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ETF's = Legalized Gambling
Wednesday December 7, 2011 I don't know how many times have I explained this to deaf ears, but it is nice to see an intelligent blog about it. Get out of Bonds, ETF's, Equities etc. Get your powder dry so that we can do something sensible with it. The next 10 years will go by very fast with hyperinflation at our back.
Derivatives = Legalized Gambling by Nathan Martin…
Good Morning,
In our down is up world, Equity markets in Europe are higher after S&P put all of Europe on credit watch “negative.” The spin is this will prompt them into action and thus it is a good thing! What a charade.
With our futures slightly higher, the dollar is also higher. Is the U.S. a safe haven? LOL X 100 trillion, plus or minus a few tens of trillion. Bonds are slightly lower, oil is still hovering above $100, gold & silver are slipping, while food commodities head in the correct direction – lower.
There is no meaningful economic data today, so I want to take the time to talk a little bit more about Exchange Traded Funds (ETFs).
Many brokers are pushing them as a way for people to be “self-directed” in their retirement plans. When they first came out I actually thought they may be a good thing as they allow people to “invest” in things they couldn’t otherwise and they do allow ordinary people to play the markets in both directions. However, this industry has morphed into something that more closely resembles a gambling parlor. My advice is to stay as far away from ETFs as possible, here’s why…
An ETF is a DERIVATIVE. It is simply a piece of paper of some underlying market. It’s basically a market on top of some other market. It is someone’s attempt to create a market so that they can profit from the market – it is NOT created to benefit you, society, or some business. And unlike stock, it provides no working capital for any legitimate business. In fact, I would contend that they are not legitimate as they serve no real purpose to society, they are simply a form of legalized gambling.
Some would say they provide a legitimate hedge opportunity – and to that I would say that “investing” in something that requires you to hedge means that you are assuming too much risk in the first place! Thus the very need for hedging means there is too much risk already. In the second place I would contend that there are insurance markets for legitimate hedge reasons and those insurance markets are at least regulated.
ETFs have two ways of eating through your money. The first is that they are extremely high in management fees – remember, they are created to benefit the manager, not the sucker who buys them! But even bigger than that is the fact that the managers buy other derivatives to make their own derivatives work! This causes massive slippage. Slippage is when the underlying market moves say 10%, but the derivative only moves in that direction by 7%! Slippage is so bad in some ETFs, that if you own them for more than a few days then you can be right in your direction but still lose money because the ETF slips so badly!
In fact, this effect is so bad that many ETFs hide slippage under verbiage like this that accompanies SDS, the “Ultrashort” (2x) SPX ETF (designed to go up when SPX goes down at two times the rate):
This Short ProShares ETF seeks a return that is -2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings consistent with their strategies, as frequently as daily.
Get that? Not only will your returns vary, but they may even differ in direction! To see a real world example of this, let’s look at a two year chart of SDS (red and black dashed line) with SPX (solid black line) in the background:
If you had purchased SDS in say May of this year and held it until today, you would have been absolutely correct in direction, and thus you would expect SDS to pay double the amount that the SPX is down. But in fact your SDS investment LOST YOU MONEY! You were right, you bet correctly, and yet you LOST MONEY. Great investment, great “hedge!”
So, what happened to your money? The derivatives players took it from you – period.
This “market” is completely not regulated – as in any regulators left, like the SEC, are completely in on the scam via the revolving door.
Again, my advice is to stay completely away from ETF’s of ALL types. Although some are better than others, they are all derivatives and they are not guaranteed by anybody. Again, they are nothing but sanctioned gambling, STAY AWAY.
To be fair, I will show you an example of an ETF that does track the underlying very well – that is the gold ETF, GLD. Below is a 3 year chart of GLD with the price of Gold underlying it, you can see that indeed it does have a nearly perfect correlation:
To their credit, the managers of GLD buy actual physical gold and place it in a vault. Thus your derivative has an actual physical something behind it – most ETFs do not. This is the proper way to run an ETF, and in my opinion if you’re going to allow them, then they must track the underlying by actually owning the underlying or they should be illegal. Still, as good as GLD is, I do not personally recommend owning it, I would prefer to simply own the physical metal myself as I know that when our monetary system unwinds that history proves that gold can be confiscated and I think it wise that ownership not be tracked or known by anyone.
I hope this article saves someone some grief. Buyer beware! Stay as far away from ETFs as you can.
Dire Straits
The reason that this story is in this blog is that it begs revealing more than the numbers of unemployed and their current dilemma. That would be the magnitude of the soon to be unemployed; -which I beg to offer will be much less rose-colored than the Media's proselytizations that the worst hit are those not from the hallowed halls of academia. It's always the public's fault!
The report ignores that small business is clawing for survival and small business is the number one employer in our fair land. So, without this data included in the report how accurate can the connotations be?
Employment disaster is much more imminent than any comeback in my opinion.
Here's their opinion.
Categorizing the Unemployed by the Impact of the Recession
Rutgers University PressIn August 2009, the John J. Heldrich Center for Workforce Development at Rutgers, The State University of New Jersey began following a nationally representative sample of American workers who lost a job during the height of the Great Recession.
The research began with a cross-sectional sample of 1,202 who had said they had lost a job at some point in the preceding 12 months (between August 2008 and 2009). They were resurveyed in March 2010, again in November 2010, and then in August 2011.
A total of 3,972 individual surveys were completed over the two years. Well over half of the original respondents participated in all four waves of the project, meaning they spent, on average, 50 minutes of their time responding to roughly 200 questionnaire items.
This resulting measure combines an assessment of the respondent/family’s current economic status with the magnitude of change in the quality of daily life, with an assessment of whether this change represents a new normal or is a temporary stay in limbo.Combining answers to these three questions result in a typology with five groups, defined as:
Workers who have MADE IT BACK consider themselves in excellent, good, or fair financial shape and have experienced no change in their standard of living due to the recession.
People ON THEIR WAY BACK have largely experienced a minor change to their
standard of living, but say the change is temporary. They also consider themselves in excellent, good, or fair financial shape.
Workers who have been DOWNSIZED meet one of three conditions; they have
experienced: a minor change that is permanent; a minor change that is temporary, but they are in poor financial shape; or a major change in their standard of living that is temporary and they are in at least fair financial shape.
Workers classified as DEVASTATED have experienced a major change to their
lifestyle due to the recession. They can be either in poor financial shape and think the change is temporary, or in fair financial shape but think this change is permanent.
Workers that have been TOTALLY WRECKED by this recession have experienced a major change to their lifestyle that is permanent and are in poor financial shape.
If you have nothing better to do read the rest of the working paper here.
Teetering...
Tuesday December 6, 2011 Like a top that is losing velocity.
Is the World Spinning Out of Control?
USAWatchdog.com
More Europe bailout news. Last week, the world was elated with news that the Federal Reserve and five other central banks got together to prop up Eurozone banks drowning on sour sovereign debt, but the crisis is far from over. The latest scheme is for countries to trade sovereignty over their budgets in return for more bailout money. The Sunday Times is reporting the ECB is putting together €1 trillion that will be used for a “colossal” intervention in European bond markets. The paper goes on to say, “The cash injection will only be carried out if leaders can agree on handing over more fiscal control to the EU and for strict controls to be imposed on nations struggling to control their debts.” Ann Barnhardt, an outspoken commodities brokerage owner who shot to notoriety because she closed her doors in the wake of the MF Global bankruptcy, says it will take much more than €1 trillion. Barnhardt thinks the MF Global implosion and coordinated action by central banks is an early sign of systemic failure approaching. In an interview last week, she said, “Europe is done. Europe is mathematically impossible. It cannot be saved. You even want to make a start at trying to bail out Europe, we’re talking $25 trillion JUST TO START…we’re in excess of $100 trillion to bail out Europe.”
You think the $100 trillion number is a little high? That is the exact same number that came out of the World Economic Forum in Davos Switzerland at the beginning of the year. While Barnhardt thinks the entire commodities market has been “destroyed” and a collapse is near, an article on Jesse’s Café American speculates a coming gigantic confiscation scheme is in the works. The story says, “At some point a ‘black swan’ event, or perhaps something the classical world would have simply called ‘nemesis,’ is going to knock the US futures market off its foundations. The government and exchanges will seek to force a solution on market participants through the de facto seizure of positions and accounts, with a settlement dictated by the Banks. MF Global looks like a dry run for that much larger default.”
Another ominous view of the EU was reported by NewsMax.com on Friday. The story said, “Bank of England Governor Sir Mervyn King has told banks to get ready for a Eurozone collapse, according to The Courier newspaper in the United Kingdom. . . . “Maybe it won’t break up, maybe it will continue in various forms, but maybe there will still be questions of default.” The default probability was echoed by Nigel Farage, Member of the European Parliament, who said Sunday the big intervention spearheaded last week by the Fed spells trouble. Farage said, “I think what it tells you is there must be, there just has to be, some very major banks that are teetering on the edge of collapse.”
Economist John Williams from Shadowstats.com said in his latest post, the downfall of the European Union is not near as troublesome to the world as a collapse of the U.S. dollar. Williams said, “In contrast, the deliberate debasement of the U.S. dollar, and the unwillingness or inability of the U.S. government to address its long-range insolvency, promise an ultimate collapse of the U.S. currency that will leave the U.S. dollar absolutely worthless to its holders. The hoopla out of the major central banks, on November 30th, over renewed coordinated global efforts at maintaining banking-system liquidity, suggested a rapidly deteriorating circumstance. Further, the continued lack of meaningful growth in either the U.S. broad money supply measure, or in domestic bank lending, remains suggestive of deteriorating banking stability in the United States.”
Jim Rickards, author of the new best-selling book called “Currency Wars,” thinks the risk of a meltdown is greater than most experts think. Rickards said in an interview over the weekend, “The likelihood of a collapse is higher than a lot of analysts assume . . . therefore we are in very dangerous territory. . . . Ben Bernanke is probably a greater threat to US dollar stability than the Chinese Communist Party; his beliefs on monetary policy aren’t dynamically stable. He believes there’s no limit to the amount of money you can print, and if the economy is in trouble, print more, and if bank’s are in trouble print more, and if Europe’s in trouble print more. . . .The Fed thinks they’re playing with a thermostat at home–but in reality, they’re playing with a nuclear reactor–and the danger is they melt the thing down.”
On the geo-political front, Iran claims it has shot down a U.S. spy drone over the weekend and is threatening to retaliate. The Telegraph is reporting, “Iran’s military said on Sunday it had shot down a US reconnaissance drone aircraft in eastern Iran and warned it would retaliate on foreign soil for the incursion.” The Iranians have become the black sheep of the world ever since the International Atomic Energy Agency confirmed it is developing nuclear weapons earlier this year. What do you bet the downed drone had something to do with spying on that program? Sanctions have been building against Iran from around the world, but the smell of war is in the air. Meanwhile, a story recently on Chinese state run Television said China would side with Iran if it were attacked, even if it means “World War Three.”
If war breaks out in the Persian Gulf, Iran’s first move would be to shut down oil flow from that region by closing off the Straits of Hormuz. 40% of the world’s oil moves through this narrow 30 mile passage every year. Between war or sanctions, oil prices will spike and push a world economy teetering on the brink over the edge into an abyss. If the global economy is not killed off by the EU debt crisis, it would surely collapse under the weight of $300 barrel oil. Never in history has the world been this close to total financial chaos and nuclear war at the same time
