If He’s So Smart, Why Isn’t He Rich?

Posted On Feb 29, 2016 By Dave Gonigam

  • People don’t care about the Oscars, Oscar voters don’t care about The Big Short
  • But there’s a lesson in the movie that’s worth a minimum $1,000 a month
  • China’s small devaluation now, big devaluation later
  • New taxes and weird fees: States eye taxing facials and funerals
  • Readers agree: Molson really is different across the border

“No One Really Cares About Your Stupid Award Show,” says a recent headline at The Huffington Post.

HuffPo commissioned a poll from YouGov this month, asking 1,000 adults which award show is their favorite — the Oscars, the Grammys or the Emmys.

Sixty-eight percent answered, “I don’t care about any of them.”

Sorta reaffirms your faith in humanity, no?

We see the one financially themed movie of this season, The Big Short, got snubbed at the Oscars last night. The only award it snagged was best adapted screenplay.

We bring it up this morning because it’s been on the mind of our income specialist Zach Scheidt. “I haven’t seen the movie yet,” he concedes. But he did read the book by Michael Lewis. And he had a front-row seat to the Panic of 2008 at the trading desk of a $130 million hedge fund.

“There’s a big difference between being right and making money,” said Zach’s boss and mentor — a fellow named Bill.

“Bill must have said those words to me a dozen times each month,” Zach recalls. “The statement was scribbled on a large index card with a black Sharpie and posted in our office kitchen as well. Every time I tried to explain an investment that I thought was ‘smart,’ Bill would use this statement as a retort.”

The traders in The Big Short definitely were “right”… but they came perilously close to losing it all anyway.

“The smart traders were betting on a meltdown in the mortgage market,” Zach refreshes our memory. “These traders realized that U.S. citizens weren’t going to be able to keep making mortgage payments, and that ultimately the mortgage market would completely implode.

“But the characters in the book (and the real traders on Wall Street) didn’t know exactly when the market would melt down. Furthermore, these traders were making big bets that required them to pay out money month after month just to keep the bets in play.

“Slowly at first, and then much more quickly, these payments ate away at their capital. And if the mortgage market had taken just a bit longer to finally implode, these ‘smart’ traders would have run out of money and wound up bankrupt.

“Some of the smartest traders that I know have either gone bankrupt or have come very close to it,” says Zach — and he just described how it happens.

“I want to make a distinction between ‘smart’ traders and ‘intelligent’ traders,” says Zach.

“To me, an intelligent trader is someone who doesn’t take excessive risks and who grows his income account steadily — month after month, and year after year.”

And for Zach, the model of an intelligent trader is his mentor Bill. “From the year he started his company (1985) to when I left the firm in 2008, Bill generated positive returns for his investors every single year. To my knowledge, that track record is intact to this day.

“While Bill never made a billion-dollar score by betting against the housing market, he did manage to grow a substantial personal net worth — while generating millions in profits for his clients — simply by collecting reliable income from the market day after day.

“Unlike The Big Short characters, Bill never put too much of his capital at risk, and never bet the farm with his clients’ money.”

It’s the strategy Zach learned at the feet of his mentor that he now brings to his premium subscribers with weekly income-generating trades. During February, his readers have had the chance to pocket $1,045. Most months, the total is even higher… but he aims for a minimum $1,000.

This perpetual-income strategy is the same one for which our publisher Joe Schriefer evangelizes — to the point of grabbing people off the street outside our Baltimore headquarters to show them how easy it is. [Note: The strategy works best if you have $20,000 in capital to work with.]

If you haven’t seen the results of our “social income experiment” yet… you should check it out right here.

The new trading week is off to a quiet start, the major U.S. stock indexes little moved.

The S&P rests as we write at 1,947 — having closed last week just above the key 1,945 level watched by Jonas Elmerraji of our trading desk.

“That’s an important breakout,” he says, “at least in the near term. Likewise, individual stocks are starting to show breakouts in numbers that we haven’t seen in quite a while.”

Still, “risk levels remain elevated in the broad market” — just not as much as they were last week.

Treasuries are rallying, the 10-year yield a hair below 1.75%. Gold is also rallying, the bid $1,233 at last check. Crude has pushed just above the $33 level.

In the currency markets, the big story is another Chinese devaluation. Overnight, the People’s Bank of China reset the midpoint of the renminbi’s trading range to 6.5452 per U.S. dollar. That’s the lowest fixing in nearly a month.

In addition, the Chinese central bank cut the reserve requirement ratio — the amount of cash the banks have to hold. It’s been 17.5% of late. Tomorrow, it will be 17%. The aim is to get money out of the banks and into the broader economy.

“It’s been a week since we’ve seen an appreciation in the renminbi fixing,” writes Chuck Butler from EverBank Global Markets in today’s Daily Pfennig.

“The Chinese sure know how to play the currency wars game, don’t they? So get this. China is at the G-20 meeting, they sign off on the statement about not resorting to join the currency wars and then they go out and devalue their currency by a larger-than-usual amount. I guess they were telling their G-20 counterparts, ‘This is what we think of that statement.’”

That said, we’re talking about nickel-and-dime moves compared with what might be coming. China’s foreign exchange reserves continue to flow out of the country at breakneck pace. “China may be broke by the end of 2017 the way things are going,” says Jim Rickards — who wrote the book on Currency Wars.

Not that Chinese leaders will let matters reach that stage. “Look for another shock devaluation of the yuan,” says Jim, “perhaps 20% in one day, as the least bad option to stop the bleeding.”

No sooner did we invoke the specter of “new taxes and weird fees” on Friday than we see many states are looking to slap sales taxes on everything from facials to funerals.

“As sales tax collections slow and the nation becomes a service-based economy,” says a new report from the Pew Charitable Trusts, “many states are considering expanding the universe of goods and, especially, services that are subject to the sales tax…

“In states from Arizona to Oklahoma and West Virginia, lawmakers are considering bills that would impose the sales tax on services ranging from beauty salons to funeral homes; from telephone landlines to cellphones.”

We told you about Oklahoma’s $1.3 billion budget gap on Friday. Republican Gov. Mary Fallin is looking to expand the state sales and use tax by $200 million. No specifics yet, but “if you never looked at any of your sales tax exemptions,” she says, “particularly in a service economy, it makes sense to look at that.”

Interesting, the bit about slowing sales tax collections. The Rockefeller Institute’s most recent “State Revenue Report” says sales tax revenue in the second quarter of last year was up 3.2% from the year before — a growth curve that’s “low by historical standards.”

Weren’t low gas prices supposed to put money back in Americans’ pockets that they could go out and spend on more consumer-y junk that’s, you know, subject to sales tax?

Heck, AAA says low gas prices gave Americans a $115 billion windfall last year. Where did it go?

“According to a national online private insurance exchange, health insurance premiums have increased between 39–56% since early 2013,” writes Lindsey Piegza, chief economist at Sterne Agee.

“For an average family, that means paying $663 a month, an increase of $230 a month, or nearly $3,000 annually.

“Over the past three months, a price decline of more than 50 cents a gallon has left consumers with a modest increase of cash in their pocket, ranging between $80–100 assuming the average two-car household fills up each 20-gallon tank at least four times a month. And while a savings of $100 is hardly something to sneeze at, relative to rising health care costs 30 times greater, such savings is hardly momentum to ramp up spending when other bills need to be paid.”

So… The strapped consumer is buying less, sales tax revenue is growing more slowly than projected and the vampires in our 50 state capitals need a new vein to tap. So there you go — sales taxes on lawn service, beauty treatments and movie tickets.

New taxes and weird fees, here we come. We started warning about this nearly five years ago. The forecast has been slow to unfold… but it might be picking up pace now.

“Absolutely, the beer is different in Canada,” reads the first of many emails wishing to settle the long-standing question of whether the Molson sold in Canada is different from the Molson sold in the States.

“I went to college 20 miles from the Canadian border (St. Lawrence University in Canton, New York, where Geoff Molson went to college) so I had lots of opportunity to compare and contrast. The Molson in Canada is much, much better.”

“Back in the 1970, it sure was,” affirms another reader.

“When I went to school in upstate New York, anytime anyone went to Canada, someone was sure to ask to bring back a case of Molson, LaBatt, etc.

“Likewise in the same time period, a bottle of Beck’s domestic version (acquired from a German ship crew member) tasted a lot better than the export version you could buy here.”

“Back in the 1970s, I and a fellow trooper in Alaska were subpoenaed to a large city in western Canada to testify in a homicide case.

“While we were there, the same question came up. So we sent some Canadian beer and some American beer to a Canadian crime lab for an analysis. Results were that the American beer contained formaldehyde (preservative) and the Canadian beer did not. Sure explained the difference in hangover.”

“The biggest difference in beer between Canada and the U.S. is if the same yeast is used in the brewing process,” a reader explains.

“The other big difference is the alcohol content, which varies considerably because of your tax and excise duties (5.5% versus 3.2%). This difference will also affect the taste.”

“Of course, the Molson is different. I’m American, and my husband of 30 years is Canadian.

“I’m pretty sure that the Molson that is sold in the USA has to be pasteurized. The Molson in Canada is not. Either way, it tastes totally different. And just as a sidebar, Windsor whiskey is not made in Windsor, Canada. It’s a product of the USA….

“As for bread prices,” the reader pivots to another recent topic, “I’ve been shopping in Toronto several times a year since 1984. If I factor in the exchange rate at the time, grocery prices are not all that different, and have not risen significantly in the recent months. Yes, some things are higher than in the USA, but some are lower. To make a fair comparison, you have to look at an entire basket of groceries including all the major food groups. The things that are higher are the ‘sin’ tax items, like liquor and cigarettes.

“As for the war on cash, I can’t seem to agree just yet about that. As a hospitality worker, my friends and co-workers have noticed that in the past 18 months or so, the use of cash has increased. Especially crisp C-notes. Any thoughts?”

The 5: Hmmm… Not offhand. But the more people who use it and circulate it, the more difficult it becomes for the feds to wage the war on cash.

Your editor has taken to paying cash when transacting with locally owned businesses. No sense in having 2% of the purchase price shipped off to a distant locale. We suspect our new colleague Nomi Prins would approve…

Happy leap day,

Dave Gonigam
The 5 Min. Forecast

P.S. Congratulations to readers of Technology Profits Confidential. On Friday, Ray Blanco recommended collecting 80% gains on the maker of a glaucoma drug… and that was on top of 250% gains from the same stock last year.

Don’t worry if you missed out. For a look at Ray’s strongest idea right now, check this out.


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