Steps to the Moon

RANCHO SANTANA, Nicaragua – Stocks sold off on Friday. The Dow fell 211 points. Leading the retreat were tech stocks with the Nasdaq, where they tend to hang their hats, down more than 3%.

“Tech sector leads sharp sell-off,” said a Wall Street Journal headline.

 

1-Nasdaq CompositeNasdaq Composite, weekly – the ride has become bumpy – click to enlarge.

 

“Did you see what happened to professional social network company LinkedIn?” asked Exponential Tech Investor editor Jeff Brown, who was down here with us at Rancho Santana.

 

passive-aggressiveOutwardly calm Linked-In shareholder last Friday.

 

“It was a disaster. The company announced earnings, which were pretty much in line with what the market expected. But its forward guidance was down a little.

“Investors dropped it like a hot potato. The stock dropped by almost 50% – and investors lost about $11 billion – in 20 minutes of trading.”

 

2-LNKDLinked-In (LNKD), weekly since its IPO – a social media company selling the opportunity to make and maintain professional connections – click to enlarge.

 

Jeff is a believer in new technology: self-driving cars. Virtual reality goggles. Artificial intelligence.

“Computers are already smarter than PhDs,” he reported.

“In what discipline?” we wanted to know. “There are Cocker Spaniels that are smarter than PhDs in economics.”

“There is a huge difference between a regular company and a company that is on the cutting edge,” he went on.

“The difference is exponential. A regular company may grow 5% to 10% per year. A good tech company grows exponentially, at 100% a year or more. Just imagine that you are walking. You get somewhere by putting one foot in front of the other. If you are like a regular company, you grow… one step at a time.

“At a step a day, you’ve gone 30 paces in a month. But if you are able to walk exponentially – one step, then two steps, then four steps… in a month – you could have covered the distance from here to the moon.”

Many tech investments don’t go anywhere, Jeff admitted. But when you get it right, you get a moonshot. That may be true. But it is also true that from time to time, investors feel they have gone too far. That seems to be the case now… with a broad sell-off in the entire tech sector.

 

0527-linkedin-HQ-760x400Linked-In headquarters in Mountain View, Ca.

Photo credit: Shutterstock

 

Look Where No One Is Looking

There are “facts and dreams,” said Churchill. Many of those dreamy, techy satellites… launched into space in the Bubble Epoch… are beginning to fall to Earth. Look out below!

Also present here in Nicaragua is our old friend and super stock picker Chris Mayer. The occasion was the Family Wealth Forum, a meeting for our premium family wealth advisory, Bonner & Partners Family Office, in which we discuss both sides of the “family money” formula.

“There are two things you need in order to have family money,” we say gravely, “family and money.” Several people spoke to all the things that could go wrong in a family. Chris was speaking to what could go wrong with the money.

“Right now, hundreds of billions of dollars are being invested in the stock market by investors who don’t know anything about the companies they own. They buy exchange-traded funds [ETFs] – passively managed groups of stocks – that typically track the performance of a stock market index. These ETFs distort the market.

“Some well-known stocks are so heavily bought by ETFs that their prices are completely out of line with the real value of the company. And the ETFs are set up in such a way that there is no judgment at all involved. They are bought automatically, almost regardless of what is actually going on in the companies themselves.”

Chris believes that the opportunities for serious investors are increasing simply because there are so many non-serious investors in the market. ETFs favor the big companies in the big indexes, such as the S&P 500. That leaves the lesser known companies often unstudied and unbought.

 

3-SPY and QQQTwo of the largest stock market ETFs: SPY (S&P 500) and QQQ (Nasdaq 100). Mindless buying? You bet. It has long been known that passive investment vehicles mimicking cap-weighted indexes are artificially skewing capitalization levels with their trading activity, which involves no judgment whatsoever. It is literally “mindless” – and mindless buying can easily turn into mindless selling – click to enlarge.

 

“Even though stock prices are generally high,” said Chris, “there are many stocks that are actually cheap. You just have to look where the ETFs are not buying.”

 

Not Your Grandfather’s Investor

This was the second time in the last few days we had been alerted about the effect of ETFs. nEarlier in the week, my colleague David Stockman warned that a market sell-off would trigger a rout in ETFs… which would collapse the value of many overbought stocks… and potentially wipe out the leading market makers in the ETF sector – Vanguard, State Street, and Blackrock.

“Yes, ETFs add a new danger,” said Chris.

“The ETF buyer is not your grandfather’s stock market investor. He was drawn into the market by greed. He’ll be driven out by fear. And when he exits, the ETFs will be forced to sell stocks at any price.

“We could see some of the steepest crashes in history.”

How to protect yourself? On high alert, we hereby take the “passively managed” fund concept to a whole new level. We propose a new category of investment – a “passive aggressive” fund. It won’t do anything with your money. Just sit on it and sulk. And maybe “forget” to take out the trash.

 

ravenLogo of the upcoming passive-aggressive Raven fund – guaranteed to sit on your money and sulk, and won’t take out the trash.

Cartoon by Jim Benton

 

Charts by: StockCharts

 

Chart and image captions by PT

 

The above article originally appeared as “These Popular Investment Vehicles Could Crash Hard” at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Regime Change: The Effect of Trump's Victory on Stock Prices
      A Soaring Market On January 20 2017 Donald Trump will be sworn in as the new president of the United States. On the stock market his victory has triggered a lot of advance cheer already: the Dow Jones Industrial Average rose by a sizable 7.80 percent between the election and the turn of the year.   Two big winners: the DJIA and Donald Trump - click to enlarge.   Many investors are now wondering what effect the change in government will have on stock prices in the new...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com