At 17-years-old, Donald Trump was named a captain for his senior year at a military boarding school. Spending five years at New York Military Academy, the school taught Trump to channel his aggression into achievement.
Under the Trump budget, almost every budget increase goes to military departments, 10% increase Y/Y in the budget for military spending. It’s not a rocket science to figure out Trump madly loves force.
Even Trump’s Secretary of Defense loves force. Mad Dog James Mattis once said, “It’s fun to shoot some people. I’ll be right up there with you. I like brawling.”
At his confirmation hearing in January, Mattis said, “My belief is that we have to stay focused on the military that is so lethal that on the battlefield, it is the enemy’s longest day and worst day when they run into that force.”
Then there came 59 Tomahawk missiles to military bases in Syria and “Mother of All Bombs” on Daesh tunnels in Afghanistan. All of those came during the heightened tensions with North Korea.
War is Good for the Cold-Hearted Stock Market
North Korea acting out is a good thing for America. War throughout the history has made us united. Not to mention that the stock market goes up.
As you can see in figure 2, the stock market barely reacted to the recent U.S. military actions that Trump gave a green light to.
As a trader and investor, I wouldn’t be concerned about the potential war with North Korea. (Although I would be concerned about the loss of human lives and loss of limbs.)
In early 2013, there were increased tensions with North Korea, similar to today. At the time, the stock market did not give a damn about the threats from DPRK.
Not only does the stock market not care about North Korea, but also for any other war in the past century. War is good for the cold-hearted stock market.
Over the past 4 decades, Dow Industrials on average was turned on by U.S.-led military operations, returning 4% in a month after the beginning of military operations and more afterward.
Recent Three Wars
When the U.S., with support from allies, started bombing against Taliban forces in Afghanistan on October 7, 2001, the stock market went up, not down. Even after 12 days later when the first wave of conventional ground forces arrived, the stock market kept going up. By the year-end when Taliban collapsed, S&P 500 was up about 14.5%.
When the U.S. began the major combat operations in Iraq on March 20, 2003, the stock market skyrocketed as shown in the candlestick bar on the highlighted portion of S&P 500 Weekly chart in figure 6 below. By the time the operations ended on May 1, the stock market was up about 11.5%.
The only difference this time is we got leaders who very much loves forces and are violent themselves. Another difference is that North Korea is little powerful today than they were in 2013. But they are very weak compared to China, Russia, Europe, and U.S. It’s better to act now before North Korea gets even stronger. Although lives and limbs will be lost, I think there’s a greater cost if we allow North Korea to get even stronger.
China and North Korea
With China possibly increasingly going against North Korea, Kim Jong-un might act even more violent. I don’t think China really wants to break off its relationship DPKR due to the geographic proximity and China’s willingness to make more friends in the region. Besides being a military and diplomatic ally, China is also an economic ally. In 2015, the second largest economy accounted for 83%, or $2.34 billion, of the North Korea’s exports.
In late February, China sanctioned coal shipments from North Korea, who is a significant supplier of coal. Instead, China has been ordering the coal from the U.S. In the past, Trump said he wants to help the country’s struggling coal sector.
As Reuters reported, Thomson Reuters Eikon data shows “no U.S. coking coal was exported to China between late 2014 and 2016, but shipments soared to over 400,000 tonnes by late February.”
Is China having a change of heart on its relationship with North Korea? I don’t think as China’s trade with North Korea still increased by almost 40% in the first quarter of this year. China also buys other stuff, such as minerals and seafood. Looks like China wants to be on the good side of North Korea and Trump. The Art of the Deal.
Is this time is also different when it comes to the stock market? I don’t believe so. I’m not worried about the negative impact on the stock market due to North Korea, even though they were to be invaded.
However, I’m watching very cautiously China and Russia getting into an armed conflict with the U.S because of the North Korea situation. Armed conflict between the superpowers is a game changer. Although that’s very unlikely as superpowers argue all the time.
Suggestion For Your Portfolio
The situations might affect the markets for a very short period of time, especially if there’s uncertainty. But investors shouldn’t worry about it. The market could care less about a war, specifically when it’s aboard.
During the times of war, don’t reduce your holdings because of misconception war is bad. If you do, you will miss the gains.
Over the past 40 years (1977 to 2016), S&P 500 has had inflation-adjusted annualized return rate of 7.20%, that’s having dividends reinvested. That means $1 grew to $16.14.
Without dividend reinvestment, S&P 500 has had annualized return of 4.12%, which means $1 grew to $5.02.
Can you see the power of time and compounding? I hope you see it.
Let’s assume you’re 20-years-old, saving $1,000 each year for the next 40 years. When you’re 59, you will have $40,000 in cash. That is considering zero inflation.
Now, let’s assume you invest in the market that will give you inflation-adjusted annualized return of 5%, without dividends. When you’re 59, you will have $97,622.30.
Lastly, let’s assume you invest in the market that will give you inflation-adjusted annualized return of 5%, with 1.5% annual dividend. When you’re 59, you will have $141,731.09.
Oh My God! The Power of Time and Compounding!
If you want to invest, invest now. Don’t let all-time highs scare you.
S&P 500 is currently yielding 1.93% dividend. Since the late 1800s, the lowest dividend yield was 1.11% in August 2000. The average dividend yield is 4.38%.
The returns you see above and below are before taxes. Tax laws might be different in 2056.
In this post, I will outline some of my plans to be a very long-term investor. I’m mostly trader and investor with less than the 5-year horizon.
Money Should Not Be Emotional
Over a year ago, I tried to open a ROTH IRA (retirement) account. After filling out the answers to countless questions, the application asked me to provide a proof of income. At the time, I did not have a job. So I just gave up on the application and did not think about it until last January.
I spent so much money in December and January alone, the expense amount freaked me out. I asked myself two key questions:
What can I do to save more?
What are the non-mandatory expenses?
One of the ways I can save more is, believe it or not, recycling bottles/cans (I don’t consider it income). In a family house of 6, we drink a lot, especially water. I drink about 12 bottles of water a day….using the same bottle. I fill the bottle with boiled water. Others just waste the bottles. I rather profit from people’s mistakes.
All those bottles collected in about two weeks made me $5.65, worth almost 6 pizzas, 2 each day. Or 6 yogurts, 3 each day.
If I make $10 every month for two hours of work, I can make $120 a year. That money can add up over the long term once invested in dividend-yielding ETFs.
I will not continue collecting bottles/cans (side hustle) once I get a full-time job/live on my own. I’m doing this now because I don’t even do my own laundry….yet.
I also figured out the non-mandatory expenses to cut back on, specifically on “ex”-food items I used to buy on a pulse. Small purchases (gum, candy, etc), for example, can add up over time. Those purchases are paid in cash. Well, I don’t carry a lot of cash. I carry reasonable amount. How you define ‘reasonable’ is up to you.
Why I don’t carry a lot of cash:
No track of cash flow. Credit card allows that
Risk of theft
Worried about losing the wallet
To avoid small purchases
Savings and Investing on Auto-Pilot
In January and February, I decided to open multiple accounts to keep my cash, rainy day savings, investments and deposited more money into my Robinhood brokage account.
Why multiple accounts? Because I don’t trust FDIC, which “protects” or “insurances” depositors to at least $250,000 per bank. I’m paranoid someday FDIC won’t be able to protect every depositor, after a major hack or something. Who knows, it might even take a long time to get depositors’ money back.
What if I lose my debit card? I wouldn’t want all/most of my cash in that account. At most, I keep 30% of my cash in the checking account. Now, my cash and short-term securities (stocks, etc) are diversified among multiple accounts.
Besides the savings account (almost 1% interest), I opened two more investments accounts. These accounts are different than Ameritrade/Robinhood.
Financial Literacy Is Very Important
The first account is Acorns, an investment app that rounds up user purchases and invests the change in a robo-advisor managed portfolio. For me, there’s no fee since I’m a student and under 24. I don’t trust robo-advisers, but this case is different. There are only 6 ETFs which I have looked into and decided they were good for the long-term in a diversified portfolio. 75% of its users are millennials.
The second account is Stash, an investment app that allows users to pick stocks in themed based investments around wants (Clean & Green, Defending America, Uncle Sam, etc). This app is also targeted toward millennials. Unlike Acorns, Stash charges you even if you are a student. But, the first three months are free. Like Acorns, Stash has a subscription fee of $1 per month for accounts under $5,000 and 0.25% a year for balances over $5,000.
Studies show 48% of Americans cite a lack of sufficient funds as their main barrier to investing. Luckily, technology is transforming the way people invest. Start small. Before you know it, it is big.
Both of the micro-investing apps are like savings/IRA accounts for me since I can grow my portfolio through dividends. I have checked out the ETFs Acorns invests in, they are good. I have checked out the ETFs Stash offers. Most of them are good. I have invested in the stable ones with low expense ratio relatively to its dividends.
Unlike ROTH IRA, I will need to pay taxes on realized capital gains, dividends and income interest.
Whopping 69% of Americans have less than $1,000 in a savings account and 50% of them have $0 in that account. All these people playing Candy Crush should be thinking about their future. Be a Robo-Saver and Be a Robo-Investor.
Note: All of my $$$ comes from off-book jobs, scholarships, prizes, and living under mommy and daddy’s roof (Can’t wait to move out). This post doesn’t mean I will stop trading. I will continue to trade forex, stocks, and commodities.
These tweets, as you can guess – sent the shares of Lockheed Martin (NYSE: LMT), which is the supplier of F-35 program, and Boeing (NYSE: BA) – down. From both tweets, Lockheed Martin lost billions in market cap. The rival Boeing was barely unchanged at the end, as it means more opportunities for them to gain more contracts.
However, Trump targeted Boeing in earlier December when he tweeted this;
Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!
Trump’s tweets are just awesome. The volatility it brings allows me to make more money than the non-volatility. As I mentioned in my previous article, I recently opened RobinHood account, broker with $0 commissions. Using the broker in the future, I’m planning to buy some shares of the companies Trump negatively targets, especially if investors overreact.
Since it seems Trump has a strong hatred towards Mexico and the U.S. companies working there, here are the potential targets;
Algos have yet to incorporate Trump’s tweets into their codes. It’s not that simple yet as it can be difficult to determine the sentiment from a tweet. Algos can easily get the direction of the stock wrong. We need more tweets to better analyze it.
But, will the future tweets move the markets or not? It all depends on how successful Trump is in implementing what he tweets. If Trump is unable to do so, he will just lose credibility.
Meanwhile, markets will react to the tweets and I plan to take advantage of them.
Yes, I know markets have been rallying and S&P 500 has been hitting all-time highs. But, remember Brexit?
In case you forgot, the people of United Kingdom voted to leave European Union on June 23rd. Markets then destroyed more than $3 trillion in paper wealth in the next 2 days (Friday and Monday).
After that, market just shook it off. As Taylor Swift says, “Shake It Off.” “It’s gonna be alright.”
The actual businesses and people in the UK just cannot shake, shake, shake, shake, shake,….it off.
The UK job market went into “freefall” as the number of people appointed to full-time roles plunged for a second successive month in July, according to a survey. An index of permanent positions dropped to 45.4 from 49.3 the previous month, the lowest level since May 2009. A number below 50 indicates a decline in placements (contraction). Employers in the survey cited Brexit-related uncertainty.
The same uncertainty that scared away some investors and sit on cash, including me. 91% of investors made money in July as US markets kept hitting record highs, according to Openfolio, an app that allows you to connect and compare your portfolio to 60,000 other investors. Average cash holdings of these investors grew 25% over the past three months leading up to July.
75% of investors lost money in June as Brexit uncertainly weighted in. The portfolio of the majority of investors are tracked with S&P 500. The problem here can be described by Ron Chernow,
As a bull market continues, almost anything you buy goes up. It makes you feel that investing in stocks is a very easy and safe and that you’re a financial genius.
93% of investors lost money in January as the energy prices plunged and uncertainty in China scared investors.
Here’s another quote by Robert Kiyosaki (Rich Dad),
As a bull market turns into a bear market, the new pros turn into optimists, hoping and praying the bear market will become a bull and save them. But as the market remains bearish, the optimists become pessimists, quit the profession, and return to their day jobs. This is when the real professional investors re-enter the market.
I’m naturally contrarian like Bill Ackman. I love going against the crowd. I love Bill Ackman. When I met him, I had no problem keeping my cool after learning my lesson from the Ben Bernanke experience.
Being contrarian has made me money. It has also got me into “value trap” like buying $TWTR around $34.
On Thursday (August 4th), Bank of England (BoE) cut rates by 25bps (0.25%) to 0.25%, the lowest since the central bank was founded in 1694 (322 years) and the first cut since March 2009.
The central bank signaled further cut to the interest rate if the economy deteriorates further, “If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.” (I’ll address the recent economic reports and BoE’s forecasts later in this article)
During the press conference, Mark Carney (The Governor of BoE), stated he is not a fan of negative interest rates. He clearly stated that MPC (Monetary Policy Committee) is very clear lower bound is above zero. Options other than NIRP (Negative Interest Rate Policy) are available, “we have other options to provide stimulus if more stimulus were needed.”
Carney told banks they have “no excuse” not to pass on the rate cut in full to customers. In other words, he’s telling them not to mess with him.
“With businesses and households, anyone watching, if you have a viable business idea, if you qualify for a mortgage, you should be able to get access to credit.”
With 6-3 vote, they will provide an extra 60 billion pounds ($78 billion) of newly created money by buying government bonds over six months, extending the existing quantitative easing (QE) to 435 billion ($569 billion).
To cushion the blow to banks’ profitability, BoE will provide up to 100 billion pounds ($130 billion) of loans to banks close the base rate of 0.25% under the Term Funding Scheme (TFS). The scheme will charge a penalty rate if banks do not lend.
“The TFS is a monetary policy instrument. It reinforces the transmission of Bank Rate cuts and reduces the effective lower bound toward zero, it charges a penalty rate if banks reduce net lending, it covers all types of lending, and it is funded by central bank reserves.” (Page 6)
With 8-1 vote, BoE will also buy as much as 10 billion pounds ($13 billion) of corporate bonds in the next 18 months, starting in September. For that, BoE is targeting non-financial investment-grade corporate bonds, issued by “firms making a material contribution to the UK economy” (Page 3)
I did not expect that much of stimulus.
I expect .25% rate-cut by Bank of England. But, not more QE. There's a little chance I think QE will be less than £20bn. $GBPUSD#BoE
Activity among UK manufacturers contracted at its fastest pace at the start of third quarter. UK manufacturing PMI (Purchasing Mangers’ Index) fell to 48.2 in July, down from 52.4 in June, the lowest levels since February 2013.
Manufacturing sector accounts for 11% of the UK economy.
“UK manufacturing employment decreased for the seventh straight month in July, the rate of job loss was the second-sharpest for almost three-and-a-half years” the PMI report said.
It also stated “Weaker inflows of new work and declining volumes of outstanding business also suggest that employment may fall further in coming months.”
Contributes to 10% of GVA (Gross Value Added), which measures how much money is generated through goods and services produced. In 2014, GVA per head on average in the UK was 24,616 pounds ($32,113), growing 3.6% Y/Y.
Accounts for 44% of total exports. Exports alone account for 27.4% of the UK’s GDP (Gross Domestic Product).
Export orders rose for the second successive month in response to the weaker pound. On July 6th, sterling plunged to $1.2788, the lowest since 1985.
Represents 69% of business research and development (R&D), which accounts for mini 1.67% of the UK’s GDP.
What is also interesting in the PMI report is the input price. Input price inflation rose to a five-year high in July, “reflecting a sterling-induced rise import costs.” Some part of the increase in costs “was passed through to clients.”
UK construction industry, accounting for 6.5% (Parliament.uk – PDF download) of the economic output, suffered its sharpest downturn since June 2009 as the sector came under pressure from the uncertainty. UK construction PMI inched down 0.1 to 45.9 last month.
Clients of the construction firms had adopted “wait-and-see” approach to projects rather than curtailing and canceling the projects. The same “wait-and-see” that has caused investors like me to sit on cash (Cash on sidelines).
“Insufficient new work to replace completed projects resulted in a decline in employment numbers for the first time since May 2013” the PMI report stated. The construction industry accounts for 2.1 million jobs, 6.62% of the working population. The industry contributes to 6.5% of GVA.
And services too. UK services PMI plunged to 47.4 in July from 52.3 in June, the first contraction since December 2012 and the fastest rate of decline since March 2009 and the steepest M/M decline (-4.9) since PMIs began in July 1996.
The sector accounts for 78.4% of the UK economic output.
Not surprisingly, the sentiment of businesses dropped to the lowest since February 2009.
Bank of England slashed its growth and increased its inflation forecasts. The central bank slashed its growth forecast for 2017 to 0.8% from initial estimate of 2.3%, making it the biggest downgrade in growth from one inflation report to the next. They now expect inflation to hit 1.9% in 2017, from previous estimate of 1.5%.
For 2018, the economy is expected to grow at 1.8% from previous estimate of 2.3%, and CPI is expected to hit 2.4% from previous estimate of 2.1.
Unemployment is expected to reach 5.4% next year from initial estimate of 4.9%, that is more than 250,000 people losing their job….even after the stimulus.
The bank’s outlook also includes lower income and housing prices to decline a “little” over the next year.
UK house prices fell 1% in July, according to a survey by Halifax, Britain’s biggest mortgage lender. The reports for the next few months will sure be interesting.
Confidence will continue to fall in the coming months as uncertainty will continue to exist and businesses will be extremely cautious with regard to spending, investment and hiring decisions, and people will be cautious with regard to spending.
All these survey conducted shortly after Brexit reflects an initial reaction. What matters now, especially after the new wave of stimulus, is the level of uncertainty and the magnitude of contractions. The three PMIs – manufacturing, construction, and services – accounting for almost 96% of the economic output, does not cover the whole economy as the retail, government and energy sectors (Oh energy), are excluded. However, it is clear the UK economy is slowing and is likely to slow in the coming quarters. Until clouds stop blocking the sun from shining, we won’t have a clear picture of the economy.
Will there be a recession or not? I’m not calling for any recession at the time. I will get a better idea of where the UK economy is heading as we get more data.
In two weeks:
Consumer Price Index (CPI) – With data reflected in the PMIs and the amount of stimulus announced by BoE, inflation overshoot is possible. This report in two weeks will only reflect July. We should get better of where inflation is going in September and October.
In four weeks:
Another manufacturing and construction PMIs. The services PMI comes the week later.
I should make a call on whatever the will be recession after the data and some by mid-September.
Without fiscal stimulus, monetary stimulus alone cannot offset most of the Brexit ills. Philip Hammond, the chancellor, signaled loosening of fiscal policy in October. By then, it just might be too late.
Extra: Bad Karma
Since Brexit (voted for by pensioners) UK 10y yield has plunged from 1.40% to record low 0.65%…decimating pensions pic.twitter.com/CtVUoufWuF