“Only when the tide goes out do you discover who’s been swimming naked.”
– Warren Buffett
Contrarians like to say the crowd is always wrong.
The reality is much more complicated.
The crowd can be right for years.
After all, Alan Greenspan spoke of “irrational exuberance” in 1996. But the dot-com bubble did not burst until March 2000.
But the crowd gets its comeuppance when the tide turns and buying interest in the latest hot asset class evaporates.
At that point, the new era’s “true believers” suffer enormous pain.
Their unshakable, blind belief transforms them from market geniuses…
Into clueless participants in the market, helplessly riding out the tidal waves of a market storm they don’t understand.
The result is as predictable as it is inevitable.
Hundreds of thousands of investors end up with hundreds of billions less than they started with.
Whether it’s due to their investments in Cathie Wood’s Ark Invest ETFs, cryptocurrencies, or meme stocks like AMC (NYSE: AMC) or GameStop (NYSE: GME), the same fate awaits today’s true believers as well…
And the contrarians will prove themselves to be right yet again.
Let me explain…
The Biggest Financial Mania in History?
Speculative assets are having a terrible start to the year.
That’s a big change.
After all, the pandemic was the best thing that ever happened to speculative assets like technology stocks, cryptocurrencies and nonfungible tokens (NFTs).
The historic rally in speculative assets was the result of several factors…
To start, the pandemic triggered an unprecedented fiscal response. Governments across the globe pumped trillions of dollars of stimulus into their economies. A big chunk of those funds went out as checks directly to households.
Then that same cash burned a hole in investors’ pockets and fueled retail investor sentiment. It quickly led to the emergence of maniacal, “true believer” retail investor fervor.
Investors in story stocks like Tesla (Nasdaq: TSLA), cryptocurrencies or meme stocks like AMC minted paper fortunes seemingly overnight.
They dismissed the experienced “smart money” who questioned the rally’s sustainability as fuddy-duddies who “didn’t get it.”
Throw in zero-commission online trading apps, people “bored in lockdown” and talk of fast-forwarding the future through story stocks like Zoom (Nasdaq: ZM) and Peloton (Nasdaq: PTON)…
And governments helped create the perfect conditions for what historians will look back on as the biggest financial mania in history.
Time for a Reality Check
Yes, asset prices may rebound for a few days or weeks and offer opportunities for the true believers to “buy on the dip.”
But the long-term trend could hardly be clearer. And that trend is down for innovative tech stocks, cryptocurrencies and meme stocks.
With 20/20 hindsight, much of the boom will seem absurd.
My favorite story concerns AMC, the all but technically bankrupt movie theater company.
AMC opened 2021 at $2.
Then a group of traders – calling themselves “Apes” – organized on Reddit to take AMC “to the moon.”
These traders pushed AMC to a high of $72 a share by June.
AMC CEO Adam Aron enthusiastically encouraged the AMC Apes, who refer to him as “The Ape Father.”
Aron has tweeted Ape memes. He donated to a gorilla charity. He issued worthless NFTs.
You can’t make this stuff up.
Yet anyone who suggested AMC was a joke was widely ridiculed – including yours truly.
What has happened?
AMC shares have dropped to about $22 a share. That’s a drop of almost 70%.
Yet even as AMC Apes were buying, “The Ape Father” himself sold about $35 million worth of AMC stock in November and December – at almost twice its current price.
Aron’s reason for the sale? Estate planning.
Look for massive class-action suits against Aron and AMC in the coming months.
My Contrarian Predictions
The manic bullishness of the past two years was powered by trillions of dollars in fiscal stimulus. That financial tide is going out. Monetary policy will tighten… Interest rates will rise.
Selling will put pressure on valuations and asset prices.
This is a nightmare for highly speculative “innovative” stocks, cryptocurrencies and meme stocks.
Cathie Wood’s Ark Innovation ETF (NYSE: ARKK) is already in free fall, down 47% since it peaked last February. And Tesla – Ark’s most significant holding – hasn’t even gone into a downtrend yet.
So what are my contrarian predictions?
The Ark Innovation ETF will collapse another 50% to 70%.
Most – if not all – cryptos will go to zero.
And AMC will soon trade near Wall Street’s target price of $8 for the stock.