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.
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.
Tuesday December 6, 2011 I don't like to publish these type of statistics because they are so outside of science, they are banal. Nothing will come of this story except filling some blogs, meeting tenure reqs., a PR coup/advert. for Rutgers and satisfying the Grant Donors! Dire Straits, Money for Nothing!
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 Press
In 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.
Tuesday December 6, 2011 Like a top that is losing velocity.