Talk about a turnaround.
We take a few days off from Money Morning in order to hand you over to our old pal and technology guru Sam Volkering, and what do you know?
The US Federal Reserve does the unthinkable – it tapered its bond-buying program.
The result? Stocks crashed, bond yields surged, and the whole financial world went into meltdown.
What’s that? None of that happened? You mean stocks didn’t crash? Bond yields didn’t soar? And financial markets managed to carry on as normal?
Who’d have thought it? Oh yes, that’s right, we told you all along not to listen to the junk about tapering. ASX 7,000 here we come…
This is something we’ve tried to explain for a long time.
At the moment there are still too many folks looking for asset bubbles. Just as a watched pot doesn’t boil, so a watched bubble doesn’t pop.
We won’t argue with the fact that things have gotten worse for governments financially over the past five years. Certainly no sane person could argue things have gotten better.
But just because things are worse doesn’t mean the crash must happen right now. The key to everything is investor perception.
And right now, that’s starting to change away from the negative and towards the positive.
One thing that the bubble watchers tend to mention in their argument for a crash is the high level of US government debt. You can see the history of the US debt ceiling in the chart below. It shows the rising increments from 1940 to 2012:
As you can see, in dollar terms the debt ceiling went from a negligible amount in 1940 to US$16.39 trillion in 2012. As of today the US debt ceiling stands at US$16.7 trillion.
Everyone can agree that too much debt is bad. It’s especially bad if the borrower can’t repay the debt. And everyone agrees that too much debt is bad for stocks, right? Not so fast.
What do you note about the US debt ceiling chart?
That’s right, a rising debt ceiling has been absolutely no obstacle to a rising stock market. The debt ceiling rose almost every year between 2003 and 2007, rising from US$7 trillion to US$10 trillion.
At the same time the US S&P 500 index gained 87%.
But how is that possible? Weren’t things getting worse during that time? Weren’t people going further into debt each year from 2003 to 2007? And wasn’t the US government borrowing and spending more money than it had?
The answer is yes.
And yet even though things got worse, stocks kept going up. We’re not saying that’s rational or even logical. And we’re not saying the same thing will happen again.
But we are saying that the bubble watchers shouldn’t assume that stocks will fall just because government finances are getting worse.
Now, there is another argument. That is, that US stocks have already gained 132% since the March 2009 low. The argument here is that things have gotten worse and that stocks have already gone up, and so now investors must meet their day of reckoning.
The outcome will be the same as in 2008. Credit will suddenly and unexpectedly dry up and that will put an end to the stock rally.
That argument forgets one key point – central banks worldwide now openly manipulate the money supply and asset prices by creating money and credit at will.
In the past those in the know knew that central banks did this, but it was all rather discreet. Not anymore. Since 2008 the US Federal Reserve, European Central Bank, Bank of England and the Bank of Japan have openly created trillions of dollars of fresh money in order to prop up asset prices.
Like it or not, if the central banks’ aim was to prop up asset prices (which it was), then their plan has worked. Stocks in the US, Europe and Japan have soared.
And while all the talk is about tapering and ‘returning to normal’, the reality is that things will never return to normal under the current money system, because the central banks now have overt permission to crank up the printing presses when things go awry.
That’s why the worst thing you could have done this year is sell stocks for fear of a crash. A crash will come. That’s inevitable. But not yet.
Central banks have barely started with their unconventional monetary policies. And most investors are still tentatively sitting on the sidelines waiting for the crash.
Trouble is, it hasn’t happened. We turned bullish on stocks in 2012, after being neutral to bullish for the previous 18 months (before that we were bullish from late 2008, telling investors to buy stocks while most others feared financial oblivion).
The bottom line is we’ve got a pretty good eye, ear and nose for what makes the market and investors tick. We won’t claim to get everything right. But right now there’s no doubt in our mind that there are still too many bears predicting a crash.
The Australian stock market may not hit our year-end target of 6,000 points, but as the bears capitulate and turn bullish, there’s no doubt our prediction of 7,000 points in 2015 is bang on target.
The Australian market has added 200 points in just over a week. A year from now you’ll look back at this period as the beginning of another great bull market run.
Cheers,
Kris+
PS: It’s fine to say stocks are going up, but you may wonder where to invest. Well, we’re big on two sectors right now, technology stocks and resource stocks. Both sectors are set for big gains in 2014, especially tech stocks. The US NASDAQ index only needs to gain another 22% in order for it to take out the 2000 high.
Our own technology guru Sam Volkering is hot on the trail of a number of technology sub-sectors he says will hit the big time and the mainstream in 2014. The outcome could mean big triple-digit gains for a select number of tech and biotech stocks if the NASDAQ hits a new high. If you don’t yet subscribe to Sam’s work in Revolutionary Tech Investor you can find out more details – including which stocks to buy – here…
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