Mid-year (6/15/2020) update

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. 

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".