Macro Tsimmis

intelligently hedged investment

Ron Paul’s Portfolio: Unusual, Yes…but “Weird”?

Posted by intelledgement on Fri, 06 Jan 12

Twice in the last three weeks, Wall Street Journal personal finance blogger Jason Zweig has taken aim at GOP Presidential candidate Ron Paul…not for anything Dr. Paul has said, or for any of his policy proposals, but rather to criticise his investment portfolio. In his 21 December 2011 post, Mr. Zweig wrote:

…[W]e’ve never seen a more unorthodox portfolio than Ron Paul’s.… It’s shockingly different.…[A]bout 21% of Rep. Paul’s holdings are in real estate and roughly 14% in cash. But he owns no bonds or bond funds and has only 0.1% in stock funds…. The remainder of Rep. Paul’s portfolio—fully 64% of his assets—is entirely in gold and silver mining stocks….

So, how has this “shockingly different” portfolio performed? Well, in his 21 December post, Mr. Zweig did not address this question. And the answer is not straightforward. Since the disclosure forms that representatives fill out only provide a range of values for each asset—and do not disclose the date of acquisition—it is impossible to calculate a precise return on investment for the portfolio. Dr. Paul’s most recent form dates from May 2010, but judging from earlier disclosure form submissions, it appears that he has held most of his mining stock investments since at least 2002. Using historical data from Yahoo!, here is a summary of how the stocks Dr. Paul owns have fared so far this Century (that is, since 29 December 2000):

Stock Symbol  Max Value ROI  CAGR
GoldCorp GG  1,000,000 1533% 29%
Barrick Gold ABX  500,000 210% 11%
Newmont Mining NEM  500,000 286% 13%
Agnico Eagle Mines AEM  250,000 527% 18%
AngloGold Ashanti AU  250,000 253% 12%
IAM Gold IAG  250,000 261% 16%
Eldorado Gold EGO  100,000 802% 28%
Mag Silver MVG  100,000 -11% -2%
Pan American Silver PAAS  100,000 736% 21%
Silver Wheaton SLW  100,000 834% 41%
Alumina AWC  50,000 -60% -8%
Claude Resources CGR  50,000 -14% -2%
Golden Star Resources GSS  50,000 83% 6%
Kinross KGC  50,000 676% 20%
Virginia Mines VGMNF.PK  50,000 59% 10%
Allied Nevada Gold ANV  15,000 451% 43%
Brigus Gold BRD  15,000 -86% -21%
Coeur D’Alene Mines CDE  15,000 157% 9%
Dundee Corp DDEJF.PK  15,000 473% 84%
Federated Prudent Bear A BEARX  15,000 41% 3%
Great Basin Gold GBG  15,000 30% 2%
Hecla HL  15,000 946% 24%
Lexam LEXVF.PK  15,000 625% 172%
Metalline Mining MMG  15,000 -59% -8%
RYDEX SERIES FDS, INVERSE S&P 500 RYURX  15,000 -28% -3%
Wesdome Gold Mines WDOFF.PK  15,000 45% 14%
Petrol Oil & Gas  POIG.PK  1,000 -100% -47%
Vista Gold VGC  1,000 207% 11%
Viterra VTRAF.PK  1,000 -24% -7%
  • Max Value = the maximum value of the asset as listed in Dr. Paul’s disclosure form
  • ROI = the overall return on investment for that position
  • CAGR = compounded annual growth rate (annualized ROI) for that position from 29 Dec 00 to 30 Dec 11 (dates for some positions vary as appropriate…e.g., MMG was bought out by HL in 2011 so the enddate for calculating MMG performance is 29 Apr 11)

For the entire 11-year period, the CAGR for Dr. Paul’s stock portfolio is 19%. That is, +19%, on average, every year for 11 years! During those same 11 years, the S&P 500 declined overall by 5%, which amounts to a CAGR of 0%…but that does not count dividends; add them in and the CAGR is a tad under +3%. What about bonds? The 11-year CAGR of PIMCO’s massive Total Return Fund is about +1%.

I am not the only one handy with spreadsheets. There were over 300 comments appended to Mr. Zweig’s post, many of which pointed out that Dr. Paul’s investment strategy was running rings around the market. But, while in his followup post Mr. Zweig graciously conceded the point—his guesstimate of how well the portfolio may have performed is +23% on a CAGR basis, more generous than my calculations—he was still not impressed. In yesterday’s “How Weird is Ron Paul’s Portfolio?” post, he opined:

…[P]erformance alone can’t tell you whether an investment approach is sensible or not. After all, over the 10 years ended Dec. 31, 1999, Internet stocks far outperformed most other investments. That didn’t ensure that they would continue to do so in the years to come, and it certainly didn’t mean that it was prudent to put all or most of your money into stocks like or eToys Inc. …[I]nvesting isn’t just about maximizing your upside if you turn out to be right. It’s also about minimizing your downside if you turn out to be wrong. Putting two-thirds of all your assets into one concentrated bet is a great idea if the future plays out just as you imagine it will—but a rotten idea if the future turns out to be full of surprises. …[I]f the future happens to unfold in ways [Dr. Paul] doesn’t expect, then his hot investment portfolio is likely to go cold in a hurry.

Well, of course it is true by definition that banking on a particular outcome is more risky than hedging your bets. But that does not ipso facto render such a strategy to be nonsense!

Dr. Paul’s portfolio employs a macro-strategy approach that by its nature seeks to derive concentrated bets from political-economic-social analysis. Within the framework of this strategy, betting against the anticipated outcome is what constitutes nonsense. Risk management here is accomplished via constant vigilant attention to the macros, not by betting against yourself. If The Powers That Be stop prosecuting illegal and wasteful wars, stop printing money to bail out criminal banksters, and stop promising the future income of our children for present-day indulgences that are beyond our means, it will be evident things are going that way well before the value of Dr. Paul’s gold holdings are much affected and he or his financial advisors will have ample opportunity to redeploy his investment dollars.

In his initial blast against Dr. Paul, Mr. Zweig gratuitously pats himself on the back for having “revealed problematic trading in Congress more than a year and a half before the ‘60 Minutes’ episode that recently raised a ruckus over the same topic.” Given that it is manifestly obvious that Dr. Paul is not employing insider tips to enrich himself, it’s not clear why this topic would be mentioned.

But in this light, perhaps the word “weird” is not so far off after all. Here we have a Congressman whose investments [a] are congruent with his diagnosis of what ails the Republic, [b] are decidedly not informed by the sort of illicit inside information that Congress has corruptly made technically legal for their members to use (which if you or I used, should likely land us in jail), and [c] are highly profitable. I suppose in the statistical sense of being unusual, that is a weird combination…and too bad for that; we’d all be better off if it were more common.

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SELL SPDR Gold Shares (GLD); BUY Sprott Physical Gold Trust (PHYS)

Posted by intelledgement on Fri, 30 Dec 11

Intelledgement’s model portfolio utilizes (mostly) exchange-traded funds to implement a macro-focused investment strategy. Consequently, we periodically review the funds relevant to any particular aspect of our overall strategy—e.g., all the funds that invest in India or agriculture, or short the dollar—to ensure that the particular fund we choose as our investment vehicle is the best choice (or at least a good one). In order to minimize potential liquidity issues, we generally eschew any fund that has less than one billion dollars under management, or trades fewer than one million shares per day on average. We occasionally make exceptions to this practice; for example when we feel strongly about the need to take a certain position and the fund choices to implement it are limited or when a fund with a large enough market cap has lower volume due to a high per-share price.

We have been satisfied investors in the SPDR Gold Shares ETF (GLD) more-or-less since the inception of the Intelledgement Macro Strategy Investment Portfolio at the beginning of 2007. (We sold our gold and silver funds in February of 2010 thinking the dollar would strengthen on flight-to-safety concerns…and got a sharp reminder that trying to outguess the market tactically is very hard to do as the price of both commodities soared. We got back in three months later, having missed a 10% rise in gold and a 17% rise in silver.) Since that time, GLD has reasonably faithfully tracked the price of gold, which has mostly gone up.

We still think gold is a good place to store some value as we explained in our original recommendation for GLD back in 2006. So we don’t want to pull any funds out of gold, but what we are doing is making a lateral move: selling the GLD ETF and rolling over all of the proceeds of that sale—our original investment plus the profits—into the Sprott Physical Gold Trust closed-end mutual fund (PHYS).

We are making this move for two reasons. First, being a closed-end mutual fund, the tax treatment for PHYS capital gains is more favorable for US investors: 15% on long-term PHYS gains compared to your ordinary income tax rate—probably 28%—for any GLD gains regardless of how long you have held the investment. Of course, this does not matter if you hold the shares in a retirement account, but for those investors working with a regular brokerage account, it is a material advantage. Secondly, so far—since the inception of the fund in February 2010—the PHYS fund has actually outperformed gold bullion by 2% as compared to the slight underperformance of GLD since its inception (November 2004). This may be a transitory effect, but there are some reasons why the market seems to prefer PHYS to GLD—for more on this see our Motley Fool weblog post—and insofar as that helps the former to outperform the latter, we are willing to let the effect work in our favor.

One of the reasons PHYS is preferred is that some investors consider that GLD is more vulnerable to systemic risk than PHYS. We believe that if the system genuinely collapses, no paper gold holdings are likely to avail one; at that point, you will need silver coins, tobacco, alcohol, and aspirin for purchasing any necessities of life that you cannot provide for yourself. The market also likes PHYS because it is the only fund that enables investors to redeem their shares for physical gold. But this is not a genuinely practical option, as you need to have about $400,000 invested in the fund to afford the tradein for a gold bar—they are not about to incur the hassle and expense of dividing up a bar for you. Anyone who seriously could afford to and wished to acquire that much gold could do so more cheaply buying from a dealer. But again, if the market bids the price of PHYS up relatively higher because of irrational beliefs that it is safer and easy to convert shares to bullion, as PHYS owners we will cheerfully accept all contributions to our share valuation.

Of course, with a marketcap of $2 billion and average trading volume of 1.5 million shares, PHYS exceeds our liquidity requirements (minimums of $1 billion marketcap and one million shares average daily volume). Sprott store all their bullion at the Royal Canadian Mint, who are responsible for auditing and issuing bar lists. Since the 2009 brouhaha over the $15 million of “missing” bullion that turned out not to be missing, the mint has tightened up their accounting procedures and now considered  one of the safest, if not the safest and most honest storehouses of gold bullion in the world. We also like the fact that—as with GLD—the gold is stored outside the USA, considering what happened in the 30s when the government confiscated everyone’s gold.

Previous gold-related posts:

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Tracking the Gold Funds

Posted by intelledgement on Fri, 30 Dec 11

If you are in the market for a paper investment in gold, there are several factors you may want to take into account in choosing among the many available investment vehicles: fund expense ratio, premium over the NAV, tax issues, who holds the physical gold underlying the fund, who audits those holdings, where they are located, and the potential for convertibility of your shares in to physical gold, to name a few. One important factor we attend to at Intelledgement is the overall performance of the fund relative to the price of gold. The following table ranks several gold funds with respect to how well they measure up:

Fund  Sym. Market Cap Volume Inception Cost 29-Dec-11 Price ROI CAGR Gold Cost Gold Price Gold ROI Gold CAGR Annualized ITR
ProShares UltraShort Gold ETF GLL 0.14 0.92 04-Dec-08 130.00 20.28 -84.4% -45.4% 767.00 1545 101.4% 25.6%  5.8
Sprott Physical Gold Trust ETV PHYS 2.00 1.48 26-Feb-10 9.59 13.72 43.1% 21.5% 1117.50 1545 38.3% 19.3%  2.2
Central GoldTrust GTU 0.97 0.13 22-Sep-06 21.95 58.07 164.6% 20.3% 588.60 1545 162.5% 20.1%  0.2
ETFS Physical Swiss Gold Shares SGOL 1.88 0.16 09-Sep-09 98.98 153.19 54.8% 20.9% 992.50 1545 55.7% 21.2%  (0.3)
iShares Gold Trust IAU 9.63 5.92 28-Jan-05 4.27 15.07 253.0% 20.0% 426.80 1545 262.0% 20.4%  (0.4)
SPDR Gold Shares GLD 72.87 9.99 18-Nov-04 44.38 150.34 238.8% 18.7% 443.70 1545 248.2% 19.2%  (0.5)
PowerShares DB Gold Fund DGL 0.50 0.13 05-Jan-07 23.49 53.87 129.3% 18.1% 605.50 1545 155.2% 20.7%  (2.6)
ProShares Ultra Gold UGL 0.43 0.28 04-Dec-08 24.27 77.31 218.5% 45.9% 767.00 1545 101.4% 25.6%  (5.4)
PowerShares DB Gold Double Lg ETN DGP 0.67 0.90 28-Feb-08 25.70 46.34 80.3% 16.6% 971.00 1545 59.1% 12.9%  (9.1)
  • MarketCap = size of the fund in billions of dollars.
  • Volume = daily average trading volume in millions of shares
  • Inception = date of first day of trading for fund (per Yahoo!)
  • Cost = closing price of a share of the fund on the first day of trading (per Yahoo!)
  • 29-Dec-11 price = closing price of a share of the fund as of 29 Dec 2011
  • ROI = return on investment for a share of the fund from the inception date until 29 Dec 2011
  • CAGR = compounded annual growth rate (a/k/a annualized ROI) for a share of the fund from the inception date until 29 Dec 2011
  • Gold Cost = closing price of an ounce of gold on the first day of trading for the fund
  • Gold Price = closing price of an ounce of gold as of 29 Dec 2011
  • Gold ROI = return on investment for an ounce of gold from the inception date of the fund until 29 Dec 2011
  • Gold CAGR = compounded annual growth rate for an ounce of gold from the inception date of the fund until 29 Dec 2011
  • Annualized ITR = the fund’s Intelledgement Tracking Rating (see below)

Basically, the higher the ITR, the better. The ITR is calculated by subtracting the CAGR of gold from the CAGR of the fund; each ITR point is equal to one percentage point of compounded annual growth rate performance. All these funds are supposed to track the price of gold; if a fund has a positive ITR, it has done better than expected while a negative ITR means the fund is underperforming gold.

The ProShares UltraShort Gold ETF (AMEX: GLL) is something of a special case; it is a fund that is supposed to perform inversely compared to the price of gold…actually, it is supposed to go up by twice the percentage decline in the price of gold in any given day that gold sells off…and go down by twice the percentage gain in the price of gold any day that gold appreciates in value. The fund has a high ITR because while gold has increased by 25.6% on a CAGR basis since the inception of the fund, GLL has declined by a CAGR of “only” 45.4%. As we would have expected a decline of 51.2%, GLL has, relatively speaking, outperformed. Of course, anyone who bought a share of the fund back on 4 Dec 2008 and held it through yesterday is still down 84.4% overall, so the good ITR rating is probably not particularly comforting.

Generally speaking, we would expect the ITR for a fund tracking the price of gold to be slightly negative, given that the cost of administering the fund—including buying and selling the underlying gold and storing it for those funds that are backed by physical metal and the transaction costs of trading derivatives and options for the funds that are not—has to be paid for out of the assets of the fund. Therefore the -0.5 ITR of GLD, -0.4 for IAU, and -0.3 for SGOL sound just about right. It does appear that the physical gold funds generally beat the paper gold funds. For example, both of the double-return long funds on the list—which utilize futures and other derivatives to attempt to double the appreciation (or decline) in the price of gold on any given day—have failed to perform as well as expected over the long run (although both are handily beating the ROI of gold). Similarly the PowerShares DB Gold Fund (AMEX: DGL)—which relies on futures contracts to track the price of gold rather than purchasing bullion like GLD or IAU—has a materially worse ITR (-2.6).

The outlier is the Sprott Physical Gold Trust ETV (AMEX: PHYS), which has a +2.2 ITR. PHYS is unique in allowing, theoretically, investors to redeem their shares for gold bars…but you have to have at least $400,000 or so because they utilize gold bars and they won’t split one up for you. It is also structured as a closed-end mutual fund that affords US taxpayers the advantage of paying capital gains taxes at the long-term rate (15%), unlike the other funds (gains from which are taxed at 28%). The fund has generally sold at a premium to the NAV—which both means it is in high demand and if you invest in it, you are in effect paying higher-than-market-rates for your gold. It will be interesting to see if the relative attractiveness of the fund enables it to sustain the better-than-expected performance.

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McRIBS Reconsidered: Taking Currency Fluctuations Into Account

Posted by intelledgement on Tue, 27 Dec 11

A few weeks ago, we published an article reviewing the performance of the stock markets of 16 nations—including all the BRICs—for the first 10 years of the 21st century…. An astute commenter pointed out that my analysis hadn’t factored in the decline of the dollar. The commenter stated that the dollar had declined 20% in value in the first 10 years of the century—it turns out that inflation from 2001-2010 inclusively actually amounted to a cumulative 21%—and thus, he complained that the chart showed the S&P 500 value as flat for the decade (a compounded annual growth rate of fractionally less than 0%) when in reality the absolute value of an investment in the S&P 500 from 2001 to 2010 would have been down by 20% or so. Now, all the bourse indexes were valued in terms of the nominal value of their respective currencies…. However, using nominal native currencies over 10 years actually does not necessarily provide a perfectly level playing field, because it ignores currency fluctuations. In looking at the changes in value for each currency relative to the dollar over the decade, these were not insignificant.

And so this sequel article published earlier today by The Motley Fool, Reconsidering the “New” BRICs, adds in the effects of ten years of currency fluctuations. Turns out some markets—e.g., Australia up 4% annually for ten years in nominal terms but up 10% annually when we take the appreciation of the Australian dollar into account—did materially better…and some did worse.

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Krugman Incinerates a Straw Man

Posted by intelledgement on Tue, 20 Dec 11

[T]here has, indeed, been a huge expansion of the monetary base. After Lehman Brothers fell, the Fed began lending large sums to banks as well as buying a wide range of other assets, in a (successful) attempt to stabilize financial markets, in the process adding large amounts to bank reserves. In the fall of 2010, the Fed began another round of purchases, in a less successful attempt to boost economic growth. The combined effect of these actions was that the monetary base more than tripled in size. Austrians, and for that matter many right-leaning economists, were sure about what would happen as a result: There would be devastating inflation…. So here we are, three years later. How’s it going? Inflation has fluctuated, but, at the end of the day, consumer prices have risen just 4.5 percent, meaning an average annual inflation rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood…Keynesian economics.…

Paul Krugman

Both: We’ve been going back and forth for a century.

Keynes: I want to steer markets!

Hayek: I want them set free!

“Fear the Boom and Bust,” a Hayek vs. Keynes Rap Anthem

Keynesian economist Paul Krugman is big on predictions. He loves to make them, and he most particularly loves to crow about how accurate his predictions are…and how wrong the predictions of anyone who disagrees with him invariably (or so it seems) turn out to be.

In point of fact, it is not news that Dr. Krugman’s economic analysis tends to be colored by his political leanings. When he retired as ombudsman for the NY Times—the host of Dr. Krugman’s “Conscience of a Liberal” weblog—Daniel Okrent noted in his farewell column that “Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.” Basically the same point has been made by The Economist and Richard A. Posner writing in The Atlantic (as well as legions of conservative pundits and bloggers, of course).

But in criticizing Austrian School economists for bad short-term predictions, Dr. Krugman has ratcheted the chutzpah level up a notch or two.

Arguably, the single most significant point of contention between Keynesians and the Austrian School concerns the feasibility and utility of managing markets. The Keynesians claim not only that it is eminently doable but that to eschew their advice is both dumb and potentially immoral…because left to their own devices, markets will gyrate madly causing economic turmoil and human suffering. Austrian School economists profess that it is dangerously presumptive to believe that we are smart enough to “manage” markets and that attempts to do so are both dumb and potentially immoral…because misguided controls inevitably distort markets and engender malinvestment—mispriced goods and services—that leads to bubbles and boom-and-bust cycles that in turn cause economic turmoil and human suffering.

Manifestly, if it is possible to reliably predict the effect of control “x” or “y” on economic activity, then the Keynesians are right. But the Austrians’ contention is that this is not possible, in the short run, to reliably make such predictions. For Dr. Krugman to criticize them for failing to accomplish what they say is impossible is pure sophistry.

Austrian School economists would indeed argue that debasing a fiat currency eventually leads to its collapse, but there are too many independent variables in the equation to specifically predict when that will happen or, in the interim, what the particular effect of any given attempt to steer things might be. Dr. Krugman cites the average rate of inflation since 2008 as being “only” 1.5%. But we are discussing macroeconomics here, and looking at just three years does not tell you much. In fact, one of those three years was 2009, when the inflation rate was -0.4%…the first year with deflation since 1955 (when it was also -0.4%). During the first decade of the 21st Century, the inflation rate averaged 2.4%—and at the end of 2010, the dollar was worth 79 cents in 2000-dollars. If we go back to 1955—the other deflationary year—the inflation rate has averaged 3.8%.

Let’s take the middle number—2.4% average inflation, as we have experienced over the last decade—and project forward. By 2020, the dollar would be worth 63 cents in year-2000 dollars. By 2030, it would be worth 49 cents. Taking a longer and more data-rich perspective, with the average 3.8% inflation since 1955, at the end of 2010, the dollar was worth 11 year-1955 cents. Presuming 3.8% average inflation going forward, by the end of 2030 the dollar would be worth a 1955 nickel. (If annual inflation between now and then averages “only” 2.4%, make that seven cents.)

Hmm…now the Austrian School fiat-money-collapse scenario is not looking so far-fetched.

The whole Keynesian-inspired notion that “low” inflation is a normal and acceptable condition is bizarre. If I borrowed $100 dollars from you and then wanted to pay you back just $50, you would likely—and justifiably—be pretty upset and may well consider me a thief. When Keynesian-inspired central bankers do it to us, however, it’s like the weather: everyone complains about it but it’s no one’s fault.

Any inflation has the undesirable effects of distorting market values, encouraging malinvestments—which lead to potentially dangerous bubbles—and destroying the value of savings, thus discouraging people from taking a long-term view. Deliberately stoking inflation, therefore, is a dubious and problematic policy.

Which is not to say there is a lack of good reasons to be critical of Austrian School economics and their potential application to policy: for example just looking at the financial markets, if we eschew regulation, would we be better off going forward with an unregulated market for credit default swaps and other derivatives (as we had in 2008…and is still the case)? What would prevent unscrupulous naked short sellers from ganging up on vulnerable early-stage startup companies and making it hard for them to raise capital via the public markets? Would rolling back Regulation FD—as some Tea Partiers have advocated—be a good thing for investors?

But setting up straw men and incinerating them, as Dr. Krugman does here, is not advancing the ball.

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I Say “Tea Party,” You Say “Z Party”

Posted by intelledgement on Mon, 21 Nov 11

…But We Know We Need Each Other

“All of the Occupy movements start with the premise that we all owe them everything. They take over a public park they didn’t pay for, to go nearby to use bathrooms they didn’t pay for, to beg for food from places they don’t want to pay for, to obstruct those who are going to work to pay the taxes to sustain the bathrooms and sustain the park so they can self-righteously explain that they are the paragons of virtue to which we owe everything. Now that is a pretty good symptom of how much the left has collapsed as a moral system in this country, and why you need to reassert something as simple as saying to them,  ‘Go get a job, right after you take a bath!‘”

—Newt Gingrich, Thanksgiving Family Forum (skip to 1:10)

“…[T]he Tea Party Movement leveraged all of middle America’s greatest fears to fuel a movement that whispered a little too loudly about the POTUS’ being a black man for the racists among us; gave rise to ‘birther’ claims for the paranoid conspiracy lovers out there; shouted threats of retribution for immigrants stealing our plush jobs flipping burgers and trimming hedges to satisfy the anti-immigration set; and called for punishment at the alter and in the law for those with alternative lifestyles to the delight of the religiously righteous and homophobes alike.  Some sensed that this new movement was less about government spending and frustration with ineffective government, and more about racism and white anger at losing power and preference. Others charged that it was yet another example of rich, educated and powerful forces manipulating populist anger and fears so average Americans would do their dirty work, even if it was contrary to their own self-interests….”

— E Gray, Blogger

Yeah, yeah…and then there are the charts detailing the differences, such as this one lambasting the OWS crowd and this one which is putatively even-handed but subtly leans against the Tea Party (utilizing a color scheme that favors the OWS folks and overstating public support for OWS).

So, yes, there are discernable and material differences between Tea Partiers and the denizens of Zuccotti Park. The “Z Partiers” are younger; the Tea Partiers are richer. The Z Partiers are likely to favor increased taxes on the rich; the Tea Partiers overwhelmingly want to cut taxes. The Z Partiers are more likely to be unemployed…but because so many Tea Partiers are retired, fewer of them actually have a job.

But all these differences pale in comparison to the huge, critical areas of agreement between Tea Partiers and Z Partiers:

  1. They’ve played the game by the rules
  2. The deck is stacked against them
  3. They are motivated to actively work to fix/change things
  4. The Powers That Be employ undue influence to misappropriate public wealth/resources (e.g., the bailouts)

Consider this tweet of potential interest:

CSFB_elevator Credit Suisse First Boston elevator gossip

#1 Hate the subway; all those rubes reading the Daily News. #2 Yeah? You have more in common with them than the ones not reading ANY paper!

Point being, the Tea Partiers and Z Partiers have both attained a higher level of consciousness than, say, their fellow citizens focused on the antics of Kim Kardashian. They may not be able to explicate the precise whys and wherefores, but they know that somehow, things are not right and they are being ripped off. They both decry the “corporate socialism” that allocates public wealth to benefit private companies (at least in most cases). They both perceive that regulators and elected officials are beholden to special interests to the point that national interests are neglected if not actually violated.

Granted, there is more agreement on the diagnosis of the disease than on what the most efficacious cure should be. Tea Partiers generally believe that there is too much power centralized in Big Government and that weakening the Feds and adopting a more laissez faire approach is the best prescription. Z Partiers are more likely to see government power as critical to leveling the playing field. There is validity to both points of view.

Critics frequently cite the desire to hamstring the Federal government as proof that Tea Partiers are shills or dupes for The Powers That Be, who presumably would benefit from a less effective umpire. But those critics fail to address the insight of the Tea Partiers that the Federal government has essentially been captured by special interests, who invariably twist the rules to come out in their favor. Logically, affording that same government more power and resources—regardless of how many new rules are imposed to mandate “fairness”—is likely to make matters worse.

For their part, the Z Partiers are often castigated for making the central focus of their protest Wall Street instead of Washington. The most vociferous voices tend to belong to apologists for the banks, who blame Federal policies for the financial crisis in general and the housing bubble/mortgage mess in particular, but there are plenty of Big Energy, Big Insurance, and “Defense” associated critics complaining that, for example, our dependence on Middle East oil is purely a function of EPA policy. This criticism ignores the insight of Z Partiers that it is The Powers That Be who spend billions of dollars annually manipulating government to obtain special favors. Protesting against the government in this circumstance is akin to treating the symptoms and ignoring the disease.

You like potato and I like potahto; you like tomato and I like tomahto.

Potato, potahto, tomato, tomahto—let’s call the whole thing off.

But oh, if we call the whole thing off, then we must part.

And oh, if we ever part, then that might break my heart.

So if you like pyjamas and I like pyjahmas, I’ll wear pyjamas and give up pyajahmas.

For we know we need each other so we better call the whole off off.

Let’s call the whole thing off.

—George & Ira Gershwin

The Tea Partiers and the Z Partiers may not be aware of it, but they are all singing from the same hymnal. They are, however, most definitely not on the same page…and it would help them both if they could get there. How hard this is to accomplish remains to be seen…but if they can, it would likely go a long way towards persuading a majority of their fellow citizens to join the party and sing along.

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Out with the BRICs and in with McRIBS

Posted by intelledgement on Thu, 20 Oct 11

It has been a decade since Goldman Sachs economist Jim O’Neill coined the acronym “BRIC” (Brazil-Russia-India-China) as a handy shorthand term for emerging-market economies that were likely to experience above-average growth in the process of converting from predominantly rural, agrarian living to more urban, industrial modes.… [T]here’s not much debate among macro-analysts as to the continued robust validity of O’Neill’s basic insight. It would take a lollapalooza of a black swan to dissipate the inertia of the BRICs—something on the order of an epidemic or a catastrophic natural disaster that killed many millions. So, in that light, the pertinent question is not where the BRICs bus is headed, but rather, who is going along for the ride.

And that question is the focus of Forget the BRICs; Here’s a Better Way to Think About Emerging Markets, published earlier today by The Motley Fool.

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3Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 14 Oct 11

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 September 2011:

Position   Bought Shares Paid Cost Now Value Change YTD ROI CAGR
FXI 29 Dec-06 243 37.15 9,035.45 30.83 8,300.57 -25.19% -25.31% -8.13% -1.77%
IFN 29-Dec-06 196 45.90 9,004.40 22.94 8,533.64 -14.46% -21.85% -5.23% -1.12%
DBA 13-Mar-08 235 42.50 9,995.50 31.74 7,078.20 -6.43% -8.17% -29.19% -9.27%
EWZ 3-Aug-09 165 60.39 9,972.35 52.01 9,604.45 -26.83% -29.46% -3.69% -1.73%
GLD 21-May-10 95 115.22 10,953.90 158.06 15,020.64 8.95% 13.94% 37.13% 26.12%
SLV 21-May-10 636 17.29 11,004.44 28.91 18,419.83 -14.55% -4.20% 67.39% 46.02%
GDX 7-Apr-11 195 62.51 12,197.45 55.19 10,762.05 1.10% -10.22% -11.77% -22.88%
RWM 26-Aug-11 358 34.02 12,187.16 28.76 12,827.14 n/a 11.34% 5.25% 70.59%
SEF 06-Sep-11 250 43.48 10,878.00 43.75 10,937.50 n/a 19.34% 0.55% 8.66%
SH 23-Sep-11 237 46.58 11,047.46 46.10 10,925.70 n/a 5.16% -1.10% -43.91%
cash 4,856.95 6,364.93
Overall 31-Dec-06 100,000.00 118,774.85 -7.07% -7.24% 18.77% 3.69%
Macro HF 31-Dec-06 100,000.00 128,059.55 2.03% 0.92% 28.06% 5.35%
S&P 500 31-Dec-06 1,418.30 1,131.42 -14.33% -10.04% -20.23% -4.65%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the virtual money Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2010 inclusively) provides a CAGR of around 13.8%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.4%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance. The “cash” line for the “Cost” column is negative because the total cost of the securities presently in the fund exceeds the starting value of the fund by $7,000 (as profits from the sales of previously held positions have been reinvested; this is a good thing). Finally, the “cash” line for the “Value” column is reduced each quarter by a management fee (annual rate of 1% of the principal under management). More information about how the IMSIP is managed can be found here.

Transactions: Finally a quarter with some action! (After only two transactions in the previous six months.) Uncharacteristically, we even bought, sold (at a profit), and then bought back (at a lower price) the same equity—the Russell 2000 short ETF (RWM)—as the odds of a short-term catastrophic collapse in Europe appeared to gyrate notably.

Performance Review: A very tough quarter. We were down 7.1%, our third-worst quarter ever (out of 19). And while we avoided the fate of the S&P 500—which was down a bear-market-and-a-half at -14.3% for the quarter—the second-worst performance in the last 19 quarters—we spectacularly failed to keep pace with the macro hedge fund index (+2.0% for the quarter). Generally, most macro hedge funds were shorter sooner than us, with less exposure to emerging market long funds than we had this quarter. And indeed, our BRIC funds continued to plunge, with Brasil (EWZ) down 27%, China (FXI) down 26%, and India (IFN) down 14%. Precious metals weren’t much help: gold (GLD) was up 9% but silver (SLV) was down 15%. Caught in the middle, our small miner ETF (GDX) was up 1%. Our other commodity investment, agriculture products (DBA), was down 6%. Our short funds helped tad—the S&P 500 short fund (SH) was up 4% overall, the Russell 2000 short fund (RWM) was up 8% overall, and the banking/finance short fund (SEF) was up 1%. We probably should have been shorter, sooner.

Our transactions were a bright spot. We sold RSX, SH, RWM, and UDN all at a modest profit. We ended the quarter having reentered the SH (at a higher price) and RWM (at a lower price) positions; RSX closed on 30 Sep down 34% from where we sold it, so that was one bullet dodged. UDN was down 2% from where we sold it by the end of the quarter.

Overall we are now 39 points ahead of the market in terms of total return-on-investment: +19% for us and -20% for the S&P 500 in the 57 months since the inception of the IMSIP at the end of 2006. However, we are now behind our benchmark, the GAI Global Macro Hedge Fund Index, which is +28%. In terms of compounded annual growth rate, after just shy of five years the GAI hedgies are at +5.4%, IMSIP is +3.7%, and the S&P 500 is -4.7%.

There were some changes in the composition of the the portfolio’s composition this quarter. We are now 43% invested in commodities, up from 36% and 29% short, up from 17%, reflecting the addition of the Russell 2000 index short ETF (RWM) and financials short ETF (SEF) to the lineup, offset by the loss of the U.S. dollar short fund (UDN). Our BRICs investments are down to 22% from 36%, reflecting both the sale of our Russian ETF and the overall decline in valuation for the other BRIC ETFs. Despite all the transactions, our cash position ended the quarter pretty nearly the same: 5% of the port up from 4% at the end of 2Q11.

3Q11 Highlights: Here are some topical 3Q11 links reprised from our Intelledgement tweet stream, organized by subject:


  • Mark MacKinnon: As China squeezes supply of crucial rare earths minerals, Japan discovers massive deposit in Pacific seabed.
  • NY Times Global Edition: Roger Cohen on “Brazil’s Giddy Convergence.”
  • The Economist: Why China may worry about North Korea just as much as America does
  • The Oil Drum: Peak Coal and China
  • Business Insider: The Latest On The Wage Inflation Mess Breaking Out All Over China
  • Edward Harrison: China’s bad debts a cause for concern
  • Intelledgement: Russia nepotism—who needs an official nobility/Party stealing from everyone else; an unofficial elite works just fine!
  • StrategyPage: Pressure From Above To Make Things Happen In Russia
  • Business Insider: Proof Of A Big Chinese Housing Bubble As Far Back As 2008
  • Bloomberg News: China…built up on a bedrock of bad bonds?
  • Intelledgement: Bad sign in Russia: young entrepreneurs appear to be emigrating in large numbers.
  • Mark MacKinnon: China makes another multibillion-dollar investment in Canada’s controversial oil sands.
  • Jonathan Chevreau: Is China heading for a banking crisis?
  • Intelledgement: Repercussions of the “one-child” policy in China long-lasting.
  • Intelledgement: Balancing development and environmental protection in India.
  • Wired: China has been buying missiles. Lots and lots of missiles.
  • Global Gains: An interesting take from the otherside—why to not invest in China.
  • Al Jazeera English: Opinion: India’s functioning anarchy
  • NY Times Global Edition: Back in the U.S.S.R.? After 20 Years, Many Russians Wish They Were:
  • WikiLeaks: Leaked US cable—China has “vastly increased” risk of nuclear accident by building reactors on the cheap
  • StrategyPage: SURFACE FORCES—India Shifts To The East
  • Edward Harrison: Brazil Surprise Rate Cut To Weigh On BRL
  • Foreign Policy: Why the world should embrace, not fear, China’s economic rise
  • China News Daily: Fitch warns of downgrades for China, Japan
  • The Economist: Two trends have contributed to a meaningful shift in China’s terms of trade
  • NY Times Global Edition: In India, Nurturing the Next Generation of Entrepreneurs
  • NY Times Global Edition: China’s Economic Engine Shows Signs of Slowing
  • citizen lab: Russia prepares UN ban on anti-government propaganda on Internet
  • The Economist: The yuan is still a long way from being a reserve currency, but its rise is overdue

Deep Capture

  • Charles Hugh Smith: The Shape of Things To Come—The unstable double-bind of rule by Financial Plutocracy
  • Intelledgement: Outgoing FDIC head Sheila Bair’s exit interview—2008 bank bailout was a mistake and we must not repeat it.
  • Edward Harrison: The Federal Reserve is a political organization
  • Brad Hessel: We-Have-Met-the-Enemy-and-He-Is-Us Dept. New book “Reckless Endangerment” explicates roots of the financial crisis.
  • Charles Hugh Smith: Complexity and Collapse—complexity offers a facsimile of “reform” to serve self-preservation
  • Intelledgement: Heads—Wall Sreet wins…tails—Main Street loses. Case study: Escanaba, Michigan paper plant.
  • The Oil Drum: Charles Eisenstein’s “Peak Oil, Peak Debt, and the Concentration of Power” #peakoil


  • Edward Harrison: How Belgian debt, Italian anarchy and Greek profligacy lead to economic chaos in Europe
  • Yves Smith: Eurozone Leaders Fiddling as Rome Starts to Burn? Worries about the Eurozone have heretofore been depicted as a…
  • Edward Harrison: Core bank exposure to Italian debt an order of magnitude larger than periphery combined
  • Yves Smith: Satyajit Das on “Progress” of the European Debt Crisis
  • Edward Harrison: Here’s why the sovereign debt crisis will deteriorate further
  • Charles Hugh Smith: Why the Eurozone Fix Will Fail—the Eurozone endgame
  • The Economist: Saving Greece will be harder than Latin American rescues in the 1980s
  • Minyanville Media: Satyajit Das on European Banks—The Real Stress Test
  • zerohedge: Why The ECB’s Monetization Is Doomed In One Simple Chart
  • Edward Harrison: The European Sovereign Debt Crisis is a solvency crisis
  • Chris Martenson: The Fatal Flaws in the Eurozone and What They Mean for You

Macro Analysis

  • Bloomberg: Jeffrey Goldberg says Israel is more likely to attack Iran because Dagan warned not to.
  • Business Insider: Are Corporate Profit Margins About To Grind Lower For Another 10 Years Or More?
  • Al Arabiya English: Mara Hvistendahl: How did more than 160 million women go missing from Asia?
  • Yves Smith: William Rees on the dangerous disconnect between economics and ecology.
  • The Economist: Rich world countries have had a disappointing economic recovery. The process of deleveraging has barely begun
  • The Oil Drum: The Link Between Peak Oil and Peak Debt – Part 1
  • Business Insider: Orszag says this economy is MUCH weaker than it appears.
  • Business Insider: The 10 Countries Sitting On A Huge Fortune Of Natural Gas
  • Brian Whitaker: The unstoppable revolution: “This is one big revolution for all the Arabs”
  • Al Jazeera English: Is climate change a global security threat?
  • StrategyPage: Pakistan Piles On The Plutonium
  • Business Insider: A Look At Gold Over The Really Long Run
  • freakonomics: Will U.S. Shale Gas Rebalance Global Politics? Russia set to lose nat. gas market share in Europe.
  • The Economist: The mass resignation of Turkey’s military leadership captured a dramatic shift of power nine years in the making
  • Intelledgement: Why the Pakistani Army wins most of the battles but never the war against terrorists. (Hint: it’s not incompetence.)
  • NY Times Global Edition: An Index for Ocean Health:
  • The Economist: Women are rejecting marriage in Asia. The social implications are serious
  • zerohedge: Joel Salatin—How to Prepare for A Future Increasingly Defined By Localized Food & Energy
  • Edward Harrison: Asian Manufacturing PMIs suggest slowing economic growth
  • Charles Hugh Smith: Currency Wars, Trade and the Consuming Crisis of Capitalism—why the swiss peg and the Euro will both fail
  • Brad Hessel: Atatürk-vs.-bin Laden Dept. The Arab Spring signifies a triumph of Islamic modernity over Caliphate restorationists.
  • Gregor Macdonald: Coal’s Terrible Forecast:
  • David Jolly: Vast reserves of shale gas revealed in UK
  • Barry Ritholtz: Derivative Size & Concentration Threaten Global Economy

Monetary and Fiscal Policy

  • zerohedge: Gold Special Report: Erste Group Says Foundation Of A Return To Sound Money Has Been Laid, Expects Gold To Hit $2,300
  • zerohedge: Mike Krieger Explains Why QE 3 Will Merely Keep The Lights On
  • Edward Harrison: Why aren’t we using monetary policy to stimulate aggregate demand?
  • Intelledgement: Increasing debt to stimulate the economy—e.g., QE3—is a bad idea, argue Ken Rogoff and Carmen Reinhart.
  • Business Insider: Bill Gross says this debt deal does nothing, and we still have an “unfathomable” $66 Trillion in liabilities to cope with
  • Business Insider: Doug Kass outlines the four potential outcomes of our ailing economy

Analysis: A relatively large portion of excrement hit the rotary air recirculation device this quarter, but in our view, sorry to say, we ain’t seen nuttin’ yet.

The overall risk of systemic failure—for which we feel the market has not adequately accounted—is clearly elevated here. While the problems associated with the housing bubble collapse of 2007-08 linger—zombie banks stuffed toxic assets mis-valued thanks to the connivance of regulators so as to maintain the pretense of solvency, millions of homeowners “under water” owing more on their mortgages than the market value of their property, continuing bailout distributions of taxpayer wealth mostly in the form of sweetheart below-market interest loans, no meaningful reform of the derivatives market, no serious attempt to address the Federal budget deficit (as we expected, the August debt limit raise deal constituted another inconsequential “pay-you-Tuesday-for-a-hamburger-today/kick-the-can-down-the-road” maneuver)—we now have the added pressure of multiple sovereign debt crises in Europe. The specter of default has caused interest rates on bond offerings by Greece and Italy to surge to levels so high as to call into question those countries’ ability to service their debt. A default would be doubly dangerous because [a] while most bondholders have purchased credit default swap (CDS) insurance on their bond holdings, no one knows if the unregulated CDS equities will or can be honored by the issuers in the event of a default—and if they are not honored, many weaker banks (not just in Europe) may not be capable of absorbing the consequent bond losses—and [b] once any one Eurozone country defaults, all the others will be considered more risky and borrowing costs will go up.

Our best bet is that The Powers That Be (TPTB) will ultimately cobble together yet one more saving throw to stave off the crash for another year or so. They can probably get some mileage out of a mechanism whereby the European Central Bank—either directly or indirectly through another entity—steps forward as the lender-of-last-resort (LOLR) for Greece-Italy-Spain-et al, printing Euros as needed to fund bond purchases. The problem with this solution is that printing Euros out of thin air would be inflationary and is opposed by Germany, the strongest country in the Eurozone. Oh, yeah and also that it is essentially fighting fire (too much debt) with gasoline (affording the deadbeat still more credit)…not a viable long-term solution.

And while concerns about the European sovereign debt crisis are now paramount, we have the looming U.S. Super Committee debt reduction plan deadline (next month)—there could be another credit rating downgrade if a serious plan is not agreed to but that is a long shot prospect at best now that the 2012 election cycle is well underway. Plus the continuing unrest in the Arab world—currently most worrisomely, Syria—the threat of a double-dip recession in the USA, an apparent slowdown in China along with continued concern about their real estate bubble and weak banks with bad loans outstanding, or any number of other potential “black swans.”

Conclusion: What has to happen really isn’t all that complicated: there is a whole mess of bad—we would say, “fraudulent”—debt out there that has to be forgiven. The problem is that admitting that all those mortgages and related securities (in the USA) and sovereign debt (in the Eurozone) are worthless would tank most of the major banks, disenfranchise a lot of very wealthy (in theory) and very powerful (in practice) individuals, and cause a major economic disruption whilst we rebooted our financial system…most probably with some safeguards and limitations that TPTB are loathe to contemplate, and in any event with few of those miscreants ending up back in charge of anything important.

So, since 2008 the USA has harbored numerous “zombie” banks that are essentially insolvent but allowed by captive regulators to continue to operate, using various and sundry accounting gimmicks—most prominently, the hamstringing of the mark-to-market rule—to disguise their discorporation. And now, we are seeing similar entities tolerated in the Eurozone…only these are not just banks, but entire nations.

In theory, the justification for this strategy of “extend-and-pretend” is that [a] an honest but sudden writedown of the toxic bad debt assets would be too disruptive and [b] if we kick the can down the road long enough, it will give us time to kick-start economic growth again which will both increase the value of some of the marginal assets and enable us to liquidate the hopeless ones more gradually.

Well, there is no denying that a liquidation of the zombie banks back in 2008 would have been very disruptive. And if we bit the bullet now, it would be worse, seeing as we are three years deeper in debt and the ranks of the unemployed have swollen in the interim…and the longer we wait, the bigger the size of the hole we will have to climb out of, and the weaker we will be for the effort required. Because the notion that we can kick-start growth and somehow reach a better place without clearing out the bad debt sludge is utter fantasy…there is no light at the end of this tunnel TPTB have us marching through…just a deeper, hotter pit.

For the time being, we continue to hold long emerging market ETFs for three of the four BRIC nations in the portfolio: Brasil (EWX), India (IFN), and China (FXI) (having liquidated our position in Russia, as mentioned above). The higher risk attendant to the Eurozone crisis has made these investments more risky, partly because the danger of a collapse is greater and partly because the threat to the Euro has perversely strengthened the dollar, and exacerbated a decline in the relative valuations of BRICs assets. Never-the-less, we are not prepared to go totally short because we believe TPTB can still stave off disaster for a spell by some variation of the Quantitative Easing maneuver the central banks pulled after 2008 in order to constitute a well-heeled LOLR for the zombie countries (the PIIGS plus whoever else needs it). Of course, in the long run, loaning more money to deadbeats is not a winning formula, but in the short run, it would have an inflationary effect which coupled with the euphoria that disaster has apparently been averted again could drive a significant market rally. If this happens, we will likely repurchase our Russia position (which is a lot cheaper now than when we sold it).

We also retain our four long commodity plays: the agriculture ETF (DBA), the precious metals ETFs for gold (GLD) and silver (SLV), and the mining ETF (GDX). Commodities remain relatively more attractive stores of value (although as the mining ETF is only a proxy for commodities and the short- and medium-term outlooks are so uncertain for companies, we may cash out those funds and redeploy them into a purer commodity play). Most definitely, if you don’t have some of your own wealth allocated to precious metals, you should reconsider.

We now have three short positions, although—as reported above—we dropped our dollar short ETF when the Euro started seriously tanking. We are still short the S&P 500 index (SH), and have added a banking sector short ETF (SEF) as well as a Russell 2000 short ETF (RWM) as insurance against a black swan event such as a near-term default.

The investing weather remains very turbulent. In times of heightened uncertainty, valuations can fluctuate wildly and the preservation of capital takes precedence over meeting any target ROI. In the long run, these problems will get worked out and on the other side there will be great growth opportunities. In the medium term, things look black and we probably need to be totally short. In the short term, the future, as they say, is cloudy. Stay tuned.

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Market Volatility Spikes in 3Q11

Posted by intelledgement on Thu, 13 Oct 11

2008 initially looked a lot like 1929…but in the Great Depression, the stock market gyrated and sank for the following three years while this time around, the markets have been calm and healthy…until this last quarter, that is. For the full story, check out “Just When You Thought It Was Safe to Go Back in the Water: An Update on Market Volatility,” published on The Motley Fool website.

Previous volatility-related articles:

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BUY ProShares Short S&P 500 (SH)

Posted by intelledgement on Fri, 23 Sep 11

We are increasing our short position here as a hedge against the increased risk of a major sovereign debt default—or potentially a series of defaults—in Europe that could negatively impact international banks (in Europe, the Americas, and Asia) and lead to a credit freeze similar to the one we experienced in 2008. As we have in the past, we are going with the Proshares Short S&P 500 (SH) ETF, which “seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the S&P500® Index.”

Previous SH-related posts:

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