The Weekend Edition is pulled from the daily Stansberry Digest.
The "MAMU" is coming...
And you should beware of its awesome power...
What am I talking about exactly? The name for another pandemic? A new WWE wrestler? The latest trendy fast-food franchise? Nope, none of the above.
It's an acronym for the "Mother of All Melt Ups."
Yale-educated economist Ed Yardeni coined the term a few weeks ago in a blog post called "Party Like There's No Tomorrow."
As longtime readers know, Steve has been talking about the idea of government-fueled "Melt Up" euphoria in the stock market for years, and he says that we are in one of these periods right now.
Similarly, here's what Yardeni wrote in his post...
Now, as in 1999, there are mounting signs of irrational exuberance in the stock market. This time, there are also more signs of ultra-stimulative fiscal and monetary policies than there were back then. The combination could be fueling MAMU – the Mother of All Meltups.
Now, I want to be clear...
The MAMU isn't here yet... For now, the dot-com bubble still holds that title.
But the recent mix of government policies and investor euphoria could be fueling a massive Melt Up in the near future.
The current moment is certainly loaded with examples of speculative froth. I hardly know where to begin.
Struggling video-game retailer GameStop (GME) is the craziest example to date...
The stock rose as retail investors posting in Reddit's WallStreetBets thread drove the share price up, causing large hedge funds like Melvin Capital to buy the stock to exit short positions. Melvin reported a 53% loss for the month of January as a result.
While some counted the episode as a victory for the little guy, I never saw it that way. I knew they'd mostly get crushed, like they always do in speculative manias.
When a stock price goes straight up like a rocket ship, it's practically guaranteed to turn right around and fall straight down – very soon.
GameStop hit $503 in pre-market trading on January 28. Its recent post-insanity low was right around $40. Since January 1, the stock rose nearly 30 times... and then crashed more than 90% from its high.
This is what bubbles look like...
The more stock charts you see that look like ballistic missiles, the more 90% crashes you'll see shortly afterward. Sooner or later, the big indexes will look the same way.
Another classic bubble-era development is the "star fund manager syndrome"...
During the "go-go" 1960s market mania, Gerald Tsai was that manager.
He was born in China and moved to the U.S. in 1947 after graduating college in Shanghai. His father worked for Ford Motor (F), and his mother was a stockbroker (an interesting story itself).
Tsai went to work for Fidelity in 1952. In 1957, he took charge of the Fidelity Capital Fund, the firm's first speculative public growth fund offering. He took large positions in then-speculative names like Polaroid, Xerox, and Litton Industries. He badgered brokers to assemble large blocks of stock and warned them not to move the price in doing so, or he would give someone else the trade.
The fund was extremely successful. Its high turnover and concentration in relatively few speculative names were unheard of at the time. With Tsai at the helm, the fund returned 285% over its first seven years.
Tsai left Fidelity in 1965. Coincidentally, he started his new project, called the Manhattan Fund, a few weeks after the Dow Jones Industrial Average peaked, ending the 1960s "go-go" bull market.
Tsai made a very respectable 39% in the first year, but seven years after the Manhattan Fund began, it was down 70% – the worst mutual fund in existence at the time. And Tsai saw the writing on the wall as his fund began to falter. In August 1968, he sold the fund to CNA Financial for $30 million.
And he was off. Tsai went on to greater successes, eventually becoming a billionaire as well as the first Chinese-American CEO of a Dow Jones Industrial company: American Can Company.
Cathie Wood is the Gerald Tsai of today...
And Wood's firm, ARK Investment Management, is the new Manhattan Fund.
Wood has been profiled in the mainstream financial press over the last year or so given her fund's eye-popping returns and the sectors that it invests in.
Wood founded ARK in 2014 to invest in "disruptive innovation." By 2018, it had $1.2 billion under management. By the beginning of 2020, ARK had $3.1 billion under management.
The world went nuts for its products in 2020, and today, it manages $54 billion. Just look at the names of the exchange-traded funds ("ETFs") it offers, and you'll understand why FOMO-addled investors are shoving money at it as fast as they can...
- ARK Innovation Fund (ARKK)
- ARK Next Generation Internet Fund (ARKW)
- ARK Genomic Revolution Fund (ARKG)
- ARK Autonomous Technology & Robotics Fund (ARKQ)
- ARK Fintech Innovation Fund (ARKF)
- 3D Printing Fund (PRNT)
- ARK Israel Innovative Technology Fund (IZRL)
The list encompasses every tech-sounding investment fad of the last several years.
Now, look up every ETF listed above...
Every single one has that same ballistic trajectory.
Every. Single. One.
Here's a chart of all of them together (which frankly mutes the uniform ballistic-ness of a couple of the individual charts, but you get the picture).
The 3D Printing Fund is the second-worst performer. The ARK Innovation Fund went up 150% in 2020. The ARK Genomic Revolution Fund rose 180%. Ballistic.
Now, before I go any further, I know Steve holds one of these ETFs in his True Wealth portfolio as part of his Melt Up thesis... which is kind of the point.
I can't give the name here, but it's up 46% since September 2020, and Steve knew full well what he was getting into. Like me, when he recommended the ETF, Steve compared today's environment with the dot-com-era Melt Up.
But importantly – and this is the step that most investors skip or don't even know to consider – Steve has an exit plan already. As he wrote in September's True Wealth...
The market has a dastardly history of sucking in the largest possible number of unsuspecting participants on the way up – and then wiping all of them out on the way down. They ride the tide all the way in, and then they ride it all the way out...
We know the tide will come in and go out. Our intent – quite frankly – is to play with fire here.
Our gamble – and yes, it's a gamble – is that we can ride the tide all the way in... and get off the boat in time as the tide goes out.
That is Steve's "Melt Down" plan.
We must not confuse a bull market with brains...
Wood has the wind at her back. And she should get a lot of credit for what she's built.
But the fat lady never sings in the stock market. There's always a "What next?" to answer. And what's next is a horrendous crashing sound in the vicinity of ARK's ETF offerings.
That's due to the precise manner in which Wood and ARK are making hay while the sun shines...
To anyone who knows even a little market history, it's as if Wood and her team went back to the great financial crisis, tried to figure out how the bankers almost broke the system while making themselves piles of money, chose today to ignore the "broke the system" part of the outcome, and are doing it all over again.
During the financial crisis, it wasn't housing and mortgages that crashed the system...
It was mortgages sliced, diced, and leveraged into structured finance vehicles called CDOs, or collateralized debt obligations (among other toxic ingredients, including highly levered bank balance sheets and sinister lending practices, to name just two).
We'll skip the details of what happened with CDOs during the financial crisis. Just know a lot of it wasn't good... and that Wood and ARK are doing the same thing today, except the underlying asset isn't the trusty U.S. 30-year mortgage. It's ARK's ballistic, bubbly-looking, sexily named mutual funds.
It wouldn't surprise me one bit if the market ripped for another year or so before crashing horrendously. If I'm too bearish, it might make me look like an idiot. That's not how I want hundreds of thousands of loyal Stansberry subscribers to see me.
But the signs are everywhere and ignoring them won't make them go away... nor will it reduce your exposure to the aftermath of MAMU, the Mother of All Melt Ups.
To that point, I would feel like you weren't seeing the full "markets are crazy" Monty if I didn't check in with our friend Jason Goepfert at SentimenTrader.com.
In a recent tweet, he links to an article that says nearly half of all trading in special purpose acquisition companies ("SPACs") is coming from retail investors – the kind of folks who lost their rent money buying GameStop and AMC Entertainment (AMC) right at the top.
Goepfert commented when sharing the story...
Just one more sign that there has never been a bigger appetite for the most speculative issues, from the least experienced investors.
To put it in 1920s terms, they're all shoeshine boys – the kids on the street telling you how much money they're making in stocks as the 1929 crash nears. Today, they're partying online like there is no tomorrow.
But there is a tomorrow – and always has been, at least so far – and you never know exactly what it will look like or what it will bring. That's why I say again, prepare, don't predict.
If you prepare your investments the right way... if you spend less than you make... and if you allocate your assets across a truly diversified portfolio of stocks and bonds, plenty of cash, and stores of value like gold, silver, and bitcoin, or put options on the big equity indexes...
In other words, if you understand that the party will end... you might not end up in the headlines like Cathie Wood, and that's OK.
Your portfolio will survive the Mother of All Melt Ups and be around for another day... and the one after that.
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