If you want any chance of getting ahead, you must speculate. Four central banks – the U.S. Federal Reserve, European Central Bank, Bank of Japan and Bank of England – have rigged the stock, bond and commodity markets.
Their goal is to make stocks fall, but without causing a terrible crash.
But why on earth would they do that?
The global economy is going through the end stages of 40-plus years of credit growth.
This period has seen huge growth in government and private debt. For instance, U.S. government debt is more than USD$14 trillion. And Australian consumer debt now tops $1.5 trillion.
Paying Off Old Debt With New Money
That’s a problem. Because most governments will never repay the debt honestly. The only way they’ll repay it is dishonestly, through inflation. In other words, they’ll devalue their debt by increasing the money supply. It means the debt they racked up in the past is worth less. But it also means your savings will be worth less. So individuals have to work harder and borrow more money.
The reason for that is higher inflation means indebted governments can pay off old debt with new devalued currency. It can then create new debt that it will eventually repay with future devalued currency.
It’s how central banks and governments have worked for the past 40 years. And they’re in no rush to stop.
The thing is, even they know there’s a limit to how far they can push credit growth and inflation. And they know it will be hard to repeat what they’ve done for the last 40 years. So, they’ve got to go with their next best option – propping up the market to stop its collapse.
Central banks will continue to let markets fall until they near breaking point. Then they’ll come to the rescue… announcing a bond-buying program, money printing, currency intervention… or some other crazy scheme.
This will boost the market, and may even filter through to the economy as businesses invest, believing the economy is on the mend. But, it’s short lived. Soon enough, the market realises the stimulus won’t help, and stocks and commodity prices fall.
Until again, the market nears breaking point… and the central banks intervene again. And so it goes on. The result they’re after is to institutionalise central bank intervention… so intervention becomes the norm rather than the exception.
In other words, they’re rigging the market.
But one day even that plan will break down. Yet for now the market wants central banks to intervene.
If this all sounds like gobbledygook, don’t worry. Because in simple terms it just means that markets are set for more volatility.
The Upside
And that creates a dream environment for stock speculators.
Whether that’s buying small-cap stocks to bet on the market going up… or short-selling stocks to bet on the market going down. Either way, it’s forcing investors to be speculators…
And speculating is something you have to do. But that doesn’t mean you should use all your cash. You’ve got to be smarter than that.
We suggest you use our “safe” money and “punting” money approach:
Make sure you put most of your “safe” money in a bank savings account or term deposit. This should be as much as 80% of your savings. But with deposit rates falling, it also helps to own a few blue-chip dividend payers… say between 10-20% of your assets.
Not forgetting gold and silver.
In our view, precious metals are a must-have in any portfolio. This is your long-term investment money. An asset you should keep until you’re well into retirement. And with any luck, an asset you’ll never have to use (there’s no better legacy than leaving a few bars of gold and silver to the kids or grandkids).
After you’ve sorted out your “safe” money, anything left over is your “punting” money.
That’s where small-cap stocks enter the frame.
Going After Big Gains
In our view small-cap stocks are the best place to put your punting money to work. You get the potential for big triple- and quadruple-digit gains, yet you only have to put a small amount of cash on the line.
In terms of reward versus risk, nothing beats it.
And with the volatility we mentioned earlier, it improves your chances of locking in big gains within a short timeframe.
That’s why it’s important to have a robust risk-management system. We recommend the use of trailing-stop orders to lock in profits or cut losses when selling a stock. And buy-up-to prices when buying a stock.
This is something to pay closer attention to this year to make the most of the volatile market. It will mean tighter buy-up-to prices (by that we mean setting the maximum buy price closer to the previous closing price) and potentially tighter trailing-stop prices.
Plus, set shorter-term price targets and taking profits earlier. For instance, taking a 50% profit in a few months rather than waiting for a 100% profit over a year or more.
While we’d prefer to hold small-cap picks for longer, we’d rather lock in a profit now (or take a small loss) than give back those profits or take a bigger loss.
Cheers.
Kris
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April 9th, 2012 at 8:29 pm
Not that long ago you considered that money printing was the root of all evil, and it would push gold and silver to extraordinary highs. Remember fiat money was really worthless, and gold was the “true money”
The problem with your old theory is that our fiat money is needed to pay our taxes, so it can never be worthless.
The concern that I have with your new investment strategy is that you accept that we will see inflation, and yet you are holding large sums of cash which will devalue in an inflationary enviroment. Gold and Silver may appreciate, and shares will appreciate if you buy well, but they may not if you choose poorly.
You also ignore a large asset class that has performed better than metals or shares over recent times.
April 10th, 2012 at 12:04 pm
-Paying Off Old Debt With New Money
“It’s how central banks and governments have worked for the past 40 years. And they’re in no rush to stop.”
Kris you just hit the root of Australian housing.
By your own past admission inflation is higher than officially suggested and that may be true.
As PF expressed, it doesn’t make much sense to hold cash in an inflationary environment. I also wanted to call you out on this concept a couple of weeks ago. Could you explain this further?
The problem i have with Gold and Silver is margin hikes..
There is nothing to stop a repeat of last years ‘raid’ on the market.. what would happen to prices if they raised margins 20 times in a short period?
Likewise, what would happen to Au property if they cut rates twelve months in a row?
I agree the market is absolutely rigged..
The problem is not one of fundamentals but guessing what they are going to do next.
Quite sad really.
April 10th, 2012 at 12:42 pm
One year ago in 2011 March/April everyone was screaming hyperinflation silver and BHP was hitting $50.
Lynas was heading for $3.00 a share.
Now 12 months later BHP is down over 30% .
Lynas is down over 60%.
Silver is down over 30%.
The banks are down over 25%.
Gold is going nowhere?
House prices are flat and heading south slowly?
Wages are not increasing, because cheap dynamic labour form China.
If you call this market inflationary then like to see what you MM bloggers call deflation!
Walks like a duck then must be a duck so I call this new market DEFLATION.
April 10th, 2012 at 1:02 pm
TRB it will be interesting to see how things pan out with the US debt.. a full blown money print after the election maybe?
Who knows.
April 10th, 2012 at 1:19 pm
Interesting if the social mood in America had enough of zero interest rates and weak US dollar and rising living costs?
Will the FED eventually be forced to listen to the American public stop bailing out speculators?
Where will the anti money printing pressure come from?
Tea Party?
Pensioners with no return on cash in USA?
Germany will not accept money printing in Europe without hardship on the countries that have high debt levels and big government spending?
Have the money printing crowd underestimated the hatred for money printing in Europe and USA?
Money printing hyperinflation is not a sure 100% bet, however Marc Faber would disagree?
April 10th, 2012 at 1:29 pm
You raise great points TRB..
The thing is you nor i know what they will come up with.
Public opinion of money printing might not matter.. does it always matter when their government chooses to start wars?
Im personally on the fence about what is going on with a lot of things these days..
One thing is certain though. The deficits are real and will be dealt with one way or another when the time is “right”.
April 10th, 2012 at 2:23 pm
TRB you are talking about asset price deflation. Expenses such as petrol, food, electricity, water, insurance, rents, and day to day costs are rising.
House prices have actually risen very slightly over the last couple of months, and that might continue if we get our rate cut in May. House prices won’t fall forever if rents are increasing, and in Sydney where shortages exist rents won’t fall.
Precious metals – I’m not sure what will happen with them.
Equities will rise selectively – have you seen the ANZ jobs report? The economy looks better than Kris thinks it is.
It’s a work in progress…..
April 10th, 2012 at 3:20 pm
PF that’s where we are different.
I see asset price deflation as more important because you cannot control it, rising costs of living you can control.
People are depending on rising assets for a good life and extra income for that rainy day.
Rising cost of living can be control.
Reduce power bills by getting solar.
By the way solar panels are dropping deflation!
Buy your food in bulk at the markets,start a garden or buy at Audi supermarkets.
I got 30% of my insurance last year by going to budget direct, however I can do that because 65% no claim bonus.
In otherwords depends on your financial situation and how lazy you are to do nothing..
However in asset deflation you can do nothing out of your control!
Had to replace a broken window in my toyota car last week quote $565 to fix it, shop around some wreckers quote $140.00 average price, eventually got a complete window for $70.00.
No labour charge did it myself total cost $70.00!
Australian economy just a rip off, but eventually people will wise up and say no to these hyperinflation prices.
That’s why internet shopping is taking off people are sick of the rip offs.
April 10th, 2012 at 4:12 pm
So TRB,
You say that you got 30% off your insurance by shopping around. The trouble is with insurance companies, you never really know how good they are till you need to claim – my bet is budget premiums will equal a budget payout. We’ll see but good luck.
As far as your Toyota window is concerned, have you factored in your time (both running around and installing), the cost of any tools required and the fact that you bought a second hand product? It is unreasonable to compare a professionally supplied and fitted “window” with a home handyman’s installation of a wreckers yard leftover. Also, does your installation devalue your car? Beware of false economies.
It’s no different to someone doing their own tax, building their own house or making their own beer – to make honest comparisons you need to factor in all tools, materials and time.
April 10th, 2012 at 4:18 pm
TRB – I have to agree especially on your last point.
With fat incomes (and rising asst prices) we don’t question costs.
Now we’re beginning to question costs and the economy is paying the price (more bankrupts and job losses).
Lower interest rates are coming…. a race to the bottom perhaps? A new normal maybe?
Personally I don’t want it. It’ll erode my Term Deposits. Make me take risk perhaps.
April 10th, 2012 at 5:11 pm
Solar panels dropping in price is more likely to be due to increased productivity or increased competition, not deflation.
House prices falling is deflation, although if it is minor and short lived then some would argue that it is just the cyclical nature of markets.
The ASX falling from around 7000 in 2008 to around 4300 is certainly deflationary for many here. That’s a 38.5% fall in equity values. Some small cap used to be large cap?
We can all cut back on expenditure, move in together to save rent, mend our own clothes, grow our own vegetables, repair our own cars and homes etc, but in the end none of that is deflationary, it’s a product of greater efficiency of use.
When no one is buying because they expect prices to fall next week, and the week after, and the week after ad infinitum, then we will be in a deflationary cycle.
There is a natural limit to cost savings caused by greater efficiency, but there is no limit to deflation. It can only be reversed by a regaining of confidence in the market.
Before the US Fed institutionalised inflation (pre WW1 I believe) when productivity increased the dollar bought more. Asset prices fell in relation to the $USD. Now we inflate asset prices and deflate the value of our currency to create wealth for people earning a wage. We create wealth by destroying debt. It works against the interests of people who no longer earn a wage, but it was up to them to put aside sufficient during their working life to cover their retirement.
Has the system changed forever – probably not, but it might at some point. Make sure that you put enough acorns away for your winter.
April 10th, 2012 at 5:50 pm
Hey PF,
what’s your take on interest rates next month?
i have a four pack of mars bars waiting for you if you get it right = )
April 10th, 2012 at 6:57 pm
down 0.25% but my wife has suggested that I diet.
Thanks all the same.
April 10th, 2012 at 8:40 pm
if it makes you feel any better amigo i gave my mrs a hug yesterday.. she jokingly told me to ‘pull my stomach in’
…i then told her it was already pulled in
April 11th, 2012 at 10:05 am
Hi John
For a started my running around and time is enjoyable.
I get real satisfaction doing the job myself without some tradesmen telling me going to take weeks to do.
I do a better job because I take more time to do it.
Time is not a issue when you are learning new skills and met good people willing to help you out and teach you.
All part of a enjoyable progress…..
As for Insurance claim I have not heard to0 many nasty stories yet about Budget Direct.
Pay top dollar in anything John does not mean your going to get top service and top products.
Biggest con for any business if you are expensive you must be good is crap, that’s why internet shopping is taking off people are sick of the rip offs and are finally waking up.