By MoneyMorning.com.au
The following map shows how German forces, in August 1941, encircled and captured over 650,000 Soviet troops in three main attacks during the invasion of the USSR.
Operation Barbarossa was Hitler’s plan to march east and take Moscow by the fall of 1941. The German armies, at Hitler’s instruction, diverted south to begin an encirclement of the Russians. The Russians surrendered by the end of September.
Hitler enjoyed a massive tactical coup at the Battle of the Kiev. But his diversion south of Moscow meant German armies would not arrive there until after the city had been reinforced by troops from Siberia. More importantly, it cost Hitler time. The Russian winter arrived. It froze the Germans. Then it buried them.
Investors in the stock market and government bonds are like the Russians.
The first attack on your portfolio began in 2007 and lasted through 2008 as the banking sector nearly collapsed worldwide. Credit reinforcements from central banks and new lines of stimulus supply from governments prevented a total rout but at great cost.
But the logistics of supporting the failing bank sector took their toll on governments. By 2010, the governments themselves were unable to continue the fight against debt deflation. The noose closed tighter on markets. The army of bears advanced.
The forces of debt deflation now surround us on all sides. Lower house, stock, and bond prices should be the inevitable result, until the last bull is routed. But the central banks are the diehard holdouts in this war. They keep airlifting money into markets (perhaps with helicopters) to keep investors supplied with confidence.
To me, this analogy represents the last stand of the corrupt financial system of the Western world. Central banks in Japan, the US, the UK, and Europe are the only thing standing between you and a big correction in stocks. I don’t think they’ll be able to hold out forever. But keep in mind they have an endless supply of bullets, if bullets are credit and credit can be created with keystrokes.
I would view these interludes of reflation in the markets as chances for you to exit this system, to slip through the encircling lines and convert your financial wealth to real wealth, or to try to get into another system. I know it’s not easy. But it’s worth trying. The alternative is almost certainly inevitable.
A Market of Stocks, Not a Stock Market
The only ray of sunshine in this otherwise dark forecast is that there is no stock market, just a market of stocks. You are under no obligation to buy “the market”. You buy “the market” when you own an index-tracking fund or a broadly diversified portfolio. If you buy “the market” you will get exactly that: a return that reflects the flow of money into and out of stocks as an asset class.
You’re better off recognising that stocks, as an asset class, are still in a bear market, and perhaps the most dangerous phase of the bear market. That allows you to select individual stocks whose returns are not correlated to “the market”. To find a stock like that, you need a company that has earnings being driven by a business or geopolitical trend that’s more powerful than the debt deflation choking the life out of leveraged markets.
Dan Denning
Editor, Australian Wealth Gameplan
