How This Global 'List Maker' Made $5.7 Billion Disappear

Conspiracy theories are everywhere – even in global finance... An elite group of string-pullers really exists... A major flaw, hidden for years... How this global 'list maker' made $5.7 billion disappear... A catastrophic 98% drop in two days... Despite all the bad news, China's stock market is chugging along...

Conspiracy theories...

They're just about everywhere. And finance is no exception.

I (Vic Lederman) have heard my share of them, too. Some are real doozies...

"Lizard people" running our government comes to mind. And I grew up in Colorado... so for those of you in the know, I've spent a good bit of time in the Denver airport.

But not every conspiracy theory is crazy... Every once in a while, it turns out a conspiracy really does exist. And one specific financial conspiracy theory is shared with me so often that I simply can't ignore it...

'All of global finance is controlled by a select few'...

That's the gist of it.

I've lost count of how many times folks have uttered some version of that phrase to me over the past few years.

I've been amazed to learn how many people around me believe it's true. You might be one of them, too. It's incredibly appealing to a wide variety of people. These encounters all follow the same basic template...

Them: "So, you work in finance?"

Me: "Yep."

Them: "You know, all of that is controlled by [insert favorite financial conspiracy here]."

Unpacking why this is incorrect takes too much time for the average conversation. So I usually stick with a benign response like, "Do you really think so?" or "Could be."

But the truth is, in a way, I also know they're right...

Seriously.

Now, almost without fail, these conspiracy theorists have the details wrong. But it would be hard for anyone that's not a finance junkie to get all the details right on this one...

You see, in finance, there really is an elite group of string-pullers...

And most people have no idea they exist.

The decisions these folks make control trillions of dollars. And just about every retirement account in America depends on them.

They're hidden right in front of us. And in reality, they're not hidden at all. That's because the best way to hide a conspiracy is to make it incredibly boring...

All of this has to do with index providers. Or the "list makers" as I call them. And more specifically, the funds that are pegged to these list makers.

If you're reaching for the snooze button, hold on. Hear me out...

These guys are more important in global finance than just about anyone. Simply put, every index fund follows a benchmark index. And that benchmark dictates how the fund invests.

That means these list makers control nearly all the "passive" investments around the world. And they control active strategies that choose from a basket of indexed funds, too.

Think about it... If you buy an index fund, do you really know how the businesses in the index got there?

Most people don't. And they don't usually need to.

For the most part, index funds do what they say on the tin... If you buy a Europe-focused fund, you get European stocks. If you buy a fund focused on the world minus the U.S. and Japan... you get global stocks minus the U.S. and Japan.

All of this is so basic, so straightforward, that most investors don't even think about it.

But for years, this system has hidden a major flaw...

For a variety of reasons, the list makers – the world's index providers – had ignored China. And as a result, Chinese stocks were excluded from their lists.

That may not sound like such a big deal at first. But it had a huge impact...

That's because China is one of the largest stock markets in the world. And yet, nearly every passive investment strategy pretended these stocks didn't exist.

It was one of the greatest "wrongs" in global finance. And it was destined to be "righted" eventually.

My boss and colleague, Steve Sjuggerud, predicted this would happen. He was so certain that he started True Wealth Opportunities: China to share the idea with readers like you.

That was back in 2016.

Today, the change is well underway – just like Steve predicted...

MSCI, the world's leading index provider, is adding China to its indexes. And it's having a massive impact...

More than $1 trillion in U.S. dollars will eventually flow into Chinese stocks. And investors don't have any say in the matter... If you hold a fund tracking an MSCI benchmark that includes China, you're going to add Chinese stocks.

Other list makers will soon follow suit. And eventually, nearly every fund in the world that tracks emerging markets will own Chinese stocks.

Now, that may sound like serious macro-level power over the long run... But it's also clear that these list makers have tremendous power right now.

For example, in late November, MSCI flexed its might – and $5.7 billion disappeared...

That's right. $5.7 billion was wiped out. And it only took two days.

But before we get into how it all happened, let's start at the top...

ArtGo is a China-based marble miner. And early last month, MSCI announced that it planned to add the company's shares into its China Index.

It was just going to be one little piece in this massive, trillion-dollar change... But for this little company, it was going to be huge. And as it turns out, it was a little too huge...

You see, as investors got wind of MSCI's inclusion plans throughout the year, a speculative bubble formed around the company. And its share price shot to the moon.

ArtGo's stock was up a staggering 3,800%... this year alone. That's a preposterous climb for a little marble-mining company. Usually, those kinds of gains are reserved for biotech breakthroughs.

The stock's meteoric climb could have gone on indefinitely. But someone over at the Wall Street Journal noticed. The company published this article on November 20...

The piece wasn't a takedown. Rather, it was an observation on the situation's absurdity.

And more important, MSCI noticed...

This wasn't the kind of thing it could ignore. And soon, the index provider issued a statement. ArtGo was cut from MSCI's China-inclusion list after "further analysis and feedback from market participants on investability."

That's when the two-day tumble started...

On November 20, ArtGo closed at HK$14.80. A day later, the stock closed at just HK$0.31. And a day after that, it bottomed at HK$0.28... a devastating 98% drop in just two days.

Take a look at this price chart...

ArtGo lost 98% of its value essentially in the blink of an eye after the world's leading list maker rejected it. The company's valuation flopped from a price-to-sales (P/S) ratio of 29 all the way down to a P/S ratio of 2.6. And there's little possibility of it ever bouncing back.

Now, I should make one thing clear... It's not fair to say that MSCI is completely responsible for ArtGo's overnight demise. MSCI didn't force investors to speculate widely on the stock.

And with a P/S ratio of 29 for a marble miner, the company was clearly overpriced. (For perspective, the P/S ratio of the S&P 500 Index is 2.3.)

But there's no question... when MSCI pulled the plug, investors ran for the exits.

Admittedly, ArtGo is on the fringe of the MSCI inclusion story...

It's a spectacle. Or a distraction.

The real story is the massive shift in global finance. Remember, more than $1 trillion in U.S. dollars is flowing into Chinese stocks. And it's all because MSCI decided to add China to its lists.

Now, I understand if you're skeptical. The news coming out of China has been abysmal...

First, there's the country's trade war with the U.S. – even if the two sides apparently reached a "phase one" deal last week. Then, you have the conflict with Hong Kong.

Both are serious issues. And they've dragged on China's economy for much of this year.

But that doesn't change the reality of the situation...

China's market is still growing and maturing. And more than $1 trillion is starting to flow into Chinese stocks as a result of MSCI's inclusion.

Yet, despite all the bad news... The benchmark Shanghai Composite Index is still up about 20% this year. Take a look...

Remember, that performance is despite the incredible pressure from the trade war for much of the past couple of years. And it's despite the ongoing tensions in Hong Kong.

The incredible amount of money moving into Chinese stocks is a tailwind that will outlast any short-term fears. It's too big not to drive major price increases over the long term. It should create a floor for the market as cash floods in... over and over again.

That's exactly what we're seeing on the chart of the Shanghai Composite Index.

So don't let ArtGo's colossal collapse distract you from the truth... More than $1 trillion is flowing into Chinese stocks.

ArtGo was simply an anomaly on the fringe of this story. And an incredible example of the faith that the world's investors put in the biggest global list makers – like MSCI.

The real story is the massive change that's already taking place – just as Steve predicted. As it turns out, a select few string-pullers really do have tremendous power in the world of finance.

Fortunately, Steve has been tracking this story for years. And he knows exactly how to take advantage of what these string-pullers are doing right now...

He has multiple open recommendations in his True Wealth newsletter that relate to MSCI's changes. And in his China-focused service, True Wealth Opportunities: China, his entire portfolio is designed to take advantage of the avalanche of money flowing into the country.

If you're not yet reading True Wealth Opportunities: China, it's a great time to get started... Right now, you can sign up for one year at 50% off the normal price. Learn more here.

New 52-week highs (as of 12/16/19): Alibaba (BABA), Becton Dickinson (BDX), Berkshire Hathaway (BRK-B), CBRE Group (CBRE), SPDR Euro STOXX 50 Fund (FEZ), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Alphabet (GOOGL), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Hologic (HOLX), JD.com (JD), iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO), Medtronic (MDT), Microsoft (MSFT), Nordic American Tankers (NAT), Anglo American (NGLOY), Norilsk Nickel (NILSY), Nuveen Municipal Value Fund (NUV), Nvidia (NVDA), Novo Nordisk (NVO), Invesco S&P 500 BuyWrite Fund (PBP), Invesco High Yield Equity Dividend Achievers Fund (PEY), Procter & Gamble (PG), ResMed (RMD), ProShares Ultra Technology Fund (ROM), ALPS Medical Breakthroughs Fund (SBIO), ProShares Ultra S&P 500 Fund (SSO), Sysco (SYY), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Russell 2000 Fund (UWM), ProShares Ultra Financials Fund (UYG), Vanguard FTSE All-World ex-US Fund (VEU), and Vanguard S&P 500 Fund (VOO).

In today's mailbag, feedback for Dan Ferris about yesterday's Digest... What's on your mind? E-mail us your comments and questions at feedback@stansberryresearch.com.

"I had to laugh when I read Dan Ferris' latest Digest that included talking about Tiffany and whether it adds value to whatever it attaches its name to. Just this morning I was looking through a recent Architectural Digest and saw an ad for an AGA. If you're not familiar with an AGA, it's a cast iron-enameled oven used more extensively in Europe than here. I associate them with Scotland where people keep them going 24 hours a day almost as the house heater. Well, this ad introduced a very special AGA, one that came in the signature Tiffany robins-egg blue. Price available upon request." – Paid-up subscriber Dave H.

"This was a particularly witty article... It had me laughing out loud at times. With the run up this December, the air is getting thinner and thinner. Thanks for a great year of 'grounding.' Look forward to your work in 2020. Have a great holiday!!" – Paid-up subscriber Susan R.

Good investing,

Vic Lederman
Jacksonville, Florida
December 17, 2019