Wednesday, July 8, 2020
League of Power

The League of power

"Freedom by Friday"

You Know it’s a Bull Market When…

You Know It’s a Bull Market When…

Greece collapses and the markets move higher. When Ireland collapses and the markets move higher. When Portugal collapses and the market moves higher. Spain is the next domino to fall – can you say Dow 13,000? Of course taking this perverse logic even further, if the US were to default on its debt, we’d probably see Dow 20,000 overnight!


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What appears senseless on the surface is even more so beneath. Printing more Euros, Dollars and Yen would appear to be counterintuitive to a market rise right? Well, it’s not. As I mentioned a few columns back, financial assets like stocks are also subject to the same inflation pressures as commodities. It’s very unusual to see stocks, gold, and other commodities rise in tandem. But, it makes sense. As liquidity floods the markets in the form of cheap Dollars, Yen and Euros, reality sets in that inflation is on the horizon and in order to keep up with inflation or even stay ahead of it, one has to make a greater return on capital. There is only one place to turn for returns that are historically higher than inflation and that is the stock market.

Add to this the massive government stimulus packages to kick start economies, and you have pump priming of incredible scale that is making its way through the system. Companies are doing better; individuals are feeling a little more secure in spending now that mass layoffs are in the past. The problem with all of this is that there is a bill that has to be paid at some point. So, once again we are in the midst of a Fed engineered bubble. They just never learn. But as long as the greater fool theory is intact, why bother learning. The world believes that the greenback is still King, and who are we to refute that misconception?

Buy Stocks, but Watch Bonds

How does one tell the health of an economy? Look at the bond market. When
yields are moving higher it means there is FUTURE underlying economic strength. When yields are low, the opposite is true. So, while we see higher GDP numbers, lower unemployment numbers, better corporate profits, what we are not seeing is higher interest rates. This implies that the phenomenon we are witnessing is not sustainable over time. That is logic in the face of emotion.

The bond market is signaling that despite inflationary pressures everywhere, this recovery is fragile at best and that the economy could stop dead in its tracks at a moment’s notice, or when oil prices reach a level that makes consumers frugal about spending once again.

It’s strange to think that interest rates are extremely low at the same time that commodity inflation is moving much higher. It’s like an oxymoron. But, there is some logic behind the madness. That logic is that more than 60% of the world’s economic powers are all inflating in tandem. Currencies that matter are all devaluing simultaneously and that makes it hard to discern true values. Sure, the Canadian Dollar is soaring, as is the Aussie Dollar and the Swiss Franc. But, in reality it does not take much to make these currencies move higher or lower. Like penny stocks, they suffer from a dearth of liquidity.

The other, less obvious reason is wealth. Europe, The United States and Japan are very wealthy countries. While they have debt outstanding, it’s just paper. What matters to some extent is infrastructure, hard assets on the ground, clean water, utilities, homes, public safety, clean air…these are tangible items that are worth a fortune.

Travel to any emerging market and the streets are clogged with traffic. Not LA style traffic, but ten times worse. The air is filled with smog and smoke. Streets are strewn with trash. Illiteracy is the norm. Birth control is still a foreign concept. You can’t drink the water. Homes are built with the poorest construction techniques. Petty crime is rampant. One or two major roads may exist. Neighborhoods of fine homes can be found in just one or two small enclaves. You get the picture – life basically sucks.

The alternative is to make money to move to places like Europe, the US or any Western Country. Last week a Russian billionaire Yuri Milner plunked down $100 million to buy a home in Silicon Valley, the most expensive single family sold in the US. Why didn’t he choose China, or his native Russia or India or Brazil? The answer is simple – the news media might be telling you how awful the United States is or is becoming. But when you are looking for a place to live with relative lawfulness and comfort, it’s the tangibles that count, and the US, Europe and Japan are full of tangibles the rest of the world can’t touch.


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