Bitcoin and the Next World Order

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Over the last five years I’ve been watching the Bitcoin movement flourish into the chaotic maelstrom of a thousand cryptocurrencies, Some see Bitcoin as the Second Coming, while others liken the movement to the Tulip Mania bubble of the 1600′s, when the price of tulips was bid up in a frenzy of speculation to valuations of over $300,000 (in today’s money) for a single bulb.

After giving this movement a lot of thought over the last years, I’ve come to the conclusion that the majority of cryptocurrencies will die a quick and painful death, but that a few dozen – possibly more – will not only thrive but come to be the dominant money order of the future. Bitcoin, Ether, EOS, Litecoin, Monero and a dozen others will be likely survivors.

I believe a $1000 investment in Bitcoin today stands about a 10% chance of being worth $0 (Zero) in 10 years time, versus a 90% chance of at least doubling and a 70% chance of increasing more than 10 fold.

In a series of articles on this site over the next few months, I’ll be providing my reasons why, and disarming the arguments against these developments one by one. In the meantime, for those of my readers who want a jump start on those articles, here’s a great interview of Eric Vorhees, founder of one of the most successful cryptotrading platforms on the internet. In it, Mr Vorhees provides an extremely coherent explanation of many of the intricacies of this budding new world of money

Listen to it, and I’d love to hear your feedback. Think he’s crazy – and by default me too – no problem! Let me know why. Interested in knowing more about one aspect or another? Let me know, and I’ll try to respond authoritatively.

A Brief Divergence into Politics

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Rarely does this blog venture into the slippery and dangerous roads of politics – as divisive as this area has become for American political culture. Yet the following intelligent post by Ray Dalio makes me feel duty-bound as an American to past this article on to all of my readers.

Like Mr Dalio, I think we are rapidly approaching a critical juncture in our nation’s history, and one that is fraught with risk. Read the article for yourself. If nothing else it will arm you with better data with which to bolster your political pursuits. If you are as impressed as I am, please refer the link along to many friends.

Why and How Capitalism Needs to Be Reformed

Confronting our Worst Fears

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In this interview, Stan Druckenmiller, legendary investor and founder of the hedge fund Duquesne Capital provides a bone-chilling, yet thouroughly realistic synopsis of the state of the American economy in 2019.

What America faces today (but also most of the developed world, including Britain, Spain , England, China and Japan) is a crisis of staggering proportions which politicians and the electorate have refused to address in any serious fashion. For good reason: the prospects are dire and the solutions politically noxious.

Our levels of debt are so large that the government cannot continue its present policies and meet its promises to its citizenry. Our debt burden, totalling over 200 trillion dollars, is about 33 times the size of our federal budget, or 10 times our Gross Domestic Product. The size of this debt is so large we cannot honor it.

To try to pay these obligations through taxation, Druckenmiller explains, would require increasing every form of federal taxes by 55% on every man, woman and child – but that would cause such a decrease in productivity and growth that it would collapse the economy. Alternatively, we could decrease all government expenditures for other items by 36%, permanently.

Addressing it through growth is possible, but very difficult:
it would require us to grow our economy by more than our rates of interest on the debt, measured at the interest on long term government bonds. Currently, that is around 2.7%. Unfortunately, in the last 10 years, the US real GDP growth rate has lagged below that rate, so our indebtedness is growing instead of shrinking.

The US did achieve real growth rates as high 6% in the late 90′s. See the Mercatus analysis of those years here. If we can achieve that again, there’s a way out of this mess. To achieve that, we should learn from history, taking a look at the 90′s and seeing what we did right back then.

Unfortunately, that was a period we had the winds at our backs, with very favorable demographics. Our situation today is the polar opposite. Since we cannot boost our productivity by throwing more young bodies at the economy, we will need to look at technological breakthroughs to increase our productivity while medical improvements extend the lives and abilities of an aging workforce.

Hedging Your Fund Against The Next Big Crash

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Includes: SPY

by: Serge d’Adesky

Summary

Protecting your portfolio against a sharp market drop is essential for today’s investor.

3 percent of your assets can hedge 100% of your portfolio.

Use options to ensure your portfolio will thrive in the next crash.

At the risk of being labeled a perma-bear, I will again repeat that it’s time for investors to revisit their hedging strategies. I won’t go into the reasons here. Instead, I’ll show you how you can cope with the risk of a 20% to 70% drop in the stock market without being crushed. This strategy can’t save you from all losses, but it can keep those losses small, without notably affecting your upside in case this prognosis is wrong.

Let’s assume you’ve got around $100k invested in a mix of growth and income companies paying you a great dividend – earnings you expect to be around 3% a year, with good prospects of moderate long-term growth and little chance of bankruptcy.

If you are in your 60s, 70s, or 80s, you might not be so sanguine about waiting out a 60-70 percent drop in the market.

So here’s how you can use options on a major index in order to sleep well at night.

First step: sell about $4,000 of your least performing investments in order to raise cash for this hedge. The hedge will cost you around $3,700 or 3.7% of your portfolio and will give you profits in a large drop in the markets as well as a continued market rise. It will limit your losses to a tolerable 6-8% in a moderate 10% to 20% drop in the markets.

Invest your money in what I label as a lopsided butterfly. Specifically, using today’s market values (April 15, 2018), you could spend $3,739 to establish the following positions:


Contract Position Average Cost Value
SPY DEC. 20 ’19 210 Put 8 $7.68 $6,148
SPY DEC. 20 ’19 100 Put 10 $0.39 $390
SPY DEC. 20 ’19 150 Put 15 $1.87 -$2,799

So how would this options play be affected by different market outcomes? Take the following 3 graphs with a pinch of salt. The first shows possible value ranges at 6 months, the second at 12 months, and the third most important graph at expiration of the options contracts on December 20, 2019, roughly 22 months out from today.

State after 6 months

State after 12 months

State at expiration after 22 months

Why the pinch of salt? Because we’ve not varied the volatility from its present value. This would introduce too many variables and just confuse the reader. True, on stark market drops, the volatility is likely to increase. Since this particular option setup is vega positive, it benefits from a rise in volatility. So actual profits would likely be higher than shown in the graphs and in the subsequent summary table. On a rising market, volatility is likely to decrease and the losses would be the same as shown in the tables below.

Our intention is to hold the options hedge to term, so the intermittent graphs are only important to give the investor an idea of how the options portfolio’s value is likely to fluctuate over time. If you know what could happen, you’re unlikely to bail out of the hedge too early.


Market Performance S&P 500 -40% -30% -20% -10% 0% +10% +20%
After 6 months +16% +12% +5% +0% -3.7% -3.7% -3.7%
After 12 months +17% +12% +5% 0%

-3.7%

-3.7% -3.7%
After 22 months +40% +35% +10% -3.7% -3.7% -3.7% -3.7%

Now let’s map the effect of various market scenarios on your growth and income portfolio. We are assuming that these holdings drop a little less than the overall S&P 500, but also rise a little less. Also, remember the assumption that you now have 97% of money in dividend paying stocks paying 3% dividends


Core Portfolio Value -35% -30% -18% -5% 0% +10% +15%

Dividend Income

(22 months return)

+5.5% +5.5% +5.5% +5.5% +5.5% +5.5% +5.5%

Total Return Entire Portfolio

Adding in Options Return

+10.5% +10.5% -3.5% -3.2% -3.2% +11.8% 16.8%

As you see, this hedge provides great protection against a big drop in the market, allowing you to reap around 10% profits even in the case of a market meltdown. Yet, it still does well in a market rise. Unfortunately, the trade-off is in the case of a small market swoon in the 0% to -20%. Here you lose around 3% overall, including your dividend income.

For most investors though, that is something they can live with.

Disclosure: All investments involve risk. In particular, options hedges are complicated products and should only be undertaken by knowledgeable investors. This is not a solicitation to buy or sell.

Disclosure: I am/we are long SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

A Paradigm Shift – Oil Displaced

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They say a picture speak a thousand words. In that case this video speaks volumes. Take a 15 minute dive into the next paradigm shift: the end of oil’s dominance in global economics. Enjoy the video, courtesy of Bloomberg. Oh, and if you happen to be an oil sheik – this would be a good time to start trembling.

Yasukawa Finally Corrects – Now We Like It

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As readers of my blog know, I’m a big believer in the growth of Robotics, the rationale for which you can view here. One of the best companies in this sector is Yasukawa, but the last time I discussed it, I suggested waiting for a better price as the company had been overbought.

Since then, the stock has dropped to $87.50, a 21% drop, where it seems to have found support. I previously suggested buying in at prices of $91 and lower. That time is now. What caused the drop? Here’s the take from the Nikei Asian Review:

Yasukawa, one of last year’s strongest-growing components on the Nikkei Stock Average, beat most peers to releasing earnings for the nine months through December, publishing its report after markets closed Tuesday. The showing was strong, with consolidated net profit roughly doubling year on year as the company seized on demand for factory automation in labor-short markets like China.

But in maintaining a forecast of 39 billion yen ($357 million) in net profit for the full year through March, the robotics company fell short of market predictions of 40.4 billion yen. It fell victim to “the market’s overly high expectations,” in the words of Yasuhiko Hirakawa at Sumitomo Mitsui Asset Management.

Remember the adage of buying when others are fearful? Now’s the time. Here’s what my technical crystal ball shows:



Click to enlarge

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Disclosure: The material presented on this site is for illustrative and educational purposes only. and is not personal investment advice to any specific person for any particular purpose. Be sure to read our disclosure page located in the right hand menu item.

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Micron – Riding the Artifical Intelligence Wave

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How do you benefit from the likely growth of AI (Artificial Intelligence), Gaming, assisted reality applications, and driverless car technologies? Buy the companies that produce the technologies at the heart of these applications.

As one web commentator put it succinctly, this market is dominated by a few players. “Intel and Micron are the only companies that have the know how to manufacture 3D Xpoint… DRAM market is controlled by Samsung, Micron and SK Hynix.. … this sector is totally controlled by just few players and no one else is even close.”

This post makes the case for Micron.
1) NAND will be the backbone storage system for the avalanche of new data produced by the Internet of Things. Other technologies will play important roles, but NAND will be dominant over at least a decade.
Projected NAND growth
2) NAND supply will seriously lag demand, forcing prices higher, and richly rewarding leading NAND producers.

3) Micron is will poised to dominate this sector, along with Samsung and 5K Hynix.

I want to give credit to one of my Seeking Alpha colleagues “Truth Investor” for his great analysis of this stock : DRAM strength and Micron Be sure to read more on this company there.

Disclosure: All investments involve risk. This is not a solicitation to buy or sell. Please read our full disclosure on this site.

Protected: Your Growth Portfolio

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Everything You Need to Know About Investing in 30 Minutes

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In this simple, entertaining, yet utterly brilliant 30 minute presentation, Ray Dalio – co CEO of one of America’s leading hedge funds – explains how the economy works. Don’t be misled by its comic-like graphics. This video provides an understanding of the underpinnings of modern economies that escapes the understanding of the average investor.
You do want to be a better than average investor, right? Take a listen:

The Death of The Balanced Portfolio

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For the last 200 years, it has always been safe to invest in a balanced portfolio of stocks and bonds, weighting more heavily towards equities at a young age, and more heavily towards bonds as the years pass. Over time, you could count on your wealth increasing and outpacing the cost of living, and leaving you in good shape to face your last decade or so of retirement.

That was then. This is now. We are facing a time when that traditional approach will fail miserably. When equities go through their inevitable correction – its a question of when they do that, not whether they will do it – investors will find no safety in bonds. Long term treasuries will drop by 30% to 60% , short-term bonds will drop a lot less, but still enough to cancel out two or three years of dividends.

Readers of this blog will not be shocked by this admittedly depressing and alarming assertion. A previous posting dealt with a number of warning signs I see forming on the horizon and explored this topic.

But my reasonings were not born in a vacuum. There is a saying that “true genius is built on the shoulders of giants”. More appropriate in my case would be Robert Burton’s saying that ” A dwarf standing on the shoulders of a giant may see farther than a giant himself.”

In that vein, let me point you to the musings and concerns of the very well-respected economist and newsletter writer John Mauldin, who brilliantly diagnoses the dismal economic corner the world has painted itself into, which can only end in tears.

Negative Rates Nail Savers

Be sure to read the follow on article:
Start Moving Some Dirt

A followup posting to this will suggest some concrete defensive steps you can take to protect and grow your portfolio in these challenging times.

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