Try to Measure the Future... And It Will Only Measure You

Revisiting the 'Top 10 Potential Surprises of 2021'... What happened? And what does it all mean?... An obvious takeaway from this list... Will bitcoin end up 'falling about in half' again?... A classic lesson in 'via negativa'... Try to measure the future – and it will only measure you...

Sometimes, I (Dan Ferris) can't help myself when it comes to waxing philosophical...

It happened a week ago in the December 7 Digest, for example.

We'll chalk it up to the natural tendency to look backward and forward in time as another year comes to an end.

With that in mind, we're doing it again today... In this Digest, we'll mostly look backward at what happened over the past year.

And then, in my final Digest before Christmas next week, we'll look forward to 2022... We'll think about what would most surprise investors based on current market conditions.

I freely indulge these speculations because investors must master the ability to look in both directions... In order to find long-term success, they must assess the meaning of past events and speculate upon the likelihood that those events will or won't repeat in the future.

That's why I started this year with a critical exercise...

On January 7, during episode No. 188 of the Stansberry Investor Hour podcast, I revealed my "Top 10 Potential Surprises for 2021" to listeners. (We also touched on a couple of these potential surprises here in the Digest on January 15 and January 22.)

It's important to distinguish that I did not make 10 predictions... You know I don't do predictions. I simply intended to make a list of market events that would surprise investors, based on the prevailing conditions at that time.

Here's the full list...

1. The benchmark S&P 500 Index drops more than 20% in a single trading session.
2. The S&P 500 hits a new all-time high and breaches the March 2020 low (2,237.40).
3. 2020 vs. 2021: The economy recovers... and stocks correct sharply.
4. Tesla (TSLA) falls more than 50% and gets kicked out of the S&P 500.
5. Bitcoin "falling about in half."
6. The Volatility Index ("VIX") hits a new all-time high.
7. Bonds stop protecting investors from losses in stocks – and do lousy in general.
8. The 10-year U.S. Treasury note either yields 0% or less... or 5% or more.
9. The "FAANG" stocks rise 30%... then erase all their gains from 2020 and 2021.
10. COVID-19 lockdowns continue until September or longer.

Besides the couple of examples in January, I've mostly avoided discussing these potential surprises throughout the year... However, in the November 30 Digest, I did reiterate Potential Surprise No. 1 in some detail.

Other than that, the most obvious thing about this list of potential surprises for 2021 is that...

Only two of the 10 surprises actually happened this year.

In Potential Surprise No. 7, I said investors would be surprised if bonds stopped protecting them from losses in stocks.

For the past few decades, bonds have offered excellent diversification for investors... They've performed well when stocks have performed poorly.

So that's why, back in January, I said I believed it would surprise investors if bonds fell in value during a time when the S&P 500 also dropped.

Of course, we're in a raging bull market... So there aren't many instances of stocks falling over the past year. That means we don't have much data to work with. We'll have to settle for slim pickings...

The S&P 500's biggest correction so far this year happened in the fall. It declined roughly 5% from its September 2 close of 4,536.95 to its October 4 close of 4,300.47.

Based on the common thinking, bond prices should've gone up as stocks fell – pushing bond yields lower. (Remember, bond prices and yields travel in opposite directions.)

But that didn't happen... During that period, the yield on the benchmark 10-year U.S. Treasury note rose from about 0.9% to around 1.4%. That means its price fell.

Overall, the 10-year Treasury yield is set to finish 2021 higher than it started. And the iShares 20+ Year Treasury Bond Fund (TLT) is trading roughly 4% below its level at the close of trading on December 31, 2020.

TLT started the year by falling straight down for most of the first three months before bottoming on March 18. It closed that day about 15% below its December 31, 2020 close. So while it has recovered somewhat since then, it's still down for the year at this point.

In other words, bond prices across the board are on track to drop in 2021.

Maybe you're thinking, "Hey Dan, bond prices did the opposite of stocks. That's what they're supposed to do, right?"

No... They're supposed to maintain their value when stocks are rising, and either stay the same or go up when stocks are falling. This year, bonds fell in value... That 15% drop in TLT over the first few months of 2021 isn't part of the usual program.

To truly offer equity investors adequate diversification, bond prices need to go up (yields need to fall) when equity prices fall... And they need to remain steady the rest of the time.

Neither of those things happened in 2021.

So what should we expect from here?

I won't predict where bond yields or the Consumer Price Index ("CPI") will go from here. I'll only note that bonds and inflation don't mix... So if inflation stays where it is or goes higher, it's reasonable to expect higher interest rates.

Come to think of it... inflation doesn't mix well with investing, period.

It's lousy for stocks and bonds... It's lousy for wage earners trying to save money and prepare for the future... And it's lousy for companies that need to stick to budgets to remain profitable.

The more inflation rises, the more you should expect stocks and bonds to suffer. And the more difficult it will be for investors to achieve adequate returns.

When I delivered Potential Surprise No. 5 on the Investor Hour podcast, I said a few things about bitcoin...

Specifically, I said...

What the heck would surprise us, here? Well, it would probably surprise a lot of people if it didn't keep going straight up like a rocket ship. So if it went sideways or down a whole bunch, that would surprise a lot of people.

[Bitcoin is] at around $35,000 as I speak to you. And I think anything under about $17,000 or $18,000 would really surprise a lot of people...

The big surprise for everybody in bitcoin is [it] falling a bunch, right? Falling about in half.

With the way bitcoin had been rising from late 2020 into the first week of this year, I also noted that some folks would be surprised if it didn't soar to as high as $200,000 in 2021.

Though bitcoin mostly continued higher for the first few months of this year, it fell more than 50% from its mid-April high of about $63,000 to its mid-July low of around $30,000.

With that, Potential Surprise No. 5 technically came true.

Still, the move wasn't enough to scare investors away... The world's leading cryptocurrency went on to hit a brand-new high of $69,000 last month. Now, it's back down to around $48,500 as we go to press... That's a decline of about 30% from its peak.

Will bitcoin's latest decline end with it 'falling about in half' again?

I heard a potentially troubling statistic recently... A survey of 1,000 people from cryptocurrency firm Grayscale showed that 55% of all bitcoin holders just entered the market this year.

Now, you might not believe 1,000 people is enough to generalize the overall market... But if the data are representative of the total population of bitcoin holders, it's a typical sign of speculative excess. All the newbies always get in at the top.

Of course, none of this guarantees that we're in for another crash. However, there's absolutely zero reason to expect bitcoin not to remain very volatile for many years.

That's mostly because nobody really knows what it's worth. As a result, there's no way to establish an intrinsic value for it... Its value is determined solely by supply and demand.

Bitcoin's supply is tightly limited, of course. Based on how it was designed, the amount of bitcoin will never exceed 21 million.

Demand is determined by how much it's used today, as well as how much faith the bitcoin loyalists have that it will hold its value and become even more widely used tomorrow.

Bitcoin is being used more and more as countries, banks, and individuals experiment with it... They're trying to figure out if it's good for them.

Personally, my view on bitcoin hasn't changed...

I'm still bullish over the long term. That's why I'm still holding on and telling Extreme Value subscribers to do the same.

It's such a potentially massive innovation in banking and payments – totally eliminating armies of middlemen – that you can't afford not to have at least a small amount in it... Even a few hundred dollars could become a substantial amount of money one day.

Only time will tell. Waiting for that time is the only strategy I can come up with today.

Potential Surprise No. 9 about the 'FAANG' stocks didn't come true, but it's worth mentioning today...

That's because a few of those stocks have underperformed the broad market in 2021.

In January, I said it would surprise investors if the FAANG stocks rose 30% then wiped out all their 2020 and 2021 gains by the end of the year. That didn't happen, but...

Amazon (AMZN), Facebook owner Meta Platforms (FB), and Netflix (NFLX) underperformed the S&P 500 this year. Amazon is the straggler in the group... It's only up around 4% in 2021. Netflix is up roughly 11%, while Meta Platforms has gained about 22%.

In comparison, as of today's close, the S&P 500 is up around 23% in 2021.

"OK, Dan, what's the point of all this?"

Good question. I'm glad you asked...

The most important lesson from my list is – naturally – that the No. 1 surprise of 2021 did not appear on it...

I'm talking about rising inflation, of course.

The year-over-year change in the monthly Consumer Price Index from the U.S. Bureau of Labor Statistics started 2020 at 1.4%... And it recently logged a 39-year high of 6.8%.

If the one-year chart of the CPI were a stock price, every technical analyst would rate it a "strong buy" and every Reddit user on the planet would be screeching from the top of their lungs about "HODLing" it forever. Take a look...

I doubt it will surprise anyone if the chart continues up and to the right for another year.

We could say the same thing about the Bureau of Labor Statistics' Producer Price Index... It rose 9.6% in November. That's the largest increase since records began in 2010.

In my mind, the 'surprise' of rising inflation is a classic lesson in 'via negativa'...

That's the Latin phrase popularized over the past several years by author and trader Nassim Taleb.

In this case, I'm inviting you to focus on what was not said.

When confronted with a list like I published, the first thing you should do is think about what isn't on it. Publishing the list still provides value for the via negativa thinker... It gives you a reference point to look away from.

It's similar with any bullish or bearish pitch you hear for any investment...

First, ask what was not said. That could wind up being more important to you than anything that was said – just like with my list and rising inflation. This threat to your money turned out to be far more important in 2021 than anything I mentioned as a possibility.

We can take something else away from my list, based on another idea from Taleb – 'Wittgenstein's ruler'...

We discussed this idea in depth in the August 6 Digest. It can be summed up as, "Sometimes a ruler is measuring a table, and sometimes a table is measuring a ruler."

The question to ask is, "What's really being measured?"

My list was full of speculations about the short-term future of market prices and related topics. It was an attempt to measure the future by suggesting that I knew the likelihood of the events listed.

But remember... nobody knows the future.

That includes the probability of particular events happening.

The only yardstick for measuring the future is time. The future is never truly measured until it ceases to exist and becomes the present. Even then, when anyone tries to measure it in any way, they're simply creating a situation in which the future will certainly measure them.

Just look at Tesla for an obvious example of Wittgenstein's ruler...

More specifically, look at all those Tesla bulls who've pushed its stock so high that the company is now worth more than the next 10 to 12 publicly traded car companies combined on any given day.

Is Tesla's stock price measuring the future of the business? Or are such incredibly optimistic views baked into such a high price measuring how totally overvalued the current price is?

Oh, by the way, those questions don't get answered until it's too late to exploit the knowledge by either buying or selling the stock. Nobody really knows what Tesla will look like in 10 years, but many of the risks are known today...

Tesla's share price is like a prediction that the company will grow 50% or more per year for at least another decade... that we'll all be driving electric cars by then... that the majority of those cars will be Teslas... and that the company will be consistently profitable for decades.

It's far too many predictions baked into one company's share price. I don't know what will happen, but I know all those things happening at one company is highly unlikely.

Tesla shareholders are like a group of school kids who think they're about to get straight As on their report card... Except they don't have a reason to expect anything but Ds and Fs.

They aren't thinking enough about the risk. And like not having the surprise of rising inflation on my list, that's more important than what they do think about the company.

An even crazier example right now comes from AMC Entertainment (AMC)...

Some folks are confident that the movie-theater owner and "meme stock" could soar up to $100,000 per share... or perhaps even $1 million per share. (Just check out this Twitter poll if you don't believe me.)

That would value an overindebted, failing business in a dying industry at somewhere between $50 trillion and $500 trillion. For perspective, consumer-electronics giant Apple (AAPL) is the highest-valued company today with a market cap approaching $3 trillion.

Those same folks should be contemplating the probability that AMC's stock will go to zero... But they'll shout you down if you do that!

The stock closed at $24.50 per share today, valuing the business at about $12.5 billion. AMC earned $1.5 billion in revenue over the past four quarters and generated a net loss of $1.6 billion. The company hasn't earned a profit since 2018. Apple did $365.8 billion in sales and generated $94.5 billion in net income during its past four quarters.

Are these folks on Twitter measuring anything about AMC's business or future prospects?

No!

They're only measuring how far out of touch with reality they've become.

The numbers these folks throw around have absolutely nothing to do with AMC or its business. They're only about the story that AMC hyperbulls are telling themselves today.

If I haven't baked your noodle sufficiently by now, I'll leave you with this thought...

When I express my bearish views, I like to think that I'm studying the past to arrive at an accurate risk assessment of the present... And that risk assessment implies a greater likelihood that stocks will perform poorly in the future.

But as we've learned today, my bearishness doesn't tell you anything about the future.

I guess that's pretty clear since the market has gone straight up ever since I turned bearish again in late 2020. Time has shown that I have no ability to make accurate predictions – just like I've been telling you for years.

My views about the future can only measure me... They can't possibly measure the future since the future doesn't even exist yet.

I'll share my list of the "Top 10 Potential Surprises for 2022" on next week's episode of the Stansberry Investor Hour podcast. That will be the last new podcast this year.

And then, one year from now, we'll find out if these lessons did me any good whatsoever.

We'll do that mostly by finding out what didn't happen in 2022 that I said could happen... or similar to rising inflation this year, what did happen that isn't even on my list.

New 52-week highs (as of 12/13/21): AbbVie (ABBV), Biotricity (BTCY), CVS Health (CVS), Quest Diagnostics (DGX), Digital Realty Trust (DLR), Expeditors International of Washington (EXPD), General Mills (GIS), Hershey (HSY), Coca-Cola (KO), Procter & Gamble (PG), S&P Global (SPGI), and Consumer Staples Select Sector SPDR Fund (XLP).

It's another day without much happening in the mailbag. We'd love to hear some of your potential surprises for 2022. As always, you can tell us at feedback@stansberryresearch.com.

Finally, we want to remind everyone that our special holiday broadcast will go live at 9 a.m. Eastern time tomorrow morning... During this broadcast, we'll reveal a secret that only the top 1% of our readers understand. Reserve your spot right here.

Good investing,

Dan Ferris
Eagle Point, Oregon
December 14, 2021