The recent big sell-off exposed a hidden danger in our financial system...
On August 24, the S&P 500 plummeted by 4%. It was the largest single-day decline for U.S. stocks since 2011. And it was part of a larger sell-off that knocked U.S. stocks down 11%. As we’ve explained, the sell-off may have kicked off a bear market in U.S. stocks.
However, something else very important happened that day. And almost no one in the mainstream media covered it...
Some of the largest - and supposedly safest and most stable - investments lost up to 38% in a matter of seconds.
It was far worse for many big, popular ETFs designed to closely follow price movements in blue-chip U.S. stocks. The $65 billion iShares Core S&P 500 ETF (ticker: IVV), meant to mimic its index, tumbled as much as 26% out of the gate, some 20% below its “fair value,” before recovering to end the day in line with the market. Dozens of funds from every major ETF issuer saw jaw-dropping, if temporary, declines: The $19 billion Vanguard Dividend Appreciation (VIG) and the $12 billion SPDR S&P Dividend (SDY) each plummeted about 38%. Many small investors caught using orders to sell at market prices could have been toasted.
IVV, the first ETF Barron’s mentions, isn’t some tiny, niche ETF. It’s the second-largest ETF in the world.The fund holds more than $60 billion in assets. It’s supposed to track the S&P 500.
Because IVV is supposed to track the broad U.S. stock market, it’s viewed as a safe and stable way to invest in U.S. stocks. It’s supposed to be the equivalent of buying a small piece of the 500 largest publicly traded U.S. companies.
Funds like IVV make up the core of many investors’ portfolios. It’s the type of fund financial advisors tell their clients to put a large chunk of their money in.
The chart below shows IVV’s stunning drop on August 24:
As you can see, IVV recovered from its flash crash within seconds. Hardly anyone even noticed that it happened.
However, an investor who had instructed his broker to automatically sell IVV if it fell to a certain price (what we call an automatic stop-loss) could have sold at a horrible price.
If you had an automatic stop-loss, you could have literally lost 20% or more in a few seconds. And, because this ETF is huge and popular, this likely happened to some investors.
Set your stop-losses using “end of day” prices. This way, a wild swing during the day won’t trigger a sell.
Don’t enter your stop-losses in the market. Keep them written down or in your head.
• This happens in the financial world all the time…
Things that are supposed to be safe turn out not to be safe.
For example, in March 2007, Fed Chairman Ben Bernanke assured us that the financial system was safe. He said the housing crash wasn’t a big deal…and that the damage wouldn’t spill over into the economy or stock market:
At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
Of course, Bernanke was dead wrong. The housing crash caused the worst financial crisis since the Great Depression. It crashed stock markets around the world and almost took down the whole financial system.
Our advice: Be careful who you believe about what’s safe and what’s not. It’s almost always a bad idea to trust the government or anyone who sells financial products when they tell you something is safe. They just want to convince you that all mainstream investments are safe.
Casey Research has spent years doing independent research about what’s really safe. And we’ve published that research in our new book, Going Global 2015. It’s a must-read if you’re serious about safeguarding your money.
Most of the strategies in this book aren’t complex or expensive. You don’t have to be rich to use them. They’re simply strategies you won’t hear about in the mainstream financial world. Because the government and Wall Street don’t want you to think about these things…they want you to put your money in the bank and the S&P 500 like a good citizen.
We’ve printed a limited number of hardcover copies of this book. Until we run out of copies, we’ll send you one for virtually nothing. We only ask that you pay $4.95 to cover our processing costs.
Why are we giving away a book we put so much work into for virtually nothing? Because we want as many people as possible to learn these easy and effective strategies for keeping their money safe.
Plus, we hope that by trying what is essentially a free sample of some of our best and most valuable work, you might want to do business with us again in the future.
• The European Central Bank (ECB) may double down on money printing soon…
Yesterday, the ECB promised to ramp up its quantitative easing (QE) program “if necessary.”
QE is when a central bank buys bonds and other assets to lower borrowing costs and boost asset prices. Basically, it’s just another word for money printing.
The ECB began its QE program in March. Its goal was to jump-start Europe’s economy, which was barely growing. Europe’s GDP growth in 2014 was 1.7%.
So far, the ECB has pumped roughly €360 billion ($396 billion) into Europe’s financial system. It hasn’t helped Europe’s economy much. The eurozone’s economy is growing about one-third as fast as the U.S.’s economy.
Mario Draghi, head of the ECB, said the central bank may extend QE past its original September 2016 expiration. Draghi also said the central bank will do more QE if necessary.
• This is part of the gigantic global monetary experiment...
Since September 2008, the Federal Reserve has more than quadrupled the U.S. money supply. The Bank of Japan has nearly doubled Japan’s money supply over the past two years. And now, the ECB might ramp up its QE program.
The main reason for all this money printing is that central banks can’t cut interest rates any more. Cutting rates is a central bank’s go-to weapon to fight economic problems. But as regular Casey readers know, central banks cut interest rates to effectively zero during the financial crisis, and have held them there ever since.
That’s a problem because the world is addicted to economic stimulus. Central bankers are rightfully worried about what would happen if they don’t stimulate their economies. The world could sink back into recession and we could get a global bear market, or even a stock market crash.
Since central bankers can’t stimulate their economies by cutting rates, they’re printing money.
The most important thing to understand about this is that it’s a reckless financial experiment. The world has never seen anything close to this level of money printing.
It has inflated stock markets around the world. The S&P 500 has gained 122% since the Federal Reserve started its QE program back in December 2008. Japan’s Nikkei 225 has gained 60% since the Bank of Japan started its latest QE program in April 2013.
And the STOXX Europe 600, an index that tracks 600 of Europe’s biggest companies, gained 2.4% on the news that the ECB might extend QE.
We recommend being extremely careful with your money and investments right now. We’re guinea pigs in the largest, most reckless financial experiment in the history of mankind...and no one knows how it will end.
Chart of the Day
Today’s chart shows how big the hidden flash crash was.
We explained earlier that on August 24, the U.S. stock market had its worst day in four years. The S&P 500 fell as much as 5% in early trading. But big ETFs designed to track the broad stock market crashed much harder.
IVV, the world’s second-biggest ETF, tanked as much as 26% during early trading. This fund is supposed to track the S&P 500. It didn’t do its job that day.
Two other big funds fell even more. The Vanguard Dividend Appreciation ETF (VIG) and the SPDR Dividend ETF (SDY) each plunged by as much as 38%.
These are also huge funds that are supposed to be safe. In total, these three ETFs hold $96 billion in assets.
As we mentioned earlier, we recommend using end-of-day prices for stop-losses. We also recommend not entering your stop-losses in the market.This is the best way to make sure wild price swings don’t trigger you to sell an investment at a big loss.
We hope you enjoy the three-day weekend. The next Casey Daily Dispatch will hit your inbox on Tuesday.
Delray Beach, Florida
September 04, 2015
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