Suppose I had $100 invested in UPRO before Trump's tariff announcement. Anticipating that the event would trigger market turmoil, I wanted to close the leveraged position and hold cash (SHV) until the volatility subsided.
In a tax-free world, this would be straightforward: sell the position and wait out the storm with no further risk. However, let’s assume the UPRO is held in a taxable account, and closing the position would trigger a capital gain of $90. If it's long-term gain, I’d owe 20% in federal tax,13.3% in state tax (CA), and potentially plus 3.8% NIIT. If short-term gain, the marginal federal tax rate can be as high as 37%.
Regardless of whether my bet is right, I would surely pay a significant tax bill. Instead of closing the position in the taxable account, I can open an opposite position in Roth IRA accounts - In practice, I used YANG and TMF to bet the market crash.
If the market does drop as expected, I’ve effectively transferred the loss in the taxable account to the tax-free account. If the market rises instead, the money flows in the opposite direction, but my overall portfolio remains market neural. As long as my betting odds are better than 50/50, this strategy can gradually move money in some desirable direction over time.
If the assets in the taxable account aren't highly appreciated, the strategy becomes even more favorable. Whenever the taxable account incurs a significant loss, I can simply close the position, realize the loss, and use it to reduce my overall tax burden.
Trump is set to announce his reciprocal tariff on April 2, a move that will reshape the global trade and mark a paradigm shift in the U.S. foreign and economic policy.
The transition could be turbulent—potentially triggering a market crash, a brief economic downturn or recession, rapid Fed rate cuts, and eventually, a recovery. It’s starting to feel eerily reminiscent of late January 2020, similar to the unsettling period just before the first confirmed COVID case hit the U.S.
My portfolio before:
40% UPRO/TQQQ 40% SHV 20% Real Estate (Primary home + 2 rentals)
To brace for impact:
10% UPRO 5% YANG 5% TMF 60% SHV/BND 20% Real Estate
Let’s see if reality unfolds as expected.
=========== Update on April 2 ===============
Last warning before the storm...
=========== Update on April 3 ===============
The market did crash today. Now, let's see if it continues to play out as expected:
It’s been clear for some time that the US equity market was propped up by unsustainable deficit spending and the manipulation of treasury duration. The interest payment in the US has exceeded the defense spending - a dangerous sign. The status quo cannot continue forever, something has to break.
=========== Update on April 4 ===============
China retaliated with a 34% reciprocal tariff. The ball is back in Trump’s court. Meanwhile, Xi has his own internal political dynamics to manage. Neither can afford showing weakness anytime soon. The trade war is likely to escalate before de-escalating. How this game of chicken will end is beyond anyone’s control.
The market continues to collapse today. These developments seem to align with the Trump administration’s objectives:
The 10-year Treasury yield has dropped below 4%, which is beneficial for refinancing over $9T in Treasuries.
Oil, gold, and most commodities are coming down, which helps lower inflation.
The dollar is depreciating, which should, in theory, boost U.S. exports.
The next question is when the Fed will intervene. My guess is it won’t cut preemptively unless:
The market downturn triggers widespread margin calls, risking a financial crisis.
Clear evidence of economic pains emerges, though that may take months to develop.
YANG and TMF appreciate ~25% and 5%, respectively, but my bet is too small to change anything.
3. Matthew Klein and Michael Pettis on trade wars:
=========== Update on April 6 ===============
Nikkei futures suspended after hitting circuit breaker.
Russell 2000 circuit breaker hit in the overnight session.
CME group futures markets are putting out circuit breaker warnings for tomorrow.
Trump is pressuring the Fed to cut interest rates:
It’s shaping up to be a high-stakes, three-way game of chicken between Trump, Xi, and the Fed. With neither Trump nor Xi showing any signs of backing down in their standoff, the pressure is mounting on the Fed to make the first move.
However, Jerome Powell can’t simply cut rates like during the GFC or the COVID crisis—he’ll need a credible justification. Until that cover materializes, global markets are likely to remain on edge, and next week could bring extreme volatility as investors try to read Trump's Xi's, and the Fed’s next move in this economic standoff.
=========== Update on April 7 ===============
Trump doubled down as expected:
YANG surged as anticipated, while TMF unexpectedly reversed its gains. I closed both positions today, the YANG bet returned about 55% in a few days but TMF was only break-even. My main decision is to close large position on UPRO/TQQQ before the tariff announcement, which saved me from big losses.
There's speculation China has sold $50B in U.S. Treasuries—potentially a signal of its intent to escalate financial tensions. If China decides to weaponize its Treasury holdings, the traditional correlation between the stock market and Treasuries may begin to break down. In light of this, I exited my position in TMF. So, this is about a break-even bet.
=========== Update on April 8 ===============
The Trump administration attempts o calm the market by signaling progress on trade negotiations. The stock market opens up with a ~3% rebound right now.
Financial markets usually move ahead of real economic shifts. With reciprocal tariffs set to take effect tomorrow, their impact will gradually ripple through the global value chain. People and businesses start to change their behaviors in response to the incentives, but it may take time for the world to adjust accordingly. I expect more negative news bubbled up from real economic before it's safe to be fully invested.
Updated: The rebound was short-lived, and the market ultimately closed lower. The new tariff will take effect at midnight tonight. As the pain spreads through the economy, its impact will be reflected in corporate balance sheets and macro stats. Only then, things start to settle and the market can recover sustainably.
Suppose that you own two accounts and you want to move money from one account to another, but there are some limits on how much you can transfer between these two accounts.
This might sound like a weird problem, but the limit does exist in real life. For example, CCP government limits how much mainland Chinese can transfer from their CNY accounts to oversea accounts ($50,000 per year). The US government also limits how much their people can contribute to Roth IRA ($6,000 per year).
If both accounts can access the same market, it's possible to do the transfer w/o transacting between two accounts. It's called statistical tunneling. Here is how it works:
Say that you have some opinion on the market, You can long or short the market, buy or sell volatility. The exact strategy doesn't matter, but you always execute your favorable trades on one account, and simultaneously execute one equal but opposite trade on the other.
As long as you have more than 50% chance to be correct -- basically better than a monkey flipping a fair coin :-) , you can effectively move money from one account to another. The strategy will generate a loss on the source account , which may be desirable for tax purpose.
You don't need to be 100% correct on your trades because the combined accounts will never lose money except transaction cost. If you have zero or very low commission fees, you can trade as often as you want.
If you're consistently wrong about the market, that's also OK. Just flip your trades and the money should flow in the opposite direction. So, you can overlay this strategy onto whatever overall portfolio you have, and the money will move from one account to another.
For the few who follow this blog, I started to implement the last step of my portfolio adjustment as planned at the end of 2021
I plan to migrate 50% cash to 50% bond in the coming years. The pace of the migration will follow the pace of Fed's rate hikes. My target is to reach 50% TMF when Fed slows down or pauses rate hikes.
Here is the timeline of my portfolio migration:
1. Dec 2021: 100% TQQQ/UPRO => sell TQQQ => 50% UPRO + 50% Cash - (This is triggered by my decision to retire, a major lifestyle change)
2. Jan 2022: Apply for HELOC as emergency fund - (Prepare for enduring 4~5 yrs downturn w/o any major lifestyle or portfolio change)
3. Feb 2022: Say Goodbye to W2 - (Retire when my W2 makes no difference as planned in 2012)
When I started this blog over a decade ago, my goal is to save enough to retire in 20~30 yrs. I tried to read books on investment theories and to talk to some experts/professionals.
What's taught in school confuses me. If professors have any faith on what they're teaching, why don't they put their own money in practice? Most of professionals fare no better, either. What actually makes them money is the fact that they're betting and leveraging someone else's money, they can earn their 2/20 fees, fully participating in the upside but don't have to bare the full blunt of the downside.
I decided to ignore most theories and use a simple framework to beat the market. Assuming the long term return of market tracks the historical average of S&P, the leverage should help my portfolio to outperform the index. For most of time, I only need to watch for the unexpected, once-in-a-decade market crashes. With some luck, I was able to to take advantage the past two crashes: 2008/9 financial crisis and coronavirus crash. The subsequent rebound and bull market carried me across the finish line at 36~37% ARR over 13 yrs.
In the past few months, I lowered my leverage ratio from 3x to 1.5x* to prepare for early retirement. I plan to spend 1~1.5% of my asset annually. This budget ensures that I can sustain <22% market corrections(1.5%->1% = ~33% = 1.5 x 22%) and still maintain my current lifestyle. If the ARR of S&P for the next 30~40 yrs is >2%, my budget (nominal) for living expense should grow a bit faster than the index.
I decide to withdraw 1~1.5% rather than the usual 4% because I want some safety margin. I hope I can spot the next major crash (>22%) before it happens. In case I fail completely, I want a large cushion allowing me not only to live through a prolonged recession but also to participate in the rebound by re-leveraging my portfolio**.
Therefore, my strategy remains unchanged: maintain a constant (>1) leverage ratio, cross my finger, and wait for spectacular crashes. The difference between my pre- and post-retirement period is just leverage ratio and margin of safety.
I'm trying to start a new chapter of my life, hopefully spending my time and energy on something other than making money.
* 1.5x is currently implemented by holding 50% 3x UPRO/TQQQ and 50% cash. The cash position is intended to limit the max drawdown to 50% in case I fail to anticipate a major crash, e.g. UPRO/TQQQ suffer 99% loss. I plan to migrate 50% cash to 50% bond in the coming years. The pace of the migration will follow the pace of Fed's rate hikes. My target is to reach 50% TMF when Fed slows down or pauses rate hikes.
** If I can foresee a major crash is imminent like coronavirus crash, I may proactively de-leverage and even short the market. Otherwise, I just do nothing and wait for the next major crash. I will rebalance (re-leverage) after the crash. The timing of re-leverage depends on the timing of Fed's action. When Fed is all-in, I'm all-in. The re-leverage ratio depends on the scale of market drawdown. If the drawdown reaches epic scale, like great depression or dot.com bust, I'm prepared to go beyond 3x using futures.
I don't manage other people's money for living. Alpha, beta, or whatever Greek letters mean nothing to me.
The only thing I care about is ensure that the total value of my portfolio is more than the alternative (buy and hold the market) for every single day after the first couple of years.
Let M0 be the market at t0, and Mnat tn, and my portfolio is P0 at t0, and Pn at tn, my relative performance ispn = (Pn/P0)/(Mn/M0).
My definition of beating the market is prob(pn > 1) -> 100% and pn>> 1 if n is sufficiently large (20, 30, or 40 yrs).
I think the definition matters more to individuals investing their own money for retirements than any Greek letters taught in schools.
The Greek letters are there for the financial industry to justify reaping people off their retirement money
If you follow this blog, you might know that I've been expecting a major market crash in the past few years. It's why I named this blog "Expect The Unexpected".
I've been resisting to make such calls in compliance with my principle of least action. The argument is, if I have to act more than 2 or 3 times for the rest of my life, I wouldn't be acting on true once-in-a-decade or once-in-a-lifetime events.
After I learned what's happening in Wuhan and its impact on economic activity in China. I made the call that a crash is imminent. I tried to warn some of my co-workers on the incoming impact. I got the usual Boglehead's responses. Here is an interesting exchange with an experienced investor*:
On Wednesday, February 19, 2020 at 11:36:11 AM UTC-8 XXXX XXXX (Me) wrote:
On Wednesday, February 19, 2020 at 7:56:22 AM UTC-8 XXXX XX (An Experienced Investor) wrote:
"investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
+1
Retirement planning isn't a race. Too many people think it is one, and thus compare/worry about numbers that ultimately makes very little sense.
It is a personal journey, and the most important thing is to reach the finish line. Whether you reach there in a rocket ship or a leisurely stroll, it doesn't really matter.
You're probably right. In general, wars and pandemics come and go, and life always goes on. For those survive, this event will have little impact on their retirement plan 20~30 yrs down the road.
But, for those with family members or friends currently locked in Wuhan, the psychological impact cannot be ignored when you see corpses are trucked out of you neighborhood because you'll start wondering whether you're going to have a retirement or not. When such videos are quickly removed from social media and WeChat accounts spreading such "rumors" are swiftly banned, you cannot help asking, do I have the necessary information to make the right decision?
I have been watching this event unfolding for the past 3~4 weeks, mostly via private communication with friends. I find it takes about 1~2 weeks for the reality on the ground to be propagated into the mainstream media in the US. Few people grown up in the Western can imagine the draconian measures currently being taken in Wuhan/Hubei and contemplate how everyday life and economic activities are affected. They probably won't feel the real economy impact till Q1/Q2 corporate earning season.
I don't want to sound like alarmist here. I agree that most people in the US shouldn't overreact. But, if you have shorter time horizon and/or your investment is tightly coupled with China, you surely have to prepare for embracing the impact.
Generally speaking, I don't time the market, but I do indulge myself once in a decade. If you can clearly see a rocket ship passing by, why not jump on board?
* This post is back dated and made public only after I left the company.
