Is the Bubble Finally Bursting?

Is the Bubble Finally Bursting?

Friday, 26 February 2021

After hitting a low of USD $1760 during Sydney’s trading session on Friday, Gold recovered back above $1800 this week before US Bond yields spiked again send us back to USD $1,770. Silver continued to track sideways for now, just under $USD $28 per ounce. A very noticeable increase in demand for physical metals on Friday lead to Perth Mint being sold out on the majority of cast bars this week. 

The pick up in physical demand coincided with the low in gold and metals recovered soon after. There is a lot of action in financial markets right now and we will cover some of the most ‘bubbly’ themes we can see right now. It seems that there is a chance that a number of assets are topping out simultaneously, which could mean we have a very volatile few weeks ahead for cryptocurrency and equity markets.

It is a scary thought to think of how many new investors are entering financial markets for the first time in 2021. What must seem normal today in the eyes of a first-time investor is actually not normal at all from a historical perspective. The time we are in right now is one of extreme greed, irrational exuberance, and a complete disregard to risk. The riskiest financial assets have been the most popular for investors the past few years, so have naturally had the best performance due to money flows. The stocks with no earnings but plenty of blue sky hopes and dreams have outperformed boring old tried and tested business models with consistent profits. Profit in 2021 has a negative effect on share price performance. It is better to have no earnings at all, that way the millions of uneducated investors can’t see a P/E ratio on their Robinhood Trading App and therefore have no way to value the stock accurately. $100 million? $1 billion? $100 Billion? if the P/E = 0 in either case then the market cap doesn’t matter, it’s all about momentum.

But what happens when momentum finally runs out of steam?

The market we are in today is completely dominated by animal spirits. Fundamentals are dead, no one cares about value investing anymore, it’s all about past performance driving newer more clueless investors into what has been winning versus what is undervalued. For those that have not come across the Ark Invest fund as yet, this is the pinnacle of a future focused fund that invests in ‘innovation’, or ‘disruption’ and the poster child of an irrational market. The fund invests in technology focused companies including Tesla, but also has very large positions in smaller or medium cap companies. Valuation is not part of their investment thesis, it’s more about finding ‘the next big thing’.

Due to having great performance during this latest bubble in equities, the fund has seen an absolutely huge number of inflows from retail investors worldwide in the past year and has swollen to $55 billion in funds under management, up form only $3 billion this time last year. In Korea they refer to the founder and CEO as ‘money tree’ due to the funds seemingly endless winning performance. Regardless of the company’s investment strategy, if you invest in small to mid-cap companies and you see over $50 Billion of inflows in under a year, then you are going to have cracking performance by default. However, if the type of investors that piled into the fund in 2020 are not long-term focused and are chasing quick gains, then you could expect equally as bad future performance should we see a mass exodus when the momentum ends.

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A scary thought is that during the $GME (Gamestop) craze we talked about a few weeks ago, ARK’s key ETF saw no inflows for 4 days straight. Does that tell you what sort of investors have been piling into ARK ETF’s?

Just this week we saw investors withdrawing a record $465 Million out of Ark Invests main ETF on Monday. The first major withdrawal of funds and a strong signal that the momentum may finally be coming to an end.

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Ark is faced with a liquidity issue should a lot of investors pull the pin at once, as they have money parked in a lot of small to mid-cap companies that would typically have lower trading volumes and not offer a nice clean exit. Due the funds large concentration in small cap companies the effects of inflows and outflows are incredibly important in determining performance. You have fantastic performance when the money is flowing in, but it’s a recipe for disaster when the funds start heading the other way. Short sellers have already started to take note with short interest on Ark ETF’s rising dramatically in recent weeks, so we could expect some major volatility in the stocks that Ark have a key holding in, especially if the broader market corrects.

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A lot of the Ark Invest companies have rolled over from their parabolic highs just this week. Having no better ideas, Cathy Wood decided to buy more Tesla shares. Buying more shares in a company that just took a $1.5 Billion dollar punt on Bitcoin, right near the recent peak, and who is currently trading over 1,000 x earnings seemed like the best possible choice in the entire market for the genius Ark analysts. This popular theme of investing with no regard to valuations and earnings is similar to what we saw in the dotcom bubble of 1999 and we all know how that ended. Fundamentals don’t matter in the peak of a bubble, but when the tide eventually runs back out, all of a sudden, they do.

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With the Nasdaq index rolling over from its parabolic highs, we have at the same time cryptocurrencies experiencing heightened volatility this week. The parabolic rise of 2020/2021 completely dwarfs that of the 2018 bull market In Bitcoin. It is a bit too early to call the top in the crypto market, but it makes sense to zoom out and look at a monthly chart from time to time to see how frothy the market is. The wick on the Bitcoin monthly candle should definitely signal some major caution for the crypto market and is very similar to the top in 2018.

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Lastly, we welcomed ACY Securities to our Sydney facility last week to talk about the latest in precious metals markets which you can watch on Youtube here.

Until next week,

 

John Feeney

Guardian Gold Sydney

If you have any feedback or questions about this report, you can contact John Feeney direct at johnf@guardianvaults.com.au

Or on Twitter @JohnFeeney10

 


 

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Sources:

https://www.bloomberg.com/news/articles/2021-02-24/cathie-wood-s-flagship-fund-suffers-biggest-outflow-on-record

 

https://www.reuters.com/article/us-tesla-ark-innovation-wood/record-redemption-in-ark-etf-sparks-liquidity-worries-idUSKBN2AO2Q2