You've Got to Dance as Long as the Music Is Playing

Massive outflows at ARK Invest... Crypto is not a business, bond, or property... You've got to dance as long as the music is playing... Jamie Dimon's 'worthless' tactics... Trying to control market nature... It's going to happen again...

Since February, I (Dan Ferris) have discussed Cathie Wood's ARK Invest asset-management firm more than once as a classic sign of a bubble topping out...

My timing (so far) has been pretty good, as most of the firm's disruptive technology-focused ETFs have fallen more than 20% from their February peaks to their recent bottoms.

So there's no way I can ignore the latest news from ARK.

Two weeks ago, I showed you a chart containing all of ARK's ETFs. You may have noticed a glaring omission: there's no crypto fund.

The folks at ARK are fixing that...

ARK is teaming up with Swiss crypto-focused adviser 21Shares to offer the ARK 21Shares Bitcoin Futures Strategy ETF (ARKA), a fund that will buy bitcoin futures.

Bitcoin futures trade on the Chicago Mercantile Exchange. That means they've been brought into the U.S. financial system's regulatory machine. Those who worry about a U.S. bitcoin ban might want to wipe away their worry... If a regulator wants to ban a financial instrument, they don't give it their blessing.

All bureaucracies just want to get bigger...

The fact that it's bad for the rest of us is meaningless to its powerful beneficiaries – the regulators and big incumbent companies that love anything that makes life hard for new competitors.

The new ARK 21Shares fund is just one of at least nine crypto ETFs currently seeking approval from the Securities and Exchange Commission ("SEC"). And regulatory bureaucracies grow by finding more stuff to regulate. So it's no surprise that Bloomberg reported yesterday that the SEC is "poised to allow" the first such fund to begin trading next week.

Optimism around the pending approvals has helped push bitcoin up 45% since September 29. I'm bullish on bitcoin and don't plan on selling any for a long time, so I'm thrilled with the news. The ETFs will bring bitcoin to the masses of people still in the dark about it, and view bitcoin exchanges and wallets as too complicated. Now, they'll be able to buy it in their online brokerage accounts.

But let's get back to ARK... I see ARK as a sign of the top in "disruptive innovation" investment. And bitcoin is the ultimate disruptive innovation, so I must set my own crypto bullishness aside and take the contrary view... Here it goes...

I've said it more than once: The world's largest cryptocurrency trades more like a biotech or small-cap mining stock than a long-term store of value.

Even if bitcoin is the Amazon (AMZN) of money, remember: Though Amazon is roughly a 2,200-bagger since its May 1997 initial public offering ("IPO"), according to data compiled by Bloomberg, it crashed more than 90% during the dot-com bust. It's fallen 30% or more many times along the way. If bitcoin lives up to anything like its own fantastic promise, a similarly bumpy trip should surprise no one.

I'll go even farther: What bitcoin lacks as a currency, it more than makes up for as a bubblicious, speculative vehicle...

The No. 1 attribute of such vehicles is that nobody knows what they're really worth ‒ if anything. I remember friend/author/investor Doug Casey telling me the story of one of the biggest winners of his investment career: Bre-X, the mother of all mining-stock frauds. It was totally worthless but made a few lucky speculators like Doug rich before it was discovered that geologists faked its allegedly rich gold deposit.

I don't believe bitcoin is a fraud, but the point is that nobody really knows what bitcoin is worth, or even where its value comes from. Many will claim to know that it's the scarcity, or the size of its network, or the blockchain, or the "DeFi," or some other aspect that makes for a great story.

Bottom line: bitcoin is not a business, bond, or real estate property throwing off a stream of cash flows. It's not a useful commodity like oil or iron ore. It's not a time-honored store of value like gold, land, or even fine art.

Who knows what the hell it's worth today... or will be worth in the future? Some folks might try to convince you they know all about bitcoin, but they don't know the future. They have no idea how it'll look in 10 years.

Still, you'll never hear me say it's worthless...

With bitcoin just over $1 trillion in total market capitalization, anybody who says it's "worthless" has some explaining to do. JPMorgan Chase (JPM) CEO Jamie Dimon recently said that very word in a CNBC interview. He immediately couched his comment by saying:

I don't want to be a spokesperson [for or against bitcoin]. I don't care. It makes no difference to me. Our clients are adults. They disagree. That's what makes markets. So if they want to have access... we can give them legitimate, as clean as possible, access.

By being kind of a jerk to his own clients, Dimon has provided us with another bubbly anecdote. You see, to a guy like me who sees bubbles the way the kid in The Sixth Sense saw dead people, Dimon's comments sound way too much like former Citigroup (C) CEO Chuck Prince's "we're still dancing" moment...

As the housing bubble was on the verge of bursting in June 2007, Prince whimsically foreshadowed the biggest crisis since the Great Depression in a Financial Times interview...

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.

Fifteen months later, Lehman Brothers went bankrupt, and Citigroup was bailed out along with all the other "too big to fail" banks. The quote serves as a reminder that big banks aren't working for their clients or shareholders. They're working for the insiders who run them.

Chuck Prince kept dancing because he liked getting big bonuses and bragging about this firm's growth on quarterly conference calls. He went with the flow because the flow made him rich. He didn't care about his bank's customers, clients, or investors...

Likewise, Jamie Dimon works for Jamie Dimon. He knows he'll still be paid way too much, even if his bank aids and abets another massive financial crisis like the one that it, Citigroup, and others did in the housing bubble.

Their employees made loans they knew at the time they never should have made... created and sold securities to clients that they knew at the time they never should have created and sold... They behaved like ransacking looters trying to steal what they could before the cops showed up. But there were no cops. They all got bonuses ‒ and nobody went to jail.

Jamie Dimon is channeling Chuck Prince, dancing while the music plays when he says...

"Our clients are adults," right after he says, "I personally think that bitcoin is worthless." And he knows when the music stops, if he is right about bitcoin being worthless, his adult clients will be screwed and he will be just fine. If the current bubble hurts the bank badly enough, the Federal Reserve will bail it out... Dimon can't lose.

Before the financial crisis, Citigroup lent money to people unable to repay the loans, then knowingly packaged and sold those garbage loans as investments, like many banks did back then. Dimon badmouthing bitcoin while selling it to his clients is the same thing. It can also be true that JPMorgan's clients are adults and can make their own decisions.

But there has to be some threshold beyond which someone in Dimon's shoes should be expected to say, "Yes, I can make a lot of money doing this. It's not illegal and our clients are adults... but we're still not doing it because if we did it, how could we ever again refer to ourselves as a trustworthy fiduciary?"

I guess that threshold lies somewhere beyond selling something you believe is worthless. Talk about a low bar. What won't this guy sell?

To sum up, I'm still bullish on bitcoin, but I can't look away from ARK and Dimon, as they provide us with two classic sign-of-the-top anecdotes.

Meanwhile, the new bitcoin fund better be a big hit because ARK is bleeding assets...

As the market has soured on ARK's ETFs, ARK's clients have soured on its funds... more than they have ever soured at any time in the firm's history.

In the third quarter, which ended on September 30, investors in ARK's flagship Innovation Fund (ARKK) withdrew $1.97 billion ‒ the fund's largest quarterly outflow since its 2014 inception. The fund's share price rose a bubbly 150% in 2020. It's down roughly 7% since January 1, after recently trading as much as 31% off its February high.

If this were any other ARK fund, I might not mention it. But according to data compiled by Bloomberg, ARK Innovation has net assets under management of $20.2 billion ‒ 51% of ARK's companywide $39.3 billion.

ARK bills itself as "Your Disruptive Innovation ETF" provider. The massive size of the outflows from its flagship Innovation Fund is begging for me to label it as the ultimate sign that the trade of the decade is over... that is, pay any price for disruptive innovation and hold on for dear life.

I know, I know... I'm always telling you that I don't do predictions ‒ bottoms or tops ‒ and I sure sound like I'm calling the top of the bull market.

But as I showed you two weeks ago, there really is no when if you're trying to call the ultimate top that signals a bear market. Various market sectors will top out perhaps a year or more before the big indexes ultimately top out. Tops are impossible to predict.

So maybe ARK is an indication that the most speculative parts of the disruptive innovation bull market have topped out... and, maybe not. Who knows? I don't.

And maybe ARK's new bitcoin fund and Jamie Dimon's we're-still-dancing moment are just signs that bitcoin is headed for another steep correction. A big sell-off just as the first bitcoin futures ETF is approved would be a perfect example of the old Wall Street adage "buy the rumor, sell the news."

Again, as I said two weeks ago, my ultimate goal is to show you what it looks like... what it feels like... when risky assets that have generated bubbly returns start disappointing investors... Soon we will see big changes occur. The trends that will rule the next 10 years are about to depart radically from those that ruled the last 10.

I can't precisely call the timing of such a transition. But it sure feels like it's around here somewhere, give or take a year or two.

Before I leave you, let's look at another huge transition that's happening faster than anybody seems to have anticipated...

I'm talking about inflation.

The Consumer Price Index rose 5.4% in September, compared to 1.4% in September 2020. That's the same level as June and July and just 0.1 percentage points above August's reading.

We are now in what I call Stage Three of the Four Stages of The Fed's Inflation Narrative.

I've told you about Stages One and Two in a previous Digest.

Stage One was when Fed Chair Jerome Powell called inflation "transitory" on May 19. Stage Two was when he called it "frustrating" during his Senate testimony on September 28.

Stage Three began three days ago, when Atlanta Federal Reserve Bank President Raphael Bostic declared, "Transitory is a dirty word" in a virtual address to the Peterson Institute for International Economics. Bostic deposited $1 into a "swear jar" each time he used the word during his talk. He said:

It is becoming increasingly clear that the feature of this episode that has animated price pressures – mainly the intense and widespread supply-chain disruptions – will not be brief. By this definition, then, the forces are not transitory.

That's Stage Three: Transitory Is a Dirty Word.

Stage Four has the biggest impact and can last for several years. We can label it something like, "Holy crap, gas is $7 a gallon!"

Maybe the Fed can stop inflation, but not without ruining millions of working people's lives...

That's exactly what happened the last time it "saved us from inflation."

Then-Fed Chair Paul Volcker took a "whatever it takes" approach to stopping inflation in the late 1970s. Volcker raised the effective fed-funds rate from 10.9% when he took over in August 1979 to 19% by January 1981.

The historical narrative is that Volcker was a courageous policymaker who saved the country from inflation... The truth is that he was a government busybody who had no clue what he was doing and as a result inflicted irrevocable damage to the U.S. economy. Anybody who thinks the Fed can do anything that dramatic without massive, horrible consequences needs to keep reading.

Two recessions followed Volcker's interest-rate hikes ‒ one in 1980 and another from 1981 to 1982. The latter was horrendous, but only for working people, who are always on the losing end of Fed policy. Unemployment reached 10.8% and didn't get below 5% until 1989. It was even worse for African-American workers, whose unemployment rate hit 20% by 1983. People lost homes... Families broke up... It was a horrible time.

Like most government policies alleged to be good for working people, it permanently damaged working people's lives and greatly benefitted the wealthy. As Jeff Spross wrote in The Week a few years back:

It was when the top 1%... started gobbling up a much larger share of the national income. It was roughly when hourly compensation stagnated and disengaged from productivity growth, and it was when family income growth in the bottom 80% of the economy slowed way down.

Consider how crazy it is to believe that a few Fed economists doing advanced math with government statistics ‒ pulling simple, top-down levers like interest rates and bond purchases ‒ can successfully manage a multitrillion-dollar economy without creating lasting damage... It's like leaving a toddler alone with the big, red "Fire Nukes" button.

Yet, the myth of the "Infallible Central Bank" is so deeply embedded in our lives that I bet most people think I sound ridiculous right now.

But the world doesn't work that way. There are no solutions to problems, especially big, hairy economic ones... There are only trade-offs, and the trade-offs for massive government intervention always cause millions to suffer... yet somehow mysteriously benefit the wealthy.

I promise you whatever benefits you think we got from the Fed's intervention since the COVID lockdown, we will get them back 10-fold in horrendous unintended, wholly unforeseen consequences that will cause millions to suffer.

Markets are not machines. They're as much a part of nature as the seasons. Human beings don't control them, despite all the nonsense you hear from all the busybodies with superiority complexes who inhabit Washington, D.C. and every state capitol in the country.

Their efforts to suppress volatility, regulate markets, and avoid the inevitable destruction of misallocated capital have always created huge, lollapalooza crises... It'll happen again. I guarantee it... I just can't say when.

"It's not nice to fool Mother Nature," an old TV commercial used to say. The government and the Fed are in the business of trying to fool "market nature," but they're just a bunch of boobs pretending they are economic brain surgeons. And every single time, those boobs bring about exactly the disastrous results you'd expect.

It'll happen again, so you had better be prepared. It's likely closer than you think.

New 52-week highs (as of 10/14/21): Brown & Brown (BRO), CBRE Group (CBRE), Cintas (CTAS), Freehold Royalties (FRU.TO), Formula One (FWONA), Home Depot (HD), Hershey (HSY), Cheniere Energy (LNG), Markel (MKL), Cloudflare (NET), Invesco S&P 500 BuyWrite Fund (PBP), Royal Dutch Shell (RDS-B), VanEck Vectors Russia Fund (RSX), Telekomunikasi Indonesia (TLK), AMERCO (UHAL), United States Commodity Index Fund (USCI), Verisk Analytics (VRSK), and Waste Management (WM).

In today's mailbag, feedback on "paying your tuition" as an investor and thoughts about Matt McCall joining our lineup at Stansberry Research... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I paid in the crash of 2001. I had a pretty good buy discipline but not a sell strategy. As a result, it took about 3.5 years to work off the losses I had to take because I was retired and living off part of my stock portfolio. Needless to say, when TradeStops came along I was one of their first customers." – Paid-up subscriber Patrick H.

"I missed seeing Matt McCall. Wondered what had happened to him. Now we know... Nothing but the best of everything to you, Matt." – Paid-up subscriber Jodi W.

"I just want to say I have made lots of money trading with Matt McCall in the last few years.

"He introduced and led me through entering into crypto before the last halving and besides bitcoin and Ether, he led me into 10 altcoins before they were easy or known. One has gone from $600 to $30,000 in a year and a half. Others from $600 to $25,000, $600 to $20,000, and $600 to $15,000 most at that level and 1 or 2 just tripled so far.

"Also he made me incredible gains at early stage stocks like Workhorse (WKHS) going from $2 to $33 per share. One thousand shares from $2000 to $33,000. Just one of most of his portfolio that skyrocketed!

"I have been searching the internet wondering where he went. I'm not on social media but could not really get answers. I was so thankful when he showed up at Stansberry, what a great fit for me and all Stansberry subscribers!

"A Home Run!" – Paid-up subscriber Michael B.

Good Investing,

Dan Ferris
Eagle Point, Oregon
October 15, 2021