By Justin Spittler, editor, Casey Daily Dispatch
One of the world’s biggest hedge funds just sounded the alarms.
Last month, it said U.S. stocks were at “significant” risk of a correction.
Technically speaking, that’s when a market falls 10% or more. It’s been two years since the last time that happened to U.S. stocks (from December 2015 to February 2016).
Now, I understand financial institutions issue statements like this all the time. Most of the time, it’s just noise. I write it off.
But this warning didn’t come from just any financial institution. It came from Renaissance Technologies.
In a moment, I’ll tell you what steps you need to take today to protect your wealth… but you should first know why this is one warning you can’t afford to ignore…
• Renaissance is a legendary hedge fund…
Jim Simons founded the firm in 1982.
But Simons wasn’t your typical Wall Street banker. He was a mathematician and former military codebreaker.
So, he created a fund unlike any other. He founded one of the world’s first quant funds.
Quant funds don’t pick stocks like most investors. Instead, they use algorithms and supercomputers to predict trends and execute trades.
Back then, this was revolutionary. Only a few firms were doing this.
Today, it’s a different story. There are thousands of quant funds.
• But Renaissance is still in a league of its own…
It manages around $80 billion. That makes it the world’s largest quant fund.
And yet, it only employs around 300 people, and about one-third of them are PhDs.
In short, Renaissance is a collection of geniuses who, together, run the world’s greatest money-making machine.
• Renaissance has booked more than $55 billion in profits over the past three decades…
That’s far more than legendary investors like Ray Dalio and George Soros have made for investors over the same period.
Its exclusive Medallion fund has generated historic annualized returns of nearly 80%, before fees. That’s otherworldly.
But here’s the thing.
• No one outside of Renaissance truly understands how they do it…
Its trading strategies are closely guarded secrets. It’s a giant black box.
Still, you can’t argue with its results. You also can’t, as I mentioned above, ignore Renaissance when it issues a serious warning.
Now, let’s look at why Renaissance issued this warning. It comes from a letter sent to its investors last month, which Bloomberg got its hands on:
With higher rates and more volatility a distinct possibility, there is a significant risk that asset prices will correct.
Now, these are two different ideas. So let’s look at each separately, beginning with interest rates.
• Interest rates are soaring…
You can see what I mean below.
This chart shows the yield on the 10-year Treasury.
You can see the 10-year yield has skyrocketed over the past 18 months. It’s now double what it was in the summer of 2016.
This is a huge deal.
• You see, the 10-year Treasury yield is a “benchmark” rate…
When it moves, it affects everything from mortgage rates to corporate bonds.
In other words, it’s getting more expensive for everyone to borrow money… not just the U.S. government.
That’s a serious problem. You see, cheap credit has been the driving force behind the rally in U.S. stocks.
It’s allowed major U.S. corporations to borrow obscene amounts of money to buy back stock, pay dividends, and grow their businesses.
But rates are now on the rise. If this continues, borrowing money is going to become a lot more expensive. That could suck the air right out of the U.S. stock market.
And that’s just one of the threats that Renaissance warned about.
• Volatility is also making a comeback…
See for yourself.
This chart shows the CBOE Volatility Index (the “VIX”)—or what most people call the “fear index.” This index measures how volatile investors expect the market to be over the next 30 days.
A low VIX reading means traders expect little volatility going forward. A high VIX suggests the opposite. It means investors could be in for a bumpy ride.
You can see that the VIX has jumped 81% from its January low. It’s now at its highest level since August. Here’s why that worries Renaissance:
While the fear of missing out may not be a concern for equity investors, increasing euphoria mixed with a bit of complacency certainly is… Historically low levels of volatility may well have given investors a false sense of security in the nearly two years since the last market correction.
In short, investors have been lulled to sleep by record-low volatility. It’s gotten so bad, many people are paying sky-high premiums to buy risky stocks they would normally never think about buying.
And that’s why Renaissance thinks the market is ripe for a correction.
• Of course, we don’t know when this correction will happen…
But it’s better to be prepared than completely blindsided. So, be sure to take precautions if you haven’t already.
The best way to do this is by owning physical gold.
You see, gold’s the ultimate safe-haven asset. It’s survived everything from stock market crashes to full-blown currency crises. It will survive the next financial crisis, too.
Its value could even skyrocket as investors take shelter.
So, consider buying some gold before it’s too late.
February 2, 2018
P.S. I also encourage you to watch this new presentation our team put together. It shows why a special group of gold stocks could soar 500%… and what you need to do today to take advantage.
It all boils down to a secret strategy. And 2018 is shaping up to be the best time in history to use it…
Today, readers respond to our recent essay on how to profit from the electric vehicle revolution…
With the head-on race to make all vehicles EV, has anyone talked about the electrical cost of having an EV and what the slowing use of gasoline will do to the funding of our roads and other transportation infrastructure, which is traditionally done with gasoline taxes? I'd be willing to bet that the trade-off of electric for gasoline will not be as advantageous as we might be thinking.
What you have said here about the demand for copper increasing with the expansion of EVs is true enough. But I wonder about other conductors of electricity. There was a time, for example, when all telephones were connected by copper wiring, then replaced to a great extent by fiber optics, to be subsequently replaced by wireless cell phones, with the consequent decline in the use of copper in many areas. I don't know anything about it, but I hear references to wireless electricity now and then.
What is that all about? And what effect will that have on anything and everything? And how long will it be before the great Tesla lithium batteries will get in the crosshairs of environmentalists. Massive EV use will mean massive battery use, and while they are long-lived, they will eventually have to be discarded—adding to hazardous waste. Lithium is far more toxic than the acid in our present battery supply.
Are you taking advantage of the massive opportunity shaping up in EVs? Do you agree with our approach to focus on copper and other metals… or are you playing it a different way? Let us know your thoughts on this big idea right here.