I have been talking about the VIX for a while now. And housing.
The thing is, both of these have intertwined roots below the surface that most investors don’t see. And that’s just the way the banks like it.
First, a quick backgrounder. The VIX is known as the fear index or, more accurately, the volatility index. Since the Fed stepped in to artificially keep the U.S. economy afloat, volatility is at record lows.
The Fed’s policy has allowed this weird, sustained bull market to continue.
What it’s done is move huge amounts of money, through 401(k)s, IRAs and other managed retirement plans into what are known as passive funds. These funds track the major indexes, like the Dow Jones Industrial Average and the S&P 500.
According to CNBC, from 2007 to 2016 $1.2 trillion has left actively managed funds, and, over the same period, index funds have seen $1.4 billion in inflows. Actively managed funds tend to look for specific stocks or sectors, and the fund managers put their own unique spin on the stocks they select.
There are two major problems with this scenario. Just like your yard or any business sector, it’s hard to have a healthy monoculture. Competition is necessary and, in this case, as I mentioned recently here and here, it’s dangerous when you don’t have one.
Let’s use the lawn analogy. Yes, a beautiful Bermuda grass lawn is a sight to behold. But it’s not natural. It takes a huge amount of manipulation to keep it weed and disease free. And if disease hits, it wipes out the entire yard.
The same can be said of the stock market. This passive investing trend is a massive bubble. And everyone is in it. If the bubble bursts it will get very ugly, very fast.
And this consolidation has one other factor — a few of the companies that offer these index funds have become giants. The top three, Vanguard, State Street and BlackRock now have $11 trillion under management and, according to the CORPNET research group, these three are the largest shareholders of 40 percent of all publicly listed U.S. shares. None of the sovereign wealth funds or hedge funds come close to that kind of capitalization.
That is a lot of stock in the hands of a very few.
The other major problem with this consolidation of wealth? It isn’t self-sustaining.
If the VIX goes back just to its normal range, it will create havoc with the markets. If the markets sell off, it will be a maelstrom.
The only thing we can really hope is that “things are different this time around.” But it seems once those words are uttered, it’s usually the beginning of the end for over-extended bubble markets.
They said the same thing before the dotcom crash and before the housing meltdown.
And speaking of housing, BlackRock is one of world’s leading alternative investment firms. Anything that isn’t a stock or bond is an alternative investment, like real estate, commodities, derivatives.
When the market crashed in 2008, it was alternative investment firms like BlackRock that started buying up distressed properties with the help of their banker friends. The housing market is now also controlled by BlackRock, Berkshire Hathaway and others.
The reason there are slowing home sales and tight supply is that these firms are holding a lot of inventory and waiting for higher prices to start dumping homes onto the market. It’s about profits.
The illusion that is spread through the markets is that not enough people are selling their homes and that’s driving prices up. Just like a few years ago, home sales were doing well and many were heralding the revival of the U.S. economy. None of it was true.
As usual, we’re being duped by big firms after more of our money.
I don’t see a way out of this without the whole thing blowing up — or crashing down.
There’s an old saying that the market can be wrong much longer than I can be capitalized (basically, don’t be against the market, even if it’s “wrong”).
But that doesn’t mean you shouldn’t make sure you’re hedged for a bad ride.
This is why I’ve been pushing gold and silver in particular.
In a massive selloff every stock will feel some pain, but consumer staples like Clorox and Colgate Palmolive will endure. Others safe havens are utilities and healthcare stocks like CVS or Walgreen’s.
And if the selloff is further out than it should be, they’re all solid investments to have regardless.
— GS Early