Lance Roberts: This Market Is Like A Tanker Of Gasoline

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Lance Roberts, chief investment strategist of Clarity Financial and chief editor of Real Investment Advice has authored a number of impressive recent reports identifying potential failure points in today's financial markets. 

In this week's podcast, Lance explains how the massive flood of investment capital into passively-managed ETFs, along with record amounts of margin debt, has the potential to set the markets afire:

Fundamentally, there’s nothing different in today's markets because, at the end of the day, they are about evaluations, earnings -- those types of things. Technically, the market is very different today because of quantitative easing, computerized trading etc.

What we see are two things happening, in particular, that people should be paying attention to. One is that investors are herding into passively-managed ETFs now, which is creating a dislocation between the underlying realities of individual stocks and their prices, because the piling into ETFs is requiring stocks like Facebook, Amazon, and Google to be bought in much greater volumes than they otherwise would. And people are making an assumption that there will always a buyer for every seller in the market.

Now that’s absolutely true. But it's often argued by the mainstream media that "For every buyer there’s a seller, so it doesn’t matter when the market turns. You’ll be okay." But you won’t, because, yes, at some point there is a buyer for every seller, but it always begs the question: At what price? And because of all the piling into these ETFs, when the market eventually breaks, yes, there will be a buyer; but that buyer could be at many percentages lower than where prices were before. We could very well see a vacuum appear in prices, with a gap down so sharp and so fast that it not only paralyzes most investors who may be hoping to get a little bit of recovery to sell into, but then will start triggering margin calls.

There’s been numerous articles written about margin debt: "margin debt is not a problem; don’t worry about margin debt." Well, margin debt is not fine. We’re at record levels of margin debts. It’s like a can of gasoline. If I set a can of gasoline in the middle of a room and nobody touches it, it's fine. But drop a match into that can of gasoline you have a different story.

So, the only thing that’s been missing up to this moment right now is the herding of individuals into a specific type of investment. But just like with real estate in the past, we have now people herding into ETFs. And now, with all these computers basically acting on the same set of information pushing stocks in the same direction because they’re all working off the same set of information, the market is like a tanker of gasoline. And somebody’s going to put a lit stick a dynamite into it because when this all reverses, you have these passive indexers become panic sellers. And then that beings to immediately trigger a reversal in the algorithms, which all feed on themselves in a negative direction. And the gap that opens up between the bid and sell prices will be staggering.  

Click the play button below to listen to Chris' interview with Lance Roberts (45m:28s).

This is a companion discussion topic for the original entry at https://peakprosperity.com/lance-roberts-this-market-is-like-a-tanker-of-gasoline/

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I agree with the concerns about passive investments/ETFs. This is the first time that market participants (including institutional investors) are happy to buy equities arbitrarily. The thought is that picking winners is a fools errand and that reducing fees is the name of the game. Hard to disagree with them looking at the numbers
This changes the capital market assumptions associated with some of the fundamentals of price discovery. This isn’t the first time prices have de-coupled from fundamentals, but it’s the first time it’s happened in a static way.
I have two fundamental opinions (that are at odds with one another):
1.) That there will be a lump-taking market calamity during the Trump years. The cure for populism is to frame it for the murder of mom and dad’s retirement savings.
2.) the market cannot correct until there is a capitulation top that lures in weak handed bears.

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Perhaps foreign policy blunders and embarrassment under trump will swing the pendulum back to a liberal version of populism, and THAT’s the patsy that will get framed. Who knows.

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Perhaps foreign policy blunders and embarrassment under trump will swing the pendulum back to a liberal version of populism, and THAT’s the patsy that will get framed. Who knows.

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Ok, once again I’m looking for the nine year cycle?

Uh, gee, the blue line has been below zero for the last 9 years. In fact the blue line has been below zero almost continuously since 2001.
I know, “Pay no attention to the man behind the curtain!”
The only nine year cycle I can see is the cycle of world banks controlling every asset market.
Unless you are talking about the nine year cycle of the SEC ignoring massive, global market manipulation through program trading.
And please, don’t even consider supporting the official GDP numbers, unless you are willing to support the official reported inflation numbers, since the inflation numbers are used to calculate the official GDP growth.

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macro2682 wrote:
The cure for populism is to frame it for the murder of mom and dad's retirement savings.
Brilliantly phrased. Wait for this. I also suspect it's coming. Or BIG WAR. That'd do the job, too.
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Are you being sarcastic here? I feel like this chart shows pretty clear 9-year cycles between the lows (on both lines).

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I think his point is that the growth is below 0% almost the whole time since 2001..so negative growth to less negative, for the most part.
That said, I see 8-9 years, followed by 12 years, followed by 7 years (1982/3-1991, 1991-2002, 2002-2009), but I guess the 9-year is an average?
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Negative growth, year after year, does not support the on-going claim that we have been in a growing economy and positive business cycle for the last 9 years. What it says to me is that we have been in a disguised/unreported recession almost continuously since around 2001.
Perhaps there have been peaks and valleys within the overall declining economy, but the economy has been declining none the less.
What I see around me doesn’t look like a robust economy, much the opposite.
Even worse, we have rapidly increasing debt AND a declining economy. It’s just scary.
Can the entire globe file for bankruptcy?!

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The economic improvement in the 80’s was also very highly driven by the microprocessor. Countless industries were revolutionized by the availability of low cost computing. Costs were driven down, labor efficiency improved, new industries were created. The operation of virtually everything was changed. I don’t see a similar revolution on the horizon. The current big things are biomedical (which has increased, not decreased, medical costs) and social media (whose impact on GDP is debatable).

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But, but, asset prices are going up - we must be getting richer.
When I see an expensive car or home I think that person is either a) in horrendous debt; b) must be a criminal of some sort like a drug dealer/medical insurer/ lawyer/banker or c) must be an old person or has inherited money from an old person.
Our energy descent back to an agrarian society is going to fun to watch, speaking as an old person (no kids).

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I think an economy experiencing a 9 year period where negative growth is “less bad” can be considered a positive business cycle.

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macro2682 wrote:
I think an economy experiencing a 9 year period where negative growth is "less bad" can be considered a positive business cycle.
Sounds a bit like a period of remission in an otherwise terminal case of cancer. In today's world, the monetary price of a "less bad" business cycle is measured in trillions and sourced from debt. The ecological price tag is more of the same, only bigger.
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I emailed Jeffrey Brown to get his two year update on his oil numbers and yup sure enough…
Top 33 exporter’s production still increasing since 2005 BUT exports continue their 2005 decline because exporter’s internal consumption continues to go up. Peak oil continues hidden in the overall production numbers that look so good. Of course we aren’t going to get growth. How can we when we don’t have more energy?

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karenf wrote:
I emailed Jeffrey Brown to get his two year update on his oil numbers and yup sure enough... Top 33 exporter's production still increasing since 2005 BUT exports continue their 2005 decline because exporter's internal consumption continues to go up. Peak oil continues hidden in the overall production numbers that look so good. Of course we aren't going to get growth. How can we when we don't have more energy?
We have a winner! It's very difficult to get growth without energy consumption, of oil specifically, going higher. Of course, maybe the last 60 years are now meaningless? Well, even if this chart is going to be rendered somewhat meaningless by artificial intelligence, starting in ten years or so due to lower gasoline/diesel demand because of smart transport....then I would remind everyone that this next one begins to bite in about 2-3 years:
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I don’t understand all of this pessimism - future GDP will be fueled by empty promises and shattered dreams!