Assuming that I believe that the U.S. economy will not recover in the near future, what's a relatively simple way to make a bet that would profit from my belief?

July 17, 2009 12:08 PM

Assuming that I believe that the U.S. economy will not recover in the near future, what's a relatively simple way to make a bet that would profit from my belief?

I don't have a lot of money to bet, but I'm willing to lose all of the amount that I put down.

I've never set up any kind of trading accounts before and don't intend to be an active trader in the future, so I would prefer something with relatively low setup (both in terms of time and money).

One thought I had was to bet on the price of crude oil. Any other suggestions?

posted by realpseudonym to work & money (18 comments total)

It's a bit boring, but you could bet on the level of the DJIA or S&P 500 being under a certain value in a certain period of time. I don't know where you live, but this is easily done in the UK through spread betting.

If you want something more obscure, bet on the Baltic Dry Index. It's an index of international freight shipping rates and is considered a leading indicator of economic activity.
posted by wackybrit at 12:16 PM on July 17 [1 favorite]

(IANAE.) I'd use the unemployment level. Any single measure is necessarily incomplete, but that seems as useful, vivid, and easy-to-check as anything. Make a bet that it won't go down to __% (whatever would count as a "recovery" to you) by [date] (however you define the "near future"). Remember to agree to look at the official US government figures, since many people argue that actual unemployment is higher since the government doesn't count certain people (those who are working but "underemployed," and those who have stopped looking for work).

Here's an article in The Economist on how to measure a recession. It's very critical of the standard definition (2 consecutive quarters of falling GDP) and argues that unemployment makes more sense:

"potential growth rates are devilishly hard to measure and revisions to GDP statistics are still a problem. One solution is to pay much more attention to unemployment numbers, which, though not perfect, are generally not subject to revision and are more timely. A rise in unemployment is a good signal that growth has fallen below potential. Better still, it matches the definition of recession that ordinary people use. During the past half-century, whenever America’s unemployment rate has risen by half a percentage point or more the NBER has later (often much later) declared it a recession. European firms are slower at shedding jobs, so unemployment may be a lagging indicator. Even so, the jobless rate has usually started to rise a few months after the start of a recession.

"As the old joke goes: when your neighbour loses his job, it is called an economic slowdown. When you lose your job, it is a recession. But when an economist loses his job, it becomes a depression. Economists who ignore the recent rise in unemployment deserve to lose their jobs."
posted by Jaltcoh at 12:21 PM on July 17

Inverse ETF's

There are also inverse ETF's with 2x and 3x exposure. With 2x, it means if a particular sector goes down 1% you gain 2%, with 3x you gain 3%. In theory.

Take a look how SKF did when everyone was worried about the banking industry...and also note how fast it crashed.
posted by Sonic_Molson at 12:29 PM on July 17

Short the Dow or short the dollar.
posted by charlesv at 12:48 PM on July 17

.. or short the dollar.

Good idea. I forgot to notice the "US economy" part of the question. That makes me think the simplest way to bet against the US economy would be to hold foreign currency.
posted by wackybrit at 1:04 PM on July 17

Be cautious with the multiple-factor inverse ETFs. Roughly speaking, upside volatility hurts you worse than downside volatility benefits you.

As for the original question, I have had some money in the Prudent Bear mutual fund since 2007. I haven't been paying attention to its performance, lately, but it's the kind of thing you're looking for, at least in terms of its stated investment philosophy.
posted by Coventry at 1:06 PM on July 17

You could buy some "stock" on Intrade.
posted by tanminivan at 1:11 PM on July 17

Depends on what time range is 'near future' I guess.
Commodities look good in uncertain times.
posted by petepr at 1:13 PM on July 17

I think you are in danger of assuming that whatever causes the US economy to sink will somehow magically not affect other countries economies as well. They don't call it the global economy for nothin. Think of it this way: You're trying to be a financial survivalist. I'd invest in skills that would be worth something in a stagnating/crashing economy. That is, skills that you can use to produce things that people need: potable water, food, etc.
posted by symbollocks at 1:14 PM on July 17

Economies are relative. If you say that the US economy will not fare well...you mean that other economies WILL fare better.

If thats your assertion, then perhaps you want to bet on some foreign currency.
posted by hal_c_on at 1:15 PM on July 17

That makes me think the simplest way to bet against the US economy would be to hold foreign currency.

Not necessarily. Somewhat paradoxically, when the US economy does poorly, USD often gets stronger relative to other currencies. One reason for this is people selling off their foreign holdings and putting their money into US Treasuries for safety; obviously, doing this requires selling foreign currency and buying USD. Observe USD-CAD, USD-EUR, and USD-GBP over the events of late '08 and early '09.

Also, consider that when the US economy is doing well, Americans should be buying lots of foreign goods, depressing the value of the dollar.

This isn't to say that USD should actually get weaker as the US economy does well, just that there may not be some sure link between the dollar's strength relative to other currencies and the US economy. In general, the US economy's influence on the world economy and the special role of the dollar and US treasuries make it difficult to make assumptions like this.

However, I will mention that JPY is generally seen as even "safer" than USD, and thus you often see JPY get stronger relative to others in times of financial turmoil.

As for what to use for betting, there a whole host of ETFs out there: for starters, there's Spyders (SPY, tracks the S&P 500 as you might imagine), there's FAZ (3x financial bear), and plenty of others you can take a look at here.
posted by pravit at 1:33 PM on July 17 [2 favorites]

You shouldn't do this with serious money, but if you are just playing around, tanminivan's suggestion of Intrade.com is good for small amounts of money.

You can place bets on all sorts of things like the level of the S&P at the end of the year, the unemployment rate, price of gold and oil, growth in GDP, Iceland or Argentina defaulting on their debt, mortgage rates at the end of the year, whether U.S. debt will be downgraded from AAA. You can even bet on who will be the next chairman of the Federal Reserve and whether former CEO of Countrywide Mozilo will be indicted on a felony charge.

As I said, these kinds of bets should only be play money, not serious investments.
posted by JackFlash at 1:55 PM on July 17

Off the top of my head:

1) Inverse ETF (watch out for the 2x type, they don't work well for long term holding due to how their math works).
2) Shorting an ETF like the SPY. You borrow a chunk from the broker, and sell them. Then buy them back for cheaper later.
3) Shorting individual stocks, or specific sector ETFs. This requires a lot more research
4) Buying options (put options or shorting calls). This will let you manage risk much closer, since you can use spreads (careful here, lots of range of risk & reward).
5) Sell USD (works best if you think inflation is going up I suppose). Your crude oil idea would probably track the USD (at least in my unknowledgeable thoughts), since oil is fairly constant demand/supply, but denominated in USD).
posted by cschneid at 3:32 PM on July 17

One very important thing to understand about short-selling: Your losses are potentially infinite. If you buy a stock long at $100, the most you can lose is $100 (if, say, the company goes bankrupt). If you short a stock at $100, expecting it to decline, you can lose ∞, because the stock could soar to limitless heights. A recent short squeeze attempted by Porsche sent Volkswagen stock soaring from €200 to above €1,000.
posted by Conrad Cornelius o'Donald o'Dell at 4:16 PM on July 17

As a slight derail, can one short those leveraged ETFs, like SKF that Sonic_Molson mentioned above? Given how they work, it seems that they would be almost certain to lose money over the long-haul.
posted by John Frum at 7:19 AM on July 18

John Frum: Yes, you can short them, although some come in bear and bull flavors for this reason. A popular trade has been to short equal dollar amounts of both FAS (Financial bull 3x) and FAZ (Financial bear 3x). In an ideal world, these would cancel out exactly, but the fact that they do not has allowed profits from this trade.
posted by pravit at 1:24 PM on July 18

Buy Gold. The worse things get, the higher it goes.
posted by exhilaration at 10:06 AM on July 19

"One very important thing to understand about short-selling: Your losses are potentially infinite.."
Your broker would probably call your short before you decided to commit suicide.
posted by petepr at 1:40 PM on August 3