Leveraged exchange-traded funds were devised in 2006 as a product to allow retail investors to double their exposure to stock indices, then bonds, commodities, currencies and volatility itself. With dreams of great upside, these products attracted retail capital like bugs to a light. Bringing in $72 billion in new cash over the past few years, their level of assets has stayed about the same because they tend to burn through money in the long term due to the daily resetting of leverage. From gullible, weak hands, to insiders as usual… the retail carnage has been brutal. Read: SEC may regret the day it allowed leveraged ETFs:
The problem with leveraged ETFs is that the losses from daily rebalancing are not easy to quantify. They’re dependent on volatility: the more volatile the underlying index, the more quickly the ETF will “decay.”
…While retail investors were slow to pick up on the daily rebalancing feature, the quants were not, and what ensued was a giant transfer of wealth from retail investors to professional investors. Professional investors figured out that you could be short leveraged ETFs and actually benefit from the effects of the daily rebalancing.
Here is the key lesson take away, that individuals forget at their peril:
..the whole point of Wall Street is to have a transfer of wealth from the unsophisticated to the sophisticated. There is nothing un-American about that. But this is egregious.
Last week brought the Canadian Real Estate Wealth Expo – learn how to become a millionaire event in Toronto.
All of the usual ridiculous, reckless characters and ideas that were prevalent at Tech investing conferences in 1999 and 2000, as well as commodity and precious metals shows in 2007-08. Today we have real estate investment conferences on how to become a millionaire using “other people’s money” aka lots of DEBT!
For an excellent first hand account from one sober attendee. Read: I attended the top of the Canadian Housing Market so you didn’t have to:
The booths outside of the presentation hall were just as troublesome. Plenty of “high double-digit monthly yields”, retire early with real estate, “everyone needs a place to live – buy apartments” type messages. Almost all of these pitches were second lien lending. Most offered yields in the 8 to 10% range. The presentations all suggested that you can borrow money, if you don’t have it, at 4% and then buy these investments at 10% – easy money.
Always the same outrageous hype near market tops, followed by devastation, loss, lawsuits and forced selling near market bottoms. If only people could learn to do the opposite of what the sales force-led-pack is doing. Well actually, you can, but it requires self-discipline.
When people are using debt to maintain their lifestyle, they are also foregoing savings for the future. Spending on debt thus reduces funds for future spending and hence economic strength and stability for years to come. A focus on short-term spending and lack of fiscal discipline has compound costs.
Scott Terrio, estate administrator at Cooper and Company, says Canadians are taking on too much mortgage debt. Here is a direct video link.
As you watch this report, remember that bank economists are required to temper their reports on financial risks, and understate downside forecasts, so as not to scare off customers from their bread and butter investment underwriting and sales side. But if you listen between the lines of the placid delivery here, there is some interesting info for the time capsule.
A new report from TD examines the level of speculative buyers in Toronto housing, and finds it might be worse than previously thought (or admitted?). Their conclusion: housing is divorced from fundamentals and some 24-40% overvalued at present. Existing home sales per person are now at a higher level than the peak of the 1980’s price bubble. (Before values collapsed by 25 to 60% in many areas, sending the economy into recession and a host of realtors, lenders, speculators and households into years of financial and legal problems.) Here is a direct video link.
Also see: Investors now speculating on single family homes across the GTA.
The credit bubble enabled a massive overbuild in the scale of housing as well as the retail and commercial sector. The mean reversion began in 2008 and then was stalled for a time by excess liquidity driven by QE and indiscriminate investor flows looking for yield. The end result has been the addition of even more excess capacity which is now having to shutter and repurpose.
As anyone can see in the growing retail and commercial vacancies all around us, the downsizing wave is now picking up pace. It has much further to go. See: Sears warns of ‘substantial doubt ‘about company’s future.
Here is a direct video link.