The US government is currently exercising the largest amount of leverage usage in the history of civilization. If Uncle Sam were an uncorrelated managed futures investment program he would have received a margin call long ago ‚Äď and in all likelihood would have already flamed out in a blaze of infamy.
For those unfamiliar with investments uncorrelated to the performance of the stock market, a margin call occurs when an investor has over-leveraged themselves.
To understand the situation, consider the US financial position for a moment from the perspective of a homeowner:
Right now the government is essentially making mortgage payments with a credit card. It issues new bonds to pay interest on old bonds, a ponzi scheme to make Bernie Madoff proud.
Ever since the logical confines of the gold standard were lifted in 1971, and the political establishment began to realize in 1978 it could simply crank up the printing press to give voters what they wanted without raising taxes, our society embarked on a debt party the likes of which have never before been seen.
My father always said there is no such thing as a free lunch. ¬†The US government has been enjoying their lunch for close to thirty years under the delusion it can simply print free money without consequence. ¬†But alas, it will learn its lesson the hard way ‚Äď and unfortunately stock investors might take the fall.
As of this writing the US government is spending nearly twice what it makes ‚Äď racking up annual debt of $3.8 trillion and bringing in $2.2 trillion in revenue. While that’s been the headline number everyone discusses, its not the real number to pay attention to as it doesn’t include all the government’s liability.
A real number to watch is the projected fiscal gap. ¬†That’s the massive $211 trillion difference between spending and income that occurs in a few years when baby boomers start to retire and claim their god-given right to government medical benefits. Add to this the fact that interest rates could dramatically rise, particularly with the excessive printing of money. ¬†Running the printing press overtime could lead to the US Greenback being supplanted as the currency of choice. ¬†When this happens, watch out. ¬†The fiscal prospects for the US government, and stock investing, won’t look particularly attractive. It gets even uglier when you consider the political realities required to solve the problems.
This summer, politicians logically tried to close the existing budget gap, but couldn’t even get close. Relying on deeply entrenched Republican and Democratic political agendas to give way to one another could be a tall if not impossible order. Try asking a senior to give up a little Medicare and it’s like you are taking away their birth right. It‚Äôs almost as bad as asking Democrats to end fast and loose social spending or Republicans to tax the rich. Asking people to give something up, to sacrifice, is something our generation is not accustomed to doing. If you think it’s got to be easy to close his budget gap, think again. It will be a constant battle that could generate strong moves stock market moves to the upside and downside.
It is said that identifying the middle of a secular bear market is always difficult. While hindsight is always 20/20, one item to consider is the volatility that can occur in bear markets. Investors have already witnessed significant volatility in 2008, 2009, 2010 during the flash crash, and most recently 2011 when a debt warning shot was fired. Increasingly there could be a cause and effect relationship with such volatility and the loose management of a government printing press for the purposes of political expediency. How do investors know when this could unravel? If the US currency starts losing favor as the reserve currency of choice, something once considered unthinkable, we could be in for rough investing ahead. When US interest rates start to rise precipitously, investors would do well to find a nice investment uncorrelated to the performance of the stock market. But perhaps the real early warning signal is that voters are unwilling to give anything up, and their elected politicians represent their wishes. If a trend follower could somehow arrange an algorithmic formula to monitor public opinion, this might be its sell signal.
At this moment in history, investments unhinged from economic supply and demand at the performance driver level should be given significant consideration. Managed futures is in the right place, providing a needed service at the right time.
To read the full article: http://bit.ly/p9xEXR
About the Author: Mark Melin is author of three books, including High Performance Managed Futures (Wiley 2010), and has taught managed futures at Northwestern University in Chicago. Mr. Melin consults with financial advisors, pension funds, family offices and high net worth investors on developing uncorrelated investments. ¬†The author is an associated person registered with the National Futures Association NFA ID#: 0348336. For further information visit his web site at www.Go2ManagedFutures.com or via e-mail at info@Go2ManagedFutures.com
All contents copyright¬†¬©¬†2011Mark H. Melin all rights reserved. ¬†This work can be re-distributed with permission from the author. ¬†Contact info@Go2ManagedFutures.com
Risk Disclosure: Past performance is not indicative of future results. ¬†There is risk of loss when investing in futures and options. ¬†Always review a complete CTA disclosure document before investing in any Managed Futures program. ¬†Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. ¬†The opinions expressed are solely those of the author, they are not appropriate for all investors and may not have considered all risk factors.