This Could Be the 'Mother of All Melt Ups'
The signs of a 'Melt Up' are everywhere... This could be the 'Mother of All Melt Ups'... Cathie Wood is the Gerald Tsai of today... Echoes of the financial crisis... Don't confuse a bull market with brains...
The 'MAMU' is coming...
And you should beware of its awesome power...
What am I (Dan Ferris) talking about exactly? The name for another pandemic? A new WWE wrestler? The latest trendy fast-food franchise? Nope, none of the above.
It's an acronym for the "Mother of All Melt Ups."
Yale-educated economist Ed Yardeni coined the term a few weeks ago in a blog post called "Party Like There's No Tomorrow."
As Stansberry Research subscribers know, my colleague and True Wealth editor Steve Sjuggerud has been talking about the idea of government-fueled "Melt Up" euphoria in the stock market for years, and he says that we are in one of these periods right now.
Similarly, here's what Yardeni wrote in his post...
Now, as in 1999, there are mounting signs of irrational exuberance in the stock market. This time, there are also more signs of ultra-stimulative fiscal and monetary policies than there were back then. The combination could be fueling MAMU – the Mother of All Meltups.
Now, I want to be clear...
The MAMU isn't here yet...
When I sent the link to the Yardeni blog post to some of my Stansberry colleagues earlier this week, analyst Alan Gula promptly sent back a chart of the Nasdaq Composite Index.
The chart showed that the dot-com peak in March 2000 was a three-plus standard deviation move above the long-term trend (based on a regression of the Nasdaq Composite since its inception in 1971).
Meanwhile, the current level of the Nasdaq is not even two standard deviations above the long-term trend.
By that measure, the dot-com bubble still holds the MAMU title...
But importantly, Yardeni said that the mix of government policies and investor euphoria could be fueling a massive Melt Up.
To me, that indicates he believes the MAMU lies ahead, if it happens at all.
I believe the MAMU lies ahead as well. I agree with investor Jeremy Grantham, who recently said he expects the next market peak and aftermath will resemble those of 1929 and 2000.
The current moment is certainly loaded with examples of speculative froth...
I hardly know where to begin...
Struggling video-game retailer GameStop (GME) is the craziest example to date. Its 52-week low is $2.57. The 52-week high during regular trading hours is $483. That's a 187-bagger from bottom to top. It recently traded around $50 a share. Most of that round trip occurred in the past month.
The stock rose as retail investors posting in Reddit's WallStreetBets thread drove the share price up, causing large hedge funds like Melvin Capital to buy the stock to exit short positions. Melvin reported a 53% loss for the month of January as a result.
While some counted the episode as a victory for the little guy, I never saw it that way. I knew they'd mostly get crushed, like they always do in speculative manias. A Financial Times article this week related a typical story...
Tori Barry said she used money from her savings to buy shares in GameStop and cinema operator AMC near their peaks, and promptly lost about £2,500. "We are not big players. We haven't lost millions, but for us that is rent for the month, it is bills. I don't know how we'll recover," she said from Wales.
When a stock price goes straight up like a rocket ship, it's practically guaranteed to turn right around and fall straight down – very soon.
GameStop hit $503 in pre-market trading on January 28. Its recent post-insanity low was right around $50. Since January 1, the stock rose nearly 30 times... and then crashed 90% from its high.
This is what bubbles look like...
The more stock charts you see that look like ballistic missiles, the more 90% crashes you'll see shortly afterward. Sooner or later, the big indexes will look the same way.
Another classic bubble-era development is the 'star fund manager syndrome'...
For example, during the "go-go" 1960s market mania, Gerald Tsai was that manager. I can barely do justice to John Brooks' telling of the details about Tsai in the must-read classic, The Go-Go Years, but I'll give you the highlights...
Tsai was born in China and moved to the U.S. in 1947 after graduating college in Shanghai. His father worked for Ford Motor (F), and his mother was a stockbroker (an interesting story itself).
Tsai went to work for Fidelity in 1952. Brooks describes him as, "brisk, practical, ambitious, energetic, logical, aggressive – almost the very model of a modern Yankee trader." According to Brooks...
He showed himself to be a shrewd and decisive picker of stocks for short-term appreciation, and so swift and nimble in getting into and out of specific stocks that his relations with them, far from resembling a marriage or even a companionate marriage, were often more like those of a roué with a chorus line.
Tsai was famous enough to drive stock prices up if it was learned he was buying, just like the famed Jesse Livermore in the 1920s.
In 1957, Fidelity put Tsai in charge of the Fidelity Capital Fund, the firm's first speculative public growth fund offering. He took large positions in then speculative names like Polaroid, Xerox, and Litton Industries. He badgered brokers to assemble large blocks of stock and warned them not to move the price in doing so, or he would give someone else the trade.
The fund's turnover exceeded 100%, meaning it sold every share it bought before the year was out. The high turnover and concentration in relatively few speculative names were unheard of at the time. With Tsai at the helm, the fund returned 285% over its first seven years.
Tsai owned 20% of Fidelity by the time he sold his company stock for $2.2 million and left in 1965 to set up his own shop in New York. He set out to raise $25 million from investors and raised nearly 10 times that amount – $247 million.
Coincidentally, Tsai started his new project, called the Manhattan Fund, a few weeks after the Dow Jones Industrial Average peaked, ending the 1960s "go-go" bull market. His name was still gold, though, and he'd attracted $500 million in assets by mid-1968.
Tsai made a very respectable 39% in the first year, but seven years after it began, it was down 70% – the worst mutual fund in existence at the time. And Tsai saw the writing on the wall as his fund began to falter. In August 1968, he sold the fund to CNA Financial for $30 million.
And he was off. Tsai went on to greater successes, eventually becoming a billionaire as well as the first Chinese-American CEO of a Dow Jones Industrial company: American Can Company.
Cathie Wood is the Gerald Tsai of today...
And Wood's firm, ARK Investment Management, is the new Manhattan Fund.
Wood has been profiled in the mainstream financial press over the last year or so given her fund's eye-popping returns and the sectors that it invests in.
Wood founded ARK in 2014 to invest in "disruptive innovation." By 2018, it had $1.2 billion under management. By the beginning of 2020, ARK had $3.1 billion under management.
The world went nuts for its products in 2020, and today, it manages $54 billion. Just look at the names of the exchange-traded funds ("ETFs") it offers, and you'll understand why FOMO-addled investors are shoving money at it as fast as they can...
- ARK Innovation Fund (ARKK)
- ARK Next Generation Internet Fund (ARKW)
- ARK Genomic Revolution Fund (ARKG)
- ARK Autonomous Technology & Robotics Fund (ARKQ)
- ARK Fintech Innovation Fund (ARKF)
- 3D Printing Fund (PRNT)
- ARK Israel Innovative Technology Fund (IZRL)
Wood recently announced plans for a space exploration ETF.
The list encompasses every techy-sounding investment fad of the last several years. I mean... an entire ETF devoted to 3D printing? Ridiculous. But after a lousy first four years, it has tripled off its March 2020 COVID-19 bottom.
The far right side of the chart is as ballistic as they come...
Go look up every ETF listed above.
Every single one has that same ballistic trajectory...
Every. Single. One.
Here's a chart of all of them together (which frankly mutes the uniform ballistic-ness of a couple of the individual charts, but you get the picture).
The 3D Printing Fund is the second-worst performer. The ARK Innovation Fund went up 150% in 2020. The ARK Genomic Revolution Fund rose 180%. Ballistic.
Now, before I go any further, I know Steve holds one of these ETFs in his True Wealth portfolio as part of his Melt Up thesis... which is kind of the point.
In fairness to his subscribers, I can't give the name here today, but it's up 60% since September 2020, and Steve knew full well what he was getting into. Like me, when he recommended the ETF, Steve compared today's environment with the dot-com-era Melt Up. He wrote in the September issue of True Wealth...
I expect to see a similar story play out... Investors will latch on to exciting stories that could change the future.
In making the recommendation, Steve even acknowledged he was "playing with fire," knowing the fuel that was being thrown on this market and the casino-like atmosphere we're seeing today among many investors.
But importantly – and this is the step that most investors skip or don't even know to consider – Steve has an exit plan already. As he wrote in September...
The market has a dastardly history of sucking in the largest possible number of unsuspecting participants on the way up – and then wiping all of them out on the way down. They ride the tide all the way in, and then they ride it all the way out...
We know the tide will come in and go out. Our intent – quite frankly – is to play with fire here.
Our gamble – and yes, it's a gamble – is that we can ride the tide all the way in... and get off the boat in time as the tide goes out.
That is Steve's "Melt Down" plan, which I wrote about last month and we've urged subscribers to consider over the last month or so. He wrote about it again in his latest issue of True Wealth a few weeks ago, summarizing his approach and quoting investor George Soros from the early 1990s...
Recognize the trend whose premise is false... Ride that trend... And step off before it is discredited. That's what we're trying to do here in the Melt Up.
Twentysomethings are trading tech stocks on their phones. They're buying cryptocurrencies. They're speculating – in a way I haven't seen since, well, the last U.S. Melt Up in 1999.
Is it some fundamental change to our economy that's driving them to buy already-expensive stocks? No. It's far simpler than that.
Animal spirits have kicked in among investors. "FOMO" is here – fear of missing out. That's it.
A similar, broader point I want to make is that by looking at the charts of the ARK funds above, you have to conclude that Wood is either the greatest investment genius in the world or that she and her firm are the Mother of All Signs of an Impending Top ("MASIT")...
Or, at the very least, a top in Tesla (TSLA) and all the more highly speculative names, the recent multibagger winners that populate ARK's funds...
Wood is perhaps best known as a vocal Tesla bull...
And it's no surprise that Tesla is the largest holding of three ARK funds: ARK Innovation Fund, ARK Next Generation Internet Fund, and ARK Autonomous Technology & Robotics Fund. Note, I can say that the fund Steve recommended is not any of these.
Tesla's epic run over the past year has certainly contributed to the ballistic recent performance of these three funds, as well as the company's overall assets under management and Wood's media bookings.
A hot stock, a star fund manager, and her firm. It's so perfect. It's often said that history doesn't repeat, it rhymes. Clearly, sometimes history repeats so perfectly, you can just keep the same script and change the characters' names.
It's like Wood read a book on asset bubbles and set out to get a starring role in the next one.
She's done it. Wood is already a bona fide celebrity. And ARK is now capitalizing on its newfound popularity with a line of merchandise – T-shirts, sweatshirts, and even baby onesies – another sign of an impending top...
(Screenshot: Ark Invest Store)
Remember, this is an asset management firm, not a professional basketball team...
Nate Geraci, president of advisory firm ETF Store, told Bloomberg earlier this week, "Ark is the center of the investment universe right now."
I'm sure Wood is thrilled to hear that... and she may even believe it! After all, ARK is the center of the universe, and she's the founder and center of ARK.
I guess that makes her the center... of the center... of the universe. The force of gravity must be serious in there.
I don't believe Wood is a genius at anything but marketing, and maybe timing.
I admit that founding her company based on disruptive-technology investing in 2014 was a stroke of genius. But I am 100% certain the ballistic trajectories of her ETFs and ARK's assets under management absolutely, positively will reverse course in the not-very-far future.
And like I said before, ballistic trajectories don't level off and go sideways. They turn around and fall back to Earth.
We must not confuse a bull market with brains...
Wood has the wind at her back. It's so windy even the turkeys are flying. I won't say, "Anyone can do what she's done." The world doesn't work that way, and she should get a lot of credit for what she's built.
But the fat lady never sings in the stock market. There's always a "What next?" to answer. And what's next is a horrendous crashing sound in the vicinity of ARK's ETF offerings.
That's due to the precise manner in which Wood and ARK are making hay while the sun shines...
To anyone who knows even a little market history, it looks like Wood and her team went back to the great financial crisis, tried to figure out how the bankers almost broke the system while making themselves piles of money, have chosen today to ignore the "broke the system" part of the outcome, and are doing it all over again.
Echoes of the financial crisis...
During the financial crisis, it wasn't housing and mortgages that crashed the system. It was mortgages sliced, diced, and leveraged into structured finance vehicles called CDOs, or collateralized debt obligations (among other toxic ingredients, including highly levered bank balance sheets and sinister lending practices, to name just two).
We'll skip the details of what happened with CDOs during the financial crisis. Just know a lot of it wasn't good... and that Wood and ARK are doing the same thing today, except the underlying asset isn't the trusty U.S. 30-year mortgage. It's ARKs ballistic, bubbly-looking, sexy-named mutual funds.
Lenders have sold about 50 "structured products" in the past three months. In this case, "structured products" is Wall Street jargon for debt securities that pay high yields by using derivatives (like futures and options) exposed to an underlying asset, like ARK's ETFs.
Bloomberg points out that such products use leverage to offer big coupons (high yield) but they also charge high fees and – here's the punch line – "can be difficult to exit."
When the finance industry says 'difficult to exit,' it sounds so benign...
... Like stubbing your toe as you get out of your car. To understand what the phrase really means, imagine someone yelling "Fire!" in a crowded movie theater that only has one door the size of a cellphone.
Ask anyone who was holding the VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (XIV) on February 5, 2018, a day known as "Volmageddon"... "Can be difficult to exit" had some meaning for anyone looking to get out the door back then...
As an inverse ETF, XIV was short the popular CBOE Volatility Index ("VIX") – which we refer to here as the market's "fear gauge" and measures the bullish and bearish sentiment of traders.
That day in February 2018, the VIX surged to a reading of 29 (up from 11 two weeks earlier), causing short bets to blow up. The inverse ETF XIV lost 97% of its value in a single session and delisted shortly after that.
THAT is what the finance industry means when it says "can be difficult to exit"...
I like how Bloomberg throws "can be" in there, like this stuff might not be some of the most illiquid toxic waste sold to the public in recent years.
Investors in ARK structured products think they're in line to buy movie tickets, but they're being thrown into a wood chipper as soon as they step into the theater.
Again, please note, I'm not talking about the ARK ETFs themselves here – and not the one Steve has in True Wealth. You can get out of that with a click.
These are derivative products – that we won't touch – that flash a warning sign to me of financial-crisis-like threats in the market today.
I keep telling myself I have to stop writing all this bearish stuff...
It wouldn't surprise me one bit if the market ripped for another year or so before crashing horrendously. If I'm too bearish, it might make me look like an idiot. That's not how I want hundreds of thousands of loyal Stansberry subscribers to see me.
But the signs are everywhere and ignoring them won't make them go away... nor will it reduce your exposure to the aftermath of MAMU, the Mother of All Melt Ups. My colleagues and I also publish a ton of long stock and option picks.
I figure my bearish Digests are needed to keep the universe in balance.
To that point, I would feel like you weren't seeing the full "markets are crazy" Monty if I didn't check in with our friend Jason Goepfert at SentimenTrader.com.
In a recent tweet, he links to an article that says nearly half of all trading in special purpose acquisition companies ("SPACs") is coming from retail investors – the kind of folks who lost their rent money buying GameStop and AMC Entertainment (AMC) right at the top.
Goepfert commented when sharing the story...
Just one more sign that there has never been a bigger appetite for the most speculative issues, from the least experienced investors.
To put it in 1920s terms, they're all shoeshine boys – the kids on the street telling you how much money they're making in stocks as the 1929 crash nears. Today, they're partying online like there is no tomorrow.
But there is a tomorrow – and always has been, at least so far – and you never know exactly what it will look like or what it will bring. That's why I say again, prepare, don't predict.
If you prepare your investments the right way... if you spend less than you make... and if you allocate your assets across a truly diversified portfolio of stocks and bonds, plenty of cash, and stores of value like gold, silver, and bitcoin, or put options on the big equity indexes...
In other words, if you understand that the party will end... you might not end up in the headlines like Cathie Wood, and that's OK. You also won't end up in a story about not being able to pay your rent either like poor Tori Barry in Wales.
Your portfolio will survive the Mother of All Melt Ups and be around for another day... and the one after that.
New 52-week highs (as of 2/10/21): Berkshire Hathaway (BRK-B), Baozun (BZUN), CBRE Group (CBRE), Columbia Care (CCHWF), Colony Capital (CLNY), Comcast (CMCSA), Cresco Labs (CRLBF), Curaleaf (CURLF), Commvault Systems (CVLT), New Oriental Education and Technology (EDU), ProShares Ultra MSCI Emerging Markets Fund (EET), Expeditors International of Washington (EXPD), Futu Holdings (FUTU), Green Thumb Industries (GTBIF), Harvest Health & Recreation (HRVSF), Intuit (INTU), Renaissance IPO Fund (IPO), JD.com (JD), KraneShares Bosera MSCI China A Fund (KBA), KraneShares MSCI All China Health Care Index Fund (KURE), KraneShares CSI China Internet Fund (KWEB), MongoDB (MDB), ETFMG Alternative Harvest Fund (MJ), Match Group (MTCH), MasTec (MTZ), OrganiGram (OGI), Palo Alto Networks (PANW), ProShares Ultra Technology Fund (ROM), Rayonier (RYN), Constellation Brands (STZ), Trulieve Cannabis (TCNNF), TFI International (TFII), TerrAscend (TRSSF), United States Commodity Index Fund (USCI), Valmont Industries (VMI), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), and Zebra Technologies (ZBRA).
In today's mailbag, feedback on yesterday's Digest about cybersecurity... Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.
"Every time I hear reports of some outfit getting hacked I ask, 'Why was their computer connected to the Internet?' It seems so simple to have a separate computer running vital systems that are independent of the web. Even large companies with hundreds of computers don't need all the work stations connected to the web. Why can't there be an independent web in a company that communicates by e-mail or PDF? Is there any reason why in this case of a computer that adjusts the chemicals be tied to a server in another country?" – Paid-up subscriber Don L.
"Regarding Corey's story on the attempt to poison water supply near Tampa the other day: Perhaps the hacker was trying to access a voting machine and got his wires' crossed." – Stansberry Alliance member Michael R.
Good investing,
Dan Ferris
Vancouver, Washington
February 11, 2021
P.S. As I've said a lot over the past few months and again today, a "truly diversified" portfolio is one that is prepared for anything that the market throws your way... and you're only truly diversified if your portfolio includes assets inside and outside the currency regime.
Stocks, bonds, and cash are inside the currency regime. Gold, silver, and bitcoin are outside of it. And exposure to all of these assets means you don't have to predict. That's the beauty of diversification – you own assets that tend to do well at different times.
Take bitcoin right now, for instance... I think of it as the "hardest of currencies" that folks are flocking to today as we continue to see the same old Federal Reserve and central-bank policies fueling today's Melt Up.
If you bought some bitcoin back in August when Crypto Capital editor Eric Wade sat down with Porter and our Director of Research Austin Root for our "Capitalism in Crisis" presentation, you're likely pretty happy today with that choice.
I couldn't have told you the price of one bitcoin would be up more than 300% in the past six months, and that folks would be speculating about it like it was 1999, but I have said – and continue to say – that there is a place for at least a small percentage of bitcoin in everyone's portfolio.
So if you've seen bitcoin hit new all-time highs recently and are wondering if there is still time to buy or how best to do it, be sure to check out Crypto Capital. It's unlike anything I've seen in the industry.
Eric provides weekly video updates along with in-depth issues, and he walks folks through everything from how to buy your first bitcoin to the ins and outs of smaller cryptos. Click here to listen to his latest message right now and learn how you can get started.