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.
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.