Hi Again!

 

Welcome to October- the month of big market crashes (1929 and 1987) !! Most people perceive market crashes as terrible but that is not prudent. There are 2 major advantages in having a crash: (1) Wonderful buying opportunity that will reward you within 5 years! (2) Instead of having a very long, grinding, bear market, this bear market could end soon after a major crash. The Federal Reserve will love a crash as that is extremely deflationary and 99% of the people who will suffer will be the top 1% of the richest people in the US. Even now there are some amazing bargains out there and I have already started “nibbling”. As they always say on Wall Street, get your shopping list ready but only buy a little at a time or you will get caught to the famous Wall Street “falling knife”!!

 

On 9/29/22, Josh Brown (a brilliant guy!) said on CNBC that due to Fed Reserve action, we have lost $10 Trillion in market cap in the stock market already. The loss is more in the bond market. Most of the money lost belonged to the top 1% richest Americans. Josh also reminded that once again, as inflation rose and stocks/bonds fell, price of gold also fell. We see so many TV commercials on how gold is a great buy as a hedge against inflation and bear markets! Not true! Commodities are priced in US dollars (USD)  so as the dollar has being rising to record levels, it is a drag on commodities. Many countries have tried to replace the USD but that will never happen.

 

The US dollar (USD) surge is raising interest rates in most countries. They have no choice or else capital will flow to the US like a tsunami. For the past 30 years, the Federal Reserve was a buyer of bonds in the open market but now they are going in the opposite direction. They have a balance sheet worth over $8 trillion, and they want to reduce it. Some say that they should just wait till the bonds mature. Instead the Feds are expected to sell $100 billion in treasuries in 2022 Q4. Even now there are signs of liquidity problems in the bond market. It is prudent to expect rates to keep rising. People complain about a 6% mortgage rate. I paid 11% on my mortgage in 1985.

 

Carter Braxton Worth is an American financial analyst and stock market strategist. Each year since 2008, he has appeared on institutional investor's All America Research Team, ranked as one of the Top 3 technical analysts on Wall Street. On 9/16/22, on CNBC, Carter predicted that the S&P 500 will go down to 2500! On 9/30/22, the S&P500 ended at 3585. Imagine that! I have already made a lot of money on buying and selling put options on the S&P500 (SPY). Imagine the opportunities it will create for us to short sell with put options and make money! When you combine stocks/ETFs and options, there are so many ways to “play” this game. For a moment, let us assume that Carter Worth is correct and the S&P500 will go down to 2500 (SPY to 250). As of 9/30/22, SPY put option expiring 12/16/22, is priced at about at $130 per contract (100 shares). Let us say that on 10/3/22, you write/sell a naked SPY put option that expire on 12/16/22, you will get $130 per contract. Then what happens? Prior to 12/17/22, if the S&P 500 go to or below 2500, the buyer of that naked option could exercise the option and you will have to buy 100 shares of SPY at $250 per contract. After that if S&P500 keeps going down, keep buying more. You can also buy puts as a hedge.

 

Experts say not to look at the previous high and assume that the stock will get back to that level. That is very true. Many years ago Boeing hit $400 and now it cannot even go over $150. However, it is a yardstick to make an estimate of the future potential. On 4/29/22, I added Netflix to our portfolio, in just 150 days, it is up 23.9% during this severe bear market!! I am not happy as I wanted it to fall further to buy more. What changed? Netflix will offer a free service with ads (like You Tube) and some say that they might generate more ad revenue than Facebook/Meta! I also bought Ford and AMD. 9/29/22 was a good day to buy AMD around $65. I was waiting for it to go to $60 to pull the trigger but $65 is good enough. Decades ago, when a Wall Street legend was asked how he made money he replied, “I never bought at the very bottom and I never sold at the very top”- if you try to do that, you will miss the boat. Even though I bought Ford and AMD (down about 50% from their previous highs) , I expect them to go lower so I also bought PUT options as hedges. With the expected recession of the century, the probability is high that AMD and Ford will fall significantly in the future.

 

Over the past few months, I have been using PUTS to short sell 20yr old US Treasuries on ETF, TLT. As interest rates go up, bonds fall. It seems like a “no brainer” but the bond market has been resisting interest rate hikes expecting the Feds to reverse it’s policy in 2023 and start lowering rates again but that probability is very low. Fed Chair Powell stated that he is more like Volker who kept on increasing rates (to 20%?)  rather than Arthur Burns who stop tightening prematurely in the 1970s. However, in 1980 Volker stopped tightening for a short period and inflation roared again so Volker kept on increasing rates for a long time till inflation came under control for a long period of time. Federal Reserve cannot openly say that they want to create a recession, but they know that it is needed to tame inflation. I bought PUTS on TLT on 5/11/22 at $575 per contract and sold them on 9/22/22 at $630 per contract!

 

DoubleLine Capital CEO Jeffrey Gundlach said the Federal Reserve should ease the pace of rate hikes as the economy is on the brink of a recession. The Fed on Wednesday raised benchmark interest rates by another three-quarters of a percentage point to a range of 3%-3.25%, the highest since early 2008. The central bank also signaled that will raise rates as high as 4.6% in 2023 before the central bank stops its fight against soaring inflation. “I don’t think they are going to be able to pull that off,” Gundlach said on the Fed’s forecast to hike rates to 4.4% by the end of 2022. “I think the economy is going to be showing signs of weakening.” “I do think the unemployment rate is going to go up and I do think we’re headed to a recession, and I think the Fed should have pasted this differently,” Gundlach said. “But now they’re so committed to this 2% that I think the odds of a recession in 2023 are very high. I mean, I would put them at 75%.” (Gundlach “Bond King”, CNBC, 9/21/22)

 

‘Get out of these distorted markets’: Mohamed El-Erian (Bond King) just issued a dire warning to stock and bond investors — but also offered 1 shockproof asset for safety. Due to rampant inflation, holding cash may not be a wise move. (Higher and higher price levels erode the purchasing power of cash savings.). That’s one of the reasons many investors have been holding stocks and bonds instead. But according to Mohamed El-Erian — president of Queens’ College, Cambridge University, and chief economic advisor at Allianz SE — it might be time to switch gears. “We need to get out of these distorted markets that have created a lot of damage,” the famed economist tells CNBC. “What we have again learned since the middle of August, is that [stocks and bonds] can both go down at the same time,” he says. “In a world like that, you have to look at short-dated fixed income, and you have to look at cash as an alternative.” (Jin Pang, Yahoo Finance, 9/12/22)

 

 

China (PRC)  is the 2nd biggest economy and they are in big trouble. I always believed that the hype was greater than reality when it came to the PRC.  Modern PRC was built on stolen intellectual property from the west. 25.7% of their economy comes from the construction industry. Some of the biggest companies in that industry are close to bankruptcy. Their banks are having a problem staying afloat. As Steve Weiss said on CNBC on 9/29/22, this industry in China is collapsing now. We still do not hear about the “Chinese debt traps”; these are billions of dollars given by the PRC to third world countries that are run by corrupt politicians who steal most of the money and these poor countries cannot afford basic necessities as all foreign exchange has to be spent on loan repayments to China (PRC). Recently the PRC was reluctant to write off a part of the money owed (as done by Europe) by Sri Lanka stating that it would lead to a precedence and about 20 other countries will ask for the same benefit. About 10% of Sri Lanka’s external debt is owed to China (PRC) but there are many African countries where it is 40% to 50%! I firmly believe that this too will drag down the Chinese economy. It will also have a detrimental impact on countries like Malaysia and Indonesia that export to support the construction industry in China. How can we benefit from this? During the past few years some Wall Street firms were leaving the US for Asia due to our problems, and I believe that was very foolish. I started short selling the EEM ETF (mainly China -Emerging Markets) with put options. The put options I bought on 9/23/22, is up by 8% already while the put options I bought on 1/18/22 is up by 15% and these options expire in 2024.

 

Recently the Fed Chair Powell stated that raising rates will hurt people now, but it will end up with most Americans being able to afford housing in the future. It seems counterintuitive but it is 100% true. As I have been saying for a long time, with the trillions of dollars “printed” by the Federal Reserve (nothing at all due to stimulus money given out), many billionaires and Wall Street funds bought houses all over the country and kept raising rents at an astronomical level. They also used margin to buy more. Fed action will kill those activities.

 

When the Federal Reserve lower rates some complain and when they raise rates to curb inflation, people complain but they do it for the benefit of our long-term economic health. This inflation that is quickly turning to hyperinflation should be crushed at any cost soon or everyone will end up in big trouble. Powell stated that he is more like Volker than Arthur Burns and that is good for the US-little pain now followed by a long period of prosperity (30 years?) with a rate of inflation below 2%.

 

I have been saying that cutting taxes (mainly for the rich) is inflationary and increasing taxes for the rich is deflationary- and some of the taxes collected could be used to help the middle class and the poor. Last week what happened in the UK was amazing! This is something that Democrats can use against the Republicans!  The new right-wing government in the UK reduced taxes which brought their bond market to a near collapse. Even though it is rare, the IMF warned the UK government that this move  is not only inflationary, but it will benefit the rich at the expense of the poor. Soon after the tax cut was announced, the UK currency (pound) crashed! Bank of England (BOE) had to reverse its actions and start buying bonds as they were afraid that pension funds would go bankrupt! The UK pound is 12% of the dollar index and soon after the BOE bond purchase, the US dollar dropped slightly after rising sharply for months.

 

Have a great month! In the month of Halloween, do not be scared!! Let us hope we will have 60% to 90% crash (from the previous highs)!!

 

Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family, is credited with saying that "the time to buy is when there's blood in the streets." Whether or not Rothschild actually uttered the famous line, it reveals an important truth about betting against market psychology.

 

Have a Great Month!