Why I’m So Bullish Once the Fed Quits
By Robert Wiedemer
Despite my sounding a bit bearish in my past articles, I am not -- AFTER the Fed gives up on its nonsensical and guaranteed to fail attempt to raise interest rates.
Reason Number One: The market knows that up is good and down is bad. Once the Fed starts printing again, this thinking will be quite powerful and self-reinforcing. Now is not a great time to think this way as it will almost certainly be crushed by the Fed. But the fact that the market is attempting this after 9 months of being bashed by the Fed, says how strong this mentality is and why it will prevail after the Fed fails.
Reason Number Two: Bonds suck. Even after the Fed fails and it prints money again, bonds won’t be very attractive. The bond bull is over. Sure, short-term opportunities are definitely there for bond traders but for bond investors, forget it. Bonds are so over. At least in terms of making money. Yes, they will pay a higher rate of interest than in the past, but that’s not where the money is made in bonds. The money is made by buying bonds and then watching interest rates go down which produces enormous capital gains. That’s unlikely to happen much in the future.
The other big concern is that bond buyers will actually become aware of inflation at some point. Right now, they have no idea that we have inflation or that it might continue. They can easily calculate bond returns to the third decimal, but seeing inflation is almost impossible right now. What if that changes? What if the 10-year bond assumed we will have inflation of 3%? OMG!!! Bonds would have to pay at least 3% plus compensation for using money for ten years, plus any risk premium.
And what if inflation is more than 3%??? Well, I’m not saying that bonds will notice that we have inflation, but it is possible. If so, rates will have to be higher and that is not good for bond values.
Reason Number Three: Real estate is not a great alternative because housing is hitting an affordability problem. Even if 30-year mortgage rates go back down to 5%, which they may, homes are still expensive and for that reason have limited upside.
Reason Number Four: It’s easy for stocks to ignore reality. Even if earnings go down or the economy slows, stocks can always go up by simply raising the multiples on earnings.
Reason Number Five: If stocks don’t go up a lot, they will go down. That’s the rule in a bubble economy and bubble stock market. Stocks have big ups and downs as we have seen this year. To compensate for the risk and volatility, stock investors need to make high returns. If they don’t make high returns, they will reduce their market exposure and move to other investments.
For similar reasons, the market can’t also have high volatility/uncertainty. Uncertainly and volatility will greatly reduce the attractiveness of stocks.
In a normal market these problems would encourage investors to move to other investments and that would be fine. In fact, that’s how markets should work.
But, in a bubble market, that behavior will collapse the bubble. Hence, the Fed and Wall Street will make sure that stock investors are rewarded highly enough to compensate for the volatility and risk. They can do this with massive amounts of printed money and borrowed money. And it works… until money printing eventually creates real long term double-digit inflation.
This is the most important reason of all for my bullish outlook on stocks. And my bullishness will remain until I see long-term double-digit inflation that, very importantly, other people see and understand is not going away because the Fed can’t stop printing because it has to print to feed the government’s demand for massive borrowing.
So, there you go. The mantra of a true stock market bull. Haha.
Many, many people will disagree with me. In fact, Ray Dalio, the manager Bridgewater, of the largest hedge fund in the world and truly one of the best and greatest of the hedge fund world, has just said that he expects negative or poor real returns in the market for the next 5 years. See the article below:
So, for people who don’t think the market will go up much, like Ray Dalio, or others who feel it is more susceptible to volatility, they’re simply wrong. They are hoping the market will be sensible in a fundamental way and it’s not. It is sensible – up is good and down is bad. But there is no fundamental reason for that to be true. Only a continuation of the bubbles that the government created for as long as the government can keep them up.
People like Ray Dalio are uncomfortable with the idea that the market is that stupid. They think their great riches are due to their great skills and not to a great bubble. Wouldn’t you want to believe that if you were in his shoes? His riches, like Warren Buffett, were due to their skills when they first started long before the bubble economy become so massive in the Financial Crisis, but they sure aren’t today. They’re due to the bubbles. It’s a big change worth repeating – Certainly Neither Ray nor Warren were bubble babies when they started, but they are now.
So, take heart and sleep soundly, the market is nuts. If it weren’t it would have collapsed by now. Nuttiness won’t keep the market hitting new records forever, but nuttiness will help it keep hitting records for a while longer.
Game on. (Once the Fed quits raising interest rates.)