That Automatic Investment Bubble
The US Equities Market is on Autopilot to the Moon...to Crash
As an anarchist investor, I follow a lot of contrarian investment influencers as you could imagine. Many of them I guess you would classify as perma-bears. One I find to be quite level headed is The Maverick of Wall Street. If you don’t follow him, I would highly suggest heading over to YouTube and giving his channel a look. He recently dropped this tweet that inspired this post that I’ve been meaning to make for a while.
What Is Passive Investing?
Ironically enough, it’s some of what I advocate for. Stop me if you’ve heard this one from investment type people, “Time in the market is better than timing the market.” The premise being that staying invested for longer means you can ride out the ups and downs versus trying to time the market and potentially losing tons of opportunity cost on your money because you bought high and sold low. Or bought all at once at the high versus dollar cost averaging. Passive Investing is defined by Investopedia as such:
In essence, it is the old Buy and Hold strategy. Just ride out the dips and the peaks. Keep your money in the market so Wall Streeters can continue to derive fees off of it like leaches. And over time your money will go up. Keep in mind Beta (aka the variability in the market) means this strategy only works if you’re lucky with when you are buying in and when you eventually have to sell. This was covered briefly when I wrote about Gold as The Contrarian Investment.
This investment mantra is nowadays paired with an even more ‘powerful’ one, Automatic Investment.
Automatic Investing
Otherwise known as investing on autopilot. Technology has given us many amazing things. One of which is the ability to schedule and automatically perform routine activities so we can focus our energies elsewhere. Investment for most average Joes and Janes has become a mostly automated process.
Automatic investment has boomed. 401K’s and employer sponsored investment accounts are the most widely utilized for of automatic investment. Add to this robo advisors like ACORNs, Wealthfront, and a host of other apps that help you round up on purchases to make investments or automatically buy a certain amount of an investment each period (daily, weekly, monthly, etc) for you. Wall Street is now dominated by automated investment as well. ‘Black box’ or Machine trading is growing in popularity as Billion dollar investment funds embrace a computer’s ability to buy/sell dispassionately and at lightning speed. This trend is so ubiquitous now that a CNBC article in 2019 estimated that 80% of the US equities market is on Autopilot!
What could go wrong?
The Automated Bubble
Welcome to the automated investment bubble of today. Most automated investments are directed towards a handful of investment vehicles. Namely the S&P 500 index, large mutual funds, and a handful of Exchange Traded Funds (ETF’s). This means there is a hyper concentration of automated investing into a number of investments that impact the whole market place. Mutual funds are required to keep a certain percentage of their money invested at all times and can only invest in long positions (meaning betting the investment will go up). ETF’s track a basket or index of investments but their fund in-flows are used as a signal to other investors to purchase or sell those targeted assets depending on the flow of funds into or out of them.
What does this all add up to? A bubble in asset prices that is supported by brainless, dispassionate buying of investments that are and continue to be more and more overvalued by the day. Paired with ETF-ization of the market (more and more etf’s tracking more and more baskets of investments causing them all to go up and down in unison), this phenomenon is causing a hyper bubble in a handful of stocks. Case and point being names like NVIDIA which I covered in another recent post. Most of the stock market’s success recently hinges on a handful of technology names with the central theme being Artificial Intelligence (AI) processors/chips. The passive and automated investment dominance in the market has created an upward movement in asset values that is not sustainable and puts everyone at risk, collectively. This is happening at a time when cash is one of the most attractive investments on the planet yielding upwards of 5% in some money market funds with relatively low risk (the wealthy have already pulled $1 trillion out of the markets to lock in those rates).
What’s the Answer?
I do advocate for some automated & passive investment. I think you should always have a core holding of certain assets. Mainly real estate, precious metals, crypto, a small bit of fiat currency and a side hustle. You should also be dollar-cost-averaging your face off. However, there is a big caveat to this. There are times to sell to raise cash or move investments from one asset to another based on their relative values (one being overvalued and the other being undervalued). There are also times to increase the size of your automated investments to take advantage of falling asset prices and decrease your automated investments to protect against overvaluing assets like I’m referencing above.
The equities market is very top heavy and not even close to reflecting the health (or lack thereof) of the underlying economy/ies. This imbalance has been caused by manipulation of interest rates and the money supply by the Federal Reserve and reinforced through passive/automated investment. As an anarchist investor it is my duty to myself and my family to identify these conditions and respond accordingly.
What are your thoughts on this bubble and the potential remedies?
Current View
BTC hits $50,000 - I am selling a little here but I’m still stacking…just at a smaller amount each month
Monero (XMR) delisted from Binance- if you don’t own any, it’s time to pick up just a little bit of XMR, it’s on deep discount and one of the most secure privacy coins in the market right now
Gold holding just above $2,000 - I am keeping my purchases steady (not high or low)…this isn’t a bad time to take some profits if you’ve been holding gold for a while and are sitting on large returns …but keep stacking
Silver holding around $23 - Silver I’m still stacking at a normal amount per month and haven’t sold much
Real Estate - residential is coming down in value but there is more to come…commercial is set to collapse and there are some real deals about to present themselves in this market place…keep cash free or talk to banks about financing opportunities you may have if this trend continues (and take a couple courses on commercial real estate investment if you want to get into that world)…you can also add micro investments in real estate on a single or automated basis using Ground Floor
Cash - there is nothing wrong with taking profit on any of the above and putting it into a money market or high yield savings account making 4-5%…yes it’s interest/coupons being paid to you through the US Treasury…just think of it as getting back some of the tax money they stole from you
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***Keep in mind that investment and investment results are very much based on you as an individual. I am not an investment advisor. I’m a dude with an opinion. Do not rely solely on the discussion here to inform your investment decisions. Always make the investment decisions that are right for you and your situation.