A Bearish Catalyst Appears

No one really understands catalysts... An uptick in financial emergencies... Small numbers get big fast... Mindless distressed sellers are incoming... Kindred bearish spirits... 'Normal accidents'... How markets really work... My 'Spidey senses' are in overdrive... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Editor's note: The U.S. markets and our offices are closed for the Good Friday holiday tomorrow... So we're sharing Dan Ferris' usual Friday Digest today. We'll pick up with our regular fare on Monday, following this weekend's Masters Series. --------------------------------------------------------------- No one really understands catalysts... An uptick in financial emergencies... Small numbers get big fast... Mindless distressed sellers are incoming... Kindred bearish spirits... 'Normal accidents'... How markets really work... My 'Spidey senses' are in overdrive... --------------------------------------------------------------- 'Dan, if stocks are super expensive and long-term returns are likely poor... then what's the catalyst that'll make them fall?' That's a typical question I get whenever I say that a particular asset or market is very expensive after rising a lot. I get the opposite question when an asset or market is very cheap after falling a lot. Folks just can't embrace the idea that a market being way too cheap or too expensive is reason enough to buy, sell, or avoid it. If stocks have risen a lot – like they have over the past year and a half – most people don't want to consider that they'll do anything but keep rising. So when you show them why that's unlikely to happen for very long, the first thing they ask is "What will cause prices to turn around and head in the other direction?" In other words, what's the catalyst? The real answer is that I have no idea. I don't often worry about catalysts because, like predicting the future, no one really knows how to figure them out. You see, even if you do find a catalyst, you have to find out why enough folks don't know enough about it to price it into the market. So I admit that today's Digest is out of character... But a compelling catalyst just dropped into my lap. In a nutshell, the endless bull market that has taken stocks to new all-time highs and mega-bubble valuations could reverse if investors keep doing what a recent Wall Street Journal article says they've been doing more and more of over the past couple of years... A record share of 401(k) account holders took early withdrawals from their accounts last year for financial emergencies, according to internal data from Vanguard Group. Overall, 3.6% of its plan participants did so last year, up from 2.8% in 2022 and a prepandemic average of about 2%. Millions of investors regularly and passively purchase exchange-traded funds ("ETFs") that buy big stock market indexes like the S&P 500. So-called passive investing means that investors are buying stocks without any reference to the fundamentals of the underlying businesses. And these ETFs are overwhelmingly passively managed. Over the past 10 years, investors have put about $4 trillion into U.S. ETFs, a 376% increase over that period. During the same period, assets in open-end mutual funds – most of which are actively managed – rose just 114%. I've written about passive investing (which I call mindless investing) before, most notably in my [September 1, 2023 Digest]( where I pointed out that 45% of all U.S. investable assets are in mindlessly managed passive-investing vehicles. But as long as folks keep buying, there's no problem, right? Wrong... partly because they never keep buying forever. At some point, the selling begins. And seemingly small amounts of selling can be more than enough to set the market into reverse. The Wall Street Journal article I cited above says that in 2022, 2.8% of 401(k) plan participants at Vanguard – one of the world's largest asset managers, with more than $7 trillion under management – took emergency withdrawals... which rose to 3.6% in 2023. These seem like small numbers, but I suspect the tipping point that could switch the passive-investment flows from "buy" mode to "sell" mode is likely a lot lower than any of us might guess. Remember what I pointed out back in September: During the pandemic panic of March 2020 – one of the scariest market moments of anyone alive today – a Vanguard report found that only 1% of U.S. households abandoned equities completely... It makes you wonder... What would happen if 2% of households sold all their stocks? Or 5%? Or 10%? I suspect Vanguard is a representative subset of all 401(k) participants in the U.S. And what will happen if 5% or 10% of all 401(k) participants take large emergency withdrawals? Various types of retirement plans held a total of about $38.4 trillion at the end of 2023, according to a March 14 report by the Investment Company Institute. Imagine if 5% or 10% of those accounts started selling at roughly the same time. That would be somewhere between $1.9 trillion and $3.8 trillion of equities hitting the market at once, looking for buyers. That's a pretty large chunk of the roughly $55 trillion total market cap of all U.S. stocks, most of which are small, illiquid names with low daily average trading volume. Remember, these sellers would also be distressed because they're doing emergency withdrawals. So they'll just keep selling no matter how far the market falls. They must have that cash and will sell their investments until they get it. So it probably won't take many investors hitting the 'sell' button to send the passive bull market juggernaut into bear market mode... As I said in September, the mindless algorithm of a passive fund "receives $1 of cash and buys $1 of equity." If that reverses, it becomes "demand $1 of cash, sell $1 of equity." Remember, in both cases, the transaction has nothing to do with the attractiveness of the stocks being traded based on any fundamental or technical considerations. The market is viewed simply as a bank account. You put money in when you can, and you withdraw it when you need it. And more Vanguard 401(k) participants than ever need money today. The more stock prices fall, the more shares you have to sell to turn $1 of equity into $1 of cash. It could get scary since the sellers are distressed and as mindless in their selling as in their buying. A steep market rout may or may not be imminent at this moment. But big declines followed by long periods of sideways action are a normal feature of markets... And the next one, whenever it occurs, is inevitable. So right now, it's just a small percent of 401(k) participants making emergency withdrawals. But if the number keeps rising, it could one day reverse the trend of the past couple of decades. A primary feature of that trend is that you could have bought any and every dip in the market, including the biggest ones, and you'd still be sitting on gains within a few years. What if that's over for the next 10 or 20 years? And what if it's over because inflation and higher interest rates have sent more households into a state of financial emergency, so the only cash they have available is in their retirement accounts? I've spoken about what could end the passive juggernaut with various investors before, and while no one knew what the catalyst would be... we all agreed it can't last forever. But now, we have an idea of that catalyst... Because if there's one inevitable fact of economic life over the centuries, it's that politicians will sacrifice the value of the currency for whatever purpose they want. And inflation means folks need more cash to buy the same amount of life's necessities. Higher interest rates that normally accompany inflation mean folks pay more, too. I know this might sound like nonsense... But I'm not alone... I recently found kindred spirits at U.K.-based asset manager Ruffer. The company boasts a 29-year track record of delivering returns to investors of 8.1% annually, net of fees. The firm prioritizes capital preservation over capital appreciation, and it has about $28 billion under management. So it can't afford to say things that'll make its clients sell it all and head for the hills. Still, it's sounding alarms... In [its recently published 2024 review]( Ruffer's co-Chief Investment Officer Henry Maxey wrote of the likelihood of a potentially large, sudden market drawdown today: Our concern is that the reversal will have more in common with 1987 than any of the other crises in the last 30 years. He's talking about the largest one-day drawdown in market history, when the Dow Jones Industrial Average fell nearly 22% on October 19, 1987, known to this day as Black Monday. Maxey cites concerns I've voiced before. For example, he details various aspects of the complexity of modern financial markets, then writes: Fans of the HBO series Chernobyl will recognise what I am describing as a 'closely coupled system'. That is, one in which the components or elements are tightly linked together. In such systems, changes or disturbances in one part quickly and directly affect other parts. In our financial application, the system is complex, tightly integrated, interdependent and highly sensitive to liquidity conditions. Crucially, it predominantly sits outside the banking system, where much of the post 2008 crisis regulatory focus has been. People often think financial catastrophes occur because herds of humans panic when the emotional pendulum swings from greed to fear. The next market sell-off will be much more mechanical, mathematical, precise and fast. Regulators and policymakers, meanwhile, are human – their reaction times are slower, with decisions made by committees. It sounds like Maxey might have read Charles Perrow's 1984 book Normal Accidents: Living with High-Risk Technologies, which describes what engineers refer to as loosely and tightly coupled systems, and how the terms are generalized for organizations and complex technologies: Loosely coupled systems, whether for good or ill, can incorporate shocks and failures and pressures for change without destabilization. Tightly coupled systems will respond more quickly to these perturbations, but the response may be disastrous. Maxey is the only person besides myself who I've heard publicly worrying about the potential of a large, one-day drawdown in the stock market... and whether or not the stock exchanges' circuit breakers could do little more than buy investors some time to try to figure out what's wrong. As I've written before, there are three circuit breakers on U.S. stock exchanges. These were adopted in the wake of the 1987 one-day crash. The first one kicks in when the S&P 500 falls 7% in a day. Trading is halted for 15 minutes if the drop occurs before 3:25 p.m. Eastern time. Trading is not halted if it happens after that. The second breaker triggers if the market falls 13% before 3:25 p.m. Eastern time. The third breaker triggers if the market falls 20%. In that case, the exchange is shut down, no matter what time of day it happens. The circuit breakers halt all trading to help investors catch up to what's happening, keep a cool head, and not overreact in a blind panic. That's not unreasonable but, as Maxey points out, the circuit breakers can also exaggerate market moves: When so much money is systematically managed – directly or indirectly – circuit breakers can buy a little time for policymakers to try to figure out what is going on. But they can also exacerbate moves. For example, I wonder how many traders of 0DTE [zero days to expiration] options know what price their option will be settled at if the market closes down 20% on a circuit breaker? Is it -20%? Or the price of the index at the open the following day – ie potentially a lot lower? Spoiler: -20% is not the right answer. In other words, just because you shut down the exchange on a Monday doesn't mean the market won't be down 20% again first thing Tuesday morning. As I've noted before, I don't purport to know the complex inner workings of the software and computers that run the big stock exchanges. Nor do I know all the rules and regulations that apply to them. My fear of a massive one-day decline is a philosophical position... I simply don't believe that humans control markets... or even that humans created markets. Markets happen when the conditions are right, and humans don't control them. They merely participate in them. You see, markets happen when humans reasonably agree on what's allowed in them and what's not allowed. For example, fraud and theft are not allowed. And you have to pay what you say you'll pay. I'm sure there are other important rules, but I'm just characterizing the basic conditions that make markets work. Once those conditions are in place, well... anything goes. For example, the price of a garbage stock like GameStop (GME) or AMC Entertainment (AMC) can rise hundreds or thousands of percent in a few days. If you sold at the top, great... If not, you lose and you don't get the money back. There are other examples. The price of oil futures went negative in April 2020. And on August 24, 2015, some stocks went to zero, before quickly bouncing back in a flash crash, making it impossible to calculate the value of many ETFs for several minutes. There's no chance oil is worth less than zero... or that the companies that tanked and recovered in August 2015 were momentarily worth zero. It was just market behavior based on stuff humans do – which, again, is allowed as long as you don't commit fraud or theft and pay what you agree to pay. All I'm saying is that if markets let this kind of stuff happen, is it so crazy to believe that they'd let the S&P 500 fall more than 20% in one day, circuit breakers or not? Or as Maxey implied, even if the stock exchange is successful in shutting down trading at a 20% decline... so what? That doesn't say anything about the prices investors are willing to transact at when the exchange reopens the next morning. So maybe the time to start thinking more about this type of event is when more folks than ever are making emergency 401(k) withdrawals. My "Spidey sense" shifts into overdrive when no one is worried about a potential disaster at a time when a big decline becomes less unlikely... And I start thinking about how to prepare for it. --------------------------------------------------------------- Recommended Links: [The Historic Market Anomaly Sending Stocks Up 100% in a Single Day]( A rare mathematical inversion in ONE corner of the stock market now presents a 1-in-20-year moneymaking opportunity we may never see again in our lifetime. It has nothing to do with the "Magnificent Seven" or the presidential election... and doesn't involve trading options or bitcoin. Yet, it could create enormous wealth for those who position themselves correctly, beginning today. [Click here for the full story](. --------------------------------------------------------------- [BREAKING NEWS: A Global GOLD LOCKDOWN Is Now Underway...]( All over the world, vaults are being emptied out by financial insiders. And soon, you may not be able to purchase gold at ANY PRICE... period. Forty-year market veteran and former Goldman Sachs Vice President Dr. David Eifrig reveals what is happening behind the scenes in the gold market and [what you must do immediately to prepare](. --------------------------------------------------------------- New 52-week highs (as of 3/27/24): American Financial (AFG), Amazon (AMZN), Grupo Aeroportuario del Sureste (ASR), Alpha Architect 1-3 Month Box Fund (BOXX), Brown & Brown (BRO), Chord Energy (CHRD), Colgate-Palmolive (CL), Cencora (COR), Pacer U.S. Cash Cows 100 Fund (COWZ), Cintas (CTAS), Donaldson (DCI), D.R. 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Berkley (WRB), and Energy Select Sector SPDR Fund (XLE). In today's mailbag, feedback on [yesterday's edition]( about the Baltimore bridge collapse... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Corey, I'm a Navy veteran. You can lose steering at a snap of the fingers and if you lose all power, you lose aft steering. I suggest you take the old parts of the bridge that aren't damaged too badly and reuse them to build a new bridge. Rebuild the bridge the same way it was and then start on a new bridge to replace the old bridge. "The channel needs to be widened and piers need to be built around the new supports so this never happens again. Once that is completed, then tear down the old bridge. The NTSB [National Transportation Safety Board] stated today that their report would not be out for 12-24 months. "Rebuilding the old bridge would allow for traffic to once again get around 695." – Subscriber Mark W. Corey McLaughlin comment: Mark, first of all, thanks for your service. Second, all that makes sense. The bridge was not built 47 years ago with the size of today's cargo ships in mind, and it obviously wasn't strong enough to take a direct shot to one of its pylons. "We realized Stansberry Research is in Baltimore and really appreciated Corey's email on the disaster at the bridge. Tragedies such as that help keep in perspective what is really important! Thank you." – Subscribers Mike and Arline W. Good investing, Dan Ferris Eagle Point, Oregon March 28, 2024 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,374.2% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,339.1% Stansberry's Investment Advisory Porter wstETH Wrapped Staked Ethereum 02/21/20 1,173.5% Stansberry Innovations Report Wade ADP Automatic Data Processing 10/09/08 900.4% Extreme Value Ferris WRB W.R. Berkley 03/16/12 806.4% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 639.2% Retirement Millionaire Doc BTC/USD Bitcoin 01/16/20 619.9% Stansberry Innovations Report Wade HSY Hershey 12/07/07 475.5% Stansberry's Investment Advisory Porter AFG American Financial 10/12/12 468.5% Stansberry's Investment Advisory Porter TT Trane Technologies 04/12/18 380.6% Retirement Millionaire Doc Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 4 Stansberry's Investment Advisory Porter 3 Retirement Millionaire Doc 2 Stansberry Innovations Report Wade 1 Extreme Value Ferris --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 2,291.8% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 1,746.7% Crypto Capital Wade ONE/USD Harmony 12/16/19 1,296.2% Crypto Capital Wade MATIC/USD Polygon 02/25/21 895.5% Crypto Capital Wade AGI/USD Delysium AI 01/16/24 579.2% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Microsoft^ MSFT 12.74 years 1,185% Retirement Millionaire Doc Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. 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