Market Crash? What’s Going On?!
Bitcoin, Tesla, cannabis … crashed this week.
But we think it’s really a bunch of FUD (fear, uncertainty and doubt).
You have to zoom out a little to see the big picture.
If you look at the markets, stocks have basically gone up uninterrupted for almost a year now.
I’m talking 100s%, 1,000s% up. It’s normal to see some pullback.
Let’s look at everything that’s going on. We’re going to debunk three mainstream theories for today’s stock market:
- Interest rates
- Collapse of the U.S. dollar
Watch the full IanCast roundup to see our outlook on the markets and your stocks now:
Bitcoin, Tesla, Cannabis Stock Crashes: What’s Going On?
Paul: For many people, everything we normally cover on the IanCast has crashed. Bitcoin (BTC) has crashed. Tesla has crashed. Cannabis stocks have crashed.
So that is going to be the subject of this week’s IanCast. We are going to cover the crash. We know that the number one thing people want to know is about the stock market. So let’s talk about what is going on. Before getting on, I looked at a bunch of charts.
Let’s cover the nature of this crash. If you look at BTC, Tesla and cannabis, Tesla peaked out in early January it turns out. Cannabis peaked out in early February and BTC peaked out shortly after. Nonetheless, when you look on a one-year basis, cannabis is up 61%, Tesla up 326% and BTC up 405%.
Ian: That’s what I was going to say. It’s a correction, a crash or whatever you want to call it, but if you zoom out a little bit you can see these have rallied hundreds of percent over the past several months. Yeah, there’s been a drawdown the past couple of weeks but that’s part of the market.
I tweeted earlier that in 2017 during the 1,900% rally of BTC there were six corrections over 30%. You have to be able to willing to ride the ups as well as the downs. Overall, BTC is in a bull market. When it’s in a bull market it’s unstoppable. Overall, we are only 2.3 times the former all-time high.
It’s really just getting started. I wouldn’t worry about this. It’s the same for 3D printing, marijuana and Tesla. Part of big rises is going to be crashes like this.
Paul: When stocks rise continuously — I know there were some short crashes. There was one in September and one right before the election as well. Nonetheless, looking at it today it looks like from the March crash to January it was almost an uninterrupted rise.
Many stocks went up hundreds of percent. I can show you stocks that went up thousands of percent.
Ian: That was a decisive time in the market too. As we have covered America 1.0 versus America 2.0 stocks, America 2.0 stocks have gone up hundreds and thousands of percent. Meanwhile, a lot of the 1.0 stocks still haven’t even gotten back to where they were before the crash in March.
It’s been glaringly obvious, in my opinion, where the demand in the market is. Again, we are going to have to sit through times like this if we want to make big money. Another thing I tweeted is a big gain requires sitting through volatility. You have to keep that in mind at all times.
As soon as people start to see a downturn, everybody wants to know what to short. They think the market is going to zero and they want to buy puts on everything. But when the market is going up, nobody thinks that can even happen. It’s a psychological thing.
Stay grounded and realize these crashes are going to happen sometimes.
Paul: It’s wild to see how the sentiment changes. I was on YouTube checking on the number of “this is the end” and “it’s all over” videos out there. The number of views on those videos is amazing. Let’s deal with some of the things that are being used to explain.
The financial media is transmitting this information to people. The explanation du jour is rising interest rates, rising inflation and the persistent boogeyman that is the dollar losing its value all at once. I know that’s something a lot of BTC folks also believe.
They can believe that, but BTC can rise irrespective of that.
Rising Interest Rate Reality: They’re Still Low!
Let’s deal with these three things. Rising interest rates. I have gone on our updates and said interest rates are still at historical lows.
Ian: People are pointing out the rise in the 10-year rate. Suddenly that has been the focus of the news cycle, even though it’s been going up ever since the recovery started last spring. Now it’s the end of the world because it’s happening. I think it was at 1.5% and if you zoom out it’s nothing.
People used to think 1.5% was terrible and now because it’s being framed in a certain way it’s bad because it’s too high. It’s just how the media spins it.
Paul: If you are buying a house, mortgage rates have gone from 2.9% to something around 3.25% it’s still insanely low. I disbelieve the idea people are going to stop buying houses or stop doing anything because of that rise.
Ian: I agree. The housing market is one of the best gauges of the economy. If people are buying houses they have to be doing something right and they have to have some money. We have seen a big wave of people going from renting to buying, as well as millennials moving out and buying a house for the first time.
I have been looking at earnings call transcripts and reports from these housing companies and they all say they can’t build homes fast enough. I think it’s nothing do anything to that side of the market. Rates are still so low. It’s negligible at this point.
Paul: 100% agreed. Interest rates are still at historical lows. Yes, they have bumped off the very, very lows when people were so pessimistic and so bearish. I think for some period of time there was one negative interest rate bond floatation in the U.S. Right, Ian?
Ian: Yes, I think so. Another thing about rates is the Federal Reserve sets the Fed fund rates which I think is anywhere from 0% to 0.25%. Those rates aren’t even close to getting to the top part of that. They are still below 0.1%. There’s no interest rate shock or anything unusual.
It’s just that the 10-year rate was so low it was almost 0 and now it’s 1.5%. It’s like people don’t have anything better to be afraid of.
Paul: From our perspective, understand that was the Federal Reserve did last year was completely appropriate. The markets were going to lock up based on panic and fear. Of course there is no purpose served by markets locking up. It would cause financial instability, human torment and a number of problems that would take year or potentially a decade to fix.
We learned that in 2008. The Federal Reserve saw various markets start to lock up and flooded the market with liquidity. Of course as you pull some of that liquidity back in, interest rates are going to normalize. It’s actually a good sign that things are going back to normal. Things are operating like they should.
Should Investors Be Worried About Inflation?
The second thing the mainstream media is pushing out as being the explanation: Inflation is going to come back and we will go back to the 1970s where we had double-digit inflation and inflation that rose for a decade.
Ian: Yeah, that’s another one.
Paul: When you look at the data, do you see any inflation?
Ian: No. Actually this morning more data came out that it was even lower than expected.
Paul: I think there is confusion here because people will say, “Just look at the price of XYZ.” I think there’s confusion. There are prices lifting as a result of what happened last year. We shut the whole world down for nearly six or nine months.
Of course there is going to be scarcity of some things. And there will be price rises associated with that.
Ian: As people go back to work in manufacturing and production, there will be a lag period of where we were making nothing and trying to get back to where we were. Then after that, everybody is going to want a surplus of anything not perishable.
People are going to be in overdrive creating a supply. It doesn’t get made overnight. So of course prices will go up in the short term.
Paul: Just like it made sense when there was no demand for six to nine months the demand collapsed. When the demand comes back, of course the price will lift. There will be very few people who went and accumulated at low prices because there was uncertainty about what was going to unfold.
If you ran a business, you might have raised cash like many people did. A lot of this is just a normalization of what was going on prior to the pandemic.
The Collapse of the US Dollar and Rise of Bitcoin
The third one is one that many people who own BTC are sympathetic to: There is going to be a coming collapse to the U.S. dollar. To cap out the last one, we have no concerns with respect to inflation. We believe what is going on will normalize over time. We believe concerns about inflation are misplaced.
Alright, so dealing with the collapse of the dollar. The Biden administration has approved this stimulus and everyone is going to get $1,400 and that is going to cause widespread devaluation of the dollar. What do you think about this, Ian?
Ian: I don’t see it as that big of a deal. I don’t think this will continue for much. We have already seen a couple stimulus deals get passed and they haven’t affected the dollar that much. We have seen some volatility but, again, that’s due to uncertainty.
Paul: The dollar has actually rallied against a number of the currencies. There’s a problem here with the analysis. It’s supposed to be collapsing, yet it’s appreciating. Then there’s the issue when you look at what people have been doing with stimulus checks.
A significant amount has actually gone to paying off debt.
Ian: Right, paying off debt, going into crypto, going into stocks. A lot of people are saving it too.
Paul: And the money going to stocks people will turn around and say, “That’s terrible. It’s a sign of a speculative bubble in stocks.” Nothing can be positive. However, a lot of the investments are in perfectly good stocks whose price relative to their future, in our judgment, is still low.
Ian: Agreed. It’s good that more people are investing. Over the past year a lot of people have gotten in the stock market for the first time, which is great. And they have done pretty well so far. People I talk to have pretty strong hands, especially for new investors. It’s impressive.
Paul: This is one thing I have noticed about younger folks who own stocks. We have all these sayings that have emerged into the lexicon of Wall Street like diamond hands. We have our own which is strong hands, which we came up with before diamond hands became well known.
A lot of entrants in the stock market are much younger and they are buying America 2.0 stocks, Fourth Industrial Revolution stocks.
Ian: Yes, because it’s the companies they have heard of. They are familiar with them. They don’t want to buy something that’s clearly on the way out like most America 1.0 stocks. They are younger. They have time to wait out dips. I would say they are more confident than most experienced investors I have talked to.
Paul: This is definitely true. There is a disparity based on age. We take the side of the younger folks because these younger companies like 3D printing, BTC, Tesla, Cannabis, new energy stocks is where the future lies.
Ian: People want to invest in something that is future oriented, especially younger people. A lot of younger people think these things are cool, which helps. Not that that’s a good reason to invest in something, but they know what it is, they like the tech and they see it being used everywhere.
So they buy the stocks. That makes sense to me.
Paul: In the end, the companies that in our judgment represent the best value are companies that represent innovation today and into the future. They are going to become a bigger part in the way we do everything. In its own way, it makes sense.
Stay Bullish on America 2.0 Stocks This Year
We continue to be BOP — bullish, optimistic, positive. Let’s put up this chart of the Nasdaq 52-week highs and lows. The green line is the number of highs, the red line is the number of lows. I have seen people spin this negatively because in another time when a lot of stocks are high people would say it’s terrible and all the stocks are already bid up. What’s your view?
Ian: Obviously when things get super one sided things might come down temporarily. But a period when so many stocks are making new highs means a ton of buyers. Small buyers don’t drive that. That means there is institutional buying. There are bigger companies putting tons of money into these stocks.
Just like you see big venture capital and private equity putting tons of money, billions of dollars into new private companies. It’s the same thing. Of course it gets scrutinized because you can look at metrics like this. Everybody likes to get scared and say we are at a top.
Really a continuous pattern of stocks making new highs like this is very bullish.
Paul: For me, the sign that we have a lot of companies making new highs is much healthier than what we experienced prior to 2020 or 2019 when it was those FANG stocks or essentially seven stocks carrying the big indices up.
Ian: You want to see way more of a level playing field. That’s what we are seeing now. There’s a big gap between the performance of those bigger companies and smaller companies. It doesn’t take nearly as much money to bid up the smaller stocks that are valued at $1 billion or $5 billion.
Then you have bigger companies worth trillions of dollars. I think money is flowing out of these trillion-dollar companies and into the smaller companies. It can fund an entire sector just from money being taken out of Apple, which is $2.2 trillion.
Paul: These trillion-dollar companies are enormous, dinosaur sized companies. Then you have something like 3D Systems which is a $6 billion company that dominates its field. From our perspective, seeing this chart is healthy.
It shows that there are a lot of smaller companies, mostly America 2.0 companies being bid up. It tells you that this is going to pass. We have had a huge run, almost interrupted from March until now. It’s perfectly normal there are people with gains who want to take profits.
When they go to sell, people usually crowd into selling. You will see prices trickle down for a bit. Once the selling is done, buyers will come in and start to dominate the market. They will start to bid prices back up again. They are still crazy low.
Like we said, 3D Systems is a $6 billion company versus Apple at $2.2 trillion. Which has more innovation in front of it?
Ian: I would say 3D Systems.
Paul: I agree. You can do the same thing for Microsoft and so many other companies. Whether it be 3D printing, biotech or any of these smaller companies, the same logic can be applied to anything.
We have been telling people there was going to be a broadening of what people are buying and what is going to rise. That has pretty much played out.
If you look at the Invesco 500 equal-weight ETF stock graph lately, you can see it. The S&P 500 equal weighted by dollar amount is up 91% almost. Compare that to the S&P 500 which is dominated by the Apples and Microsofts of the world, which is up 74%. This is a big difference.
Ian: I have noticed that a lot of that has come just in the last three or four months. There’s been a huge difference. Apple is still 10% below that big spike it had when the stock split happened. That’s basically gone nowhere. Microsoft has gone up a little.
These smaller companies just in that time period — marijuana, 3D printing, Tesla — has gone up a ton since that split. That’s driven the equal-weighted S&P 500.
Paul: The other thing we have been telling people is to focus on smaller cap companies, the Russell 2000 ETF is up 122% even after recent declines.
Ian: That’s the difference we are seeing between America 1.0 and 2.0. The America 2.0 companies are small and mid-cap companies, which is basically the entirety of the Russell 2000, which has been leading a lot.
Paul: We would tell folks that RSP is a better bet than the cap-weighted ETF SPY. Just for purposes of comparison, I also looked at the Nasdaq index which is up about 93%, that’s the purple line. Then the Nasdaq 100 is up about 84%.
Even there you can see the difference between having a broader participation. The Nasdaq Composite has a lot of smaller companies in it versus the Nasdaq 100 which is extra dominated by Apple and Microsoft.
Ian: I don’t think the regular Nasdaq really has that many restrictions. The S&P 500 only has 500 stocks, the Nasdaq has way more than that. It also has smaller, more innovative companies with higher growth ahead. That’s where the money is going.
We’re seeing the overall Nasdaq Composite definitely outperforming the Nasdaq 100.
Paul: For those who are confused by what we mean by equal weighted, it means you put an equal amount by dollar amount into every stock. Cap weighted means the biggest companies get the biggest weight of investment dollars. So when you have all the companies going up, the equal weighted ones tend to do better.
When you have only a small sliver going up, you tend to have the cap weighted ones do better. We’ve gone through some analysis, so let’s talk about what is going on in the world of crypto. We saw BTC peak and, as usual, what happens with BTC sets the pace and tone for what’s happening in the crypto market.
BTC Tanks and the Rest of Crypto Follows
Ian: The rest of the market follows BTC. Obviously most of them are more volatile than BTC because they are smaller and more speculative. BTC at its bottom was down about 25%. So it was a fairly normal correction. Like I said before, in 2017 during the bull run it had six corrections of 30% or more.
Even if it goes down a little more it’s nothing to worry about. It’s still in a bull market, which means it’s going to do better than most people expect in the long run. Meaning over the next year to year and a half it’s going to do very well.
Of course whenever BTC does this there is ton of FUD — fear, uncertainty, doubt — that spreads around. I have seen plenty of articles already that say BTC is on its last legs and Tether is going to cause the crash of BTC. The media tries to overhype what is happening, usually negatively.
Paul: We are still BOP on BTC and crypto. We will keep broader discussions of crypto for another time. I have seen very little of what people are saying to justify this. Tell folks what your prediction is for BTC. And, if you are interested, last week we covered why we have these predictions.
Ian: My prediction for BTC is that it will hit $115,000 by August and during this bull run it will hit $350,000.
Paul: I have a prediction for BTC which is that I believe it will be at $250,000 in the next one to three years. Our predictions are unchanged. We see it has come down, but Ian and I have been tracking BTC for a long time and we know this happens with regularity.
Is there anything going on with Ethereum (ETH) or DeFi in particular that may actually be hidden by the fact everyone is focusing on the BTC decline in price.
Ian: If you have used any DeFi platforms at all or read anything about them you will know the fees are ridiculously high to trade, lend, borrow or anything. That has been the main FUD spreader for ETH. We have seen other ETH rivals go up recently because everyone thinks it’s going to fail because it’s expensive to use.
There has been a string of announcements recently from what is called layer 2 providers. They are basically how ETH is going to scale, accept more transactions for lower cost and be able to run way more efficiently. It will dramatically drive down the fees people pay.
The company leading this said they will start implementing this widespread next month. That is something that has been buried by this price action. I think that could be a huge thing for ETH.
Paul: The second thing I will bring up is that Coinbase sent an email last week saying they are getting ready to start staking ETH for folks on their platform. It’s a lot of folks. They released their IPO document yesterday and it said they have 43 million active users.
Ian: It’s huge. It’s the go-to here in the U.S. I know here everybody uses Coinbase for the most part.
Paul: If they have 43 million users and I believe ETH is the second most popular coin on their platform, if that many people are going to start staking it there is going to be a significant price rise in ETH sometime in the future.
Ian: Agreed. It will drive more scarcity. Basically staking gives you a yield or dividend on crypto. If you put in ETH, you’d earn 7.5% a year in ETH. So you benefit from that by getting ETH, but you also benefit from an ETH price rise. Scarcity and also a lot of incentive for people to earn more.
Paul: One more news item. Square is a company that has been at the forefront of adopting BTC said they have upped how much BTC they own.
Ian: They bought a lot. MicroStrategy had another $1 billion capital raise for BTC. Those two have been leading the charge. Of course there’s Tesla also. Besides those three, I bet there are dozens that are going to do that in the near future, if not more.
Paul: I believe it’s just beginning. What Tesla, Square and MicroStrategy are doing, eventually everyone will adopt it. We will see skyrocketing BTC price. We are BOP on BTC and crypto.
Tesla’s 30% Drop
Let’s talk about Tesla price action. It has dropped 30% from the peak. People are starting to feed me FUD stories. Some of these are amusing. They are withdrawing the Model Y. I saw this and I said, “This is completely untrue.”
Ian: I guess that was a false rumor going around to create fear.
Paul: What they have done is cut prices on the Model 3. They cut prices on the Model Y. Many people have spun that as saying it’s a sign they are on their way to bankruptcy.
Ian: That narrative is going to be hard to shake. There will be people who think that forever.
Paul: From our perspective, Tesla had this massive run. It was always likely that some number of people who own Tesla were going to come and sell it. Some of those blocks will be large and they are to push the price down. Our friends at ARK Invest have seen during this period of time a lot of redemptions on their ETFs.
Perhaps they may have needed to sell some amount of Tesla. At the same time, I have also seen a news report saying they have been buying Tesla.
Ian: Right. And last time I looked, it was their top holding in their main ETF. They are going to need to continue buying a lot of it. I think they are one of the top owners of Tesla at this point.
Paul: Bottom line for Tesla: We are BOP on Tesla. There’s never going to be a straight line. Look at the chart of Tesla. There are periods of time where it went nowhere and then it rocketed up. The benefit of being strong hands on Tesla is you get the benefit of the rise if you stay in it.
Cannabis Stocks Have Sold Off
Not much news. It has sold off.
Ian: Since the bottom last March, ETFMG Alternative Harvest ETF (NYSEArca: MJ) is still up 160%, even after this. I think it has fallen 40% now in a matter of weeks. It seems scary but we have to remember that this industry was undervalued by a crazy amount.
Everybody thought so many of these companies were going to go bankrupt and priced them in ranges that were absurd. Nobody wanted to own them. Hardly anyone still owns them in any big way. A lot of these companies are worth a few billion max. There’s a ton of upside here.
The downside long term is nothing in my opinion. I actually have a prediction for MJ this year, which I have said before but I just want to remind everybody. It’s $40 by the end of the year.
Paul: So we are BOP on cannabis, BOP on BTC, BOP on Tesla, BOP on America 2.0 and Fourth Industrial Revolution stocks.
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