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Back on January 8, Socio Times reminded readers of the great falderal that surrounded the initiation of a big silver Exchange Traded Fund in mid-2006, and directed their attentions to the coincident peak in the underlying silver market. We offered “Ends the Fun” as an alternate designation for ETF and said it applies not just to the rise in commodities, which was then and now remains a focus of new ETFs, but to the financial markets as a whole. Another signal is the appearance of the “Exchange Traded Funds for Dummies,” which The Elliott Wave Financial Forecast commented on in January (see Additional References below). This broad interpretation is confirmed by the Wall Street Journal’s latest take on the “shift from ETF evolution to ETF pollution.” One new fund, the Powershares DB, even offers investors a chance to participate in the yen carry trade. After a record-breaking 2006,” in which 158 new ETFs doubled total assets to $417, Smartmoney.com says the rapid pace is continuing in 2007. “We've already seen announcements for new ETFs that slice and dice the health-care industry, weight companies based on revenues and track newfangled indexes designed around nontangible assets like innovation and customer loyalty.” 

Customer loyalty? Looks like we spoke too soon here on January 8 when we suggested that the well of speculative conduits was dry. But the ability to buy and sell intangible corporate qualities is not a long-term proposition. It could only happen in an extreme environment as the trend in financial engineering exhausts itself. This is not to say all ETFs are bad. Some are very useful. If they’ve been properly constructed they will arrive just in time to give investors efficient ways to make the most of the bust side of the great boom.  Of course, there’s a big if. To be of any value, they will have to survive the washout and trading slumber that is likely to ensue. 

January 2007, EWFF
Now it’s the hedge funds that “have gone retail. Copycat mutual funds that mimic the ‘alternate’ investment strategies” of hedge funds are being “rolled out to attract the 401(k) crowd.” For just $500, the little guy can “cover corners of the market that had been considered esoteric and risky in the past.” “Hedge funds are on the public radar,” the NY Times observes. “They even have their very own ‘Dummies’ book.” This “democratization” of the riskiest assets stamps the trend as a mania. It is the part of the sequence that The Elliott Wave Theorist dubbed the “insidiousness of a mania” back in 1997. In a mania, knowledge of history and value are “judged an impediment to success,” and the advantage falls to the “utterly unknowledgeable novice.” Thus we see “Hedge Funds For Dummies,” which came out in October. The final weeks of 2006 brought several additional titles that imply a much broader turn. Apparently, commodities, exchange-traded funds and “flipping” real estate (published a year too late) are also “for Dummies” now. All three themes represent critical components of the liquidity driven, all-the-same market forecast that has been slowly falling into place over the course of 2006 (for the last discussion, see page 2 of the October issue). A quadruple whammy of “Dummies” books fits right in with the across-the-board, all-the-same-decline that EWFF has been tracking. Ironically, the financial sophistication that many are working hard to acquire will undoubtedly do more harm than good in the coming environment. Getting in cash and staying there just isn’t that complicated. But we’ll know that the market is near a low when “Cash for Dummies” comes out.