Mid-year (6/15/2020) update
This is an update to my two articles:
“Market timing example” and “Disaster of 2020”.
Basically nothing significant has
changed recently: The market is fundamentally unsound and technically sound
after the recent rally. The only update is our national debt is skyrocketing.
Today’s “Debt/GDP”
is similar to the market height in 2000 and we know what happened afterwards. That’s
why Buffett has accumulated a lot of cash now.
Even with the unlimited QE (i.e.
printing money excessively), the high inflation and market crash predicted by
many experts have not been materialized so far. This is my third prediction in “Disaster
of 2020”. The status of USD as a reserve currency will be shaken; I do not know
when, as I do not have a time machine.
Why the market keeps going up while the economy is going down? The Fed has provided a lot of cash and the cash is chasing a fixed number of assets such as gold and stocks. It is the simple, proven theory of demand and supply. It will continue for a while as long as there is unlimited supply of money. At some point, it will pop. At that time, it could lead to a long recession, unless the economy improves as it did in 2009. The smart Fed chairman knows how it will harm the country by printing money excessively. However, he has to obey his boss who is seeking for reelection.
Why the market keeps going up while the economy is going down? The Fed has provided a lot of cash and the cash is chasing a fixed number of assets such as gold and stocks. It is the simple, proven theory of demand and supply. It will continue for a while as long as there is unlimited supply of money. At some point, it will pop. At that time, it could lead to a long recession, unless the economy improves as it did in 2009. The smart Fed chairman knows how it will harm the country by printing money excessively. However, he has to obey his boss who is seeking for reelection.
I expect we are in a prolonged period
of low interest rates and even negative interest rates. When the rates are
negative, our Treasury bonds are no longer marketable. The foreign central
banks including China would dump our national debts if it has not been already
started. The economy is dressed up nicely in an election year. Giving us free
money is the easy way to buy votes, but the long-term effects are very harmful.
Using cheap money to buy back the
company’s stock would boost the stock price and hence make the management wealthier. It is a
false sense of the stock value. When the company cannot pay back the debt
obligations, the company would go bankrupted. If the U.S. were a company, she
has gone bankrupted already.
As of 6/15/2020, QQQ (representing
NASDAQ stocks) has been up 11% YTD and it is far better than DIA (representing DOW
stocks) and SPY (representing the 500 large stocks in the S&P Index and
losing about 5% YTD). QQQ has a lot of tech stocks while DIA has a lot of losers such as Boeing. Most FAANG stocks are making record highs.
Most of the ETFs on chips have
been up more than 40% in a year. I bought Amazon and two chip ETFs. I use
trailing stops to protect my portfolio. Huawei is buying a lot of U.S. chips in
the 120-day relaxed period. In September this year and if there is no
extension, I would sell these chip ETFs fast.
I have used the strategy
described in my book “Profit from the recovery of the pandemic” to take
advantage of this volatile market. I used 5% as the threshold and I had too few
trades; now I changed to 3%. Expecting a market crash, I weigh more on contra ETFs.
As described in the same book, I bought a lot of contra ETFs, GLD and the stock
of a gold miner. It is for insurance. ETFs on oil is my big mistake.
If the U.S.D. loses the status of
reserve currency (not likely soon), it would bring prolonged depression and
high inflation in the U.S. In this case, it is safer to invest in real estate,
precious metals and profitable companies than in CDs and bonds that would lose
values due to inflation.
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This article will be updated to my books including "Complete the art of investing".
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This article will be updated to my books including "Complete the art of investing".
