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2016 NIRP Did Not Matter

Kelly Letters Past
From The Kelly Letter Note 7 sent February 14, 2016:

The age of NIRP [negative interest-rate policies] sent Martin Armstrong, of Armstrong Economics, into a tirade last week. He wrote:

“We are on the precipice of what can only be described as a rising systemic risk for all markets. The Fed is now hinting that banks should prepare for NEGATIVE INTEREST RATES. This insanity of following the crowd is undermining the entire world economy. The increasingly unstable footing that we find ourselves standing on is reflected in widening credit spreads that demonstrate that CONFIDENCE is indeed collapsing. … Even the Japanese 10-year bond has gone NEGATIVE, demonstrating the total collapse in CONFIDENCE. Why, you ask? Because this time, the defaults will engulf all governments at all levels.” The all-caps emphasis is his.

That’s a good encapsulation of the current fear. The perspective to keep is this:

People claiming with confidence to know the dangers lurking before us are the same ones who steered investors wrong half the time in the past.

It’s sheer arrogance to claim to know why the yen went where it went, where it will go next, what this will mean to Japanese consumers, what that will mean to Japanese stocks, how governments will respond to whatever defaults happen, and what the effects of those responses will be in their immediate economies, much less the US stock market.

Remember, these experts didn’t even get the US bond market right. Now, they know what’s going to happen to the yen and what it will do to stocks in America? I don’t think so.

NIRP will have consequences. Not going NIRP would have had consequences.

Eventually, the price of oil will stabilize, currencies will reach an equilibrium, what needs repricing will get repriced, and the usual recovery will follow the drop. Sticking to our signal systems will ensure that you participate in it.

Paying attention to the pundits will increase your odds of missing out.


In the two years following Armstrong’s warning, the S&P 500 gained 46%.

From his warning through last Friday, it gained 62%.

Yours Very Truly,

Jason Kelly
Sign up to start beating the market.

Posted in Kelly Letters Past | Leave a comment

The Buzz Lightyears of Borrowing

Who says bipartisanship is dead?

America’s two major political parties proved yet again that they always agree on one thing: the need for more spending.

Sure, one side says it wants to put an end to runaway military spending and the other says it wants to put an end to runaway social spending, but then they compromise by granting higher spending to both categories. Checkbook balancers, these are not.

It happened again on Monday when President Donald Trump, Democratic House Speaker Nancy Pelosi, and Senate Democratic leader Chuck Schumer—who get along about as well as a badger, a bear, and a boa in a bag—announced they’d struck a bipartisan budget deal by following the least creative path possible. It feathers the military nest and tosses cash to the masses, no belt tightening in sight.

Never mind the distracting trillion-dollar budget deficit. A trillion ain’t what it used to be, which was a thousand billion. It’s now a mere fifth of five trillion, and five trillion is a whole 21 years away at the 8.2% compound annual rate of deficit growth since 2008, according to data from the Office of Management and Budget. Twenty-one years hence, AOC’s proposed 70% tax rate should be in effect, and all of this will cease to matter anyway, so why worry?

Republican House Minority Leader Kevin McCarthy admitted the new budget deal wasn’t perfect, but said “compromise is necessary in divided government.” Such compromise—where nobody gives up a thing but just votes for more spending across the board—has proved remarkably popular in non-divided government as well. “More money! More money!” is as evergreen a chant as you’re likely to hear.

And it worked this week, garnering a federal spending jump of $320 billion and the suspension of that pesky debt ceiling until the end of July 2021, nearly nine months after the next presidential election. Just think of the spending “compromises” they can dream up in the freedom of infinite borrowing capacity.

It’s like receiving along with your new no-limit American Express Centurion card a second no-limit American Express Centurion card. What the heck, why not get one for each member of the family?

In Washington, the massive federal debt might give some pause but everybody knows debt gets easier after the first $22 trillion. Additional trillions just roll off the pen. Whoo! Once the zeros can’t fit on calculator screens anymore, innumerate voters will stop watching anyway. Oh wait, that already happened.

Watch for Buzz Lightyear’s catchphrase as a campaign slogan one of these cycles: “To Infinity and Beyond!” captures the spirit of political debt addiction. We might as well embrace it.

Washington’s idea of bipartisanship has made our politicians the Buzz Lightyears of borrowing.

Posted in US politics | Tagged | 8 Responses

Managing TQQQ Volatility to Higher Performance

The Kelly Letter Excerpt
The following is from this year’s Note 16 of The Kelly Letter, which went out to subscribers last Sunday morning.

On Wednesday, April 17 the Nasdaq 100 (NDX) reached an intraday high of 7715, above its previous all-time high of 7701 on October 1. The event enabled my research partner Roger to log an important milestone in a study he’s been doing on the NDX 3x fund’s (TQQQ $64 +73% YTD) tracking of the index.

This issue frequently comes up when people are first exposed to our use of leverage in 6Sig and 9Sig. Despite my having repeatedly corrected the inaccuracy of media warnings against leveraged funds due to their daily tracking and beta decay, many people remain skeptical of any plan that holds leveraged funds for an extended period of time.

My thesis is that beta decay is less of an issue than reported, even over long periods, and that our plan’s moving into and out of fluctuating funds relegates it to a non-issue. We’re not going for a precise multiple of an index’s performance, we’re going for higher volatility. We use that higher volatility to our advantage. Some time periods will show us recording precisely double or triple the S&P MidCap 400 in 6Sig and the NDX in 9Sig, or more, while some will show us performing below the advertised multiple, but we should come out well ahead of the indexes over time.

To illustrate, let’s turn to Roger’s findings.

From October 1 through April 18:

+0.58% NDX
-10.61% TQQQ

This is the type of comparison media fixate upon, concluding that holding leveraged funds does not work. However, it’s not the whole story.

From the low on December 24 through April 18:

+30.35% NDX
+91.05% NDX performance multiplied by 3
+110.46% TQQQ

While TQQQ did underperform NDX in the time frame, its performance greatly exceeded NDX’s from the bottom. Should things keep going how they’ve been going, a holder of TQQQ through the cycle would pull ahead of NDX in another month or two.

We know that eventually TQQQ reasserts itself over the index even when merely held, rather than magnified with our buying of weakness and selling of strength. According to Roger, the gain multiple of TQQQ from December 1, 2015 is 3.3x, better than the fund’s goal of 3.0x.

When the long-term dominance of the fund is coupled with our 9Sig plan’s buying of weakness and selling of strength, performance improves further in most time frames, even short ones.

From October 1 through April 18:

+0.58% NDX
-10.61% TQQQ
+15.91% 9Sig

What accomplished this mathematical magic was our January signal, which bought another $287K of TQQQ during its cheap phase. We paid $38.65 on January 7. It’s $63.98 now after a 65.54% ride higher, on which we sent a lot more money than we sent down to the December 24 low.

When you send less money down and more money up, the numbers work in your favor.

Yours truly,
Jason Kelly
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Posted in 9Sig, Kelly Letter Excerpt, Kelly Letter Success, Leverage, TQQQ | Leave a comment

Stack: Bear Market Ahead

Mr. Stack’s technical indicators are still pointing toward a bear market. He’s also worried about the shaky housing market, with price drops and slowing sales showing up in major cities.

“We’re not trying to time the market, but we’re very comfortable with our defensive allocation,” he said. Although he predicted higher volatility a year ago, he was nonetheless surprised by the extremes reached in December, without even “a single hard warning sign of recession on the horizon.”

“Can you imagine,” he asked, “how volatile it will be when we do have those warnings?”


Z-val: James Stack
Via: The New York Times
Date: 1/4/19
Disposition: Medium-Term Bearish
S&P 500 on 1/4/19: 2532
S&P 500 on 7/5/19: 2990
Change: +18.1%
Judgment: Wrong

Z-val definition and more forecasts in The Z-val Zone.

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China’s Debt, 2018 Midterms, Trump Impeachment, Bond Funds, Maslow, and Halloween

These discussions are on The Kelly Letter premium subscriber site:

In a comment below last Sunday’s letter, Henry asks why China’s debt is worse than America’s. I answer that Beijing is probably understating the level of its debt, wastes much of its spending just to grow GDP, and does not enjoy the benefit of controlling the world’s reserve currency.

In a comment below Note 23 sent October 14, Greg suggests that the midterm elections would be better discussed in the Politics forum. I agree, and created a 2018 midterms topic. There, Greg writes that he’s “not very concerned” by the trade war with China: “When I think about Chinese trade practices (or requirements for foreign companies to do business in China), it seems there is a lot to be gained there by challenging the status quo.”

Also in the 2018 Midterms forum, I review the long odds of President Trump being removed from office through impeachment, as outlined in Note 21 sent June 3, then show that those odds remain long now, according to FiveThirtyEight, which sees only a 19% chance of Republicans taking the Senate. Of course, you know how forecasts go.
Earlier this month, Cody asked about which bond fund to use for his 3Sig plan at Fidelity. I answered: “Why not run iShares Bond (AGG)? It’s one of the letter’s approved funds, currently running in 9Sig, and free to trade at Fidelity, It would work for any Sig plan.” Remember that the bond funds shown in the letter are interchangeable among the plans.

A number of people emailed me in praise of last Sunday’s End Note, “Stop and Smell the Roses — for Maslow.” Much appreciated. You can comment on it and any End Note in the End Note Archive, or below the Sunday note in which it was sent. I love the feedback.

Finally, please take a moment to appreciate the Halloween header and sidebar images on the subscriber site! We even put up a special spooky typeface for this month. You can see the site photo history in The Kelly Letter Collection. The Halloween set has only another week to go.

Posted in Kelly Letter Conversation | Tagged , , | Leave a comment
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