The Biggest Lie in Modern Finance

A new best friend for many Americans... The tragic tale of an inexperienced investor... A warning about the 'bananas' markets... The biggest lie in modern finance... A financial tulpa and an 'Ice Age endgame'...

Editor's note: Before we get to today's Digest from Dan Ferris, we wanted to take a moment to celebrate some big news that doesn't come around very often...

You see, earlier today, Stansberry Venture Technology editor Dave Lashmet booked a 10-BAGGER for his subscribers in part of a position with one of his biotech recommendations.

A year ago yesterday, Dave recommended that his subscribers buy shares of a $240 million biotech based on its groundbreaking work with vaccines. And thanks to this company's ongoing efforts to develop a COVID-19 vaccine, its stock has soared so far this year.

In January, Dave told Venture Technology subscribers to close half of their original stakes when shares first doubled. And today, with folks who followed his advice sitting on 1,000% gains in the remaining half-position, he said to book more profits by selling another half.

Best of all, with the company now valued at nearly $5 billion, Dave's Venture Technology subscribers are still playing with "house money" for any potential future upside. (If you're a Venture Technology subscriber, be sure to check your inbox for the full update from Dave.)

This is by far the biggest winner in our company's 20-year history. So congrats to Dave and all of his loyal subscribers who profited – and continue to profit – from this investment idea.

Now, let's turn things over to Dan...

Stuck inside and armed with 'free money,' many Americans met a new best friend this year...

The stock market.

The U.S. government started dishing out $1,200 checks to everyone in April. It intended to help millions of folks keep up with their bills as COVID-19 and related lockdowns shuttered the economy. And it wanted to buy its way out of a prolonged recession from the get-go.

But as it turns out, many people cashed their $1,200 checks... turned on the computers in their basements... opened up trading accounts... and started speculating with stocks.

According to data-aggregation firm Envestnet Yodlee, securities trading ranked as the second- or third-most-common use for stimulus funds in almost every income bracket. The data showed that Americans who earn between $35,000 and $75,000 per year increased their stock trading by roughly 90% over the week before they received their checks.

And many of these folks were introduced to stocks for the first time... Investment firm Fidelity had a record 1.2 million new accounts in the first few months of 2020. Millennial-focused trading app Robinhood reported 3 million new accounts during the first quarter.

The influx of inexperienced investors – and more importantly, their money – is undoubtedly fueling the stock market's bounce-back from its March lows. The benchmark S&P 500 Index has pulled back a bit recently, but it remains within about 10% of an all-time high.

Of course, the lack of experience often catches up with many investors... costing them a big chunk of their net worth. And like one recent case, it can sometimes end tragically...

Like millions of others, Alexander Kearns turned to Robinhood to pass the time during the pandemic...

Kearns, a 20-year-old student at the University of Nebraska, stayed at his parents' house in Naperville, Illinois, during the lockdowns. According to People magazine, he "had recently expressed a keen interest in markets and the economy."

So he started using Robinhood. And by all accounts, Kearns' trading crash course was going smoothly until two weeks ago. That's when things took a sudden turn for the worst...

You see, despite not having any investing experience before this year, Kearns traded complex options instruments on Robinhood. And eventually, the app's interface led him to believe that he was more than $730,000 in the hole...

So on June 12, thinking his future was ruined over the money that he allegedly owed to Robinhood, Kearns threw himself in front of an oncoming train.

Kearns' cousin, Bill Brewster, posted his suicide note on Twitter... It clearly indicates the young man was distraught and confused over the substantial deficit showing in his Robinhood account. But even worse, it appears that Kearns didn't actually owe the money... Apparently, it's just how Robinhood displays the financial figures as the trades play out.

In his suicide note, Kearns admitted that he had "no clue" what he was doing and didn't understand how Robinhood could give "almost a million dollar's [sic] worth of leverage" to "a 20 year old with no income." He signed off, "F--- Robinhood."

As unfortunate and tragic as Kearns' death is, it can serve as a warning for the rest of us...

You can suffer real, often life-altering, and occasionally life-threatening consequences for believing it's easy to make big, fast money by taking major risks in the markets. Brewster, who is also a research analyst at Sullimar Capital, said it well in his Twitter thread about Kearns...

But here's the truth. AND PLEASE PAY ATTENTION TO THIS IF YOU'RE YOUNG.

The markets are bananas right now. It's not the time for amateurs. Really really pay attention to position sizing. Stay away from exotic instruments like options and futures.

In reality, it's extremely hard to make big, fast money in options and futures. As we've said time and again, investors will generally make larger, more consistent returns by taking less risk... and by focusing on the shares of stable businesses with good long-term outlooks.

On this week's episode of the Stansberry Investor Hour podcast, I (Dan Ferris) interviewed author and investor Rupal Bhansali, who worked for billionaire speculator George Soros early in her career. I asked Bhansali what it was like to work for him. As she explained...

The most important lesson I learned from Soros and the hedge-fund world... It is that in order to enhance returns, you actually must reduce risk. That is a paradox of investing that few people realize.

Amen.

Bhansali's very readable, insightful book, Non-Consensus Investing, includes a chapter called "Do No Harm." Back in April, I wrote an entire Digest about the idea of avoiding bad consequences in markets and in life. It's also known as the idea of "via negativa."

Of course, the failure to heed Bhansali's insight is rarely fatal, like in Kearns' case... though it always carries the potential to be catastrophically detrimental to your net worth.

And perhaps in our small way, we can honor Kearns' premature departure from this world. Perhaps we can learn to recognize and understand the underlying conditions currently leading investors to throw all caution to the wind and believe it's easy to make big, fast money by taking major risks in the market.

We'll skip the condition represented by commission-free trading of fractional shares pioneered by Robinhood and similar investing apps. That certainly lubricates the axles of speculation for inexperienced investors, but it doesn't really fill the tank with nitro.

For that, we turn to the insidious, deep-seated belief in the 'Fed Put'...

For those of you who don't know, the "Fed Put" is the idea that, as a recent Forbes article put it, "Central banks, led by the Fed, have [investors'] backs."

In March, as markets tumbled, Federal Reserve Chairman Jerome Powell confirmed that belief when he said, "We are really going to use our tools to do what we need to do here."

The Fed Put is perhaps the biggest lie in modern finance...

Peter Atwater, an economics professor at the College of William & Mary, addressed this topic in a recent LinkedIn piece. He suggested that the big lie of the Fed Put may soon be revealed for what it is, and in the meantime, it has created a situation that smacks of house-flipping circa 2005 – not long before the bubble burst in that sector...

Much like house-flipping called the top of the housing market, I think today's call-buying craze is calling an extreme peak in not just financial markets, but in the perceived omnipotence of the Federal Reserve and other central banks.

Atwater included a chart from SentimenTrader.com that you don't even need to see once you read the title: "Small options traders are twice as aggressive as the February peak."

As we said earlier, Alexander Kearns traded options on Robinhood...

But based on the description of his inexperience, I bet Kearns didn't know anything about the Fed. In fact, I bet most Robinhood traders don't know anything about the Fed or its big lie. But that doesn't stop them from behaving like its most faithful disciples...

Kearns' peers have gone ape. BCA Research recently reported the number of Robinhood accounts holding six big airline stocks is up 48-fold since the February 19 market top. And accounts owning three mortgage real estate investment trusts ("REITs") are up 93-fold in that span.

The mortgage REIT bet is a typical insane Robinhood gamble... BCA Research said all three companies – Invesco Mortgage Capital, MFA Financial, and AG Mortgage Investment Trust – "failed to meet margin calls from their repo lenders and have either suspended or cut dividends."

Mortgage REITs borrow for the short term at low rates via the "repo" market (Google it if you want to know more) and buy long-term mortgages. The model is thought to be relatively safe because of the inherent security of the 15- and 30-year mortgages.

But... haven't we seen this movie before? Doesn't it end badly? Any business that can get wrecked by a margin call can't possibly be safe by any reasonable measure... can it?

In the short term, Robinhood and other Fed-induced bulls might levitate the market as their own financial tulpa...

A tulpa is a (usually supernatural) entity conjured into existence merely by believing in it.

Perhaps if the Fed Put believers believe hard enough, the market will rise and stay higher than you'd ever expect... for longer than you'd ever imagine...

You know, like in the 1990s, when stocks rose 20% annually for four years in a row from 1995 through 1998 (falling short of 20% in 1999 by less than 0.5%).

Or maybe... like the past 10 years.

Our colleague and Stansberry NewsWire editor C. Scott Garliss wrote in this morning's free DailyWealth e-letter that net short positions among noncommercial (small) traders in futures contracts for the S&P 500 and Nasdaq Composite Index recently hit their highest levels since 2011. And the Dow Jones Industrial Average futures short position among noncommercial traders also hit a new all-time high.

If stocks move just a few percentage points higher, that massive short position could start to get too painful for those traders. These speculators could turn around and head for the exits... And as they buy to cover their short positions, it could attract momentum players, Robinhood traders, whoever... pushing stocks even higher than their current levels.

But longer term, how will all this intervention from the Fed and other central banks play out?

History suggests the answer is "not great."

On last week's episode of the Stansberry Investor Hour, I pointed out how the Bank of Japan's aggressive market interventions didn't work so well.

And in 2012, then-European Central Bank ("ECB") President Mario Draghi preached that he would do "whatever it takes" to stimulate the European economy. Aggressive ECB policy helped push many European nations' sovereign bonds to negative yields – prices higher than principal plus all future interest payments – guaranteeing a loss if held to maturity.

Japan's stock market has done well over the past decade, but it still hasn't returned to its 1990 peak. European markets have gone up a little, but have mostly moved sideways.

So much for central banks having investors' backs.

Rather than believing the Fed can simply print the best of all possible financial outcomes (rapid riches) into existence, a financial Candide might want to think ahead to the central banks' ultimate endgame...

Societe Generale economist Albert Edwards – a well-known 'perma-bear' – has contemplated exactly that...

Edwards said the experience of Japan and Europe suggests the central banks' massive interventions of today (and tomorrow and the next day) will lead to massive deflation.

But the central banks' "Ice Age endgame" is not to sit by and watch asset prices fall. The Ice Age of central bank-induced deflation will lead to what Edwards sees as the point of quantitative easing ("QE") in the first place – to drive down the value of the currency, which he views as "the only effective transmission mechanism for QE to stimulate an economy."

In other words, when it's proven beyond a shadow of a doubt that central bank QE is outright deflationary over the long term, central banks and governments will "cooperate." That's a Bank of Japan euphemism for monetizing government debts, otherwise known as massive government fiscal stimulus, financed by central-bank money printing.

With the passing of the CARES Act in March, debt monetization is irrefutably well underway in the U.S...

The $2 trillion fiscal stimulus bill passed on March 25 was the largest fiscal stimulus bill ever passed in U.S. history.

As a result, the Fed's balance sheet is larger than ever... Its total assets now stand at more than $7 trillion, having grown eightfold since August 2007 and nearly doubling since September 2019. Take a look...

When the balance sheet grows endlessly and never shrinks, that's debt monetization. That's the Ice Age endgame that Edwards foresees. That's outright money printing.

What's bad for the value of the currency is bad for businesses and individuals who use it...

Given the U.S. dollar is the world's reserve currency, the implications are earthshaking.

Imagine a whole new global monetary regime within, say, a decade... and lots of brutal volatility in stock and bond markets along the way.

I won't get into any more detail than that today. We still have some time, and I suspect I'll revisit this topic more than once in the coming months and years.

For now, just know that debasing the currency is really bad. And as it happens over the next several years, it means you need to be at the top of your game as an investor.

So what should you do if you want to sleep well after hearing about all manner of calamity... from an inexperienced young man's tragic death over options trading to the Federal Reserve behaving like a crazed counterfeiter from an old gangster movie?

My advice hasn't changed for how you can prepare today...

Buy some gold... preferably the kind that clanks.

A little bitcoin wouldn't hurt, either. It's unlikely to ever be printed with wild abandon like central banks' fiat money. And fortunately, the upside potential for bitcoin is so huge that a few hundred bucks' worth (or a few thousand for the big shooters) is all you need.

Buy both today and forget you own them. As I've said time and again in recent months, I suspect they'll take very good care of that portion of your net worth.

And if you want the perfect stock to take advantage of a long-term bull market in gold, I've recommended it to my Extreme Value subscribers for the past two and a half years.

But feedback from Digest readers suggests Extreme Value sales pitches are a total waste of your time and my energy. I know diddly-squat about what makes folks want to buy stuff... let alone a value-investing service that normally costs $1,500 per year.

And if they finally let me have my way around here, you won't be allowed to get a refund once you commit to a subscription. (Hey, if it's too hard to get people to buy it, maybe I can get a sense of accomplishment by scaring folks away from it!)

So this week, instead of a final sales pitch asking you to buy Extreme Value, I'll just remind you to buy gold and bitcoin... worship God instead of the Federal Reserve... and don't let your kids use Robinhood without strict supervision, if at all.

New 52-week highs (as of 6/25/20): BlackLine (BL), Sprott Physical Gold and Silver Trust (CEF), Crispr Therapeutics (CRSP), DocuSign (DOC), Lonza (LZAGY), Match Group (MTCH), Sprott Physical Gold Trust (PHYS), ResMed (RMD), Sprott (SII.TO), and Spotify Technology (SPOT).

In today's mailbag, feedback and discussion on Kim Iskyan's Thursday Digest about rising food prices. Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.

"Oh yes food prices in our jurisdiction are rising and soon to be exploding. Local berries at the market (raspberries, tayberries, strawberries) are up to mid 50 dollar range per flat. Normally around $30 a flat.

"Meat is higher, all produce is higher (and lower quality), and some staples are in low supply (rice, pasta, frequently flour, dairy products, and condiments (catsup, mustard, pickles, etc.). Such is life." – Paid-up subscriber Steven A.

"Check the prices being paid by the packers vs. a year ago.

"A year ago I was paying $0.99 a lb for 70% lean ground beef vs. paying $5.98 a lb. 4 weeks ago. Do see it on sale @ $2.49 per lb. this week. New York strip steaks $12.99 lb vs. $5.99 lb. Beef roasts $4.99 lb vs. $2.99 lb 4 months ago. Chicken leg quarter $0.59 a lb. vs. $0.39. Pork back ribs $3.49 vs. $2.49 Bnls. pork loin $1.99 vs $1.29. Could go on and on.

"I could also point out examples in the produce department. Someone is making extra profit. Last but not least when you talk about inflation I was a manager of the meat department in a grocery store in the '60s and remember selling ground beef for $0.33 a lb., whole chickens @ $0.15 a lb, Comparable beef roasts @ $0.39 a lb.

"Of course I also remember seeing the check my dad made for the dinner he, my mother, best man and bridesmaid, had in 1938, which was for $1.87. Anyone wonder why you need to have investments in precious metals and stocks?" – Paid-up subscriber Denny B.

"Most areas have seen an increase recently in companies which grow foods indoors and even in cities, often for restaurants and other commercial customers, often specialty foods not commonly grown by farmers.

"I know there are several such operations locally, sometimes on farms, but often within the city. Look for some of these companies to begin expanding operations and catering to the needs of supermarkets and their customers with need for generally popular produce even out of season when farmers can't provide supplies.

"When food prices inflate, as you predict and I agree, you might want to look into some of these companies, especially those which might become regional or national operations, and perhaps recommend them to your subscribers." – Paid-up subscriber Chuck B.

"I will have to disagree with you on this thesis about the fracturing of the global economy leading to food price increases. This simply is not true. In fact, it is the opposite. Once the global food-supply chain fractures because of tariffs and nationalism, food prices will actually go down.

"Ask yourself: why do multinational corporations invest billions of dollars developing global supply chains? Do they do so because a) they want to pass the savings on to you or b) they want to maximize their profits? Clearly B. Since 'lowering prices' is not conducive to maximizing profits, it is not at all clear that the global supply chain is saving anyone any money.

"In fact, it is more clear that the point of controlling the global supply chain is to make sure that goods and services flow to countries in precisely the amounts that result in prices never falling. Corporate global supply chains exist to make sure that there is never a mad rush to the market with the highest prices, that will eventually cause the price to collapse.

"Such control of the global supply chain calibrates the quantity sold to markets such as not to crash the price. If oranges sell in the US at $3.00 a bag and this is the highest price in the world, the global supply chain will only sell enough oranges such as to not alter that price. This is why, despite all of the promises of the globalism, nothing is actually cheaper and there is no savings. In fact, prices, though volatile, are always moving up.

"Look, I know this because it's what I would do. I would always try to establish and enforce monopolies where I could. With globalism, monopoly is even easier to do because governments vary in how they police monopolists. We have unwittingly backed a new East India Company." – Paid-up subscriber O.P.

Good investing,

Dan Ferris
Vancouver, Washington
June 26, 2020