Remember, The Money Has To Go Somewhere
Mike Larson: Sometimes, investment analysis can be extremely complicated … You have to be able to turn a balance sheet upside down and inside out. You have to know a company’s sector, competitors, and business like you’ve worked there for years.
You have to figure out precisely where you are in the economic cycle, and monitor every minor data release from here to Shanghai.
And sometimes? It’s much simpler.
Sometimes, the direction of the markets is dictated by a very simple principal: The money has to go somewhere! And that’s precisely where we stand today.
This isn’t some tiny wave of cheap money — it’s a tsunami of easy cash the likes of which we rarely see!
What do I mean? Well, take a look at this chart. It shows the rate of expansion in the European Central Bank’s balance sheet over the past couple of years. You can see it has more than DOUBLED to 2.67 trillion euros from 1.3 trillion. And this is from a central bank that claims it’s not printing money, mind you!
Anyone expecting a change of course will likely be disappointed too. Just this week alone, the ECB doled out ANOTHER record 529.5 billion euros for three years as part of its second Long-Term Refinance Operation (LTRO). A whopping 800 piggy banks lined up at the ECB trough for the virtually free cash, up from the 523 that borrowed 489 billion euros at the December LTRO.
The Bank of Japan and The Bank of England are also flooding their markets with newly printed cash. And this week, in comments before Congress, Federal Reserve Chairman Ben Bernanke also signaled he has no intention of stemming the flood of easy money coming from his central bank. Specifically, he said …
“With the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives.”
That pretty much ensures the 218 percent explosion in the Fed’s balance sheet that we’ve seen already is just a start!
Bottom line: If you thought the Alan Greenspan-era, interest rate-cutting campaign that helped fuel the tech bubble was crazy … if you thought the massive dose of stimulus that fueled the housing bubble was insane … or if you thought the cheap money that helped propel crude oil to $147 a barrel a few years ago was completely nuts, you ain’t seen nothing yet!
|Irrational exuberance revisited.|
This time, it’s not just the U.S. Fed that has lost its marbles …
It’s practically every central banker on the planet who is printing money like mad. And as I said at the outset, that money has to go somewhere. If you’re wondering why virtually every asset class is being reinflated right now — or why the core Consumer Price Index just surged at the fastest rate in 40 months — there’s your answer!
How to Cope In a World Gone Mad
So how do you cope with this environment? What do you do when investors all around you are losing their minds, taking what amounts to free central bank cash and throwing it at every lousy bond, stock, or other higher-risk investment they can find?
Well, as I’ve been counseling for some time, you have to make hay while the sun shines. You want to invest in select stocks, sectors, or asset classes that will get a turbo boost from cheap money, but that can also hold their own when the sugar high wears off.
I’ve identified several of them in my Safe Money Report, and I’m happy to report that they’re working out nicely. You can find more information here if you want my top names.
You also want to maintain hedges for the inevitable moment when the world’s central banks signal that they’re slowing the pace of money printing. The last couple times that happened — at the end of QE1 and especially QE2 — the market collapsed in a short period of time.
Finally, you have to remember that this kind of policy making always … ALWAYS … ends in tears. The tech bust. The housing bust. The Great Recession, partially triggered by the explosion in oil and other commodity prices that cheap money fueled.
We’ve seen this boom/bust cycle play out over and over again in the past several years. Yet policymakers keep doing the same thing, expecting a different result.
I have zero doubt in my mind we’ll see this most recent explosion in cheap money blow up in our faces, too. It’s just a question of when. So be sure to have an exit strategy in place and ready to implement!
Until next time,
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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