, sweep accounts that leave the counting house floor dust free, and wire transfers to servers so invisible on the Dark Net that sometimes even Petrov Vasilovitch cannot find them.

For a much higher fee that fund will provide specialized human resource deployment or human resource disdeployment. You will have to talk to Petrov about these services.

IMPORTANT DISCLOSURE: Desert of the Real Economics Strategic Investments disclaims and all liability for users of the “Reversal” Fund. This disclaimer is so obvious that we did not even need to call our attorneys to figure this one out.

*But with the substantial risks of these dynamic and inverse funds, the investing experience could become a “Lose your Shorts” event.

**The stock markets close on some holidays and since nothing had traded the day before, there are no stock price quotes in the paper.

*** Trailer Park Boys is a mockumentary series on Canadian television. It is available on Netflix and probably lots of other modalities. The series revolves around marginal criminals, drunks and dopers that live in Sunnyvale Trailer Park in Nova Scotia. http://www.trailerparkboys.com/
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