Short UNH

Puts bought on UNH again, still feel good about my general thesis and am just trying to pick good times to go short. 

Short SQ

Just what the title says, ootm puts on SQ for September.

Closed UNH, 3/4ths of HQY

Closed out my first position posted here, put on UNH up ~280%, and UNH up ~105%, and a position I took this morning which was a put on abmd.

Selling here because I find myself frozen, unable to think of what to do next.  This is an unhealthy mindset that I am familiar with from playing poker years ago, better to step back, collect thoughts and then proceed.  Buying a put on abmd worked out, but I bought because I didn't want to watch a big move down right after I sold out of half my exposure, basically it was emotional and shortsighted, which probably will lead to other similarly based decisions. 

To state/restate my investing theory in bullet form.

1.  The yield curve inversion is an inflection point.  Approaching the inversion is a different investing environment than the period during the reversion and widening of the curve, companies and industries that do well in one probably won't do as well in the other.

2.  The curve takes a long time to narrow, long enough for the 1st effect to have knock off effects on the economy.  If housing booms from the environment then eventually construction firms will boom and then logging, reits, and realtors etc will boom.  The early stages of the boom are when the first sectors take off, the height of the boom is when all the sectors are growing and the early stage of the bust is when the leading sectors have lost their growth but it has not yet hit the secondary sectors. 

Clearly I picked the health care industry (as in stock prices within) as benefiting from the previous circumstances and the movement of prices recently has been a point in favor of my hypothesis.  Now I need to move forward on projecting the timing and depth of the pullbacks and also anticipating the first order knock off effects, not staring at prices willing them to go down further. 

Another position

Short HQY (financial/healthcare stock).  Big move down today with the curve inversion steepening along with UNH having a moderate down day.  I put a tiny position in on this a few weeks ago, this one is larger. 

Why Healthcare

Previously I discussed why I think bubbles occur in the US but I left out why I took the position I did, and I was asked so the answer is:

I asked the market.  Starting from the assumptions that I layed out the conclusion is fairly straightforward.  The bubble sector* would be one that has grown much faster than the surrounding economy and then showed strong signs of a peak just as the yield curve started to invert.  There were a few other check marks that it would need to have, such as increased demand or government meddling recently to explain why they were the sector that the money flowed into, but those were obvious for healthcare once I found that the other two patterns fit. 

As for individual companies I went through and chose one whose growth appeared to have benefited the most from this situation (stock price wise). 

*There doesn't have to be just one.

First Move

I posted my first trade based on the ideas that I have been (slowly outlining above), I am listing my general positions here (but not the specifics) for tracking purposes (yours and mine).  Today I went short (via puts) on United Health Groups stock (UNH ticker).  This is not financial advice, this is simply my position and my reasoning.  My actual advice is don't take financial advice from random people on the internet.  A little bit of my positional reasoning to follow.

My current thoughts on how bubbles are created in the US is functionally a Cantillon feedback loop (for lack of a better term).  As the Fed expands the money supply in the aftermath of a recession there will be some sector of the economy that is situated to benefit from this more than the others.  One possible reason for why an industry would have greater profit potential would be a recent shifting of regulations meaning there is a new profit space to be explored and the means to do it.  Three factors then compliment each other to push up the desirability of investing in the sector.  First is the higher profit potential, the second is that there are underused resources in the economy as it comes out of recession, and third you have the Cantillon effects.  Money naturally flows faster towards areas where there is more profit potential and so any new money* that enters the system is more beneficial to these sectors than other ones, and the sector gets first crack at the unused resources.

This gives you the initial growth period, but it also allows you to overshoot the "natural" total growth that an industry would see.  Each new dollar that is created disproportionately benefits the particular sector and so the sector has an outside boost for as long as the Fed is loosening.  From my point of view the Fed is functionally loosening until the Yield Curve starts to invert.  The curve inversion strongly coincides with the early signs of issues within the bubble.  The 2006 inversion was just before the sudden decline in new housing starts and the 2000 inversion was just before the sudden decline in the NASDAQ.

This general explanation has two advantages over other discussions of the Yield Curve that I have seen.  It can be used to explain why the recession typically starts 6-8 quarters after the inversion and it can explain why the bubble does not reflate when rates are cut.  The latter point is often ignored, as the Fed was cutting interest rates in July of 2007 and in November of 2000, both ahead of the beginning of the recession.  

*using the term loosely here

More on debt

In my previous posts I have frequently discussed government debt and the dangers it causes, but with fairly vague notions of where it becomes dangerous.  Looking further into this I have sketched out a basic outline for myself, and it follows.

1.  To steal from Adam Smith, there is an awful lot of ruin in a nation.   A country can absorb a tremendous amount of debt and spending without a collapse, and even in some cases with continued growth.  Greece hit 100% debt to gdp levels in 1994, but didn't have (perhaps thanks to some fraud) major issues until the world started shaking in 2008, and I discussed Japan as an example in my most recent post.   This is not to say that these countries were trouble free, only that the high debt loads looked more like a hindrance than a potentially fatal flaw.

2.  High debt levels can exist for long periods of time, and so are "slow moving" crisis in that sense, but the end is very fast.  The indicators that a country is approaching a crisis appear to likewise be slow moving for long stretches.

One rule of thumb that looks solid is a lack of improvement in debt to gdp levels during good times.  Greece had decent growth from 1994 through 2008, but debt to GDP levels stuck at between 98% and 110% of GDP during that time.  Think of it this way, if you left college with $50,000 in unsecured debt and started out making $50,000 a year and 10 years later you were making $100,000 a year but your unsecured (ie no mortgages) debt had also increased to $100,000 that would be a pretty bad sign for your finances, right?  What are the odds you are going to on net be paying down debt in the future if you can't even maintain a level of debt while doubling your income?  What are the odds you would be able to handle a major life crisis if your baseline is increasing debt?  Japan also had some significant warning signs during the 80s.  Their debt to GDP levels rose from 50% in 1980 to 70% in 1992 despite GDP tripling in that time.  

This is very worrying for the near future as the US has been following this pattern.  Debt to GDP was fairly stable at around 60% for the 90s and 2000s until 2008, during a period of relatively strong growth and then saw a large burst during and immediately following the crisis.  While the expansion has slowed it has not reversed with a return to full employment, debt to GDP was higher in 2017 than any year prior to 2016.  

This is a pattern not isolated to the US, I looked at 19 countries (why not 20?  because that would have been more) including most of the top 20 world economies in terms of GDP and 16 of the 19 had increased their debt to GDP levels from 2008 to 2017 and 14 of them from 2012 to 2017.  10 countries had increased debt by 20 percent of GDP or more and 5 by 30 percent or more since 2008.

This is also not a series of small economies along with the US, 6 countries from that sample now have debt to GDP ratios of 85% or more and they are the UK, Canada, France, the US, Italy and Japan.