Monday, August 22, 2016

August 21 Update: Keeping HDGE as insurance

The Schiff-Maloney portfolio continued to follow the bullish triangle pattern over the past two weeks, and its value reached an all-time high of over $112,800 on Thursday.  Presently it stands at $112,137.



I've been thinking about the bearish stance on the U.S. stock market using HDGE, and its seeming futility in the face of central banks buying tens of billions of dollars worth of equities, but I've decided to keep HDGE in the portfolio.  As much as the returns have been hurt by the rise in the stock market and the corresponding drop in HDGE, it provides vital insurance against a global market crash, particularly for retirees or people nearing retirement.  The portfolio has been making steady gains since November of last year, and that's more important than the performance of just one fund.



Sunday, August 07, 2016

August 6 Update: Fooled by the Fed Again

1) Stealth QE and HDGE

One-quarter of my Schiff-Maloney portfolio is a bet against the U.S. stock market using a bear fund (ticker symbol HDGE), with the proviso that I will sell it if and when the Federal Reserve Bank announces the next round of quantitative easing (QE).  The first three QE programs all caused stock prices to rise and HDGE to fall, while in 2015 the market started to fall and HDGE rose when there was no quantitative easing.

Just two days ago it was revealed that a new round of stealth quantitative easing (SQE?!) has been going on under our noses for most of 2016.  The website Zerohedge revealed the big news on Thursday.  The Swiss National Bank, already an owner of $41 Billion of U.S. stocks as of 2015, purchased another $21 Billion in just the first six months of 2016, thus explaining the out-of-nowhere rally that's taken the stock market to new all-time highs:

If the central bank of Switzerland was compelled to buy U.S. stocks, other central banks (Japan, EU) were probably following suit.

This was a clever and timely intervention by the central banks.  It was clever because many U.S. investors had recently become aware of the nearly perfect correlation between the Fed printing money (QE1, QE2, and QE3) and the stock market rallies from 2009 to 2014 shown above.  Having foreign central banks do the next round of stock buying without any announcement of QE4 by the Fed, and keeping the U.S. money supply flat, made it look like this year's rally was due to prosperous and optimistic investors buying stocks, when in fact it was foreign central banks who were buying stocks with newly created currency.  The intervention was timely because the U.S. stock market was rolling over in late 2015, and was approaching a 2-year low point in February of this year.  Just as QE1 stopped the 2008 market crash in its tracks, SQE reversed this year's decline and has taken stocks to new all-time highs.

The lesson is that central banks will always stay one step ahead of investors - even well-informed investors - and there is almost nothing they won't do at this point to prevent a bear market or a crash.   There was probably a quid pro quo agreement between the Fed and the other central banks that instigated this year's SQE program, but I don't know what "quid" the Fed gave in return for the foreign banks' "quo", and by the time somebody figures it out, it will probably be to late for investors to profit from it.

Future stealth intervention will probably prevent any major stock market decline before the dollar collapse happens, and that would make HDGE a pointless component of my portfolio.  I will consider dropping it over the next few weeks.

2) A simpler portfolio for small accounts


For investors with small accounts, such as a $5,000 Roth IRA starter account, I've identified some ETFs that can create a decent portfolio with just a few purchases.  (Remember that I may be ejecting HDGE soon, which would make the portfolio even simpler.)

DVYA 25% (Pacific ex-Japan Dividend Fund)
FXF  25% (Swiss Franc Currency Fund)
GLTR 25% (Precious Metals Fund)
HDGE 25%


Aside from HDGE, this portfolio uses only three funds to invest in ~40 stocks, five of the top six Schiff countries (Australia, New Zealand, Hong Kong, Singapore, Switzerland), and 4 precious metals. (GLTR invests in a combination of gold, silver, platinum and palladium!)

3) Slower trend


The Schiff-Maloney portfolio fell 1% this week to $111,369.  Overall its value is still rising, but it's been growing more slowly since mid-June.


4) New silver bullion bar

Many online bullion dealers, including Provident Metals and JM Bullion, are selling a new 5-ounce silver bar that can be broken up into 20, 1/4 ounce pieces for bartering.  It looks to me like an ideal combination of large and small, and best of all it's cheaper than buying twenty quarter-ounce coins.


Saturday, July 30, 2016

July 30 Update: Boing!; Bailing on Bonds

1) BOING!

The value of the Schiff-Maloney portfolio bounced up off of the rising lower trend line, netting a 1.5% gain for the week. (click chart to enlarge)


2) SELLING BONDS

I'm shaking up the portfolio this weekend by selling both of the bond funds (ALD, AUNZ) and replacing them with foreign currency funds, which are analogous to bank accounts or money market funds.  Thanks to some fortuitous timing I was able to take advantage of a six-month window of opportunity in which the value of the dollar relative to Schiff currencies started falling while the global bond bubble continued to inflate.  The closing gains for the ALD and AUNZ positions are 3.5% and 8.5%, respectively.

Given that global bonds are in a bubble, it was technically against the philosophy of the Schiff-Maloney portfolio to invest in them at all, but I had a reason for briefly surfing the bond wave before it broke.   A sizeable chunk of my savings is in a group retirement plan that has access to only a limited number of funds.  Most of them are tied to doomed U.S. stocks and bonds, and none of them invest in foreign currencies, but a few of them have bonds from several countries, including Schiff countries.  To maximize my diversification while getting some protection from the dollar collapse, I was obliged to invest in three foreign bond funds and hope for the best.  In the interest of convincing myself that these funds were adequate, and to demonstrate this decent alternative to other investors with similar limitations, I found ALD and AUNZ and used them in my accounts where I have complete freedom to choose any investment.

A recent post by Mike Maloney inspired me to take a closer look at the bond situation, and what I've seen convinces me that it's a great time to sell the bonds in the Schiff-Money portfolio.  First, Maloney points out that the "yield curve" in the U.S. recently made a big move towards "flattening":


When bond yields fall it means bond prices are rising, and in the chart below you can see long-term U.S. treasury bond prices (20-30 year maturities) have reached a rising upper trend line (green) for only the fourth time since 2008:

There's also a lower trend line (red) that will intersect the upper trend line some time in 2018.  Market technicians call this a "rising wedge" pattern, and in this situation the price usually reverses and falls below the red line well before the trend lines meet, thus it's quite possible that this is THE peak in bond prices.  A drop back to pre-2008 prices would be a ~35% drop, and in this interconnected global economy all foreign bonds would be dragged down as well.  Most bond funds have shorter average maturities (5-10 years), so the fall will not be as steep for ALD, AUNZ, or the mediocre funds that I'm stuck with in my group plan.

3) NEW CURRENCY FUNDS

I've used the bond sale proceeds to purchase six exchange traded funds (ETFs) that invest in foreign currencies.  Three of the funds are in currencies of top Schiff-approved countries, and three more are second-tier currencies included for diversification.

FXF: Swiss Frank CurrencyShares
FXA: Australian Dollar CurrencyShares
FXSG: Singapore Dollar CurrencyShares

FXS: Swedish Krona CurrencyShares
FXB: British Pound Sterling CurrencyShares
FXC: Canadian Dollar CurrencyShares

The new funds are listed at the bottom of the table below.  Presently they're each sitting at an $8 loss, reflecting the trading fee for a Fidelity account.  (For some reason the ticker symbol for the Singapore fund [FXSG] doesn't add or subtract from the value of the portfolio in the chart, but does for the table. I'm not sure yet how to solve this.)

Finally, this week I encourage you to visit your local coin store with a wad of cash and establish good relations with the proprietor(s).

Saturday, July 23, 2016

July 23 Update: Made in China

The Schiff-Maloney portfolio had another down week with a drop of nearly 1%, but as you can see in the chart below, this is actually an expected decline that takes the value down to the rising red trend line for at least the 8th time since February.  Assuming the current trend holds, this is probably a good time to add money to the portfolio.

Schiff-Maloney Portfolio performance (CLICK TO ENLARGE)


I end today's quick update with something tangentially relevant that I find darkly amusing.  The Wall Street Journal recently produced a video on the Panama Canal expansion project:


The video is informative enough, but at the 1:30 mark the video explains the primary justification for the expansion project, and in doing so it inadvertently lets us glimpse the house of cards that we're sitting on.  The nice young lady explains, "[it] would make it cheaper and faster to get (Asian) consumer goods to big cities along the Atlantic Seaboard," and as an afterthought she notes that it might make it easier for the U.S. to export food and energy.  Even assuming that the canal helps our exports, a country with a supposedly 21st-century, high-tech economy can't stay that way if it's importing most of its consumer goods in return for sending some corn, coal, and treasury bonds.

People assume that this one-way flow of manufactured products can somehow go on forever, but it won't last.  China is wise to what's coming, as evidenced by their recent massive purchases of gold bullion:

Most of us won't be able to afford Chinese goods after the dollar collapses, but Chinese consumers with good manufacturing jobs and gold-backed money will be happy to buy their own products in our stead.

Friday, June 03, 2016

Jobs data looks bad; bots turn super-bullish

Today was a banner day for my Armageddon portfolio - both the dollar and the S&P 500 fell, and that means just about every fund in my portfolio made gains.  The highlights were a 9.7% gain by silver miners [SIL] and an 11.2% gain by gold miners [GLD].



For anyone who is paying attention to the S&P 500 bots, the internal price forces number is now even higher at 8.9 out of 10.


Wednesday, May 18, 2016

Bots are extra bullish now

My S&P 500 market bots have become even more optimistic about the U.S. stock market's prospects for the next few months.  The Internal Price Forces number has risen to 7.9, which is fully bullish. When the bots are this bullish, only a pre-crash signal a la 1929 or 1987 can make them switch to a bearish stance. 


Despite the bots I remain in my bullish-foreign-stocks/short-U.S.-stocks stance.  The Federal Reserve Bank has been the driver of the U.S. stock market since 2009, and that's not going to change any time soon.  Presently the Fed has taken a pause in the money printing and that leaves the market vulnerable.  When the Fed resumes printing (and it will resume printing) the market will start climbing again and the bots will be proven right, but for the wrong reasons.

Tuesday, May 17, 2016

The Schiff Thesis Portfolio

I've set up a portfolio on Google finance that includes my transactions and holdings since I started betting against the dollar on October 14 of last year.  I normalized the starting amount to $100,000.  Here's a screen capture of the results so far (click to enlarge):


Google finance doesn't always give the correct names of the funds, so here's a table of the ETFs I'm using:

ETF TickerDescription
AUSEAustralia + New Zealand Bonds
ALDAsia Local Debt (Bonds)
AUSEAustralia Dividend Stocks
ENZLNew Zealand Stocks
DVYAAsia/Pacific Dividend Stocks
EWMMalaysia Stocks
NORWNorway Stocks
EWLSwitzerland Stocks
HDGEUS Bear Market
SILSilver Mining Stocks
USLOil price ETF (12 month futures)
GDXGold Mining Stocks

I'd rather have a live public portfolio that readers can check at any time - does anyone know of a website that does this?

Tuesday, April 26, 2016

How 'bout them bots!

The S&P 500 market bots have apparently come through once again.  On October 26 last year they switched to a bullish stance with 100% confidence based on an unusual seasonal factor, then last night - exactly 6 months later - they returned to their normal operating mode.  Although they remain in a bullish stance, the "internal price forces" are now neutral with a value of 5.3.  The S&P 500 index was at 2065 when the bots turned bullish in October, and this morning the index opened at 2091, so at the moment the six-month bullish call has eked out a 1% gain.

I've made good gains over the past six months, but it wasn't by following the bots' advice.  Regular readers know that I've been ignoring the bots this time, and instead have been bearishly invested against U.S. stocks with HDGE.  However I've had an equal investment in certain foreign stocks funds, and because these funds have gained more than the S&P over this period (i.e., they've gained more than HDGE has lost) I've made a net gain.

However the REALLY big gainer has been my 10% stake in the Gold Miner's ETF, which has absolutely skyrocketed in the past few months:


Ironically, the ability of my bots to time the U.S. stock market has been of little significance lately, and I suspect the bots will be even less significant over the next year or two as the dollar collapses and gold, silver, and foreign assets make large gains in dollar terms.

Tuesday, April 05, 2016

Dollar's fifth time on the brink

The U.S. Dollar Index is a weighted average of the exchange rate between the dollar and major currencies like the Euro and Yen.  The index started with a value of 100 in 1973 after the dollar was disconnected from gold, and it has since ranged from 165 (in 1985) to 71 (in 2008).  Lately it's been hovering in a range between 94 and 101, and today marks the fifth time in 11 months that it has reached a rising support line, shown in blue in the chart below:


It's only a matter of time before the Federal Reserve Bank lowers interest rates back to zero, or begins printing more money to prop up the stock market, or both, and the index will likely fall through the support line at that time.  It's also possible that foreign investors will anticipate those moves by the Fed before they happen, and if the index breaks below the support line before any Fed actions, it would both reveal that anticipation among fundamental investors, and trigger a bearish rush by currency traders.

This eventual breakdown is precisely why I'm in gold and silver, gold mining stocks, and stocks and bonds of foreign countries with healthier monetary policies.  Americans who are fully invested in U.S. stocks and bonds, or who keep lots of savings in dollars, are going to become much poorer.

Friday, April 01, 2016

Will the bots get a win here?

My automated S&P 500 market-timing bots turned bullish on October 26 last year, when the S&P 500 index was about 2065.  The market then fell 13% from December through February, and has since regained nearly all of the losses.  Yesterday the market closed at 2059, just six points below the bots' buy point.

I chose not to trust the bots at this time, and made a hedged bet of 30% bearish on the U.S. stock market [HDGE] and 30% bullish on some foreign funds that match the "Peter Schiff criteria." (Australia, New Zealand, Hong Kong, Singapore)  This combination has made a small gain over the past few months, which is good enough in these crazy central bank manipulated-markets.

The rare seasonal factor that has the bots pegged at 100% bullish is going to end very soon.  It will be interesting to see if this bullish position would have paid off after all, and what the market stance will be when the seasonal factor ends.

Sunday, February 14, 2016

Some previews from the past

Do you remember the 2008 financial crisis?   It will soon be returning to a neighborhood near you, only it's going to be even bigger this time.  In the last eight years every nation has gotten deeper into debt, and the surviving banks (those that were bailed out in 2008) have gotten bigger and have taken even greater risks, thanks to seven years of 0% interest rates, $3 trillion printed by the Fed, and trillions more printed by other central banks in Europe and Asia.

You may think you have money in your bank account, but even in good times the vault doesn't have a single penny with your name on it.  There's a number on a computer somewhere that indicates your account balance, but the money isn't there.


Tom asks for $242 dollars, which before 1935 was equivalent to 12 ounces of gold.  Do you have 12 ounces of gold?  If not, it will cost you $14,800 to get it at February 2016 prices.

On the other side of your bank account there are people with student debt, car loans, and home mortgages who will soon stop making their payments to your bank.  In theory the bank can repossess the cars and homes and get *something* back when the borrowers default, but if everyone defaults at the same time, and cars and homes all hit the auction block simultaneously, then prices will plummet and the banks won't recoup the money that you think is in your account. Corporations have also been seduced into borrowing billions of dollars that they can't pay back, and much of their debt is in the bond market where it waits to implode.  When this all goes down, the ugly truth will finally slap you in the face: the banks can't even maintain the electronic numbers, let alone actual physical money.  It's all gone.



... UNLESS the Federal Reserve Bank steps in first and prints trillions of dollars more in order to bail out all of the bad debt before the implosion happens. Yes, that will ensure that you still have your electronic numbers at the bank, but the fatal side effect is that you'll be spending $1000 per day on food.  As I've been saying for a while now, one way or another, "a great deal of illusory capital is about to disappear."

Sunday, February 07, 2016

OK. I get it now.

History shows that every form of paper currency eventually becomes worthless.  After World War I, European currencies like the German mark and the Italian lira plummeted in value, requiring governments to print larger and larger denominations just to facilitate the simple act of buying food.


In American history we have the examples of the Continental currency and Confederate States dollar becoming worthless during wartime. It will be no different for the yen, the euro, or the dollar, as the central banks in these modern countries have been printing new money at an accelerating rate since the financial crisis of 2008.

A 2,500 year old Lydian gold coin, on the other hand, is just as valuable in terms of its gold content today as a newly minted 2016 American Gold Eagle coin.  The relative staying power of gold compared to paper is nearly infinite.


For a while the U.S. dollar was actually tied to gold. Anyone with a $20 bill could, in theory, walk into a bank and exchange the paper for one ounce of gold.


However that's not the case today.  In 1971 the U.S. government ended the dollar's connection to gold altogether.  From that point on the dollar only had value because Americans and foreigners alike were in the habit of trading with it, and because nearly every foreign bank in the world backed its local currency with the (formerly gold-backed) dollar.  Now that the Fed is gearing up for a fourth round of Quantitative Easing money printing, the dollar's days as the world standard are coming to an end.


I'm convinced that the citizens of the First World will soon have the same reaction that Auda Abu Tayi did in the movie Lawrence of Arabia; they will realize that they've been working all of these years to earn worthless pieces of paper and ephemeral electronic numbers which the Federal Reserve and other central banks can ceaselessly create out of thin air.

Friday, December 18, 2015

Temporarily ignoring the bots

Given the deteriorating economic fundamentals, bearish market internals, and recent interest rate rise after an unprecedented seven years of 0% interest, I don't think the usual positive seasonality that's making the bots bullish applies today.  I've committed the remainder of my retirement funds to the bear market ETF (HDGE).  Here's the summary of my current holdings:
  • Schiff country stock ETFs: 30%
  • Schiff country bond ETFs: 30%
  • Bear market ETF (HDGE): 30%
  • Gold miners (GDX): 10%
One of the long term strengths of this portfolio is that the U.S. stock market is highly overvalued relative to the Schiff countries, so even if the dollar doesn't collapse, the bearish-U.S./bullish-foreign combination will eventually pay off.

---
Edited on January 20th to correct typo - I swapped the stances of the U.S. and Schiff countries.

Monday, December 07, 2015

The Schiff Thesis: Introduction

I stumbled across Peter Schiff and his views on the economy a couple of years ago when I was researching the cause of the 2008 financial crisis.  Although there are now several vocal economists who are predicting more or less the same imminent economic disaster that Schiff is, I'm giving Schiff extra credit for being - as far as I know - the first person to widely broadcast warnings about the previous bubble in the mid 2000's, despite receiving plenty of on-screen scorn and ridicule from all of the experts who didn't notice the looming sub-prime crisis.

More recently Schiff has correctly predicted the Fed's ongoing behavior of promising to raise interest rates "any day now", while never actually doing it.  Schiff is further making the case that the coming economic collapse is simply a continuation of the previous crisis that wasn't allowed to fully reach its resolution, so economists who now agree with Schiff that another collapse is coming are, as far as Schiff is concerned, latecomers.  Out of deference to his unusually accurate and early record of big-picture predictions, I'll refer to countries that Schiff generally recommends investing in as "Schiff countries", and funds that invest in those countries as "Schiff funds", even though Peter Schiff doesn't actually manage or endorse these funds.

According to Schiff, the Federal Reserve Bank is the major player in the looming collapse.  The Fed has been engaged in a long term program of lowering interest rates, from its peak of 19% in 1981 down to 0% in 2008.  The Fed sets the interest rate of loans between the Fed and major banks, and this rate tends to propagate to other parts of the economy such as bond yields and interest rates for mortgages and savings accounts.


These ever lower rates have made it easier for the federal government to borrow ever increasing amounts of money, so the Fed is partly to blame for our exponentially growing national debt, which is approaching $19 Trillion.  Low interest rates actually encourage everyone to borrow more money, including families who can buy bigger homes with smaller down payments, and drivers who can buy bigger cars and get cash back on the day of purchase.  Corporations also take advantage of low interest rates by borrowing more money and taking bigger risks than they otherwise would.  Put simply, artificially low interest rates create financial "bubbles" that inevitably "pop", and the lower interest rates are, and the longer they persist, the larger the bubbles get.

Even though it's the Fed's low interest rates that create every doomed-to-pop bubble, the Fed's strategy since about 1990 has been to respond to each economic decline with even lower interest rates, thereby maintaining the debt bubble and re-inflating it to larger proportions in new sectors of the economy. After the dot-com bubble popped in 2001, the Fed set rates below 2% for a couple of years, which started inflating a housing bubble and a second stock market bubble.  When that bubble started popping in 2008, and threatening to take the entire global economy with it, the Fed stepped in one more time and set rates to 0%, where they have now been for seven years.

According to Schiff, it is this most recent period of zero percent interest that has finally created the mother-of-all-bubbles.  Since 0% interest rates weren't sufficient to stop the collapse in 2008, and since setting rates below 0% might cause the world to lose faith in the U.S. economy, the Fed started creating trillions of dollars to bail out banks that loaned too much money and save corporations that risked too much.  Instead of admitting to printing money, which might illicit fears of Weimar Germany or modern Zimbabwe, the Fed used interesting names like "TARP" and "quantitative easing" in place of "inflation".  Whatever term one uses, the combination of zero percent interest and trillions of dollars of printed money has inflated bubbles in many parts of the economy, and at a scale that dwarfs the 2%-for-two-years period that fueled the sub-prime crisis.  Today we're in a third stock market bubble, a second housing bubble, a bond bubble, a car loan bubble, a college loan bubble, and a government bubble.  The path of least resistance, both economically and politically, for all of these bubbles to pop together is for the U.S. dollar to collapse.

The next time the mega-bubble starts to pop, the Fed will probably try to stop it by printing money like never before, and this is true regardless of whether or not Federal Reserve Chair Janet Yellen understands the nature of the problem.  The Fed must be partly aware that the economy is still in a crisis, since it has undertaken three rounds of quantitative easing from 2008 to 2014 and kept interest rates pegged at 0%, but there's no way of knowing what conclusion the Fed is arriving at now that the economy is still stagnant after $3 Trillion of printing.  It is possible that Yellen will conclude that she simply hasn't printed enough, and that $10 Trillion more may finally take the economy out of danger, however the more interesting scenario would be if Yellen wakes up in her bed one morning and realizes that she never should have lowered rates and printed money in the first place, because at that point she would be trapped by her own past mistakes rather than by her current economic philosophy.  Were Yellen to announce that day that she was raising rates to 5%, and that catastrophic bankruptcies and bond defaults would unfortunately result, but that in the long run the economy would be better off for it, she would become public enemy #1 overnight.  No, even if Yellen is wise to what's happened, it's far better for her legacy to print even more money this time and pass on the ticking time bomb to her successor at the Fed.  In the worst case she will cause hyperinflation to start before her tenure is up, but at least she'll be able to claim that she was only trying to help everyone by giving them money and preventing bankruptcies - who could argue with that?

It is the inevitable tidal wave of money printing in response to the inevitable mega-pop that will cause the dollar to collapse, and the decline may start even before the printing starts if foreign creditors realize ahead of time what has to happen and cash out of their U.S. assets.  As the exchange rate between the U.S. dollar and other currencies plummets (or skyrockets, depending on your perspective) foreigners will see prices of U.S. goods plunge, while Americans will see prices for imports go through the roof.  The problem for retirees and people saving money in the U.S. is that the effective value of their nest eggs will plummet along with the value of the dollar.

The solution to preserving wealth during this collapse is to move savings into assets that can't be inflated (gold) and into the stocks and bonds of other countries where the threat of inflation is at a minimum.  Peter Schiff's recommendations for which countries to move money to will be the subject of the next post.

Saturday, October 31, 2015

Needing bots, having bots, superseding bots

Before I talk about the mega-bubble which will eventually become the most important story on the planet, I want to put my new investment strategy in context by reviewing my history of learning about, and interacting with, the stock market.

The first time I ever paid real attention to the market was in the late 1990's when I had my first 403(b) retirement account with TIAA-CREF.  Some time around 1998 I noticed that TIAA-CREF's growth fund was outperforming its value fund, and so I naturally moved all of my savings over to the growth fund(?!).  Soon after that I started reading and following the Motley Fools to try my hand at individual stock picking, and in 2000 I invested in my first four companies, all of them members of the Dow 30.

Everybody knows what happened next; the stock market tanked.  Although the worst damage was done to the dot-com stocks in the NASDAQ exchange, growth stocks in general and the large companies of the Dow 30 were pretty much the next worst places to be.  By 2002 I was thoroughly discouraged, and I put my stock market research on ice.

Around 2005 I learned that an investment adviser named Bob Brinker had predicted both the market top in 2000 and the market bottom in 2003.  I subscribed to his newsletter after that, but more importantly I realized that it was indeed possible to time the stock market, and thereby avoid losses during bear markets.  Since my natural talent is for finding patterns in complex data, I immediately set out to learn why Bob Brinker's method worked, and then to improve on it if possible.  After a couple of years I was back in business; I had found additional market-timing factors which (to my knowledge) were not used by Bob Brinker, including a pre-crash signal in market data that I've never seen anyone else illustrate or otherwise talk about.

In 2007 I started going public on this blog with my own buy and sell signals, albeit still backed up by Bob Brinker's overall view of the market.  Unfortunately I was still doing everything by eye, rather than by impartial calculations, meaning all of my decisions still had to pass through my own emotional filter and hubris.  Even though I had discovered an important pre-crash signal that preceded the crashes of 1929 and 1987, I didn't notice when it happened right under my nose in late 2007 right before the plunge of January 2008.  Once again I was suffering during a bear market despite having put considerable effort into avoiding just that.  To my additional horror, the great Bob Brinker remained 100% invested in stocks all the way through the 2007-2009 bear market.  That ended my trust in Brinker's method.  Fortunately I gathered my wits and clawed back with timely bear fund purchases over the next several months.

I emerged from two stock market bubbles and two bear markets with the following perspectives:
  1. Sometimes economic distortions cause parallel distortions in the stock market, as happened in the late 2000's with the sub-prime housing bubble, but sometimes the stock market experiences a "mania" bubble just from hype, as it did in the late 1990's.  (I'm less convinced about this latter point now.)
  2. Regardless of whether particular market moves are driven by real economics or short-term enthusiasm/panic of the herd, I had found market data "indicators" that correctly signaled market tops and market bottoms in each case.  In other words, it's possible to see the beginning of a buying frenzy or a selloff before it's reflected in the price of stocks, regardless of the cause.  (I remain convinced of this.)
My next goal had to be the design and implementation of an automated market timing method that, once running on a computer, wouldn't rely on me personally to collect data, interpret data, or produce a forecast. After much effort and several starts and stops, the first version of my "market bots" went online in June 2013.

Oh, if only the perfect stock market bot was the only thing we needed to maximize our retirement savings!

Incredibly, now that I have the exact tool I that I've wished for since 1998, I'm suddenly convinced that it's going to be moot when the next bubble pops.  The dot-com bubble was focused on a subset of U.S. stocks; the sub-prime bubble combined a housing bubble with a global stock market bubble; and now I fear the next bubble involves ... just about everything.   Most importantly for investors who wish to preserve a nest egg for retirement, I think the next bear market will include a steep plunge in the value of the U.S. dollar, meaning that even if you preserve the numerical value of your 401(k) by staying out of plunging U.S. stocks, you will still lose your purchasing power anyways because the dollars you managed to hang on to will become almost worthless.

This mega-bubble and my strategy for avoiding it will constitute the next few posts.

Bots back to bullish

The S&P 500 bots turned bullish again on Monday, October 26 (apologies for the delayed post) due to a rare seasonal factor, and I sold all of my shares of HDGE on Tuesday morning.  I anticipate that this seasonal bullishness will gradually fade away by early 2016.

Meanwhile about two-thirds of my total retirement portfolio is in a combination of foreign stock and foreign bond funds, as I will detail in an upcoming post.

Sunday, October 11, 2015

Is it really a bubble? Fair dinkum, mate!

How can anyone really know if the stock market is overvalued or not?  Times change; numbers can be interpreted any number of ways or even be fudged; and some prognosticators are naturally pessimistic while others are optimistic.  Maybe the stock market is just fine, even if the yield is only 2%.  We've already had two bubble peaks that were followed by crashes in 2000 and 2007 - how could we possibly have a third bubble in less than two decades?

Australia, a country that is similar to the U.S. in many ways, can be thought of as a control group in an experiment, and Australia's stock market (All Ordinaries Index) is a nice baseline that we can compare with our S&P 500 Index.

(CLICK TO ENLARGE)

In this chart that spans from 1995 to 2015, we see three massive stock market rallies in the S&P 500, shown in red.  The first rally from 1995 to 2000 was the infamous dot-com bubble which deflated from 2000 to 2002.  The dot-com mania was a mostly American phenomenon centered in Silicon Valley and the NASDAQ stock market, and was sparked in part by low interest rates, particularly a Fed Funds rate of 3% throughout all of 1993.  Australia had neither the glitter of Silicon Valley nor the low interest rates (6% in 1993), and accordingly its stock market (blue) participated in neither the bubble nor the decline.

The second stock market bubble started in 2003 while the S&P was still above the level of Australia's index.  In an effort to cushion the blow from the dot-com bust, the U.S. Federal Reserve set interest rates below 2% from January 2002 through mid-2004, while Australia's interest rate remained above 4%.  Unfortunately for Australia and the rest of the world, low U.S. interest rates encouraged the invention and exportation of sub-prime loans, mortgage-backed securities, and trillions of dollars worth of risky derivatives. Australian stocks, like stocks everywhere, eventually caught up with the U.S. in 2007 as part of the global financial bubble, which then burst in 2008.

Amazingly, at the end of the 2007-2009 bear market, and 14 years after the dot-com bubble began to inflate, the S&P 500 Index and All Ordinaries Index re-aligned.  As the above chart shows, both the S&P and Ordinaries gained about 70% from 1995 to 2009.  At some fundamental level it seems similar economies tend to grow at similar rates over the long haul, despite short term financial turbulence.

But getting back to the turbulence...

The Federal Reserve loves to lower interest rates after bubbles burst, and the bigger the bursting bubble is, the lower the Fed sets the rates afterwards.  As we now know, the entire global economy was in real danger in 2008, and central banks around the world took drastic steps to keep private banks, corporations and countries from going bankrupt.  In December 2008 the Fed lowered interest rates to below 0.25% ... and it hasn't raised them since then.  In addition the Fed has been making trillions of dollars of cash available for banks to borrow in a never-ending series of maneuvers called "Quantitative Easing".  Not surprisingly, the even lower interest rates over an even longer period of time coupled with money printing have fueled another huge rally in U.S. stocks.  Thanks to the Australian stock market, which is dealing with relatively large 2% interest rates and relatively little money printing, we can safely draw the conclusion that yes, we are indeed in a third stock market bubble here in the U.S.

(CLICK TO ENLARGE)

Since early 2010 the S&P 500 has gained 80% in value, while the All Ordinaries Index gained only 5%.  Dividend yields provide further evidence of the discrepancy: the iShares Australia ETF (ticker: EWA) has a whopping 6.9% dividend yield, compared to the paltry 2.1% yield of the SPDR S&P 500 ETF (SPY).

With no other information at hand, there is one play on this Yankee-Aussie split that is likely to win in the long run: betting on the S&P and Ordinaries to meet up again at their long-term trend like they did in 2009.  Equal investments in the U.S. bear market ETF (HDGE) and the Australia ETF (EWA) would result in a net return as long as U.S. stocks and Aussie stocks move back together.  This could happen if Australian stocks rise, but more likely U.S. stocks are poised to fall soon, and they would have to fall about 50% to return to today's Australian market level.  (HDGE would gain ~50%.)  As a bonus, if the U.S. dollar collapses in value relative to the Australian dollar, which is likely to happen if the Fed keeps printing money, then Australian stocks will make gains for American investors simply from the moving exchange rate.

In place of the Australia-only ETF I'm actually going to use Pacific ex-Japan ETFs (EPP, DVYA), which also include stocks from the relatively healthy economies of New Zealand, Hong Kong and Singapore, as the bullish counterbalance to HDGE.

Friday, October 09, 2015

Dollar testing support again

The exchange rate of the U.S. Dollar against other currencies has been bouncing up and down between two converging trend lines for most of 2015.


The dollar has bounced up off of the lower support line four times already (red arrows) in May, June, August, and September.  (It actually fell below the support for one day in August before returning to the range.)  Eventually the trend lines will intersect and by then the dollar will probably start a new upward or downward trend.  It's now reached the lower support line for a 5th time, which raises the possibility that the dollar will break out to the downside here.

If the dollar breaks down, it could be the event I've been waiting for.  At that point I'll move the bulk of my investments overseas with foreign stock and bond ETFs.  Presumably gold and silver could start rising as well, so it would also be a good time to buy the Gold Miners ETF (GDX).

Monday, September 28, 2015

Bots declare BEAR MARKET

My old automated market-timing bots have finally switched to a bear market stance.  This is hardly a surprise since internals have been negative for weeks while the long-term trend has been turning south.


With this objective reading of the market I'm going to start buying shares of the Ranger Equity Bear ETF (HDGE, formerly known as the Active Bear ETF); the same ETF that gave me my 15 seconds of fame in the Wall Street Journal.

Given the worsening news from around the world - both economic and otherwise - I have almost no qualms about shorting the U.S. stock market at this point.  The only thing that could rain on a bear's parade would be an announcement by the Federal Reserve that it's starting the 4th round of counterfeiting money-printing Quantitative Easing (QE4), and I agree with people like Peter Schiff that the Fed will almost certainly start QE4 at some point in order to maintain the illusion of a strong economy.  If I'm still in a bearish bet with HDGE when the Fed announces QE4, I will seriously consider moving back to cash.

Tuesday, September 01, 2015

Market Bots on the threshold of shorting the market

My old Market Bots just moved the "internal price forces number" down to 1.8 out of 10.  That's the lowest reading in ten years - lower even than it ever reached in the 2007-2009 bear market.  The long-term trend and investment stance are still positive and bullish, respectively, but it's close to switching.  If the internal number drops below 1.0 then the bots will turn bearish on the S&P 500 Index regardless of the price trend.

Reminder: I'm mostly in cash (Money Market) with a dash of real estate and longer-term bonds.  I anticipate my next investment moves will be, in no particular order: (1) going bearish on the dollar with UDN, (2) going bullish on gold with GLD, and (3) buying foreign stocks and bonds with up to a dozen ETFs.