by Owen Sullivan
On Oct 2, 2018
Last week, we took one step closer to a full-blown financial crisis. But with all the brouhaha surrounding the Kavanaugh hearing, nobody noticed a darn thing… except for financial expert Jim Rickards.
by Owen Sullivan
On Sep 6, 2018
The U.S. has been highly successful at pursuing financial warfare, including sanctions. But as the U.S. wields the dollar as a weapon more frequently, the rest of the world works harder to shun the dollar completely.
by Owen Sullivan
On Aug 31, 2018
The trade war with China has taken a strange and dangerous turn. Disturbing news is emerging from the Centers for Disease Control (C.D.C.) regarding China’s deliberate mishandling of a deadly and infectious virus…
It’s easy to mistake the thick-headed fly for a bumblebee.
Heck, even bumblebees — who should probably know better — make this mistake all the time, allowing the thick-headed fly to get up close and personal… with itsvictim.
In a grisly display of airborne aerobics, the female thick-headed fly snatches a bumblebee right out of the air and cracks open their exoskeleton. Then she implants an egg right into the cavity in the bees back… and releases it… all without ever touching the ground.
The bumblebee thanks it’s lucky stars it got out of that one alive. But that’s when the horror show begins.
After it hatches, the newborn starts to kill its host. At first it simply drains nutrients from the bee’s fluids. Then, as it gets stronger, it begins to eat it from the inside out.
This nightmarish behavior is more common in the animal kingdom than you’d think. But according to financial expert Jim Rickards, we see the exact same kind of behavior… in investors.
And right now, the host is dying.
All the best,
Editor, Money & Crisis
P.S. After 15 years of secrecy, Jim is finally able to reveal this sensitive information on camera. It has everything to do with a powerful tool he developed while working with the U.S. government… that can predict surprising political and economic events before they happen. Click here for Jim’s shocking confession.
Free-Riding Investors Set up Markets for a Major Collapse
Free riding is one of the oldest problems in economics and in society in general. Simply put, free riding describes a situation where one party takes the benefits of an economic condition without contributing anything to sustain that condition.
The best example is a parasite on an elephant. The parasite sucks the elephant’s blood to survive but contributes nothing to the elephant’s well-being.
A few parasites on an elephant are a harmless annoyance. But sooner or later the word spreads and more parasites arrive. After a while, the parasites begin to weaken the host elephant’s stamina.
Eventually a tipping point arrives when there are so many parasites that the elephant dies. At that point, the parasites die too. It’s a question of short-run benefit versus long-run sustainability. Parasites only think about the short run.
A driver who uses a highway without paying tolls or taxes is a free rider. An investor who snaps up brokerage research without opening an account or paying advisory fees is another example.
Actually, free-riding problems appear in almost every form of human endeavor. The trick is to keep the free riders to a minimum so they do not overwhelm the service being provided and ruin that service for those paying their fair share.
The Cushiest Job in the World
The biggest free riders in the financial system are bank executives such as Jamie Dimon, the CEO of J.P. Morgan. Bank liabilities are guaranteed by the FDIC up to $250,000 per account.
Liabilities in excess of that are implicitly guaranteed by the “too big to fail” policy of the Federal Reserve. The big banks can engage in swap and other derivative contracts “off the books” without providing adequate capital for the market risk involved.
For years, the Fed held interest rates near zero to help the banks earn profits by not passing the benefits of low rates along to their borrowers.
Put all of this (and more) together and it’s a recipe for billions of dollars in bank profits and huge paychecks and bonuses for the top executives like Dimon.
What is the executives’ contribution to the system?
Nothing. They just sit there like parasites and collect the benefits while offering nothing in return.
Given all of these federal subsidies to the banks, a trained pet could be CEO of J.P. Morgan and the profits would be the same. This is the essence of parasitic behavior.
Yet there’s another parasite problem affecting markets that is harder to see and may be even more dangerous that the bank CEO free riders. This is the problem of “active” versus “passive” investors.
The Most Dangerous Trend in Investing Today
An active investor is one who does original research and due diligence on her investments or who relies on an investment adviser or mutual fund that does its own research. The active investor makes bets, takes risks and is the lifeblood of price discovery in securities markets.
The active investor may make money or lose money (usually it’s a bit of both) but in all cases earns her money by thoughtful investment. The active investor contributes to markets while trying to make money in them.
A passive investor is a parasite. The passive investor simply buys an index fund, sits back and enjoys the show. Since markets mostly go up, the passive investor mostly makes money but contributes nothing to price discovery.
The benefits of passive investing have been trumpeted by Jack Bogle of the Vanguard Group. Bogle insists that passive investing is superior to active investing because of lower fees and because active managers can’t “beat the market.” Bogle urges investors to buy and hold passive funds and ignore market ups and downs.
The problem with Bogle’s advice is that it’s a parasitic strategy. It works until it doesn’t.
In a world in which most mutual funds and wealth managers are active investors, the passive investor can do just fine.
Passive investors pay lower fees while they get to enjoy the price discovery, liquidity and directional impetus provided by the active investors.
Passive investors are free riding on the hard work of active investors the same way a parasite lives off the strength of the elephant.
But what happens when the passive investors outnumber the active investors? The elephant starts to die.
Since 2009, over $2.5 trillion of equity investment has been added to passive-strategy funds, while $2 trillion has been withdrawn from active-strategy funds.
The active investors who do their homework and add to market liquidity and price discovery are shrinking in number.
The passive investors who free ride on the system and add nothing to price discovery are expanding rapidly.
The parasites are starting to overwhelm the elephant.
The Brakes Are Cut…
The danger of this situation is that active investors are the ones who prop up the market when it’s under stress. If markets are declining rapidly, the active investors see value and may step up to buy.
If markets are soaring in a bubble fashion, active investors may take profits and step to the sidelines. Either way, it’s the active investors who act as a brake on runaway behavior to the upside or downside.
Active investors perform a role akin to the old New York Stock Exchange specialist who was expected to sell when the crowd wanted to buy and to buy when the crowd wanted to sell in order to maintain a balanced order book and keep markets on an even keel.
Passive investors may be enjoying the free ride for now but they’re in for a shock the next time the market breaks, as it did in 2008, 2000, 1998, 1994 and 1987.
When the market goes down, passive fund managers will be forced to sell stocks in order to track the index. This selling will force the market down further and force more selling by the passive managers. This dynamic will feed on itself and accelerate the market crash.
Passive investors will be looking for active investors to “step up” and buy. The problem is there won’t be any active investors left or at least not enough to make a difference. The market crash will be like a runaway train with no brakes.
The elephant will die.
P.S. This could be my most important message of 2018.
It contains sensitive information that I’ve only just revealed. I can’t reveal everything, for national security reasons. But I say as much as I can legally say. And everything’s true, I promise.
To date, the CIA has given clearance to fewer than 100 people in the entire world involved with this project.
I happen to be one of them!
But what I reveal has implications far beyond national security. As a tax-paying American citizen, you deserve to know the truth.
Click here for all the details.