For the last few weeks your Capital Wave Forecast has been highlighting “negative narratives” like the fake recession and fake manufacturing recession narrative, the Fed’s lost control narrative, and how global debt is going to crash markets narrative.
The purpose of highlighting and debunking negative narratives is to warn investors that they should be watching the market go higher and reading Capital Wave Forecast to understand what’s driving markets, and not listening to or reading naysaying nonsense.
There are other negative narratives out there, which we’ll continue debunking, just not today.
Today, we’re catching up with where the market’s been going and what’s immediately ahead for stocks.
The secret momentum driver elevating market indexes to all-time highs, again and again, is none-other than the “passive investing” trend. It’s going on unbeknownst to even the drivers of this momentum bus.
Investors who don’t understand how big an impact money flowing into index funds has had on the market’s performance probably have no idea what could happen if the trend stalls, or worse, reverses.
Here are the pitfalls of passive investing and how bad the fallout could be if passive investors discover the trap they’ve entered, turn active, and sell.
The almost self-perpetuating cycle of rising markets attracting passive investment capital into index products, which boosts the value of indexes as money flows into them, which attracts more sidelined money and compels investors to sell actively managed funds and buy passive index-following funds, which have been lowering their management fees since they aren’t actively managed, which attracts more investor capital into the growing universe of index funds, which keep increasing in value as sponsors and their authorized participants buy all the underlying stocks in the indexes they track when investors buy those packaged products in the open market, is, almost self-perpetuating.
But you know the saying, almost only counts in horseshoes and hand grenades.
The truth is passive investing’s virtuous positive momentum manufacturing feedback loop isn’t a guarantee.
We talked about this on Tuesday, and now there’s more news out about Goldman Sachs’s potential hit for its part in the 1MDB global scandal.
While Goldman and the U.S. Justice Department are reportedly negotiating a $2 billion fine and criminal rap for its Asian-based banker’s part in the sensational multi-billion scandal and theft of assets from a Malaysian sovereign wealth fund, Malaysia’s attorney general said last week he’s going after the bank for $8 billion to $9 billion.
Anything close to a $10 billion hit to Goldman would be devastating.
It’s out there, that out-of-left-field thing, that exogenous event, that black swan, that thing that could implode the stock market.
Only, it’s not out there, it’s right here.
And it’s got a name: “repocalypse.”
What the smartest, biggest traders in the world are afraid of is an apocalypse in the fed funds market for repurchase agreements (repos); hence, the name is repocalypse.
They’re petrified that extraordinary year-end borrowing by banks and overleveraged hedge funds to meet reserve requirements and settle year-end accounting demands could cause repo borrowing rates to explode and sink the fed funds market, the very plumbing that the financial system lives and dies by.
But if there’s a cheap way to buy insurance on the market faltering, I’m buying it.
No, I don’t think the market’s going to crash. It’s not even done going higher. In fact, I believe it’s going at least another 10% higher, maybe more.
It’s just that I like buying cheap insurance when I can. I may never need it, you may never need it; still, that doesn’t stop us from buying insurance on our cars, homes, or other investments, does it?
The whole WeWork saga just keeps getting stranger and uglier, especially for SoftBank, Vision Fund, SoftBank’s $100 billion subsidiary investment vehicle, and Masayoshi “Masa” Son, founder, chairman and CEO of SoftBank and CEO of the Vision Fund.
SoftBank just took control of the floundering WeWork this morning with an almost $5 billion rescue package after the company’s board sought out 75 financing sources in a week, but in the end chose SoftBank’s deal over JPMorgan’s junk bond-based rescue plan.
Too bad for SoftBank, the Vision Fund, Masa Son, WeWork, its investors, and its employees, the rescue package is only a temporary lifeline.
The Dow and S&P 500 both broke three-week losing streaks last week, and the Nasdaq Composite was up for the second week in a row.
We’re heading back up closer to all-time highs.
The Dow’s only 582 points or 2.12% from Olympus and the S&P’s only 1.9% from its all-time highs. On the other hand, the Nasdaq Comp, the index that’s been higher for two weeks, is 3.5% from Magicland.
So why do I say this is just a “kind of rally” with all this seemingly good news?
Clearly last week was an otherwise down week if not for the one positive lifting market on Friday: trade talks.
This was good news, until it was stripped down and re-rated by market judges.
The reason that the Dow was up more than 500 points but ended up on Friday only 242 points higher was the whole judgement thing.
The U.S. looked like it scored a victory because China agreed to purchase $40 billion to $50 billion in U.S. agricultural products, at least according to President Trump, but the time frame of any purchases wasn’t immediately clear.
Also, China agreed to open its market to international financial services, again according to Mr. Trump, potentially allowing U.S. banks and insurance companies to expand in China: no timetable there either.
China looks like it scored on account of the U.S. not moving forward on Oct. 15 with a planned increase in tariff rates to 30% from 25% on about $250 billion of Chinese goods.
The old saying is, “there’s no such thing as a free lunch.”
But that’s old school.
The new economic orthodoxy, better known as Modern Monetary Theory (MMT), says that it’s possible.
And not just possible, but a perfectly viable option for the economic prosperity of any nation who does it properly, which sounds a bit pretentious to me.
In fact, according to political advocates of MMT, which Leftist Democrats and honest Republicans will tell you is currently being practiced successfully by the Federal Reserve, MMT makes free college, free healthcare, and even guaranteed income possible, in theory.
If you’ve ever wondered what’s really driving private companies when they don’t report their financials publicly but instead get the word out when their “valuation” reaches a billion dollars, or many times that, well then I’m going to tell you.
Usually, what’s driving the company is “The Valuation Game”.
Sometimes the Game’s real meaning that the company’s valuation is justified.
But, not quite half the time, the Game is so unrealistic that companies’ valuation numbers should be classified as fantasy, not fact.