How To Position Your Stock Portfolio To Win With Rising Interest Rates [View article]
Long-term bonds will depreciate further. I've warned it many times. From my book Debunk the Myths in Investing (from amazon):
Chapter 63 My A.B.C. on bonds
As of 5/2013, the long-term bonds are very risky. The interest rate is so low and it has no way to go but up. It will when the economy is improving. I do not expect that we will have the zero interest rate for a long while.
• Japan has almost virtually zero interest rate for a long while. If you borrow 1 M from them at almost 0% and invest in another country's bond at 8%, you think you win. However, you need to consider the risk in converting the country’s currency back to Japanese Yen, inflation (the U.S. annual inflation rate is 3%), bond loss, and taxes.
• In 2008, almost all assets lost. However, some high yield bonds (or junk bonds) made over 40% for 2009. To illustrate, you bought these bonds yielding about 8% dividends in the beginning of the year. The government lowered the interest rate to stimulate the economy and hence the average yield was about 1% at the end of the year. The bonds you held yielding 8% was worth far more than the current bonds yielding 1%.
• As of 4/2012, the interest rate is almost too low to invest in bonds to me.
Even the king of bonds made the wrong call. Do not bet against the Fed as they control the interest rate.
Conventional wisdom tells us to balance your portfolio with a combination of bonds and stocks in proportional to the risk tolerance, which for some is determined by their ages. I prefer the reward/risk ratio and only buy bonds when interest rate is expected to fall which usually occurs after the first six months of a market plunge. The government has stimulated the economy by lowering the interest rate in almost all recessions.
As of 4/2013, the bond crash seems to be coming. When the economy improves, the interest rate will rise. The interest rate is so low now that it has no way to go but up. It will affect adversely to the bonds you’re holding especially the ones with low interest rates and long maturity from today.
If you have not got out yet, it could be your last chance. Even if it will not crash, the risk/reward is too high for me. You have been warned. If you read this article after the crash, check how much you have lost, learn it, and be smarter next time. If you have made some money by not following my advice, check whether the extra money is worth it for the risk.
If your guru tells you to stay with bonds this time, check his agenda and find another adviser if I am 100% correct.
• As of 4/2013, cash could be a very good alternative to avoid the risky market and the poor bond prospect. You may lose due to taxes and inflation, but you're buying insurance. Move back to stocks when the reward/risk is higher.
• The government bond prices could collapse when its issuing country is printing too much and depreciating its currency.
A bond at 30% yield may not be good if the company/country has more than 50% chance to default on their bonds.
• These holding the GM bonds before the reorganization (i.e. the first bankruptcy) lose more than 40% of the bond values. Corporate junk bonds (i.e. high yield bonds) have its risk.
• The muni bonds are risky to me. I do not really care about the small tax advantages. Some default. If you really want to buy them, use a bond fund to spread out the risk.
• The long-term bond price moves in the opposite direction of the interest rate. It is about a 1 to 5 ratio by my rough estimate. If the interest rate moves 5% up, then the bond price would moves 25% down. It is very rough estimate as it also depends on how long will the bond matures (i.e. short-term vs. long-term).
• Few sell the bond until it matures. If you need a steady income, buy the government bonds at an acceptable rate (for example, greater than 8%). 2012 is not a good year to buy bonds with the low interest rates. Some bonds did default and the owner lost most or even the entire investment. The GM bonds before its first bankruptcy is one of them though it is quite rare.
• China has been a big player to buy US treasuries. Chinese do not want to kill the goose that lays the golden eggs. They need a good economy in the USA in order to sell their stuffs, which would create jobs for their citizens and reduce their unrest and dissatisfaction on their government.
However, when your loan is repaid with the USD that is losing buying power, it is about time to switch to other assets including gold or ask your loanee to repay in gold instead of the USD. When the goose becomes meatless, it is time to slaughter the goose and make soup. Hopefully the USA will most likely be saved by the shale energy.
Stagflation: Coming Soon To A Market Near You [View article]
I posted the same post last week and at least one closed out all his bond exposure.
From my book Debunk the Myths of Investing (amazon): As of 5/2013, the long-term bonds are very risky. The interest rate is so low and it has no way to go but up. It will when the economy is improving. I do not expect that we will have the zero interest rate for a long while.
• Japan has almost virtually zero interest rate for a long while. If you borrow 1 M from them at almost 0% and invest in another country's bond at 8%, you think you win. However, you need to consider the risk in converting the country’s currency back to Japanese Yen, inflation (the U.S. annual inflation rate is 3%), bond loss, and taxes.
• In 2008, almost all assets lost. However, some high yield bonds (or junk bonds) made over 40% for 2009. To illustrate, you bought these bonds yielding about 8% dividends in the beginning of the year. The government lowered the interest rate to stimulate the economy and hence the average yield was about 1% at the end of the year. The bonds you held yielding 8% was worth far more than the current bonds yielding 1%.
• As of 4/2012, the interest rate is almost too low to invest in bonds to me.
Even the king of bonds made the wrong call. Do not bet against the Fed as they control the interest rate.
Conventional wisdom tells us to balance your portfolio with a combination of bonds and stocks in proportional to the risk tolerance, which for some is determined by their ages. I prefer the reward/risk ratio and only buy bonds when interest rate is expected to fall which usually occurs after the first six months of a market plunge. The government has stimulated the economy by lowering the interest rate in almost all recessions.
As of 4/2013, the bond crash seems to be coming. When the economy improves, the interest rate will rise. The interest rate is so low now that it has no way to go but up. It will affect adversely to the bonds you’re holding especially the ones with low interest rates and long maturity from today.
If you have not got out yet, it could be your last chance. Even if it will not crash, the risk/reward is too high for me. You have been warned. If you read this article after the crash, check how much you have lost, learn it, and be smarter next time. If you have made some money by not following my advice, check whether the extra money is worth it for the risk.
If your guru tells you to stay with bonds this time, check his agenda and find another adviser if I am 100% correct.
• As of 4/2013, cash could be a very good alternative to avoid the risky market and the poor bond prospect. You may lose due to taxes and inflation, but you're buying insurance. Move back to stocks when the reward/risk is higher.
• The government bond prices could collapse when its issuing country is printing too much and depreciating its currency.
A bond at 30% yield may not be good if the company/country has more than 50% chance to default on their bonds.
• These holding the GM bonds before the reorganization (i.e. the first bankruptcy) lose more than 40% of the bond values. Corporate junk bonds (i.e. high yield bonds) have its risk.
• The muni bonds are risky to me. I do not really care about the small tax advantages. Some default. If you really want to buy them, use a bond fund to spread out the risk.
• The long-term bond price moves in the opposite direction of the interest rate. It is about a 1 to 5 ratio by my rough estimate. If the interest rate moves 5% up, then the bond price would moves 25% down. It is very rough estimate as it also depends on how long will the bond matures (i.e. short-term vs. long-term).
• Few sell the bond until it matures. If you need a steady income, buy the government bonds at an acceptable rate (for example, greater than 8%). 2012 is not a good year to buy bonds with the low interest rates. Some bonds did default and the owner lost most or even the entire investment. The GM bonds before its first bankruptcy is one of them though it is quite rare.
• China has been a big player to buy US treasuries. Chinese do not want to kill the goose that lays the golden eggs. They need a good economy in the USA in order to sell their stuffs, which would create jobs for their citizens and reduce their unrest and dissatisfaction on their government.
However, when your loan is repaid with the USD that is losing buying power, it is about time to switch to other assets including gold or ask your loanee to repay in gold instead of the USD. When the goose becomes meatless, it is time to slaughter the goose and make soup. Hopefully the USA will most likely be saved by the shale energy.
U.S. Inflation: Delayed, Not Denied [View article]
Hi Guardian,
Agree to certain extent.
For those who have jobs, you have a deflation when your increased income can buy your more of your basic goods than you can last year. Do you think with this economy, their incomes are gaining that much?
However, the investors' investments are beating the inflation from last year.
The Most Overlooked Value Stocks In The Market? High Returns For Patient Investors [View article]
Great analysis. I believe the entry point is after the 'expected' correction. I have CAT and it is doing average compared to many other major holding of Cisco.
U.S. Inflation: Delayed, Not Denied [View article]
Housing prices could be the last argument that we have deflation, but it is changing fast. When you look at all items in the supermarket, it is inflation - the food is higher than the average 3% inflation.
Inflation is everywhere now, interest rate will rise and long-term bond prices will drop soon.
From my new book Debunk the Myths in Investing (from amazon):
The historical annual average is about 3% inflation.
Inflation is:
• An invisible tax to those who have.
• A strategy to lessen the loan burden. To illustrate, your loan of $1 can buy a loaf of bread, and you pay back the $1 plus negligible interest that can buy only half a loaf of bread due to inflation. China is the loser and the USA is the winner in this deal.
• An invisible salary cut.
• An invisible cut to your entitlements/welfare. Social security is supposed to be adjusted to the CPI, which can be manipulated by the government by using different weighs on food and energy to reduce social security payment increases.
• An invisible cut to your investment incomes (dividends and appreciation).
Deflation is no angel:
However, deflation is far worse than inflation to the economy. When the company produces a product and find out they have to sell it for less due to deflation, then their profit would be cut and they might need to hire less employees.
To illustrate, a manufacturer of making phones calculates the component costs and the expected sell price. If the cost is too high or the profit too low, he would skip the project.
Considering on inflation/deflation only, deflation costs you to sell the phone at a less price. It could make you lose money and lay off employees.
Inflation and deflation at the same time
As of 2/2013, we have both inflation and deflation at the same time for several years now.
We have inflation in most of our basic necessities: food, gasoline and heat (for NE) with the exception of rent due to the depressed house prices. Electronic stuffs and PCs are deflated considering how much we can buy today vs. last year. Cars have been slightly deflated when figuring in the extra features.
Outlook
The government should ensure inflation and deflation within an acceptable range. It has printed a lot of money and lower interest rate to stimulate the economy and at the same time has accelerated inflation. When the economy does not improved, it has run out of tools to improve our depressed economy.
However, the shale energy and time would cure all problems. When the economy is improved, it will accelerate inflation.
From my new book Debunk the Myths in Investing (from amazon):
Chapter 62 My A.B.C. on bonds
• Japan has almost virtually zero interest rate for a long while. If you borrow 1 M from them at almost 0% and invest in another country's bond at 8%, you think you win. However, you need to consider the risk in converting the country’s currency back to Japanese Yen, inflation, bond loss, and taxes.
• In 2008, almost all assets lost. However, some high yield bonds made over 40% return for 2009. To illustrate, you bought these bonds yielding about 8% dividends in the beginning of the year. The government lowered the interest rate to stimulate the economy and hence the average yield was about 1% at the end of the year. The bonds you held yielding 8% was worth far more than the current bonds yielding 1%.
• As of 4/2012, the interest rate is almost too low to invest in bonds to me.
Even the king of bonds made the wrong call. Do not bet against the Fed as they control the interest rate.
Conventional wisdom tells us to balance your portfolio with a combination of bonds and stocks in proportional to the risk tolerance, which for some is determined by their ages. I prefer the reward/risk ratio and only buy bonds when interest rate is expected to fall which usually occurs after the first six months of a market plunge. The government has stimulated the economy by lowering the interest rate in almost all recessions.
As of 4/2013, the bond crash seems to be coming. When the economy improves, the interest rate will rise. The interest rate is so low now that it has no way to go but up. It will affect adversely to the bonds you’re holding especially the ones with low interest rates and long maturity from today.
If you have not got out yet, it could be your last chance. Even if it will not crash, the risk/reward is too high for me. You have been warned. If you read this article after the crash, check how much you have lost, learn it, and be smarter next time. If you have made some money by not following my advice, check whether the extra money is worth it for the risk.
If your guru tells you to stay with bonds this time, check his agenda and find another adviser if I am 100% correct.
• As of 4/2013, cash could be a very good alternative to avoid the risky market and the poor bond prospect. You may lose due to taxes and inflation, but you're buying insurance. Move back to stocks when the reward/risk is higher.
• The government bond prices could collapse when its issuing country is printing too much and depreciating its currency.
A bond at 30% yield may not be good if the company/country has more than 50% chance to default on their bonds.
• These holding the GM bonds before the reorganization (i.e. the first bankruptcy) lose more than 40% of the bond values. Corporate junk bonds (i.e. high yield bonds) have its risk.
• The muni bonds are risky to me. I do not really care about the small tax advantages. Some default. If you really want to buy them, use a bond fund to spread out the risk.
• The long-term bond price moves in the opposite direction of the interest rate. It is about a 1 to 5 ratio by my rough estimate. If the interest rate moves 5% up, then the bond price would moves 25% down. It is very rough estimate as it also depends on how long will the bond matures (i.e. short-term vs. long-term).
• Few sell the bond until it matures. If you need a steady income, buy the government bonds at an acceptable rate (for example, greater than 8%). 2012 is not a good year to buy bonds with the low interest rates. Some bonds did default and the owner lost most or even the entire investment. The GM bonds before its first bankruptcy is one of them though it is quite rare.
• China has been a big player to buy US treasuries. Chinese do not want to kill the goose that lays the golden eggs. They need a good economy in the USA in order to sell their stuffs, which would create jobs for their citizens and reduce their unrest and dissatisfaction on their government.
However, when your loan is repaid with USD that is losing buying power, it is about time to switch to other assets including gold or ask your loanee to repay in gold instead of the USD. When the goose becomes meatless, it is time to slaughter the goose and make soup. Hopefully the USA will most likely be saved by the shale energy.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Today the market is chased by momentum speculators and the market is manipulated by the flooding of money by the government.
From my new book Myths (amazon):
A non-correlation of the market and the business
The Business (same as economic) Cycle is supposed to lag the Market Cycle1 by about 6 months as the stock market is a leading indicator of the economy. As of February of 2013, this has not occurred. The U.S. economy is in a non-correlation to its stock market. The market has recovered most of its losses from 2007-2008.
The economy is still in a recession considering the high unemployment and under-employment and the poor GDP growth. The global economies are more inter-connected than before, and our trade partners are also not doing well. Though there have been some recent signs of recovery in the U.S. economy, the job recovery may never reach to its previous peak.
Is this non-correlation important to us, the retail investors?
For an economist, the Business Cycle is important. For an investor, the Market Cycle is important. The economists forecast business growth, GDP growth, job growth, housing start…, and plan accordingly. The investors care about the potential appreciation of their portfolios.
It could be the beginning of this non-correlation for the coming decade. There is a good chance economists can no longer depend on the previous correlation to use the market to predict the economy. As long as the market is moving up, the investors are not concerned with the non-correlation.
However, most likely the market will correlate again in the future with the economy as there has always been a correlation as far as I can remember. Until the following reasons of this non-correlation change, the correlation will continue.
The reasons for this non-correlation
1. Most big companies are now global companies. Hiring at these multinational corporations (MNCs) depends on where offer the greatest benefits including low workforce salary, educated workers, tax credits, less tax …. A good portion of MNCs' incomes are from foreign countries. Hence the U.S. market is getting less correlated with the U.S. economy which uses local employment as a measurement.
2. Too many government interventions. The government bailed out too many companies that should fail. No companies are too big to fail. It has not punished the executives/bankers to get us into this recession thru their greed. The market may falsely expect that future failing companies will be bailed out. Hence, the stock market is expected to be protected by the government.
3. There is still a lot of easy money. Since the American recession, banks use government money to invest in the market instead of loaning it to small businesses and house buyers to stimulate the economy. In addition, the demands from businesses and potential house buyers have been reduced.
Corporations have the highest cash reserves for a long while. They use their cash reserves to buy back their own stocks, acquire companies and increase dividends. All these actions increase their stock values. Dividend stocks are flocked by income seekers especially with low bond yields.
When the government borrows a lot of money (to the ceiling literally), everything including the market looks good. However, somehow and sometime the taxpayers pay for those debts to China, Japan and whatever other treasury buyers. Today the U.S. has a benefit: It will repay the debtors with depreciated dollars. A country loses its competitive edge if a good percentage of the GDP is used for servicing those debts. If the USA were a company that cannot service its debts, it would be bankrupt. Most believe this is the prime reason. 4. Regulations appropriate for the health of the market are typically not boasting the economy. To illustrate, the expected ObamaCare is discouraging small businesses from hiring.
5. Today’s market may not be a good indicator of its value, if this were considered to be a commodity unit (a combination of natural resources including gold) or Swiss Francs instead of the USD.
6. There are too many factors that influence both the market and the economy in separate directions. Examples include the recent shale energy discovery which could improve the economy while a new war would do the opposite.
What should be done
1. The government cannot pump that much cash into the economy. Depreciating our currency is a short-term solution at best as it would improve our trades both ways. The status of being a reserve currency is shaken.
A depreciated currency would encourage foreigners to buy the United States’ assets that would not be good for long term. To illustrate, if the GE building were sold to a foreigner, GE would pay rents to a foreigner for years to come. It is similar to selling our know-hows to a foreign country - the seller has immediate benefit at the expense of losing its competitive edge.
2. The United States government must address and service the debt better now! The high debt will deteriorate the United States’ competitive edge to foreign countries. A high percentage of our GDP to service the debts will not help the economy.
3. Its citizens and the government need to bite the bullet with more taxes, more incentives to create jobs, less entitlements, less welfare… Ending the current two wars and avoiding future wars is almost mandatory to improve the economy.
4. The economy cannot be recovered without job recovery. The money spent in creating jobs will be better spent than on welfare and unemployment benefits.
Tesla At $97: How Many Cars Does It Need To Sell? [View article]
It is an obvious bubble. I do not want to short it but I may when the momentum reverses. From my book Myths:
Bubbles in 2013
Bubbles have existed throughout our history. It is due to excessive valuation driven up by big boys and then individual investors and sometimes by government intervention via money policy and subsidies. The first ones riding the wave make good money and the last ones buying at the peaks suffer most.
From recent history, we have 2000 internet bubble, and then 2007 housing bubble. The last chapter shows you how easy to detect the last two plunges. Read this chapter AGAIN and digest it. It would save you 40% of your portfolio in the next plunge.
As of 5/2013, the gold price has been down from its height of 1,800. It will remain in this range (1,300 – 1,900) until USD appreciates and / or the global economies improve. Actually USD is doing well recently (actually at its highest level since 2008). It could be the other countries (such as ECB in EU and BOJ in Japan) are doing worse than us and /or the shale energy is very promising.
The market will start a 10% or so correction to me or at least its bubble is forming. Bond bubble will be burst when interest rate rises. It will as the interest rate should be bottom by now – it can’t go negative I guess. Farm products (and farm land) have reached high price levels. The student loan is getting its status as a bubble soon.
Unless you borrow my time machine (which is still in development), we cannot pin point when the bubble will burst. Your timing to act depends on your risk tolerance, your knowledge (a commodity trader can afford to take more risk for example) and your past experience that could give you false security.
For me, it is safer not to make the last buck as the reward / risk ratio is too low. A good sleep would improve your health and that is worth all the gold in the world.
I read Krugman's article and it is similar to my comment except mine is at least one month earlier (posted here in SA). I'm a nobody.
From my book Myths (amazon):
* Bubbles in 2013 *
Bubbles have existed throughout our history. It is due to excessive valuation driven up by big boys and then individual investors and sometimes by government intervention via money policy and subsidies. The first ones riding the wave make good money and the last ones buying at the peaks suffer most.
From recent history, we have 2000 internet bubble, and then 2007 housing bubble. The last chapter shows you how easy to detect the last two plunges. Read this chapter AGAIN and digest it. It would save you 40% of your portfolio in the next plunge.
As of 5/2013, the gold price has been down from its height of 1,800. It will remain in this range (1,300 – 1,900) until USD appreciates and / or the global economies improve. Actually USD is doing well recently (actually at its highest level since 2008). It could be the other countries (such as ECB in EU and BOJ in Japan) are doing worse than us and /or the shale energy is very promising.
The market will start a 10% or so correction to me or at least its bubble is forming. Bond bubble will be burst when interest rate rises. It will as the interest rate should be bottom by now – it can’t go negative I guess. Farm products (and farm land) have reached high price levels. The student loan is getting its status as a bubble soon.
Unless you borrow my time machine (which is still in development), we cannot pin point when the bubble will burst. Your timing to act depends on your risk tolerance, your knowledge (a commodity trader can afford to take more risk for example) and your past experience that could give you false security.
For me, it is safer not to make the last buck as the reward / risk ratio is too low. A good sleep would improve your health and that is worth all the gold in the world.
You Can Still 'CAN-SLIM' With 3D Printing Systems For High Growth [View article]
It is quite good. Usually after a year or so (when the time honeymoon is over), we need to take another look at the fundamental metrics. A lot of time the herd drive the stock too high and set up a deeper cliff for us to fall. Examples abound.
I usually sell the stocks when they double. In the average, I do not regret. missing the ten baggers.
Tesla At $97: How Many Cars Does It Need To Sell? [View article]
China will depend on coal for the majority of electric power for at least the next 50 years. There is no way out even if you include all the nuclear generators that will be on line. Coal will never be 100% clean as it generates CO2 as part of the chemical process.
You Can Still 'CAN-SLIM' With 3D Printing Systems For High Growth [View article]
Does this technique still work?
Try the top IBD 50 performance in last 3 years. I do not think it works well in last several years. But, I do not give it up as the market may change to the growth and this technique. Currently I use it for reference. For the price, it is a bargain.
It could be this technique is not effective when too many folks are using it - a victim of its own previous success.
How To Position Your Stock Portfolio To Win With Rising Interest Rates [View article]
Chapter 63 My A.B.C. on bonds
As of 5/2013, the long-term bonds are very risky. The interest rate is so low and it has no way to go but up. It will when the economy is improving. I do not expect that we will have the zero interest rate for a long while.
• Japan has almost virtually zero interest rate for a long while. If you borrow 1 M from them at almost 0% and invest in another country's bond at 8%, you think you win. However, you need to consider the risk in converting the country’s currency back to Japanese Yen, inflation (the U.S. annual inflation rate is 3%), bond loss, and taxes.
• In 2008, almost all assets lost. However, some high yield bonds (or junk bonds) made over 40% for 2009. To illustrate, you bought these bonds yielding about 8% dividends in the beginning of the year. The government lowered the interest rate to stimulate the economy and hence the average yield was about 1% at the end of the year. The bonds you held yielding 8% was worth far more than the current bonds yielding 1%.
• As of 4/2012, the interest rate is almost too low to invest in bonds to me.
Even the king of bonds made the wrong call. Do not bet against the Fed as they control the interest rate.
Conventional wisdom tells us to balance your portfolio with a combination of bonds and stocks in proportional to the risk tolerance, which for some is determined by their ages. I prefer the reward/risk ratio and only buy bonds when interest rate is expected to fall which usually occurs after the first six months of a market plunge. The government has stimulated the economy by lowering the interest rate in almost all recessions.
As of 4/2013, the bond crash seems to be coming. When the economy improves, the interest rate will rise. The interest rate is so low now that it has no way to go but up. It will affect adversely to the bonds you’re holding especially the ones with low interest rates and long maturity from today.
If you have not got out yet, it could be your last chance. Even if it will not crash, the risk/reward is too high for me. You have been warned. If you read this article after the crash, check how much you have lost, learn it, and be smarter next time. If you have made some money by not following my advice, check whether the extra money is worth it for the risk.
If your guru tells you to stay with bonds this time, check his agenda and find another adviser if I am 100% correct.
• As of 4/2013, cash could be a very good alternative to avoid the risky market and the poor bond prospect. You may lose due to taxes and inflation, but you're buying insurance. Move back to stocks when the reward/risk is higher.
• The government bond prices could collapse when its issuing country is printing too much and depreciating its currency.
A bond at 30% yield may not be good if the company/country has more than 50% chance to default on their bonds.
• These holding the GM bonds before the reorganization (i.e. the first bankruptcy) lose more than 40% of the bond values. Corporate junk bonds (i.e. high yield bonds) have its risk.
• The muni bonds are risky to me. I do not really care about the small tax advantages. Some default. If you really want to buy them, use a bond fund to spread out the risk.
• The long-term bond price moves in the opposite direction of the interest rate. It is about a 1 to 5 ratio by my rough estimate. If the interest rate moves 5% up, then the bond price would moves 25% down. It is very rough estimate as it also depends on how long will the bond matures (i.e. short-term vs. long-term).
• Few sell the bond until it matures. If you need a steady income, buy the government bonds at an acceptable rate (for example, greater than 8%). 2012 is not a good year to buy bonds with the low interest rates. Some bonds did default and the owner lost most or even the entire investment. The GM bonds before its first bankruptcy is one of them though it is quite rare.
• China has been a big player to buy US treasuries.
Chinese do not want to kill the goose that lays the golden eggs. They need a good economy in the USA in order to sell their stuffs, which would create jobs for their citizens and reduce their unrest and dissatisfaction on their government.
However, when your loan is repaid with the USD that is losing buying power, it is about time to switch to other assets including gold or ask your loanee to repay in gold instead of the USD. When the goose becomes meatless, it is time to slaughter the goose and make soup. Hopefully the USA will most likely be saved by the shale energy.
Stagflation: Coming Soon To A Market Near You [View article]
From my book Debunk the Myths of Investing (amazon):
As of 5/2013, the long-term bonds are very risky. The interest rate is so low and it has no way to go but up. It will when the economy is improving. I do not expect that we will have the zero interest rate for a long while.
• Japan has almost virtually zero interest rate for a long while. If you borrow 1 M from them at almost 0% and invest in another country's bond at 8%, you think you win. However, you need to consider the risk in converting the country’s currency back to Japanese Yen, inflation (the U.S. annual inflation rate is 3%), bond loss, and taxes.
• In 2008, almost all assets lost. However, some high yield bonds (or junk bonds) made over 40% for 2009. To illustrate, you bought these bonds yielding about 8% dividends in the beginning of the year. The government lowered the interest rate to stimulate the economy and hence the average yield was about 1% at the end of the year. The bonds you held yielding 8% was worth far more than the current bonds yielding 1%.
• As of 4/2012, the interest rate is almost too low to invest in bonds to me.
Even the king of bonds made the wrong call. Do not bet against the Fed as they control the interest rate.
Conventional wisdom tells us to balance your portfolio with a combination of bonds and stocks in proportional to the risk tolerance, which for some is determined by their ages. I prefer the reward/risk ratio and only buy bonds when interest rate is expected to fall which usually occurs after the first six months of a market plunge. The government has stimulated the economy by lowering the interest rate in almost all recessions.
As of 4/2013, the bond crash seems to be coming. When the economy improves, the interest rate will rise. The interest rate is so low now that it has no way to go but up. It will affect adversely to the bonds you’re holding especially the ones with low interest rates and long maturity from today.
If you have not got out yet, it could be your last chance. Even if it will not crash, the risk/reward is too high for me. You have been warned. If you read this article after the crash, check how much you have lost, learn it, and be smarter next time. If you have made some money by not following my advice, check whether the extra money is worth it for the risk.
If your guru tells you to stay with bonds this time, check his agenda and find another adviser if I am 100% correct.
• As of 4/2013, cash could be a very good alternative to avoid the risky market and the poor bond prospect. You may lose due to taxes and inflation, but you're buying insurance. Move back to stocks when the reward/risk is higher.
• The government bond prices could collapse when its issuing country is printing too much and depreciating its currency.
A bond at 30% yield may not be good if the company/country has more than 50% chance to default on their bonds.
• These holding the GM bonds before the reorganization (i.e. the first bankruptcy) lose more than 40% of the bond values. Corporate junk bonds (i.e. high yield bonds) have its risk.
• The muni bonds are risky to me. I do not really care about the small tax advantages. Some default. If you really want to buy them, use a bond fund to spread out the risk.
• The long-term bond price moves in the opposite direction of the interest rate. It is about a 1 to 5 ratio by my rough estimate. If the interest rate moves 5% up, then the bond price would moves 25% down. It is very rough estimate as it also depends on how long will the bond matures (i.e. short-term vs. long-term).
• Few sell the bond until it matures. If you need a steady income, buy the government bonds at an acceptable rate (for example, greater than 8%). 2012 is not a good year to buy bonds with the low interest rates. Some bonds did default and the owner lost most or even the entire investment. The GM bonds before its first bankruptcy is one of them though it is quite rare.
• China has been a big player to buy US treasuries.
Chinese do not want to kill the goose that lays the golden eggs. They need a good economy in the USA in order to sell their stuffs, which would create jobs for their citizens and reduce their unrest and dissatisfaction on their government.
However, when your loan is repaid with the USD that is losing buying power, it is about time to switch to other assets including gold or ask your loanee to repay in gold instead of the USD. When the goose becomes meatless, it is time to slaughter the goose and make soup. Hopefully the USA will most likely be saved by the shale energy.
U.S. Inflation: Delayed, Not Denied [View article]
Agree to certain extent.
For those who have jobs, you have a deflation when your increased income can buy your more of your basic goods than you can last year. Do you think with this economy, their incomes are gaining that much?
However, the investors' investments are beating the inflation from last year.
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U.S. Inflation: Delayed, Not Denied [View article]
Inflation is everywhere now, interest rate will rise and long-term bond prices will drop soon.
From my new book Debunk the Myths in Investing (from amazon):
The historical annual average is about 3% inflation.
Inflation is:
• An invisible tax to those who have.
• A strategy to lessen the loan burden. To illustrate, your loan of $1 can buy a loaf of bread, and you pay back the $1 plus negligible interest that can buy only half a loaf of bread due to inflation. China is the loser and the USA is the winner in this deal.
• An invisible salary cut.
• An invisible cut to your entitlements/welfare. Social security is supposed to be adjusted to the CPI, which can be manipulated by the government by using different weighs on food and energy to reduce social security payment increases.
• An invisible cut to your investment incomes (dividends and appreciation).
Deflation is no angel:
However, deflation is far worse than inflation to the economy. When the company produces a product and find out they have to sell it for less due to deflation, then their profit would be cut and they might need to hire less employees.
To illustrate, a manufacturer of making phones calculates the component costs and the expected sell price. If the cost is too high or the profit too low, he would skip the project.
Considering on inflation/deflation only, deflation costs you to sell the phone at a less price. It could make you lose money and lay off employees.
Inflation and deflation at the same time
As of 2/2013, we have both inflation and deflation at the same time for several years now.
We have inflation in most of our basic necessities: food, gasoline and heat (for NE) with the exception of rent due to the depressed house prices. Electronic stuffs and PCs are deflated considering how much we can buy today vs. last year. Cars have been slightly deflated when figuring in the extra features.
Outlook
The government should ensure inflation and deflation within an acceptable range. It has printed a lot of money and lower interest rate to stimulate the economy and at the same time has accelerated inflation. When the economy does not improved, it has run out of tools to improve our depressed economy.
However, the shale energy and time would cure all problems. When the economy is improved, it will accelerate inflation.
Why Inflation Never Came [View article]
From my new book Debunk the Myths in Investing (from amazon):
Chapter 62 My A.B.C. on bonds
• Japan has almost virtually zero interest rate for a long while. If you borrow 1 M from them at almost 0% and invest in another country's bond at 8%, you think you win. However, you need to consider the risk in converting the country’s currency back to Japanese Yen, inflation, bond loss, and taxes.
• In 2008, almost all assets lost. However, some high yield bonds made over 40% return for 2009. To illustrate, you bought these bonds yielding about 8% dividends in the beginning of the year. The government lowered the interest rate to stimulate the economy and hence the average yield was about 1% at the end of the year. The bonds you held yielding 8% was worth far more than the current bonds yielding 1%.
• As of 4/2012, the interest rate is almost too low to invest in bonds to me.
Even the king of bonds made the wrong call. Do not bet against the Fed as they control the interest rate.
Conventional wisdom tells us to balance your portfolio with a combination of bonds and stocks in proportional to the risk tolerance, which for some is determined by their ages. I prefer the reward/risk ratio and only buy bonds when interest rate is expected to fall which usually occurs after the first six months of a market plunge. The government has stimulated the economy by lowering the interest rate in almost all recessions.
As of 4/2013, the bond crash seems to be coming. When the economy improves, the interest rate will rise. The interest rate is so low now that it has no way to go but up. It will affect adversely to the bonds you’re holding especially the ones with low interest rates and long maturity from today.
If you have not got out yet, it could be your last chance. Even if it will not crash, the risk/reward is too high for me. You have been warned. If you read this article after the crash, check how much you have lost, learn it, and be smarter next time. If you have made some money by not following my advice, check whether the extra money is worth it for the risk.
If your guru tells you to stay with bonds this time, check his agenda and find another adviser if I am 100% correct.
• As of 4/2013, cash could be a very good alternative to avoid the risky market and the poor bond prospect. You may lose due to taxes and inflation, but you're buying insurance. Move back to stocks when the reward/risk is higher.
• The government bond prices could collapse when its issuing country is printing too much and depreciating its currency.
A bond at 30% yield may not be good if the company/country has more than 50% chance to default on their bonds.
• These holding the GM bonds before the reorganization (i.e. the first bankruptcy) lose more than 40% of the bond values. Corporate junk bonds (i.e. high yield bonds) have its risk.
• The muni bonds are risky to me. I do not really care about the small tax advantages. Some default. If you really want to buy them, use a bond fund to spread out the risk.
• The long-term bond price moves in the opposite direction of the interest rate. It is about a 1 to 5 ratio by my rough estimate. If the interest rate moves 5% up, then the bond price would moves 25% down. It is very rough estimate as it also depends on how long will the bond matures (i.e. short-term vs. long-term).
• Few sell the bond until it matures. If you need a steady income, buy the government bonds at an acceptable rate (for example, greater than 8%). 2012 is not a good year to buy bonds with the low interest rates. Some bonds did default and the owner lost most or even the entire investment. The GM bonds before its first bankruptcy is one of them though it is quite rare.
• China has been a big player to buy US treasuries.
Chinese do not want to kill the goose that lays the golden eggs. They need a good economy in the USA in order to sell their stuffs, which would create jobs for their citizens and reduce their unrest and dissatisfaction on their government.
However, when your loan is repaid with USD that is losing buying power, it is about time to switch to other assets including gold or ask your loanee to repay in gold instead of the USD. When the goose becomes meatless, it is time to slaughter the goose and make soup. Hopefully the USA will most likely be saved by the shale energy.
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From my new book Myths (amazon):
A non-correlation of the market and the business
The Business (same as economic) Cycle is supposed to lag the Market Cycle1 by about 6 months as the stock market is a leading indicator of the economy. As of February of 2013, this has not occurred. The U.S. economy is in a non-correlation to its stock market.
The market has recovered most of its losses from 2007-2008.
The economy is still in a recession considering the high unemployment and under-employment and the poor GDP growth. The global economies are more inter-connected than before, and our trade partners are also not doing well. Though there have been some recent signs of recovery in the U.S. economy, the job recovery may never reach to its previous peak.
Is this non-correlation important to us, the retail investors?
For an economist, the Business Cycle is important. For an investor, the Market Cycle is important. The economists forecast business growth, GDP growth, job growth, housing start…, and plan accordingly. The investors care about the potential appreciation of their portfolios.
It could be the beginning of this non-correlation for the coming decade. There is a good chance economists can no longer depend on the previous correlation to use the market to predict the economy. As long as the market is moving up, the investors are not concerned with the non-correlation.
However, most likely the market will correlate again in the future with the economy as there has always been a correlation as far as I can remember. Until the following reasons of this non-correlation change, the correlation will continue.
The reasons for this non-correlation
1. Most big companies are now global companies.
Hiring at these multinational corporations (MNCs) depends on where offer the greatest benefits including low workforce salary, educated workers, tax credits, less tax …. A good portion of MNCs' incomes are from foreign countries. Hence the U.S. market is getting less correlated with the U.S. economy which uses local employment as a measurement.
2. Too many government interventions.
The government bailed out too many companies that should fail. No companies are too big to fail. It has not punished the executives/bankers to get us into this recession thru their greed. The market may falsely expect that future failing companies will be bailed out. Hence, the stock market is expected to be protected by the government.
3. There is still a lot of easy money.
Since the American recession, banks use government money to invest in the market instead of loaning it to small businesses and house buyers to stimulate the economy. In addition, the demands from businesses and potential house buyers have been reduced.
Corporations have the highest cash reserves for a long while. They use their cash reserves to buy back their own stocks, acquire companies and increase dividends. All these actions increase their stock values. Dividend stocks are flocked by income seekers especially with low bond yields.
When the government borrows a lot of money (to the ceiling literally), everything including the market looks good. However, somehow and sometime the taxpayers pay for those debts to China, Japan and whatever other treasury buyers. Today the U.S. has a benefit: It will repay the debtors with depreciated dollars.
A country loses its competitive edge if a good percentage of the GDP is used for servicing those debts. If the USA were a company that cannot service its debts, it would be bankrupt.
Most believe this is the prime reason.
4. Regulations appropriate for the health of the market are typically not boasting the economy. To illustrate, the expected ObamaCare is discouraging small businesses from hiring.
5. Today’s market may not be a good indicator of its value, if this were considered to be a commodity unit (a combination of natural resources including gold) or Swiss Francs instead of the USD.
6. There are too many factors that influence both the market and the economy in separate directions. Examples include the recent shale energy discovery which could improve the economy while a new war would do the opposite.
What should be done
1. The government cannot pump that much cash into the economy.
Depreciating our currency is a short-term solution at best as it would improve our trades both ways. The status of being a reserve currency is shaken.
A depreciated currency would encourage foreigners to buy the United States’ assets that would not be good for long term. To illustrate, if the GE building were sold to a foreigner, GE would pay rents to a foreigner for years to come. It is similar to selling our know-hows to a foreign country - the seller has immediate benefit at the expense of losing its competitive edge.
2. The United States government must address and service the debt better now! The high debt will deteriorate the United States’ competitive edge to foreign countries. A high percentage of our GDP to service the debts will not help the economy.
3. Its citizens and the government need to bite the bullet with more taxes, more incentives to create jobs, less entitlements, less welfare… Ending the current two wars and avoiding future wars is almost mandatory to improve the economy.
4. The economy cannot be recovered without job recovery. The money spent in creating jobs will be better spent than on welfare and unemployment benefits.
Tesla At $97: How Many Cars Does It Need To Sell? [View article]
BTW. The short % is 20%.
Tesla At $97: How Many Cars Does It Need To Sell? [View article]
The last ones who leave will get hurt the most. There will be one or two exceptions when the prices rocket as they all obey Newton's Law of Gravity.
Tesla At $97: How Many Cars Does It Need To Sell? [View article]
Bubbles in 2013
Bubbles have existed throughout our history. It is due to excessive valuation driven up by big boys and then individual investors and sometimes by government intervention via money policy and subsidies. The first ones riding the wave make good money and the last ones buying at the peaks suffer most.
From recent history, we have 2000 internet bubble, and then 2007 housing bubble. The last chapter shows you how easy to detect the last two plunges. Read this chapter AGAIN and digest it. It would save you 40% of your portfolio in the next plunge.
As of 5/2013, the gold price has been down from its height of 1,800. It will remain in this range (1,300 – 1,900) until USD appreciates and / or the global economies improve. Actually USD is doing well recently (actually at its highest level since 2008). It could be the other countries (such as ECB in EU and BOJ in Japan) are doing worse than us and /or the shale energy is very promising.
The market will start a 10% or so correction to me or at least its bubble is forming. Bond bubble will be burst when interest rate rises. It will as the interest rate should be bottom by now – it can’t go negative I guess. Farm products (and farm land) have reached high price levels. The student loan is getting its status as a bubble soon.
Unless you borrow my time machine (which is still in development), we cannot pin point when the bubble will burst. Your timing to act depends on your risk tolerance, your knowledge (a commodity trader can afford to take more risk for example) and your past experience that could give you false security.
For me, it is safer not to make the last buck as the reward / risk ratio is too low. A good sleep would improve your health and that is worth all the gold in the world.
Why Inflation Never Came [View article]
From my book Myths (amazon):
* Bubbles in 2013 *
Bubbles have existed throughout our history. It is due to excessive valuation driven up by big boys and then individual investors and sometimes by government intervention via money policy and subsidies. The first ones riding the wave make good money and the last ones buying at the peaks suffer most.
From recent history, we have 2000 internet bubble, and then 2007 housing bubble. The last chapter shows you how easy to detect the last two plunges. Read this chapter AGAIN and digest it. It would save you 40% of your portfolio in the next plunge.
As of 5/2013, the gold price has been down from its height of 1,800. It will remain in this range (1,300 – 1,900) until USD appreciates and / or the global economies improve. Actually USD is doing well recently (actually at its highest level since 2008). It could be the other countries (such as ECB in EU and BOJ in Japan) are doing worse than us and /or the shale energy is very promising.
The market will start a 10% or so correction to me or at least its bubble is forming. Bond bubble will be burst when interest rate rises. It will as the interest rate should be bottom by now – it can’t go negative I guess. Farm products (and farm land) have reached high price levels. The student loan is getting its status as a bubble soon.
Unless you borrow my time machine (which is still in development), we cannot pin point when the bubble will burst. Your timing to act depends on your risk tolerance, your knowledge (a commodity trader can afford to take more risk for example) and your past experience that could give you false security.
For me, it is safer not to make the last buck as the reward / risk ratio is too low. A good sleep would improve your health and that is worth all the gold in the world.
You Can Still 'CAN-SLIM' With 3D Printing Systems For High Growth [View article]
I usually sell the stocks when they double. In the average, I do not regret. missing the ten baggers.
Tesla At $97: How Many Cars Does It Need To Sell? [View article]
Just bookmark this page and review the performance in one or two years. Only time can be the final judge.
Tesla At $97: How Many Cars Does It Need To Sell? [View article]
You Can Still 'CAN-SLIM' With 3D Printing Systems For High Growth [View article]
Try the top IBD 50 performance in last 3 years. I do not think it works well in last several years. But, I do not give it up as the market may change to the growth and this technique. Currently I use it for reference. For the price, it is a bargain.
It could be this technique is not effective when too many folks are using it - a victim of its own previous success.