The rosy view says that the economy is growing briskly. A more accurate view is that spending has been growing briskly as recent data shows the personal savings rate has fallen to 0.2%.

The spending spree in government is being fuelled by imported savings as Asian central banks recycle the profits (savings) earned from selling to the US consumer. When does this stop?

It stops when the Asian economies slow. Which is real soon now. Japan was never really growing, and looks to be falling back into recession. The Chinese authorities are busily trying to slow down the investment rampage that has been sucking up the world’s resources in commodities. The US consumer who has driven exports from these economies is also slowing, as shown by the gloomy holiday retail sales reports. This all means less savings to recycle. Therefore either the government must slow spending or expect to pay much higher interest rates to attract new savings. Either is likely to have serious economic consequences in the US. Jimmy Rogers is reported to have said that the Chinese economy will crash in 2005. I think he is right. What he didn’t say was that the US will crash too.

November sales

Percentage change from a year earlier in November sales at stores open at least one year

I saw a post on a board that I frequent that asserted (times being bullish, of course) that since when shorting the risk of loss was infinite and you could only make 100%, it was a stupid thing to do. Since the risk-reward was so poor.

Well shorting stocks is for the birds, I must agree. Too easy to get squeezed out and all you can make is 100%. True enough, and I have long positions which are up 200 and 300% (even after today’s attack on the oils).

But leveraged shorts with Rydex or options? Ah, there is a different kettle of fish.

A Tempest short on the S&P by 600 will be worth 4x the investment - also a 300% gain. (Actually quite a bit more because of compounding on the way down, but how much more depends on the actual trajectory)

And the risk - well let’s say we might move to retest the all-time high around 1500 and you covered there. That would be a 50% loss. Painful, but who would wait that long to cover anyway?

Or options. A SPX June 1150 put now $29 would be worth $550 at SPX 600. That would be a 1800% gain (more or less). If we went to 1500, obviously you would lose 100%. But not such a terrible ratio, I would say.

So what do you think the relative probabilities are? I say 20% 1500, 80% 600. Simplistic, but I’m a simple kind of guy. Obviously a better analysis would have a continuous probability distribution but say I haven’t taken my meds and I’m bipolar today.

So my expected return from the Rydex trade would be (.2*0.5)+(.8*4.0)=3.3 or a 230% gain. The option trade: (.2*0)+(.8*550)=440 or a 1400% expected gain. Whooeee.

So I check my portfolio: Rydex (check) putties (check) I’m good to go. See you in June.

Oh, and by the way the option trade is tax-favored under Sec 1256 and is taxed at 60% long term. So if you want to make a million dollars after tax on this trade, assuming your ordinary income rate is 45% for the sake of argument, then you need to commit the following capital:

Rydex: Pretax gain on one unit is 2.3, after-tax is 2.3*.55=1.265 (short-term gain) so you need to commit $790,000.

Options: Effective tax rate is (.6*.15)+(.4*.45)=.27 and pretax gain on one unit is 14, after tax is 10.22, so you need to commit $98,000.

Too bad I can’t use options in my IRA.

“The cost of Chinese factory labor is a paltry 64 cents an hour. Although that figure is rough, since it’s pieced together from sketchy statistics, it’s still the most thorough estimate ever compiled. It includes both wages and employer contributions for benefits and social insurance. And it covers not just city factory workers, who get the most attention, but the more numerous rural and suburban factory workers as well. For comparison, hourly factory compensation in the U.S. in 2002 was $21.11, and an average of $14.22 in the 30 foreign countries covered by the existing BLS report.”

That means Chinese labor costs are 3% of US costs. Really.

Just How Cheap Is Chinese Labor?

“ShopperTrak, which tallies 30,000 stores, said weekend sales finished up just 3% over the period last year after an 11% bump on Friday, suggesting shopper enthusiasm faded as opening day sales drew to a close. The International Council of Shopping Centers said the full week’s sales at member malls fell 1.5% from the previous week. Johnson Redbook, which tracks the largest store chains, reported a mere 0.9% uptick last week over the week before.”

I guess it wasn’t just Wal-Mart.

Stores reconsider sales strategies after sluggish weekend