At some point, this market will fall.
When it does, it will be a big fall.
We’re not talking hundreds of points.
We’re talking thousands of points.
But as the US stock market cracks another high, and the European Central Bank runs with a negative interest rate policy, don’t expect the crash of the century to happen anytime soon…
Free Reports:
Not everyone has the same view.
As Bloomberg reports:
‘For five years it’s been the fate of American short sellers to be wrong, as the biggest rally since the Internet bubble steamrolled defensive trades.
‘They’re loading up again, sending bearish wagers in the SPDR exchange-traded fund tracking the Standard & Poor’s 500 Index to almost 11 percent of its shares, the highest proportion since 2012…’
The interesting point about that statistic is that from 2012 to today the US index has rallied 52.7%. Just because a bunch of folks think the market will fall, doesn’t mean it will.
But there was a quote from the Bloomberg article that really paints the picture of the current market. It’s a quote from Stephen Solaka, managing partner at Belmont Capital Group:
‘This is one of the most-hated bull markets. A lot of people are praying for the market to fall. There are a lot of professional shorts. It’s been a painful trade.’
He’s got that right.
Most bull markets have some element of excitement and thrill.
But this bull market hasn’t had any of that. At every step of the way you’ve had warnings about a coming collapse.
Each time the stock market has seemed to hit a head of steam, a supposed crisis has reared up to stop it in its tracks.
And each time, these supposed crises have turned out to be nothing. They have had no real impact on the market or on the world economy at all.
Yet, that doesn’t stop the mainstream from constantly looking for the next bear market trigger. We guess they’re going for the scattergun approach. If they predict enough crashes, they’re bound to get one right.
The trouble is, by the time they get it right, most investors will have grown immune to these warnings.
But on cue, here comes another fatal warning.
Not satisfied that the conflict between Russia and Ukraine didn’t cause a crash, just as we said it wouldn’t, the mainstream has come up with another reason why stocks will crash.
Only, they won’t.
By the way, on the Russia story, we actually suggested that Money Morning Premium subscribers look at profiting from the Russia-Ukraine spat. We suggested they look at the Market Vector Russia ETF Trust [NYSEARCA:RSX].
That ETF is up 25.2% since mid-March.
So much for the idea that Russia was about to crash and burn. This is the kind of contrarian investment opportunity in emerging markets that analyst Ken Wangdong is monitoring right now.
More news on Ken’s special project soon.
But we bring up the subject of ETFs for another reason. Forget about all the other terrible crises over the past two years that were sure to send stocks crashing. Apparently, the real reason stocks will fall is all down to ETFs.
This news report from Reuters explains:
‘Blackrock Inc Chief Executive Larry Fink this week dropped a stink bomb on a small corner of the $2.5 trillion global market for exchange-traded funds.
‘Fink, who runs the world’s largest asset manager and ETF provider, said structural problems with leveraged ETFs have the potential to “blow up the whole industry one day.” Sponsors of leveraged ETFs and related products, which make up only about $60 billion of global industry assets, called his remarks an exaggeration.’
An exaggeration is one way to look at it.
But we see it another way. We see it as a diversion.
Let’s be clear, US$60 billion is a tiny amount. It’s barely 5% of the ASX’s market capitalisation.
But the fear of an implosion of leveraged ETFs isn’t the real issue. It’s a diversion. We remember the same scare tactics during the 2003–2007 stock market boom.
The big institutions issued similar warnings about leveraged products. In Australia, the fear mongering was about Contracts for Difference (CFDs).
The busybodies claimed that these financial products gave too much leverage to retail investors. They said if the market crashed it would create systemic problems throughout the financial markets.
But what happened during the last crash? Did the CFD market cause systemic problems across Aussie financial markets? Of course not. It barely had an impact.
The retail financial sector is a drop in the ocean compared to the institutional sector. When the big institutions start trying to warn about leveraged retail products (such as CFDs and leveraged ETFs), odds are they’re trying to divert attention away from the real problem products.
In 2007–2008 the real problem products weren’t the things retail investors got excited about; the real problems were the off-market products such as CDOs.
And if Mr Fink is looking for a real potential blow-up in the market he should look no further than his own firm. As an article in The Economist last December noted:
‘[BlackRock’s] reach extends further: to corporate bonds, sovereign debt, commodities, hedge funds and beyond. It is easily the biggest investor in the world, with $4.1 trillion of directly controlled assets (almost as much as all private-equity and hedge funds put together) and another $11 trillion it oversees through its trading platform, Aladdin.’
If you asked us to pinpoint the bigger of the two potential systemic risks to the market, — US$60 billion of leveraged ETFs or BlackRock’s US$15.1 trillion of direct and indirect market exposure (252 times the value of the leveraged ETF market) — we would say it’s BlackRock every time.
As we’ve explained for more than two years, this rally won’t go on forever. When it collapses it will be painful. But don’t for a minute think that leveraged ETFs will be the cause of it. In fact, if you’re bullish on this market, we’d recommend allocating a small part of your portfolio towards leveraged ETFs.
They’re risky, but if you understand the risks they can provide a good boost to your portfolio.
So as long as this rally continues, it’s up to individual investors like you to make the most of it and potentially profit from it. Don’t let the diversionary tactics from the ‘big end of town’ put you off trying to achieve that goal.
Cheers,
Kris+