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.