- The greatest financial innovation of this century…
- … could blow up the boomers’ retirement for the last time
- Stockman on a “giant oil slick” that will make the next crash even worse
- With allies like this, who needs enemies: A WWIII update
- A crackdown on cash from 1948… readers write on Apple vs. the FBI… credit where it’s due… and more!
What if the biggest financial innovation of the 21st century proved to be the third and final blow to the baby boomers’ retirement — the coup de grace after the dot-com crash and the Panic of 2008?
Sorry to clobber you right out of the gate today with such a bold proposition. But this is something that’s been building for nearly six months… and only now is the scope of the threat becoming too obvious to ignore.
To be clear: We’re not talking about some exotic instrument you’ve never heard of… or a new type of derivatives contract traded only among high-finance types. We’re talking about something that might well sit in one or more of your investment accounts right now.
Our story begins the morning of Monday, Aug. 24, 2015. It was like many days in recent months, with traders freaking out over China and Federal Reserve policy. But on this day, the Dow industrials collapsed nearly 1,100 points in the first five minutes of trading.
In the scheme of things, it was no big deal. At its nadir that day, the Dow stood at 15,370. At no time since has the index traded that low.
The S&P 500, meanwhile, tumbled 5.3% that morning. But look what happened to the iShares Core S&P 500 ETF (IVV). This ETF, which hypothetically tracks the S&P 500, crashed 26% that morning… as seen on this one-year chart that includes the intraday action…
In theory, this isn’t supposed to happen. Exchange-traded funds are supposed to trade in lock step with their underlying indexes, with little if any tracking error.
But in practice, these flash crashes happened last Aug. 24 to ETFs from all the major ETF names — iShares, SPDR, Vanguard, PowerShares. Trading was halted on 85 exchange-traded products before the markets righted themselves.
The elite financial media shrugged off this event as a freak occurrence, an anomaly… even as it assured us that Wall Street’s best and brightest were hard at work to make sure it never happened again. Heh…
Looking at the chart above — and there are dozens of others like it — you could be forgiven for wondering whether something deeper is wrong. But what would it be? And is it possible that one day these ETFs tank again… and that time they don’t come back?
Only in the last six weeks has a credible explanation emerged for what happened last Aug. 24.
And the man who’s come forward with that credible explanation says yes — not only is it possible these ETFs will sink and not recover, it’s inevitable.
“ETFs are a creature of bubble finance that would hardly exist, if at all, in an honest free market,” says David Stockman.
David, you might recall, is the veteran of both Washington and Wall Street who’s calling BS on the “bubble finance” distortions wrought by politicians, central bankers and financiers these last 20 years.
ETFs are among those distortions… first coming on the scene in 1993 and taking off in earnest when Vanguard entered the fray in 2001. Today, ETFs own some $3 trillion in assets.
“Real long-term investors buy individual stocks after careful investigation and due diligence,” David explains.
In contrast, ETFs “are just a vehicle for momentum-based speculation. The punters and robo-machines that move in and out of them (often in lightning-fast trades) have no clue whatsoever as to the fundamentals of the underlying companies. They also have no idea whether or not the valuation metrics implicit in the ETF as a whole are even remotely justifiable or even sensible.”
So while millions of retail investors hold ETFs for the long term — maybe you? — they’re dwarfed by day traders and computer algorithms looking for a fast buck.
And that sets the stage for events like last Aug. 24 — when the ETFs veer far away from their underlying indexes.
“The underlying basket of stocks is frequently far less liquid than the ETF itself,” David goes on.
“Since the latter can be sold at any moment the market is open, a sharp stock market plunge can force the ETF’s market maker to dump the underlying stocks. They do so at deep discounts in order to generate cash to redeem ETF shares for which there are no bids.
“This is especially true because in a falling market, the robo-machines trade out of ETFs even faster than individual stocks. This dynamic, in turn, has the potential to generate a doomsday loop in which ETF selling begets more selling as market makers frantically attempt to meet redemptions.”
“When the stock market breaks for the third time this century, the ETFs will function as a giant oil slick,” David concludes.
“They will accelerate the market’s decline because the momentum traders who own them will hit the sell button first and not even worry about questions later.”
As you might be aware, David has recently come out of retirement to partner with Agora Financial — developing a one-of-a-kind investment strategy to seize on the end of the “bubble finance” era.
To date, the results have been spectacular — four closed positions good for an average gain of 88% in an average holding time of 67 days. The average open position is up 55% in 40 days.
Already in 2016, David recommended a play based on the looming trouble he sees in ETFs. It was good for a 58% gain in only two weeks.
But there will be more opportunities where that came from. To help you get ready, David is hosting a live online workshop next week. He’ll tell you much more about the inevitable implosion in ETFs… and how you can transform this implosion into 300% gains over the next 14 months.
We’ve scheduled this event next Wednesday, Feb. 24, at 7:00 p.m. EST. It won’t cost you a thing to look in. Just RSVP us at this link with your email and we’ll make sure to save you a spot.
The first three-day winning streak in the U.S. stock market this year is in danger of being snapped.
At last check, all the major indexes are in the red, the Dow the most resilient of the bunch — down a quarter percent, still holding the line on 16,400.
Hot money is streaming into both Treasuries and gold. The yield on a 10-year Treasury rests near 1.77%. Gold is smartly holding the line on the $1,200 level, up $10 at last check, to $1,218.
Crude is holding its own at $30.86 despite the latest inventory report from the Energy Department — registering an increase of 2.1 million barrels over the last week.
The one economic number of note this morning the February “Philly Fed” survey, and it’s no surprise: The factory sector in the mid-Atlantic has been contracting for six straight months.
Because the media are more concerned about the presidential horse race and Kanye West, it’s up to us to let you know America’s NATO allies in Turkey are getting uncomfortably close to dragging us into World War III.
(Gee, we’re just full of good cheer today, aren’t we?)
Yesterday, a car bomb went off in Turkey’s capital, Ankara, the car pulling up alongside military buses. Twenty-eight people were killed, mostly soldiers.
Turkey’s increasingly hotheaded president Recep Tayyip Erdogan is keen to pin the blame on Kurdish separatists. But this time there’s a twist — he says the attackers were YPG militia, a group of Kurds from neighboring Syria.
As it happens, the YPG is a critical ally of Washington’s in the battle against ISIS. It’s the only effective fighting force in Syria that’s in Washington’s corner — well, the only one not tied in with hard-core jihadis.
Even before the bombing yesterday, Turkey’s government was bombarding the YPG with artillery… and talking up a ground invasion, with help from Saudi Arabia. Actually, since Saturday, Turkey’s been busy shelling Syrian government forces fighting alongside Iranian and Lebanese forces with Russian air support.
We know, this Syrian civil war thing is confusing. A guy at the Middle East Institute recently sorted out who’s opposing whom and presented it in this “simple” chart…
Anyway, with the fighting intensifying… how long might it be before the Turks shoot down another Russian jet, as they did in November? And with America sworn to defend Turkey, then what?
It’s worth recalling Jim Rickards’ words in this space soon thereafter: The risks of a new world war have grown substantially. It’s not imminent or inevitable… but “relations among major powers are more fraught, and the military capabilities of those major powers are receiving renewed attention.”
The war on cash has a history longer than you might suspect — or so a Swiss reader informs us.
“A news article in our local paper in the ‘history’ section,” he writes, “describes something I had never heard about. On Feb. 17, 1948, the French government, overnight and without warning, simply withdrew the 5,000 franc note from circulation.
“The official reason? War on the black market, force people to deposit their money in the bank, put the money back into circulation.
“Sounds familiar… Do you know of other similar occurrences?
“We’re told that unless we learn history, we’re bound to repeat the same mistakes. It seems to me that the one thing I’ve learned from history is that people don’t learn anything from history.
“Love The 5.”
The 5: Fascinating. In retrospect, we’re not surprised a postwar European government would resort to such measures to “stimulate the economy.” What’s old is new again…
“Is there not a way for Apple to open the San Bernardino shooter’s phone in total privacy for the FBI to do its investigation without the technology being exposed?” a reader inquires after the feds amped up their assault on Apple’s “business model.”
“I see no problem helping the FBI, but I don’t want this technology exposed to anyone.”
The 5: Not really. The feds are effectively ordering Apple to build a defective version of the iPhone’s operating system.
“If the order stands,” writes Greg Nojeim at the Center for Democracy & Technology, “the defective operating system (iOS) could be installed over any existing version of iOS, enabling law enforcement officials to guess the password on a cellphone. If the order stands, Apple and other technology companies could be ordered to build backdoors — essentially defects — into other devices, rendering them insecure and vulnerable to attack by law enforcement and by others as well.”
“Rather amusing to watch the feds, after a couple decades of getting pretty much unlimited budgets, the highest in high-tech, and the freedom to squash our freedom, all in the name of fighting ghosts, now tossing tantrums over their inability to crack the code of the dastardly iPhone,” writes another.
“One would think that with the trillions that they have commandeered via scare tactics, and with all of their top-secret gadgets, doohickeys, thingamajigs and related gizmos, they would not be brought to a standstill by a hand-held computer. Score another win for the free-market private sector over the blowhards in government.
“As always, thanks for The 5!”
“This situation is being completely misread by ‘the mainstream press’ and has little to do with successfully expanding the San Bernardino investigation,” writes still another reader with an intriguing take.
“This is about government hoping to cow industry. Such code does not presently exist. This is about to become a constitutional issue. The 13th Amendment abolished slavery and involuntary servitude, so even a corporate person such as Apple Inc. can’t be forced to do some piece of work for the government ‘just because.’
“The legally proper approach would be for the Department of Justice to invoke some Patriot Act hokum and demand source code and then ask the highly paid NSA coders to write the software themselves.”
The 5: Which still doesn’t solve the core problem. Even former NSA and CIA director Michael Hayden — who supervised mass surveillance under Bush 43 — says Apple is in the right. “America is simply more secure with unbreakable end-to-end encryption,” he tells The Wall Street Journal.
By the way, after we went to virtual press yesterday, Google CEO Sundar Pichai spoke up in support of Apple. “We build secure products to keep your information safe,” he tweeted, “and we give law enforcement access to data based on valid legal orders. But that’s wholly different than requiring companies to enable hacking of customer devices & data. Could be a troubling precedent.”
“About your claim Jim Rickards was ‘all alone’ in late 2014 when he said the Fed wouldn’t raise rates in 2015,” says our final correspondent: “I think Chuck Butler from EverBank Global Markets was taking that position about the same time in his daily newsletter and stuck with it right up until it was clearly happening in December.”
The 5: Ah, the hazards of using sweeping language like “all alone.”
We’ve been proud to count Chuck as a friend of The 5 from the beginning. We’re well aware of his position, and we cited it more than once last year. It’s on your editor for not giving him his due yesterday!
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Kevin C. used to work at a gas station in Georgia… cleaning bugs off windshields and pumping gas. Today, he’s a retired millionaire.
No, he didn’t win the lottery.
Click here to see how he did it. (Hint: He used a hand-held calculator.)
