The Wealth Gap
Betting Big on the Downside
We may not spend a lot of time thinking about it, but most of us would like to be rich.
About three times a year (usually when the payoff in the biggest lottery gets above $200 million), everyone at Cabot kicks in a buck and we buy a wad of tickets, with the understanding that any winnings will be split evenly among us.
There are two things that interest me are 1) that everybody buys in, and 2) that we always spend at least part of Coffee Time (which is 10:30 to 11:00 here at Cabot) talking about what we would do with our winnings.
We all know that our odds of winning are infinitesimal. (I always point out that, statistically speaking, your chance of winning the lottery is so small, that it’s about the same whether you buy a ticket or not.) But that doesn’t keep us from making plans and talking about them.
We all acknowledge the stories of people whose lives have been ruined by the avalanche of lottery cash, including unwise purchases, rampant envy and the platoons of con men and charity seekers who inevitably follow a big win.
But we still want to be rich.
If we ever won, and each of us wound up with, let’s say, $10 million after taxes, we would genuinely qualify as rich.
How rich would we be? Well, there’s a big difference between money in the bank and annual income, but annual income figures are a place to start.
According to the latest reliable figures (done in 2008 and including capital gains), having a little over $1 million ($1.14 million, to be exact) in annual income would locate you in the top 1% of all American families. And having an income of $3.24 million per year would qualify you as part of the richest one-tenth of 1% of all U.S. families.
Anyway, it looks like we’re pretty safe from having to face the challenges of wealth. The best we’ve ever done in our occasional dips into fantasy finance is to match a couple of numbers on a ticket with 42 numbers on it.
But on a serious note, if we were suddenly to be vaulted into the upper reaches of the family wealth scales, we would become part of the problem of the increasing gap between the wealthiest and the poorest Americans.
I know that this is a politically charged issue, but I don’t have an ax to grind.
The question is whether there is a downside to having 87% of the total net worth of all Americans in the hands of just 25% of U.S. households?
The government of China, which has lots of things to worry about—corruption, pollution, inflation and unemployment among them—is also worrying about the growing gap between the richest and poorest Chinese. This topic has even shown up on the agenda for major Communist Party Congresses.
But it’s one thing for China to worry about wealth distribution. That seems natural for a country that’s still at least nominally Communist.
The question of what, if anything, to do when the wealth gap widens in a capitalist country is something else entirely. The gap may be unsettling, but the consequences of just about any remedy you can think of are almost certainly worse. It’s something to think about.
And while we’re thinking about it, we at Cabot will be working hard to help you increase your own net worth. Our investment advisories provide clear advice for equity investors—from conservative to aggressive—who have investment horizons from decades to days.
You can find a ton of information about how to prosper in the stock market at the Cabot website, including a short quiz that will help you find the newsletter that will fit with your investing personality.
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The Halter USX China Index tracks the performance of 200 or so Chinese stocks that trade as American Depositary Receipts (ADRs) on U.S. exchanges, giving us a snapshot of how China stocks are doing. The Halter made a couple of two-month advances in 2010, one in February and March and another in September and October. But much of the year was spent trading sideways.
Oil prices are rising, and investor anxiety is running high as the murderous loon in charge of Libya tries to cling to power.
Investors hate uncertainty more than anything (except, perhaps, reporting and accounting fraud) and markets have reflected their discouragement.
My approach to stock investing has a strong market-timing component, so I’m advising my readers to dial back their exposure to the emerging markets.
This involves curtailing new purchases and tightening loss limits on all of the recommendations in the Cabot China & Emerging Markets Report.
As a matter of principle, I avoid trying to predict what markets will do, whether it’s for tomorrow or next year. The simple fact is that no one can consistently predict where the markets are heading.
But if you have a sense of adventure and a strong opinion about what’s going to happen in China and the other emerging markets, I have an exchange-traded fund (ETF) that may interest you.
If you’re convinced that China is in for a steep correction and want to cash in on that dip, you should consider the Direxion Daily China Bear 3X Shares (CZI). This ETF will earn you triple the opposite (or inverse) of the price performance of the BNY China Select ADR Index. This leveraged short fund has had three good days in a row, and a big pullback in China would be highly profitable. Just be aware that such a leveraged ETF is more of a short-term vehicle, not a long-term holding
I don’t advise it, of course, because it’s a bet on the future of an entire market. That means you can’t—as you could with an individual company—get any insight into a business plan, revenue and earnings history, management, barriers to entry, debt, product mix, strategy or any of the other bits of data that due diligence can bring you.
Personally (and for my subscribers) I prefer going to cash when the wind is in the wrong direction.
But if you have a hunch and want to make good money if you’re right, here’s your chance.
For Cabot Wealth Advisory
P.S. Paul Goodwin is the editor of Cabot China & Emerging Markets Report, which Hulbert Financial Digest rated as the #1 newsletter for five years in 2009 and 2010. During that time, the Report rewarded subscribers with a jaw-dropping return of 174% (an average annualized gain of 20.5% every year) versus the Wilshire 5000’s gain of 15.4% over the same period. Don’t miss another winning recommendation. Get started today!