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Tag Archive | "central banks"

But when <a href="http://www.moneymorning.com.au/stock-market" title="More on the stock market"><strong>the market</strong></a> deals the cards, it’s up to you as an <a href="http://www.moneymorning.com.au/category/investments/investment-strategy" title="More on investment strategy"><strong>investor</strong></a> to play the best hand you can out of those cards.

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We May Not Like the Game, But We’re Not Folding This Hand

Posted on 03 September 2014 by Kris Sayce

Oil down.

Gold down.

Stocks fell too…but not too much.

With everything going on in Russia, Ukraine, and Iraq, we have to wonder why the traditional ‘fear assets’ of gold and oil haven’t skyrocketed.

And why haven’t stocks fallen in a heap?

There’s a simple answer. The crazy central bank policies of low interest rates and money printing are ‘working’…

We know the claim that the policies are working will cause howls of protest from some readers
.
But listen up. We’ll explain what we mean.

When we say the policies are ‘working’, we mean that they’re slowly having the impact that the central bankers want.

It means that economies are beginning to grow again (slowly) and that people are borrowing again. That’s what the governments and central banks wanted.

And, slowly, they’re getting it.

That doesn’t mean we agree with those policies, because we don’t. In our view, the money printing and low interest rate policies are madness. Didn’t their mothers ever tell them that money doesn’t grow on trees?

But when the market deals the cards, it’s up to you as an investor to play the best hand you can out of those cards. And by not taking part in this market it would be like folding on a hand with four aces…you just wouldn’t do it.

This is how it has always been

The important thing to remember is that the current economic set-up isn’t so different to how things were for the previous 100 years.

Given the opportunity, governments and central banks have always printed money.

It’s just that today they do so completely in the open.

That’s why so many people think that what’s happening today is so unusual. But it’s not.

Why do you think inflation took off in the 1970s, through the 1980s and right up to the 2007 crash? It was due to the steady stream of new money that central banks fed into the economy.

It was the creation of new money by banks in the form of loans to buy houses.

When a bank only has to hold two cents in cash for every dollar it has on deposit, it’s no wonder they’re so keen to create as much new debt as possible.

That behaviour continues now. As the Australian reports today:

The latest example of reckless lending comes after the Australian Prudential Regulation Authority released data this week that showed a record 43 per cent of loans in the June quarter were ­interest-only loans as investors took advantage of low interest rates and rising house prices.

It makes you think, doesn’t it?

Interest rates are at record lows, and yet borrowers still can’t afford to repay principal and interest.

Of course, there’s a reason for that.

Making the most of cheap money

Every home buyer always wants to know the maximum amount they can borrow.

It’s never a question of how much they should borrow. It’s how much they can borrow.

The simple reason for that is the obsession with buying houses in the belief that house prices always go up.

The more you can borrow, the bigger the profit when you sell. And many buyers are happy to pay interest only because they figure that if they get into a pickle they’ll just sell the house at a profit anyway.

It’s a win-win situation!

That’s what many think anyway…until they get into a real pickle.

But when will that happen? As long as interest rates stay low, even those up to their neck in debt should muddle through.

When rates start to rise…it will be a different story.

But low interest rates are here to stay for the foreseeable future. And as long as they stay low, it will encourage folks to borrow as much as they can.

And it’s not just home owners. Look at the example of Spain. It has just issued 50-year bonds at a face value of one billion euros.

It managed to lock in a 4% interest rate on that debt.

Why wouldn’t Spain keep doing that as long as there were buyers?

It’s just another boom

This is the story that’s playing out in the stock market too.

Investors are slowly coming round to the idea that they don’t need to worry about the end of the US Federal Reserve’s bond buying program.

They’ve seen the ease with which the European Central Bank can announce plans for further stimulus, and the positive impact it has had on stocks.

So what if the Fed plans to stop its bond buying program? Everyone knows it will launch another stimulus or money printing plan as soon as the market starts to complain.

That’s why we’re playing the hand the market has dealt us to the best of our ability. It means taking advantage of the cheap money and money printing.

It means buying stocks as more money flows into the economy, creating inflation and boosting stock prices.

As with every inflationary boom, it won’t last forever. But the previous boom had a pretty good run. It ran from the mid-1970s through to 2007.

That’s around 30 years. The current leg of the inflationary boom has barely lasted six years. Sure, there’s no guarantee that it will last forever, but flip it around. There’s no guarantee it will collapse tomorrow either.

The message is simple: Don’t bet your life savings on this market; it’s too risky. But if you don’t have some exposure to high growth assets, you really are missing out on the chance to buy into a boom that could last for another decade or more.

Cheers,
Kris+

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Something that many hyperinflationists still don’t realise. <a href="http://www.moneymorning.com.au/category/financial-system/inflation-and-deflation" title="More on inflation"><strong>Hyperinflation</strong></a> is only a danger if an economy operates a dual <a href="http://www.moneymorning.com.au/category/financial-system/currency-market" title="More on currencies"><strong>currency</strong></a> system.

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The Three Steps to Avoiding Hyperinflation

Posted on 25 August 2014 by Kris Sayce

Sometimes even contrarians like to know that we’re part of a crowd.

It’s true.

For the most part we like being on our own.

We don’t like the herd mentality. Or rather, we don’t like joining in on the herd mentality.

If we get in first and then a herd develops behind us, that’s just fine.

It happened when we were among the first to back a tiny natural gas stock two years ago, only for the herd to follow. And now it’s happening to something on a much bigger scale.

Do you hear the rumbling? The herd is growing…

We don’t mind admitting that sometimes we get things wrong.

For instance, take interest rates and inflation. Back from 2008 to 2010 we were firmly in the hyperinflation camp.

It just seemed so obvious. If governments print money, it has to result in hyperinflation. It would be just like in Civil War America, Weimar Germany, and Zimbabwe.

But then we realised something. It was something that many hyperinflationists still don’t realise. Hyperinflation is only a danger if an economy operates a dual currency system.

So as long as a government can control three key areas, hyperinflation as you understand it, won’t happen.

Governments in control

So, what are the three areas?

To avoid hyperinflation the government needs to:

  1. Centrally control the currency through legal tender
  2. Ensure that a black market in an alternative currency doesn’t develop
  3. Hope that all other governments and central banks increase their money supply at a similar pace

These are key points. Yet few people get it. In the most famous cases of hyperinflation, it could only happen because the government couldn’t influence or control these points.

In the case of the hyperinflation during the American Civil War and Weimar Germany, it took hold because the government issued two classes of currency — one backed by gold and another backed by the word of the government.

Needless to say the currency with gold backing became more valuable than the other currency. This led to rampant price rises and the devaluation of the non-gold-backed currency.

In the case of Zimbabwe, it was because people preferred to use US dollars. So when the government began printing more Zimbabwe dollars, the public tried to get rid of them as quickly as possible.

The more the government printed of them, the less the public wanted them.

In the West today this doesn’t exist. Today, legal tender laws make it hard for people to use other currencies. They know they can only use their local currency. There is little or no desire for Australians, Americans or Europeans to use anything but their domestic currency.

As long as it stays that way, central banks know they can keep printing and creating more money to keep interest rates at record lows.

This is why for nearly four years we’ve pushed the idea that interest rates are staying low and could go even lower. We’re not the only one to think that. We’ve got a big-hitting international economist on our side too.

Which will come first?

One of the keynote speakers at our March World War D conference was world-renowned economist Jim Rickards.

He’s written a book called The Death of Money: The Coming Collapse of the International Monetary System.

As Mr Rickards writes in the book:

‘The Death of Money is about the demise of the dollar. By extension, it is also about the potential collapse of the international monetary system because, if confidence in the dollar is lost, no other currency stands ready to take its place as the world’s reserve currency.

The question is how the demise of the dollar will happen. Will people lose confidence in the US dollar, leading to a collapse in the whole monetary system? Or will people lose confidence in all other currencies first, before finally losing confidence in the US dollar?

No one knows the answer just yet.

The far more important issue is what will happen with interest rates. As we’ve pointed out many times, contrary to what you read in the mainstream, interest rates aren’t going anywhere.

They certainly aren’t going up. As for staying where they are or going lower, that’s a different story. Interest rates are staying low, and Jim Rickards agrees.

Rates are zero forever

Rickards posted this comment on his Twitter feed late last week:

He’s right. Rickards explained everything at World War D.

Those were also the same people who said the stock market would crash and bond yields would soar as soon as the US Federal Reserve started to cut its monthly bond-buying program.

We told you at the time to ignore that junk. We hope you listened.

It was just over a year ago that the markets started to talk about the ‘tapering’ of the Fed’s bond-buying. The story was that if the Fed cut this program it would kill the market.

Only it didn’t. Over the past year, the US S&P 500 index is up 19.5%.

Why? Because gradually investors realise that this era of low interest rates won’t end anytime soon. Faced with the choice of tiny deposit rates at the bank or a much healthier looking dividend yield on stocks, investors are going for the latter.

We can’t blame them either.

Rickards is saying exactly the same thing that we’ve said. This is a low interest rate market. Governments and central banks know they have to do all they can to keep interest rates low to avoid a repeat of the 2008 crash.

And so as long as interest rates stay low, it means good news for stocks. We’re not saying we agree with this terrible manipulation of money and interest rates, but as long as it’s happening, we intend on finding every possible way to help you profit from it.

Cheers,
Kris
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The market knows the <a href="http://www.moneymorning.com.au/category/financial-system/banks-and-interest-rates/the-federal-reserve" title="More on the US Federal Reserve"><strong>Federal Reserve</strong></a> (and every other central bank) will jump back into the <a href="http://www.moneymorning.com.au/stock-market" title="More on the stock market"><strong>stock market</strong></a> at the slightest sign of trouble.

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How the Stock Market Scores on the ‘Crash Scale’

Posted on 18 August 2014 by Kris Sayce

Well, that appears to be another imminent crash threat that has come and gone.

It’s not the done thing to say, ‘We were right.’

But we were. So we’ll say it. We were right.

The Australian share market is now almost back to where it was on 31 July. That was the market’s highest point in six years.

And for the year the Aussie market is up 4%.

It’s not a stunning return, but it’s hardly a complete fizzer either. Not only that, but it’s a poke in the eye for those who claim the stock market is at the top of a bubble.

It’s not. In fact, according to a team of US analysts in a report from earlier this year, stocks only show two out of the nine characteristics you’ll normally find in a bubbly market…

The Financial Times explained the research in March this year:

In a checklist of nine factors that it says in 2000 and 2007 signalled a peak for equities, [research firm] Strategas says only two are currently flashing red today.

One is rising real interest rates — as shown by meek inflation and 10-year Treasury yields near 2.80 per cent.

The other is weakening upward earnings revisions.

In bad news for crash watchers, it seems that since then, there is now only one of the signals flashing red.

Front-running returns

Since March US interest rates have continued to fall. As the following chart shows, the trend in the US 10-year bond rate is clearly heading down:


Source: Bloomberg
Click to enlarge

The above chart is a five-year chart. You can see that interest rates began going up in May last year. That was when the market started to worry about the US Federal Reserve tapering its bond-buying program.

But now that the taper is in full effect, the market has realised that it doesn’t really make a difference. The market knows the Fed (and every other central bank) will jump back into the market at the slightest sign of trouble.

That’s why you’re seeing interest rates fall. Big investors know the current bond-buying program is about to end. Logically that should mean interest rates would go up.

Except, if investors figure that another program will soon be on the cards, they plan to buy bonds now in expectation of yields slumping back to record lows in the near term.

And because bond yields move inversely to bond prices, it means that those investors would get a nice capital gain on their bonds.

Who said front-running the Federal Reserve was a dead strategy?

So with only one out of nine top-of-the-market signals flashing red, what does it say about today’s market?

Don’t sell at the wrong time

The simple answer is that stocks aren’t currently in a bubble.

So the latest ‘crash alert’ was exactly what we said it was — a false alarm.

These false alarms are becoming a regular event. The market goes on a nice run, and then something happens out of the blue that causes markets to go into a meltdown.

Novice investors sell out in a panic just as stocks hit the low point. Then the stock market rebounds, and the same novice investors buy back in…missing out on the gains.

But those are the lucky ones.

The unlucky ones are the investors who sell in a panic and are then too scared to buy back in at all. So not only do they miss the rebound rally, but they miss the ongoing rally too.

They’re waiting…waiting for the crash they believe is inevitable. Except it isn’t.

Why selling could harm your portfolio

OK, we’ll qualify that. All crashes are inevitable. The stock market never goes up in a straight line.

But if they’re waiting for the crash to happen in the near future, they’re in for a big disappointment.

Crashes don’t happen when everyone expects them to happen. They happen when no one expects them to happen. They happen when investors start believing that a crash can’t happen — because this bull market is different to other bull markets…this one is sustainable forever.

When we hear folks saying that, that’s when we’ll start to sound the alarm.

But so far we haven’t heard anyone say that. Most investors are on edge. They’re still worried about the last crash, fearing another boom and bust will happen again.

That’s why so many get scared when irrelevant events in Russia, Iraq, Ukraine, China and Europe hit the front pages.

They remember the 50% fall in 2008 and want to make sure the next crash doesn’t catch them unawares.

The sad thing is, by shifting in and out of the stock market, they could be doing their portfolio more harm than good. For a start they’re racking up commission charges.

Second, they may be triggering capital gains tax liabilities. Third, they could inadvertently miss out on ex-dividend dates for a stock that’s about to go ex-dividend.

And fourth, there’s no guarantee that when they buy back in they’ll buy at a price that makes the whole thing worthwhile.

In short, keep your eyes peeled for an event or events that could cause stocks to crash. But for the sake of your wealth, avoid the temptation to let every non-story panic you into selling stocks.

Despite the fear campaign, this market still has a long way to run.

Cheers,
Kris+

PS: I covered the idea of ‘fake crises’ at the World War D conference earlier this year in Melbourne. It was a cracking event. If you didn’t attend, the good news is we recorded the presentations. This week we’ll let you know how to get your hands on a copy of the footage. Stay tuned. In the meantime, today you’ll find an article on fracking from another of the keynote speakers at World War D, international resources and military technology expert Byron King.

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Low <a href="http://www.moneymorning.com.au/category/financial-system/banks-and-interest-rates" title="More on banks and interest rates"><strong>interest rates</strong></a> and cheap money are helping to fuel the boom. As long as the world’s economy needs it, <a href="http://www.moneymorning.com.au/category/financial-system/banks-and-interest-rates/central-banks" title="More on central banks"><strong>central banks</strong></a> will keep rates low.

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The Chart That ‘Proves’ the Low Interest Rate Era is Alive and Well

Posted on 15 August 2014 by Kris Sayce

Raise your hand if you really think interest rates are about to go up.

We’re sorry to keep going on about boring old interest rates.

But it amazes me that so many folks still think central banks are about to pull the trigger on rate increases.

We just don’t see it happening.

In fact, we’ll go further — it won’t happen. If anything, the trend isn’t up…it’s down…

In a moment we’ll show you a remarkable chart.

Some may think this is an exaggeration, but we’ll go so far to say that it’s one of the most remarkable charts we’ve seen…at least in the past 10 years.

If you think the chart of the 2008 stock market crash is frightening, you’ve seen nothing. During that crash, the US stock market halved in value.

But how would you like a market (another ‘blue-chip’ market) that has effectively fallen 71% in value over the past three years?

A shocking chart

We’ll show you the details of this horrific market in a moment. First, check out this report from the Financial Times. This is what alerted us to the chart:

The German economy contracted by 0.2 per cent in the second quarter while France stagnated.

The 10-year German bund yield is down 1bp to 1.02 per cent, having earlier hit 1 per cent for the first time, while Berlin’s 2-year implied borrowing cost sits at minus 1 basis point, reflecting expectations that the European Central Bank will have to adopt further stimulus measures to boost growth.

(By the way, one basis point — 1bp — is another way of saying 0.01%.)

You can bet they’ll have to adopt further stimulus measures.

And you don’t need to be a Harvard PhD either to work out what those measures will be.

Why, it will mean low interest rates…for a long, long time.

Here, let’s show you the chart that shows a 71% drop in ‘value’ over the past three years:


Source: Bloomberg
Click to enlarge

The above chart is the German 10-year bund yield. It shows the yield falling from 3.5% in 2011 to 1% today. That’s a 71% drop in the value of the bond yield.

Put another way, investors who bought a 10-year German bund could have got €350 a year in income for every €10,000 invested. Investors who buy 10-year German bunds today will only get €100 a year in income for every €10,000 invested.

How do you like that for a ‘wage cut’?

Is it any wonder that investors around the world are looking elsewhere for yield?

It’s no wonder at all.

Better than blue-chip stocks

This is all part of the reason for the hunt for yield.

It’s happening in Germany. It’s happening in the US. It’s happening in the UK.

And it’s happening right here in Australia.

It’s helping push share prices higher. It’s a big reason why stocks like Commonwealth Bank of Australia [ASX:CBA] are trading near record highs.

In Australia the search for yield started in earnest in 2012, when the Reserve Bank of Australia (RBA) began signalling that it would cut interest rates.

That pushed stock prices up and dividend yields down.

It’s exactly why, since then, we’ve advised investors to hold a good amount of their investable wealth in dividend-paying stocks. And not just blue-chip dividend payers either.

Some of our favourite dividend payers are small-cap stocks, such as a small-cap medical company that continues to raise its dividend as profits grow. Investors who bought at the original recommended buy-up-to price of 23 cents just over a year ago are now sitting on a gain of 170%, including dividends.

Investors who bought into the boring small-cap property stock housing one of Australia’s most popular retailers are now sitting on a 67.4% gain (including dividends), while the blue-chip S&P/ASX 200 index has only gained 18.5% over the same time.

There’s no way this is ending

The important thing to understand is that this trend of looking for dividend-paying stocks isn’t over.

With German 10-year bond rates at 1%, do you really think it’s likely that investors will plump for that yield instead of buying stocks?

It just doesn’t seem logical at all.

Sure, there will always be a demand for government debt. Pension funds and insurance firms like the supposed guarantee of government bonds.

But even they can only cope with low rates for so long before they look for better yields somewhere else. That’s where stocks enter the frame, and of course, the exotic derivatives that we mentioned earlier this week.

This all goes to show you that it’s too early to talk about central banks raising interest rates. Low interest rates and cheap money are helping to fuel the boom. As long as the world’s economy needs it, central banks will keep rates low.

And that can only be good news for stocks.

As we’ve long said, we may not agree with these policies, but it’s foolish not to take advantage of them while we can.

Cheers,
Kris+

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Don’t fall for the junk that competition is pushing down <a href="http://www.moneymorning.com.au/category/property-market/australian-house-prices" title="More on house prices"><strong>home loan costs</strong></a>. Here’s the real reason that banks are cutting <a href="http://www.moneymorning.com.au/category/financial-system/banks-and-interest-rates" title="More on interest rates"><strong>interest rates</strong></a>.

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More Evidence to Back Our Low Interest Rate Forecast

Posted on 28 July 2014 by Kris Sayce

For some time we’ve tried to convince you that interest rates are staying low.

In fact, there’s a good chance interest rates could go lower.

It’s not a popular view.

Most people seem to think that interest rates must go higher one day.

And they will. But that day won’t be tomorrow, or next year. It won’t be five years from now either, or 10 years.

Our bet is that interest rates will stay low for at least another 20 years.

And thanks to news out last week, we figure the evidence is lining up on our side…

Last week the big four Aussie banks cut interest rates on fixed rate loans.

The mainstream press said it signalled a price war due to competition.

Not surprisingly, the mainstream has gotten it wrong…again.

The idea that there’s competition in the Aussie banking sector is laughable.

The big four banks control 84% of the Aussie mortgage market. The Aussie banking sector has favoured status. It has the gift of oligopoly from the Aussie government.

In short, it’s a legalised cartel. The banks don’t compete. They don’t have to. They know that for every customer they lose to a ‘competitor’, they gain one back from one of their ‘competitors’.

It’s the ultimate revolving door as punters go from one bank to the next. Little do they realise that each big four bank is just as good/bad as the other.

So don’t fall for the junk that competition is pushing down home loan costs. That has nothing to do with it. Here’s the real reason that banks are cutting interest rates.

Two reasons banks are cutting rates

Actually, there are two reasons for this move.

The first is that the banks know what we’ve known for the past three years — that interest rates are staying low for the foreseeable future.

By foreseeable future, we’re talking 20-plus years.

A report in The Australian quotes Clive van Horen, head of mortgage lending at NAB:

This is not about me or somebody else predicting what interest rates will do. It’s more about what the financial markets are saying. The market is saying that rates are going to be lower for longer.

Lower for longer.

Don’t fall for the bank’s coyness. It is the banks’ job to predict what interest rates will do.

If the bank can anticipate what the market or the Reserve Bank of Australia will do next, it could result in billions added to the top and bottom line.

So by cutting fixed interest rates, the bank hopes to entice borrowers into taking out fixed rate mortgages. If borrowers fall for it, the bank will get a nice profit boost if — as we expect — interest rates fall further over the next two years.

But as we said, there’s a second reason for the banks to cut interest rates.

The Australian report refers to it:

The price war has erupted just as concerns were starting to emerge that the boom in house prices — they are up 11 per cent on average over the past 12 months, according to Australian Property Monitors — poses risks for borrowers.

Unlike elsewhere in the world, Aussie house prices didn’t fall when economies collapsed in 2008.

Sure, highly leveraged and speculative markets such as the Gold Coast and parts of Perth suffered, but there wasn’t a widespread downturn.

Now, with Aussie house prices gaining 11% over the past year, the banks are no doubt worried what could happen if prices fall and if fewer people borrow to buy a home.

After all, if house prices rise, it means borrowers need to borrow more money. If incomes don’t keep pace with rising prices, it makes it harder to borrow. So, what’s the solution?

That’s right, a lower interest rate means lower repayments — or that borrowers can borrow more money and help support high house prices.

The solution to low interest rates is lower interest rates

That’s why the banks are really in a hurry to cut interest rates.

Don’t fall for the idea that it’s all about competition. That’s the last thing they have to worry about.

But whatever it means, the most important thing for you to know is that this market is playing out almost exactly as we predicted.

When interest rates stay low for an extended period, it’s important that they continue to remain low. Yes, we know that will create all kinds of problems. Low interest rates tend to result in bad investments and the misallocation of resources.

But that doesn’t really bother central banks and governments. They just want to make sure the world’s economy doesn’t go through a repeat of 2008. The one way they can ensure that is by keeping interest rates low.

Do you remember how central banks and governments responded to the problem of too much debt? That’s right, they created even more debt. It only makes sense that their solution for too-low interest rates will be to cut interest rates even lower.

This is exactly why we’re so bullish on the stock market. We’re not saying this will be sustainable forever. That’s why we don’t recommend you put all your money in stocks.

But until we see a sign that the markets have had enough of low rates and that investors are genuinely worried about the long term consequences of these policies, we’re staying the course.

Stocks are still a buy, and the Aussie blue-chip index is still on course to hit 7,000 points by early next year.

Cheers,
Kris+

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The game is simple. <a href="http://www.moneymorning.com.au/category/financial-system/banks-and-interest-rates/the-federal-reserve" title="More on the US Federal Reserve"><strong>The Federal Reserve</strong></a> and other central banks want to continue fiddling the market. They want <a href="http://www.moneymorning.com.au/category/stock-market/stocks-and-bonds" title="More on stocks and bonds"><strong>stocks</strong></a> to keep going up.

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Why the Federal Reserve Wants to Rein in the Stock Market

Posted on 16 July 2014 by Kris Sayce

Surprise, surprise.

The market still doesn’t get it.

We wonder if they ever will.

The odds are they won’t get it.

For some reason they can’t see the bigger picture.

They’re too busy looking at their short-term trading account.

That’s why when this stock market takes off again most investors will stand stunned, wondering why they didn’t see it coming…

What is it that has the market so worried?

It’s this comment in the US Federal Reserve’s latest policy report:

Valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.

The Fed would know. Thanks to its money-printing policies many stocks have gone sky-high over the past six years. It’s not just small-cap stocks either.

Big US companies have soared too. The Walt Disney Company [NYSE:DIS] share price is up 443% since March 2009. That’s when the market bottomed out after the crash.

Can the Federal Reserve justify that valuation when Disney’s revenue has only increased 20%, and net profit is ‘only’ up 50%?

Maybe it can. And maybe investors can justify it too in a world of low interest rates. As we’ve argued before, investors will accept higher valuations, higher PE ratios, and lower dividend yields because interest rates are so low.

But there’s a reason the Fed singled out small-caps rather than blue-chip stocks. It’s because this is all part of the grand game we’ve talked to you about for the past year.

The Federal Reserve goal is slow and steady growth

The game is simple. The Federal Reserve and other central banks want to continue fiddling the market.

They want stocks to keep going up. But they don’t want them to go up too quickly. If they did that they would risk creating a huge asset bubble.

Instead, they want to achieve steady market growth. Annual gains of 5­–15% are probably what they’ve got in mind. That’s high enough to keep investors happy, without them worrying about a price bubble. And it’s high enough to make sure investors don’t become disappointed with stocks.

Because disappointed investors can quickly lead to falling stock prices. And the Federal Reserve doesn’t want that…unless the price falls are under the complete control of the Fed.

That’s what the Federal Reserve Bank is doing right now. After the Dow Jones Industrial Average hit a new high, the Fed wants to make sure investors don’t get too excited. If they can drag the market back during the northern hemisphere summer, it will ensure the market isn’t at a high point in October.

And you know what happens in October. That’s when every commentator and their dog start talking about a correction or a crash. It’s harder to spin that story if stocks aren’t at a high.

Central banks have a ‘good’ record

After that point, well, the market is in the home straight for the fabled end-of-year stock market rally.

Of course, some folks will claim this is just conspiratorial rubbish.

They’ll say the folks at the Federal Reserve aren’t that smart. They’ll say they aren’t that devious. They’ll say it’s not the job of the central bank to do that.

To those folks, we just look them straight in the eye and say, really?

This is exactly what central banks do. It’s not the first time they’ve tried it. And in all honesty, they’ve got a pretty good record of doing it. When it comes to central bank intervention most people tend to focus on the negatives.

They point out how the market crashed in 1929, 1987 and 2008 due to undue central bank influence. Whether that’s meddling with the Gold Standard, interest rates, inflation, or printing money.

But what they tend to ignore is the 98% of the time that central banks have ‘succeeded’. The Federal Reserve is partly responsible for the 40,000% rise of the Dow Jones Industrial Average between the early 1900s and today.

We’re not saying we approve of their policies. We’re just saying that’s how it is.

As much as we don’t like admitting it, the megatrend of American Supremacy wasn’t all about innovation and entrepreneurs. It was about governments and central banks fiddling with the economy. It created booms and it caused busts.

That, dear friend, is what central banks do. Don’t let anyone ever tell you otherwise.

Megatrend opportunity

But it’s not just America playing this game.

Everyone’s at it.

As you may know, we’ve just launched a premium investment advisory that seeks to help investors profit from the kind of megatrend that saw the Dow Jones climb 40,000% in 100 years.

Except, we don’t believe that investors will have to wait 100 years to get a payoff from the next megatrend.

This megatrend is happening now. And thanks to improved transport, communications, and technology, megatrends can happen at a much quicker rate.

Where it took the age of American Supremacy more than 150 years to run its full course, our bet is the current megatrend will deliver the same kind of riches (perhaps more so), but within 10 or 15 years.

That’s the power of the megatrend that’s building right now. The policies that emerging market economies like China are putting in to place are exactly the same as those used by Western economies over the past 100 years.

That’s not to say it’s all money-printing and stimulus. As emerging markets analyst Ken Wangdong recently revealed in an on-camera interview, there is plenty of innovation in China. It’s even developing its own Silicon Valley.

Chinese entrepreneurs are now choosing to stay and innovate in China rather than move to the US, because they know they have a competitive advantage over foreign companies when it comes to selling to the Chinese market.

This is how it is, make it work

We know. This kind of talk scares a lot of investors. We hear them say all the time that they’re prepared to sit on the sidelines and ride out the storm. They’re waiting for the market to return to normal.

Well, we’ve got some late breaking news for them: this is normal. This is how it has been for 100, 200, 300 years. Heck, manipulation of money and markets goes back millennia.

To think that things used to be different or that they will be different in the future is naïve at best and plain ignorant at worst. This is the market. It has always been like this and it always will be like this.

It’s up to investors to recognise it and take the opportunity to profit from it in any way you can.

Cheers,
Kris

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You've got exciting stories and opportunities in <a href="http://www.moneymorning.com.au/category/economy/global-economy/emerging-markets" title="More on emerging markets"><strong>emerging and frontier markets</strong></a>, the tech sector, biotech sector, and even <a href="http://www.moneymorning.com.au/category/economy/global-economy/emerging-markets" title="More on energy stocks"><strong>energy stocks</strong></a>.

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Here’s Why Investors Shouldn’t Worry About Stocks…

Posted on 02 July 2014 by Kris Sayce

The financial world is a tale of two halves right now.

One half is optimistic about the future.

The other half is worried about the future.

You know where we stand. We’re bang at the forefront of optimism.

Not because we’re hopelessly ignorant of the world around us. Far from it.

Rather, it’s because we know exactly what’s going on. And because of that, we know the best way for investors to play it…

But it’s one thing to be optimistic. It’s something else to be downright delusional.

And trust us, there are plenty of delusional investment professionals out there.

Those are the folks who really don’t have a clue what’s going on.

They either think everything is just fine because governments and central banks have saved the day, or they think the market is going through a bit of a rough patch, but things will return to normal soon enough.

But things won’t return to ‘normal’. The world economy is changing. And if those folks don’t realise that, they’re in for a big surprise.

Don’t get lost in the ‘ennui’

Humans are naturally bad at predicting change.

That’s not to say that humans can’t adapt to change, because they can. Arguably, humans are excellent at adapting to change.

But predicting change and adapting to it are different things.

Most people find it hard to predict change because it’s hard to see things changing around you when you see them all the time.

For instance, when you see your kids every day, you don’t notice how much they’re changing. It’s only when you see a photo of them from a year ago and compare them to today that you can see the change.

That’s why — don’t be offended — most investors make lousy investors. They see that things turned out fine in the past and so they assume things will be fine in the future.

And when we say ‘most investors’ we’re not just talking about the average private retail investor.

We’re talking about investors of all shapes and sizes, including the biggest of the big fund managers.

An example of this was a report from Bloomberg quoting one of the top research boffins at HSBC:

“There is an optimism bias, largely reflecting an attachment to pre-crisis growth trends which, post-crisis, have mostly remained out of reach,” according to a report published last week by the team led by Stephen King, HSBC’s global head of economics and asset-allocation research. “Our latest projections are consistent with this sense of ennui.”

Perhaps like us, you use ‘ennui’ all the time in conversation too!

OK, we admit it. We had to look it up. Ennui means ‘a feeling of listlessness and dissatisfaction arising from a lack of occupation or excitement.

Blimey. That’s depressing. Things aren’t that bad are they?

Investing is predicting

According to Bloomberg it has been a tough few years trying to predict the markets:

‘[HSBC’s] economists found that since the crisis their industry’s average estimate of inflation proved off by at least 1 percentage point in the U.S., U.K., Sweden and Spain and by 0.7 point in German. Those are big misses given that most major central banks target 2 percent inflation.

Oh dear. The life of a forecaster.

But we shouldn’t mock. Making predictions is a big part of investing. You’ve got to predict. Otherwise, you can’t invest. Every investment you make is the result of a prediction.

You buy a stock because you predict it will go up. You sell a stock because you predict it will fall. But here’s the thing: It’s impossible to get every prediction right.

It just can’t happen. Sometimes you’ll get things wrong. That’s all a part of investing.

We don’t even need to go into detail about why they’ve got things so wrong. It’s simple. They’ve failed to see that the market is changing. They’re looking for opportunities in the wrong place.

There may be plenty of ‘ennui’ in the US, UK and Europe. But there isn’t much ‘ennui’ where we’re looking.

Things are pretty exciting in some areas of the market…

This boom hasn’t even started

It just so happens that another story on Bloomberg shows the HSBC analysts where they should really focus their attention:

Emerging-market stocks rose, posting the biggest quarterly gain since 2012, as signs of a revival in economic growth lured investors. Bulgarian stocks surged the most in the world, rebounding from last week’s five-month low.

The MSCI Emerging Markets Index advanced 0.4 percent to 1,050.78 in New York, extending its increase this quarter to 5.6 percent. The measure has risen for a fifth month, the longest rally since 2007.

Really, who cares about Swedish inflation rates when you’ve got exciting stories and opportunities to tell in emerging and frontier markets, the tech sector, biotech sector, and even energy stocks?

They would be better off forgetting the inflation forecasting game and look at exciting economies, sectors and companies. They should try to get inside these subjects to find out the strengths and weaknesses.

What is it about the economy that could make it boom? What is it that could cause it to go bust? And most importantly, if you make an investment in the market aligned to that economy, what kind of returns could you make?

If it’s a high growth emerging markets economy, such as China or India, then you’re looking for a big return. If history is anything to go by (as we’ll illustrate in the Megatrend Master Series) then the biggest gains are yet to come.

Look at the opportunities. Take China. The US economy grew for another 124 years after it gained the top spot as the world’s biggest economy from Britain in 1890.

China’s economy only really began to motor in the 1990s. It’s still only half the size of the US. How can that not be an opportunity?

And the mainstream wants you to believe China’s economic growth has ended.

Give us a break. This boom hasn’t even started.

Cheers,
Kris+

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<a href="http://www.moneymorning.com.au/category/financial-system/banks-and-interest-rates/central-banks" title="More on central banks"><strong>Central banks</strong></a> have increased stock holdings by US$1 trillion in recent years. That’s the rough equivalent of buying nearly every <a href="http://www.moneymorning.com.au/category/stock-market/stocks-and-bonds" title="More on stocks and bonds"><strong>stock</strong></a> listed on the ASX.

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The Real Reason Central Banks are Buying Stocks

Posted on 19 June 2014 by Kris Sayce

Are we wrong or is everyone else wrong?

Can we see things no one else can see?

Maybe.

We’ll start believing we have unworldly powers if this carries on.

Perhaps your editor is the ‘chosen one’ of financial forecasting.

OK. We don’t really believe that. We don’t really have special powers. It’s just that the rest of the market appears to have gone completely bonkers.

Despite all the clues, they just can’t see what’s really going on with this market. We don’t know why. It’s simple…

We’re not kidding. This market has taken by surprise some of the smartest minds in the financial markets.

Take this report from the Financial Times:

Like many investors, Mr Hasenstab [portfolio manager at Franklin Templeton] was wrongfooted by this year’s unexpected fall in US Treasury yields; also like many others, he has yet to find a single convincing explanation.

Is it really that hard?

What more convincing do these folks need other than the fact that central banks are using every power they have to keep interest rates low.

And by every power, we mean it.

How can this surprise anyone?

Governments and central banks simply can’t afford for interest rates to rise too high. The higher interest rates go, the more interest governments have to pay on new debt.

In the past, governments would have to grin and bear these interest rate fluctuations. As odd as it may seem now, the threat of higher interest rates forced governments to be cautious about going into too much debt.

We know that seems crazy. Because at the time government debt levels seemed high. Of course, that’s nothing compared to where they are now. Even the Aussie government is now in hock for $320 billion. Just six years ago the federal debt level was around $60 billion.

The five-fold increase in debt levels by the Aussie government is among the biggest debt increases in the Western world.

So with all this in mind, how can it surprise anyone that central banks and governments would do all they can to keep interest rates as low as possible?

As the chart shows, the US 10-year bond yield is already well above where it was from 2011 to 2013 during the height of the US money printing program:


Source: Bloomberg
Click to enlarge

Our bet is the US Federal Reserve won’t want interest rates going too much higher, as each tenth of a percentage point rise adds US$62 billion to the US government’s interest bill.

So even though all the talk is about the end of money printing, don’t let that fool you. The experiment in low interest rates isn’t over by a long shot. And now it’s taking a new turn.

‘Buying’ the entire Australian stock market

Another report in the FT reveals the extent to which central banks are going to keep interest rates low:

Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions.

The report suggests that central banks have increased stock holdings by US$1 trillion in recent years. That’s the rough equivalent of buying nearly every stock listed on the ASX.

It’s a big number.

But we dare say the report misses the mark. The inference is that central banks are buying stocks because they aren’t making enough money by holding bonds.

While that may be partially true, it’s not the real motive for central banks to buy stocks. In the world of big institutional investing, it’s important to understand the relative yields between different investments.

In investing, everything is about risk. Typically, big investors will compare the yield of a so-called ‘risk free’ government bond with that of the yield on a stock. If the difference between the bond yield and the stock yield isn’t big enough to warrant the risk, then investors may choose bonds over stocks.

If the spread between the stock yield and the bond yield is unusually large, then it may suggest stocks are cheap, and therefore the investors will buy stocks.

Can you see where we’re going with this?

It’s all about the relative yield

The simple fact is that if the central banks want to exert as much control as possible over bond yields they can’t just buy government bonds. They have to buy other assets too.

That’s why they bought mortgage-backed securities — to bring those yields down and make them less attractive investments compared to government bonds.

We dare say the central banks are directly or indirectly involved in buying ‘junk’ corporate bonds too — to bring those rates down so they are nearly on par with government bond rates.

The same goes for stocks. If the central banks can manipulate stock prices higher, and therefore manipulate dividend yields lower, it also reduces the spread between bond yields and dividend yields.

The narrow spread between the two makes the ‘risk free’ government bond a far more attractive investment for big investors compared to the riskier stocks.

Of course, what happens when investors sell stocks to buy bonds? Doesn’t that push stock prices down? Yes, it does, until stocks fall by enough to make the slightly higher yield more attractive, and then the stock price rises again.

In effect, the goal of the central banks isn’t necessarily to become big stock owners. Rather, it’s to manipulate the market and create a ‘new normal’ level for interest rates and dividend yields.

So far their plan appears to be working. Like it or not, agree with it or not, stocks have had a good run as this policy has played out. It will end in a bad way at some point. But not yet.

We see no reason why it won’t continue for years to come. And that’s why it makes sense to buy stocks during a short term dip.

It amazes us that so few others can see what’s really happening in the markets.

Cheers,
Kris+

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