Beware the ‘perpetual-motion machine’ driving this market, warns billionaire Howard Marks

President Donald Trump and China just keep ramping up their trade battle, sending stocks worldwide into the woodchipper.

The tweeter-in-chief also is preparing to huddle this afternoon with GOP lawmakers over that family-unfriendly border policy that’s sparked outrage.

Regarding the back and forth with tariffs, Bridgewater’s Ray Dalio may be speaking for many investors with his take.

“We hope and expect that rational heads will prevail, and tit-for-tat escalations won’t accelerate to produce horrible wars,” he writes in his latest LinkedIn post.

But it’s another billionaire investor, focused on another hot topic, who provides our call of the day.

Howard Marks has thought about the growth of what he calls “investing without people,” and the Oaktree Capital co-chairman is offering warnings.

ETFs — those increasingly popular funds that track indexes — have provided a big boost to large-cap stocks and made them overpriced, Marks writes in his latest memo.

“Like the tech stocks in 2000, this seeming perpetual-motion machine is unlikely to work forever,” he cautions.

“It’s not clear where index funds and ETFs will find buyers for their over-weighted, highly appreciated holdings if they have to sell in a crunch. In this way, appreciation that was driven by passive buying is likely to eventually turn out to be rotational, not perpetual.”

High-yield bond ETFs also worry Marks.

“What’s the probability that in a crisis, a high-yield bond ETF will prove more liquid than the underlying bonds (which themselves are likely to become illiquid)?” he asks.

“The truth on this will become clear when the tide goes out.”

Beyond raising concerns about so-called passive funds, the storied investor offers views on quants and algos, as well as artificial intelligence. And he thinks there is still “a role for investors with alpha.”

Go here to read the Oaktree heavyweight’s full memo, though the always-critical Twitterverse is suggesting he’s just selling his own active shop’s offerings.

Key market gauges

Futures for the Dow  , S&P 500 and Nasdaq-100 are tumbling, putting the Dow on track for its sixth down session in a row. It would be the S&P’s third-straight drop.

The Shanghai Composite closed nearly 4% lower, and Europe is a sea of red. The dollar index is higher, while oil and gold are falling. Bitcoin is changing hands around $6,800.

See the Market Snapshot column for the latest action.

The chart

Gimme shelter? Where?

Try tech stocks, say J.P. Morgan strategists led by Dubravko Lakos-Bujas. They have upgraded the technology sector to overweight (or buy) from neutral, saying in a note that they are “modifying some sector views where the relative performance has been more pronounced.”

And the chart above nicely illustrates how the tech-heavy Nasdaq Composite is trouncing the NYSE Composite this year. It comes from the trader/media critic who runs the StockCats Twitter account.

The quote

Getty Images

“The time is now for the White House to end the cruel, tragic separations of families. ... If the administration does not fix this and fast, we in Congress must.” — Sen. Lisa Murkowski, R-Alaska, is among the Republican lawmakers who are increasingly joining Democrats in calling for the Trump administration to end the separation of families at the southern border.

An audio recording of children crying at a detention center has added to the outrage, especially as a Border Patrol agent is heard joking callously that the “orchestra” of weeping kids is just missing a conductor.

The GOP’s internal feuding over this issue is “fast becoming an election-year nightmare,” says a Wall Street Journal editorial, while the Border Patrol is reportedly “very uncomfortable” with news outlets using the term “cages” to describe conditions at detention facilities.

The buzz

Apple’s stock is falling premarket, following a report that CEO Tim Cook visited the White House last month to warn that imposing tariffs on Chinese goods could hurt the iPhone maker.

The euro is dropping as European Central Bank President Mario Draghi says the central bank could extend its bond-buying program if necessary.

Tesla CEO Elon Musk claims that an employee attempted to sabotage the car maker.

After one of our digital age’s most lampooned rebrandings, Tronc is going to return to the name Tribune Publishing.

Deal news: KKR is looking into the sale of a $3.5 billion European telecom company, health-care payments player Cotiviti is getting bought out for $4.9 billion, and Roche is paying $2.4 billion for the part of Foundation Medicine that it doesn’t already own.

Housing starts have roared to an 11-year high.

Check out: MarketWatch’s Economic Calendar

North Korean leader Kim Jong Un is making a two-day visit to China.

Random reads

The Caps’ coach is out right after winning the Stanley Cup — here’s why.

Could England’s feel-good factor after its win set the stage for a World Cup run?

Rapper XXXTentacion has been killed in a shooting in Florida.

Emmanuel Macron is getting criticized for his “Call me Mr. President” lecture.

A sports envoy gig in Africa may give Boris Becker immunity from bankruptcy proceedings.

Turkey’s leader has found a new friend, and it’s not the U.S.:

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