If You're Not an Emotionless Cyborg, You Must Read This Essay
It's still a 'bubble'... The latest insanity in the art world... Speculative froth is draining from these assets... This is what tops feel like... Prepare, don't predict... The only man who knows exactly when to sell... If you're not an emotionless cyborg, you must read this essay... What every Digest reader needs now more than ever... Steve Sjuggerud, Doc Eifrig, and I all agree on this...
Over the past couple of Fridays, I (Dan Ferris) have proclaimed that 'this is a bubble'...
In the September 17 Digest, I gave my reasons for that proclamation... And then, last week, I showed you how at least one bubbly corner of the market – special purpose acquisition companies ("SPACs") – already washed out so much that it's now a value play.
Naturally, as soon as I say it's a bubble, a crazy story appears in the industry prone to the weirdest financial excesses, suggesting the current bubble is as frenzied as ever...
And like last week, another corner of the stock market (which I've mentioned in previous Digests) now suggests that the stock market may have already begun to top out.
Before we move on, just to be clear... I did not just call the top of the bull market.
By now, you know that I don't do predictions... and I certainly don't call tops and bottoms.
My goal today is not to call the top. Instead, I simply want to give you a sneak peek of what it feels like at the top. (Hint: It feels just like this.)
But before we do that, regular Digest readers know I can't resist a good story from the art world...
There's just no place for sheer, unbridled financial excess like the one for fine art. (OK, "fine" is debatable, but you know what I mean.)
In past Digests, I've covered such extravagances as a $120,000 banana taped to a wall... a $69 million non-fungible token ("NFT")... and a $18,000 piece of "invisible art" in Italy.
I thought I had seen it all (yet again) until the latest example came across my desk.
In short, the Kunsten Museum of Modern Art in Aalborg, Denmark recently contracted Danish artist Jens Haaning to recreate a pair of his previous works...
According to multiple reports, Haaning first exhibited the two pieces, "An Average Austrian Annual Income" and "An Average Danish Annual Income" in 2007 and 2010, respectively. The pieces were created as visual representations of the two countries' average incomes at the time of each work – 25,000 euros (roughly $29,000) and 328,000 Danish kroner ($37,800).
In addition to an undisclosed amount that the museum agreed to pay Haaning, it gave him $84,000 in cash to use as part of the two pieces of art. Haaning signed a contract that said the cash was to be displayed on the works... It wasn't his money to keep, and it must be paid back when the exhibition closes on January 16, 2022.
However, as you can probably guess since I'm telling you about it, Haaning had other plans...
Instead of the two works requested by the museum, he submitted something much more interesting – two blank canvases under a brand-new title, "Take the Money and Run."
Haaning is apparently known for art that promotes activism with a sense of humor.
The humor part is obvious... Even museum director Lasse Andersson laughed when the newly delivered crates containing the works were opened, revealing the blank canvases.
But what's the activism angle, you ask?
How much artists get paid.
No joke.
According to a press release from Haaning, by changing the title and submitting blank canvases...
[He questions] artists' rights and their working conditions in order to establish more equitable norms within the art industry.
On a Danish radio show, Haaning also said...
I encourage other people who have just as miserable working conditions as I do to do the same.
Rights... more equitable norms... miserable working conditions.
For gluing cash to canvases... Or this time around, for doing nothing!
But, well, maybe he's right...
Demanding that artists submit work you can actually see seems like nothing short of slavery...
I bet some evil capitalist thought it up, just to keep artists enslaved.
Imagine being an artist who works for a global company like Disney (DIS)... or maybe some big advertising agency in charge of marketing. They must crank out a constant flow of real artwork that you can see. And I bet some of those folks don't even make $100,000 a year!
But they should darn well also have the right to submit nothing and get paid for it... or at least the right to throw a banana against the wall and collect an extra $120,000 for it. They should all show up for work tomorrow... submit something invisible... and demand a big, fat raise.
Artists of the world, unite! Stick it to the man! Empty all of the world's art galleries of visible artwork! End the chauvinism of visible art now!
Thank heaven for frontline warriors like Haaning... He's striking at the root of this horrendous abuse on behalf of oppressed artists all over the world, the voiceless folks who are required to do actual artwork by heartless capitalist pigs.
The whole situation makes me want to vomit...
I hope you sensed my sarcasm. I could keep going on this rant all weekend, though...
An artist saying he's underpaid to produce absolutely nothing is even crazier than the $120,000 banana and the $69 million NFT. It also trumps the previous work of invisible art in Italy because that guy only got $18,000... which, by the way, he was paid outright without stealing it. He failed to get into the activist spirit like Haaning.
As Haaning said in a Danish radio interview, "the breach [of contract by taking the money] is part of the work." Not keeping your word is art these days, apparently.
I'll be curious to see if the Danish museum tracks Haaning down and gets its money back...
Andersson, the museum director, said he's not in breach of contract until January 16, 2022 – the date that the $84,000 is due back to the museum. I'm betting on Haaning, though...
If he's smart, he has already converted it to bitcoin and laughed all the way to Thailand.
Like the art world, the financial world is full of intangibles that can garner outrageous valuations...
But in a bubble, even the most valuable assets wind up being inflated well beyond their real value. And that means they also have a date with a bear market destiny...
That's what happens as reality catches up with these assets and sends the stock prices of the companies that own them plummeting back to Earth. True believers tend to hold on to the worst of these stocks far too long... And of course, they get badly burned in the end.
The burning may have already begun...
Earlier this year, I wrote a few Digests about Cathie Wood and her company, ARK Investment Management. Specifically, I pointed to ARK's exchange-traded funds ("ETFs") as a sign of the bubble we're living in today.
ARK is focused solely on the theme of innovation... And plenty of the companies in its ETFs are unproven businesses with no profits. They're long on vision and short on cash.
These ETFs all surged triple-digit percentages off the March 2020 bottom. So in that way, investors were well paid for what wasn't there – just like Haaning and the other creators of invisible art.
But lately, it appears the speculative froth is draining from these ETFs...
As you can see, the ARK ETFs all peaked during the "meme stock" madness in the first two months of the year. Now, they're almost all down between 18% and 33% from those peaks.
The one exception is the ARK Space Exploration & Innovation Fund (ARKX), which is only down about 4% since its debut in March. But I can't help but wonder... Once the current euphoria for space stocks passes, would it surprise anyone if ARKX were down as much as the rest?
All the ARK ETFs have followed a similar trajectory up and down. That's a typical bubble-like characteristic... When bubbles crash, all the price movements of the assets swept up in them tend to correlate, even if they were viewed as non-correlated assets before the crash.
For example, if you thought your shares in the ARK Israel Innovative Technology Fund (IZRL) would perform well even if your shares in the ARK Innovation Fund (ARKK) performed poorly, you've experienced a rude wake-up call over the past seven-plus months.
Of course, it could be just an extended "risk off" moment in the markets, but who knows?
Again, I'm not calling the top in ARK's funds... I'm just showing what the top of a bubble looks like.
I could do the same exercise with the four big market indexes, though they don't look nearly as bad (yet?)...
The Dow Jones Industrial Average hit its most recent peak on August 16. Since then, the index is down about 4%.
The S&P 500 Index and Nasdaq Composite Index reached their latest all-time highs a little bit later – on September 2 and September 7, respectively. They're down around 4% and more than 5% since their respective peaks.
And the Russell 2000 Index of small-cap stocks has gone sideways for almost seven months... It topped out (at least for now) back on March 15, though it has never been down more than about 10% from that high.
Still, with the latest tops in the S&P 500 and the Nasdaq happening less than a month ago, and the Dow Jones Industrials' latest top occurring less than two months ago... it's neither likely nor unlikely that the bull market has peaked.
You can't know that until the top is long in the past.
(In the October issue of my Extreme Value newsletter, I'll dive even deeper into this idea by showing how the different sectors of the S&P 500 have all topped out over the past several months... That suggests the recent top in the overall index might look a little shakier than it does by itself. So if you're a subscriber, stay tuned for our next monthly issue a week from today, on October 8. And if you're not a subscriber, learn how to get started right here.)
The point here is not to call the top – which, again, you know I don't do...
The point is simply to show you ahead of time how the top will look and how it will feel while it's starting to happen.
I want to do everything I can to guide you through the bear market when it finally arrives.
Everybody else will talk about it long after the top is already in. Even worse, every talking head on TV will smugly act like they knew it all along... even though they never said a word about it until the trend was well-established (like always).
But if you're not talking about what to expect at the top before it's definitely in, save it.
The skill you need is not calling tops... That can't be done. Rather, the skill you need is the recognition, understanding, and control of risk – and furthermore, the intuitive feel of a bear market.
But since you're a human and not a cyborg (more on that in a minute), it's better to talk about what it feels like instead of pretending there's some perfect suite of metrics that will predict it. (There isn't one.)
You'll know the top isn't in yet if the Dow Industrials, S&P 500, Nasdaq, and Russell 2000 all make new all-time highs again soon... And you won't know it until that happens.
With the recent pullback, the market-topping process could be underway right now... And the next bear market may have already begun... But there's no concrete way to know yet.
One more thing... I'd be doing you wrong if I didn't also point out that new highs are more likely than a bear market. Over the long term, the markets go up and to the right.
Before I move on, I must share one caveat...
Volatility is not risk – in the stock market or anywhere else.
In fact, a certain amount of volatility is healthy... Over a decade or more, you'll get plenty of random variations of different sizes (up and down) from day to day and week to week.
The fewer and smaller those variations, the more prone the market is to a larger correction. But as long as plenty of small variations are occurring, big variations – like market crashes – will remain relatively rare events.
In September, two low-volatility trends in the S&P 500 ended, according to our friend and SentimenTrader founder Jason Goepfert... The index closed more than 5% below its 52-week high of the year and ended its streak of consecutive monthly gains at seven.
That increase in volatility doesn't increase the risk of a crash, though... It might simply be a return to more healthy levels of variation in stock prices, which in turn might decrease the chance of a big crash.
Now, with that caveat out of the way...
You can't predict the top (or even recognize it until it's long in the past) – but you can prepare for it...
Regular Digest readers are likely familiar with my advice to prepare for a wide range of potential market outcomes. And you can do that by holding a truly diversified portfolio with four basic components...
- Stocks and bonds
- Plenty of cash
- Gold and silver
- A little bitcoin (or not, depending on your personal preference)
But today, I must confess... That's not nearly the whole story.
You see, most humans are their own worst enemies in a bear market. If the stock market falls 50%, 60%, or more over the next few years (as I believe is likely), far too many folks will make the absolute worst decision they could make... They'll sell out at the bottom in utter despair, exhausted by the pain of watching their net worth fall by half or more.
That doesn't need to be you. You can handle this emotional battle in one of two ways...
First, you could be a totally passive investor. You could contribute to a 401(k) account and not actively buy and sell stocks weekly – or even monthly. If you forget about your portfolio for 30 to 40 years, you'll probably be fine.
But if you're reading my words right now in the Digest, that likely isn't an option...
Odds are good that you're actively managing your own portfolio, buying and selling stocks based on a specific strategy. You either make money or lose money based on numerous decisions that you make every day, every week, and every month.
If that sounds like you and you're not an emotionless cyborg, then you absolutely must have a plan to avoid selling out in a panic at the bottom. You must plan ahead for when you'll sell... and it better be long before all those poor folks who panic at the bottom.
Unfortunately, I now must disclose a slight hiccup with this line of thinking...
It's nowhere near as easy as it might sound.
Knowing when to sell is the hardest thing you'll ever have to do as an investor.
In my humble opinion, nobody really knows when to sell – not even Warren Buffett. I think that's an unspoken reason why he always says that his favorite holding period is "forever."
My next sentence might sound incredibly self-serving, but it's true... The only person I know who has a system that can improve your investment returns by showing you the ideal time to sell is Keith Kaplan, the CEO of Stansberry Research's corporate affiliate TradeSmith.
Keith's company sells – and he uses – a system that will help you know when to get out of stocks you don't want to own in a bear market... long before they hit bottom.
It's sort of like a cyborg's emotional control... It'll save your financial life in a bear market.
With the 'bubble' upon us and the bear market inching ever closer, I believe one thing is clear...
Every Stansberry Research subscriber should at least try TradeSmith's flagship product today... It's called TradeStops.
TradeStops doesn't just help you know when to sell. It tells you the exact time to sell... by automating everything except for the actual placement of the trade. (You need to do something... We're not making invisible art here.)
About his company's one-of-a-kind service, Keith says...
Movies have Netflix. Online shopping has Amazon. And now investing has TradeStops. Over the past eight years, it has helped over 40,000 investors around the world track nearly $30 billion invested in the stock market.
Keith and his company have done all kinds of research to show how TradeStops can improve the performance of any investor – including billionaire geniuses like Buffett, David Einhorn, and Bill Ackman.
Keith recently joined me and a pair of my colleagues to talk about the current state of the stock market...
In case you couldn't tell, I'm bearish.
My colleague and True Wealth editor Steve Sjuggerud is bullish. And Retirement Millionaire editor David "Doc" Eifrig – ever the reasonable and wise investor – is neither a bull nor a bear today... As he put it during our discussion, he's a market "realist."
(By the way, check your inboxes on Monday and Tuesday for special Digest contributions from Steve and Doc... They're planning to share their current thoughts on the markets.)
The four of us hardly ever get together for a chat like that... So we filmed it. And frankly, I don't think you can afford to miss our conversation unless you're an emotionless cyborg.
If you're as worried as I am that we could be near a major market top...
If you're worried that "this is a bubble" and certain corners of it are already popping...
If you're worried that the most expensive stock market ever could fall 60% or more before it bottoms out...
I urge you to stop reading this Digest right now. (Fortunately, we're near the end anyway.) Go watch our entire presentation. It'll blow you away. You'll likely come away realizing that you're not prepared for a steep bear market... and that you better prepare immediately.
Before long, it'll be too late... It'll be clear by then that the market top is long in the past.
New 52-week highs (as of 9/30/21): Black Stone Minerals (BSM), Cheniere Energy (LNG), OptimizeRx (OPRX), and Royal Dutch Shell (RDS-B).
In today's mailbag, an opinion about Steve's "Melt Up" thesis. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Here's a prediction for subscribers... The Melt Up will occur but not in Tech or Biotech stocks. This time it'll be the energy sector. It'll work its way from one of the most undervalued, overlooked segments to eventually become the most overvalued sector." – Paid-up subscriber Boyce W.
Good investing,
Dan Ferris
Eagle Point, Oregon
October 1, 2021