It seemed like only a week ago when permabears were predicting the appearance of a new bear market that would take out the lows of 2009. The variables all seemed to be there: Greek debt crisis, inflation from higher commodity prices, and worsening economic data in the U.S. Most economic observers believe these kind of variables lead to lower stock prices. As you can clearly see, this is not the case.
There will be a lot of buying pressure in stocks due to: 1) the flight to liquidity, and 2) the attempt to hedge against inflation. As long as bond yields remain incredibly low, stocks are a viable investment option, even for retiring Boomers who have been brainwashed into believing there is some magic bond to stock ratio you must follow as you age. Such rubbish. Every era is different: sometimes you have good leaders, sometimes bad leaders; sometimes you are on a gold standard, sometimes you are not; sometimes taxes are low, sometimes they are high. You must use your common sense or risk losing all your retirement savings.
I have consistently said that there won’t be another stock market crash along the lines of what we saw in 2008. The positive correlation between stocks and the economy is far from absolute. In the current economic environment, rising domestic stock prices are actually bad in a way because it evidences a growing lack of confidence in the U.S. dollar. As I’ve said before, stocks rose in the 1930′s because we were on a gold standard and the flight to safety to gold was effectively a flight to safety to the dollar. This created the deflationary environment that exacerbated the stock market crash. We now essentially have the 1930′s situation in reverse: a flight to safety to gold is a flight out of the dollar.
What to look for now is rising inflation along the lines of what we experienced in the U.S. following FDR’s confiscation of gold. The dollar was untethered and this led to a rally in stocks and real estate even with about 20% unemployment. While our situations are somewhat similar, we also face a debt crisis that threatens to undermine the dollar. That being said, I would not be surprised if stocks double or tripled in the next 5 years. The debt crisis will wipe out bondholders, which means people have to put their capital somewhere. Stocks and gold are the likeliest candidates to receive massive inflows of hot money.
The coming years will likely be profitable for those who maintain a bullish bias in stocks, commodities, and gold. Besides minor reactions these markets are poised to rise dramatically because of the devaluation of the dollar and the concurrent loss of confidence. The thing to remember is that Treasuries are government debt, which means they will eventually fall as the public’s confidence in the government falls. This leads to a cascading effect in all other type of bonds, and in the worst case scenario, a panic. It is virtually guaranteed that money will panic out of bonds in the same way it panicked out of real estate. Our job is to figure out where that money will find a home and why. Believe me, conventional wisdom will do you no good in the coming years- it’s time to think independently and intelligently.Follow