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When a poker player has a good hand that's likely to win, he goes "all in". He puts ALL of his chips into play.

Everyone's in the Game – What Comes Next? Dear Reader, When a poker player has a good hand that's likely to win, he goes "all in". He puts all of his chips into play. Given recent all-time highs in the markets, this same action is what many investors are doing right now. But there are consequences to this, as I'll explain. What Motivates "All In" Mentality Interest rates for bonds, savings accounts, and term deposits will remain at zero for many more years due to enormous global debt rates. Many investors who are generally risk-averse have given up their defensive positions in the last 12 months. They're pulling money out of their interest-bearing accounts and trading stocks, desperately trying to get some returns on their hard-won savings. Since this has proven to be a successful maneuver in the short term, more and more savings have been transferred recently into the stock market. Success in stock investing can lead to lust for profit. The more you earn in financial markets, the greedier and more reckless you're likely to become. That's not just an opinion. There are decades of academic research that show how people become overconfident and drop their guard in times of economic euphoria or personal success. Need proof of overconfidence right now? The following chart provides an impressive visual representation of this effect. It shows call option purchases by retail investors. By purchasing calls, investors bet on rising prices but risking far less money and getting more leverage. The red verticals at the beginnings of 2018 and 2020 show how speculation with calls has been consistently growing since 2017. But since the beginning of 2020, it's exploded! In the past 13 months, the number of call contracts opened by retail investors and the volume of invested capital has more than quadrupled! The Pressure to Perform Institutional investors are also engaged here. Investment funds and hedge funds always hold a cash reserve if they need to pay out to investors, so they don't have to close any of their current positions to do so. The cash level usually hovers around 4% to 6% of the managed capital. A lower cash level means that the funds are heavily invested. Below, you can see the changes in cash reserve levels for American mutual funds. Mutual funds are investment funds that only invest in stocks. As you can see, between 1995 and 2005, mutual funds never had cash reserves of less than 4%. After the financial crisis, these fund managers got bolder. The cash levels are currently at only 1.5%! This is also a consequence of the enormous pressure on fund managers to perform. The Greed Factor Unseasoned investors who grow bolder from success do not only enter riskier trades, they also invest all the capital they can raise. And when that isn't enough anymore, there's money to borrow—cheaply, since the interest rates are so low. But this type of securities lending almost always uses the portfolio as collateral. Every market day, the collateral values are updated. For stocks, it's usually 50% of their list price. For derivative instruments like futures, options, warrants, and certificates, it's usually set at 0%. If the collateral value sinks below the sum of the debt due to falling stock prices, the borrower has to make up the difference by paying in more money or selling off positions. If they don't do it fast enough, their portfolio will be subject to "forced liquidation." The following chart shows changes in margin debt since 1959, measured from each yearly low point. The red line at the current level lets us compare it to historical levels. The recent rise in margin debt has only been exceeded three times: 1985, 2000 (dot-com boom), and 2007 (financial crisis). The Furious Finale So how could this end? I'll use a simple analogy. Imagine a crowded swimming pool on a hot summer day. The pool is only accessible from one side and is almost full of people. Some of the bathers have floats. Due to the crowd, the water level rises. The water volume sinks as it spills over the side. The water in the pool is the capital invested in the stock market. Some of it disappears (spills over) as profit for those who leave the pool early. Now imagine that a panic breaks out among the bathers. Most want to get out of the pool as quickly as possible, and the one exit becomes a bottleneck. Some are further hindered by their floats (the securities loans). Others remain calm and stay in the pool, hoping to have more room now that everyone has panicked and left. Eventually, these people realize that the water in the pool now only reaches their knees. Sincerely, Dr. Gregor Bauer © 2021 Godesburg Financial Publishing, Inc. DISCLAIMER: COMMUNICATIONS FROM HAVEN INVESTMENT RESEARCH (HIR) ARE FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY – NOT INVESTMENT ADVICE: HIR and all the services it offers are for educational and informational purposes only and should NOT be understood to be securities-related offers or solicitations. None of HIR's communications should be considered or used as personalized investment advice. HIR recommends that you speak with a licensed professional before making any investment decision. RESULTS PRESENTED ARE NOT NECCESSARILY TYPICAL OR VERIFIED: HIR communications may include information regarding the historical trading performance of gurus in their services (all verified by a third party), as well as testimonials of non-employees depicting profitable investments and trades that are believed to be true based on the representations of the persons providing the testimonial of their own free will. Please be aware that the claims regarding investing or trading results of non-employees are not tracked by HIR nor can they be verified. As always, past performance is not necessarily indicative of future results. Therefore, results presented in this email should NOT be considered TYPICAL. Actual results can and will vary based on everything from experience, ability, risk mitigation practices, and market volatility... to the amount of money exposed in the investment or trade. Investing and trading are speculative and carry serious risk. You may lose some, all - or possibly more - than your original investment or trade. HAVEN INVESTMENT RESEARCH IS NOT AN INVESTMENT ADVISOR OR REGISTERED BROKER: HIR, including its owners and employees, are NOT registered as securities broker-dealers, brokers, or any sort of registered investment advisors with the U.S. Securities and Exchange Commission, any state securities regulatory authorities, or any self-regulatory organizations. HAVEN INVESTMENT RESEARCH EMPLOYEES MAY HOLD SECURITIES DISCUSSED: If a writer holds any securities in a communication, it will be disclosed along with the information on the potential investment or trade. HIR, its owners or employees, have not been - or ever will be - paid by the issuer of a security mentioned in our services or communications. HIR, its owners and employees are paid entirely or in part from commissions based on sales of their services to subscribers.

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