‘“Code Red”: A condition of heightened alertness or preparedness, especially to guard against imminent danger…’ This is the strangest time in history to be an investor. Over 35 years in this business, I’ve seen the beginning and end of three such periods. The 1987 melt-up…and meltdown. The dotcom boom…and bust. The US housing bubble…and GFC. Each time had just one or two ‘Code Red’ investments. I was a first-hand witness to: Entrepreneurial stocks in the 1980s. And the so-called portfolio protection insurance that grew around them. These were 1987’s Code Reds. Then there were unlisted property trusts in the early 1990s. These flashed red and then blew up Australian investors. Then tech funds in the late ‘90s. Then came mortgage trusts and high-yield lending. Each had its own compelling story — like meme stocks, cryptos, and high-yield bonds do right now. But right before the crash, these ‘Code Red’ alerts sounded. No one listened. The bubbles burst. And people lost billions. I believe the same alerts are sounding today. ...but there’s one key difference. In this report I’m going to show you what that difference is. You’ll see that the potential consequences for ignoring this difference are grave. In fact, it could be one of the costliest wealth mistakes you make in your whole life. We’ll zero in on four key Code Reds that are signalling the loudest and clearest. According to the industry spruikers, there will NEVER be a bad time to be invested in these assets. This is pure, self-serving nonsense. You’ll see what I mean in a second. But, in short: now is the time to learn how dangerous these four Code Reds really are. And to consider scaling back…or liquidating your positions entirely. Finally, I have a plan of action for you. When things reverse, market forces will have an awful lot of work to do in correcting the excesses. Smart investors will have a ‘before/during/after’ plan already in place. Because there’s a key difference between now…and all bubbles that have come before… The boom that started in 2009 has mutated into a bubble in everything. Extreme overvaluation. 20-year-olds trading stocks on apps. Crazy property price increases. Bonds more expensive than ever before. Tech companies swamping the market. Digital art selling for $70 million. Frenzied issuance. Hysterically speculative behaviour. For the first time in market history — Code Reds are EVERYWHERE you lookThis is no ordinary uptrend. In fact, at least from my point of view, it’s the most dangerous collection of overpriced assets in the history of mankind. In previous up-cycles, you always wondered how — and when — they would end. Today, the very concept of ‘an end’ is being challenged. Thanks to the actions of central banks, there’s an entrenched belief this isn’t a bubble. It’s just how things work now. But here’s my question… Do you really think this can go on forever?Markets move in cycles. Yet we tend to look at them, as we do life, in linear fashion. We think the immediate future will be the same as our recent past. And our past has been up, up, up. This is the stock market right now… | Source: Ned Davis Research |
Every valuation metric flashing red. But, unlike other bubbles, this is not just a stock phenomenon. It’s ALL assets. And very few people think it will end any time soon…or in any meaningful or harmful way. I think these people are gravely mistakenA ‘Code Red’ is a term used by the military, medical professionals, emergency services, and even climate scientists. When a situation escalates to a Code Red, the public is alerted to the dangers we face. And told how to prepare for the probable eventuality. Yet, when it comes to markets, no such alarms are being raised. Not by government. Not by mainstream media. And not by financial advisors. So today, in this letter, I’m doing it. Now, to be clear, I made a very good living — and was able to retire at an early age — directly because of the financial planning industry. But in my view, it has slowly veered further and further away from the interests of its clients. They don’t want you to see what I’m about to show you. The same goes for institutional economists. They’ve become professional marketers for the Everything Bubble. Always sticking to the script and promoting the institutional line — ensuring money continues to flow into their employers’ funds. But here’s something these people will never admit to you… The central banks are not all-powerful. There are forces even they can’t control. If you care about your personal wealth, the stakes couldn’t be higher. As investing legend Jeremy Grantham states… ‘Make no mistake — for the majority of investors today, this could very well be the most important event of your investing lives. ‘Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time.’ By the end of this research paper, you’ll see how this ‘Everything Bubble’ has to end. No matter what central banks do. You’ll have a much better idea of what to do with your investments right now to protect yourself from a seismic shift in the markets. And you’ll be given a five-part plan that sets out all the smart moves to make with your money over the coming months...and years. If you agree with me — you’ve some big decisions to make. These are decisions you have to get right. For that reason, we’re not going to get bogged down with charts and economics and PE ratios. Instead, we’ll start simple, with: What I think you should SELL right now, to avoid big lossesBecause when then biggest boom in history ends, you will no longer be able to buy stocks, or property, or cryptos and just expect prices to rise. More likely, the opposite will happen. Most prices will start going down, not up. Most prices…but not all prices… That’s why, as well as giving you a specific plan to help your portfolio avoid the worst of the pain…we’ll also talk about several investments that I believe are most likely to go UP when the trend changes. Two of these investments jumped 61% and 31% during the brief but brutal post-COVID sell-off in March 2020. And that was just a sharp correction. In a proper, prolonged down-cycle, these could feasibly return you many hundreds of percent — at the very time the wider market is imploding. But before we get to that, you need to understand my reasoning behind the four investments capable of causing the most harm to your savings and investment wealth. Starting with the most imminent threat... CODE RED INVESTMENT #1 Take profits from tech stocks…before 17 January 2022!Investors were drunk on tech stocks before the pandemic. Then lockdowns happened: and Bezos and the rest had all their Christmases come at once… Imprisoned customers, with nothing but tech to turn to. And bored investors — with stimulus cheques to spend…steadfast in the knowledge stock markets don’t crash anymore — all looking for the next ‘hot thing’ to buy. And buy they did… The FAANGs — Facebook, Amazon, Apple, Netflix, and Google — are now the greatest concentration of stock market wealth in history. Take a look: The blue line is the valuation of those five stocks. It’s swamped the other 495 on the S&P 500. See the green line? That’s their ACTUAL REVENUE compared to those 495. So small you can barely see it. Monster valuations…tiny revenue. A pile-on towards more and more growth…when the fundamentals don’t back it up…is human nature at this stage of the cycle. It’s what we do. For this reason, tech is the spearhead of the Everything Bubble. And the ‘smart money’ has started to act… The Big Short against Big TechDr Michael Burry is the most famous Code Red predictor on the planet. He created the ‘credit default swap’ to bet against the housing market in the run up to the subprime mortgage crisis in 2007. Well…Burry is now warning of ‘mother of all crashes’ with ‘losses the size of countries’. He’s taken out a huge $534 million short position against another big tech player — Tesla. And he’s spent 2021 loading his hedge fund with ‘anti-tech’ companies. Real asset holdings now make up 60% of his portfolio. Most recently — he took out a huge short on the most famous tech growth fund in the world, ARKK Innovation. Its portfolio is made up of the tech monsters — including Twitter, Facebook, Netflix, and PayPal. The ‘stay-at-home’ techs — whose revenues are questionable now the world is getting out of lockdown — like Zoom, Teledoc, Shopify, and Peleton… And the bulk of the ARK portfolio are smaller biotechs. Think of ARKK as a war wagon of tech companies haemorrhaging cash. And quietly, as the wider market’s risen, ARKK’s started haemorrhaging investors as well… ‘Investors pour out of Cathie Wood’s flagship innovation ETF at the fastest quarterly pace on record.’ Bloomberg, 1 October 2021$1.97 billion in smart money bailed in the last quarter alone because it’s not dumb. According to a recent investigation by Fortune magazine, in order for ARK to be worth its valuation, its holdings would ‘need to soar out of a $169 million hole and add almost $2.4 billion in profits.’ If that’s not a Code Red, what is? If I’m right, ARK is just the canary in the coalmine. Yet another generation of growth investors is walking into a well-set trap. And just like with the GFC, a very small number see exactly what’s coming. They’re either selling — and leaving the dumb retail investors holding the bag (as always happens at the end-stage of an up-cycle). Or…they’re making moves to actually PROFIT when the trend turns. All the signs are indicating we’re in the late and highly dangerous stage of the cycle with tech stocks. Are we at five minutes to midnight or is there still more time left on the clock? No one, not even Michael Burry, knows for certain. But: Circle 17 and 25 January 2022 in your diaryThis is a one-week period in January where a slew of Q4 earnings results will be released from the US’s Big Tech complex. But…the investing world may well return from their Christmas breaks to a very nasty surprise. You’ve been warned. But let’s stop here for a second to look at the ‘big picture’. Because, frankly, the plan you’re about to get isn’t worth anything if we have the big picture wrong. To really understand the fate for this market, you’ve got to go back to the 1950s. Out of the ashes of the Second World War, rose an economic phoenix. The developed world transformed from war machine…to manufacturing hub. Factories produced all sorts of goods and gadgets to satisfy increased consumer demand. Advertising agencies — think the TV series Mad Men — pitched creative ideas to companies in a range of industries, mass-producing a range of new goods. Cars. White goods. Televisions. Cameras. Cigarettes. Fast food. Fashion. The campaigns worked a treat. Households bought whitegoods from Westinghouse and General Electric. GM and Ford dominated the auto industry sales. Cars ran on fuel…think Mobil & Exxon oil. They also needed tyres…Goodyear. Philip Morris. Kodak. McDonald’s. Pepsi Cola. None of this escaped the attention of investors. These were the FAANGS of the 1960s and ‘70s. Except then they were called the Nifty Fifty. The drivers of the biggest and longest boom the world has ever seen. They ushered in an age of endless growth. At least that’s how it seemed to investors at the time… But, just like now, investor belief started to trump fundamentalsIn an article on Michael Burry’s current short against tech, Ng Nhu Hann observes: ‘In the past 17 months, stocks with the word “tech” in their names have achieved a meteoric rise in their share price. ‘The ascend is mindboggling considering most of them having delivered only subpar earnings performance and have somewhat questionable track records.’ Rewind to the 1970s, and that was the Nifty Fifty. But when the cycle turned…their stock prices collapsed… After the carnage was over, post-mortems began... In 1977, Forbes magazine published an article titled ‘The Nifty Fifty Revisited’. Here’s an extract: ‘What held the Nifty Fifty up? The same thing that held up tulip-bulb prices long ago in Holland — popular delusions and the madness of crowds. ‘The delusion was that these companies were so good that it didn’t matter what you paid for them; their inexorable growth would bail you out.’ Ring any bells?Getting caught in seemingly never-ending growth periods is a generational rite of passage. 25 years later, history repeated… The Industrial Revolution was about to be replaced by the Technological Revolution! A new generation of investors believed — as they did in the 1970s — that this time was different. When a boom is in full swing, no one can see a limit to the share prices of popular growth stocks. No amount of reason can persuade investors that up-trends never last. Especially when you have dominant players like IBM, Cisco, Microsoft, Intel, Oracle, and Apple. These were not your run-of-the-mill dotcom start-ups…they were the titans of tech. Just like the stocks we were just talking about in Code Red Investment #1. Throw in a big pharma like Merck, a banking giant like JPMorgan, and a fast-food whopper like McDonald’s…and how could you go wrong? Here’s what those ‘can’t-go-wrong’ investments went on to do in the great tech bust of 2000… And therein lies the critical ‘Code Red’ of a market close to its peak. Any sentence prefaced with… ‘You can’t go wrong buying…’How many times have you heard that…tagged to so many different investments…over the last five years? People also say, ‘it’s different this time’. And in one way it is. But not in a good way. Now the illusion isn’t confined to one type of ‘can’t go wrong’ stock. EVERYTHING is immune to common-sense valuation metrics. And NOTHING can go wrong. Which brings us to your next Code Red. To me, this one is the modern-day version of 2007 margin lending. There’s that same stench of speculation, blind belief, and outright fraud… |