And You Thought This Would Last Forever?
For many years now, my father has called me every few weeks to tell me about the latest problem which will cause an imminent economic or financial crash. Each time, I respond to the latest flashpoint with, ‘They’ll just print more money.’
The underlying idea is that central bankers can paper over any financial crisis if they just create a sufficient amount of money and inject it into the economy.
When COVID-19 came along, that idea was put to the test. Could money printing prevent the economic consequences of a pandemic and lockdown? Surely, this time, they’d reached the limit of their powers?
Nope, it only took months for financial markets to bounce back. In fact, in many nations, household wealth hit record levels this year!
But is the key to a booming stock market, a surging property market, record economic prosperity, happiness, and world peace really that simple? All you have to do is quantitative easing (QE)?
Before 2008, we all understood the taboo of printing money.
Where it leads, eventually.
But the financial crisis brought back the old temptation.
QE was the only way to save the system back then. The world succumbed.
With the onset of the pandemic, central interventions in the world economy have ramped up to even greater levels.
As Guggenheim Partners Chief Investment Officer Scott Minerd pointed out last week, markets are now addicted.
Central bank stimulus is no longer providing temporary life support.
‘For the time being we’re just addicted to this. Central banks are functioning in a role that they were never designed to do. Central banks are now running the markets.’
But what happens to markets when the central banks lose control?
This is the central question of Vern Gowdie’s latest research.
He sees this happening soon. In fact, he shows, it may well have already started…
You can read his research now by clicking on this link: ‘Four Code Red Investments to Sell Now’.
History teaches us that, over time, this ends badly.
The central authorities and policymakers believe we are capable of avoiding this fate.
A monumental wealth destruction event
This ideology, Vern argues, is setting investors worldwide up for a monumental wealth destruction event.
They opened Pandora’s box a long time ago.
But in 2022, we may just get to see what’s inside…
Citi (formerly Citigroup) has been using its Panic/Euphoria model since 1987.
‘In 1987, the market internals signalled a mood of euphoria.
‘The result 12 months later? Close to MINUS 30%.
‘The Euphoria reading at the peak of the dotcom boom resulted in a near MINUS 40% return 12 months later.
‘In 2007/08, investor mood again wandered into the Euphoria zone. 12 months later, the US market delivered an almost MINUS 50%.’
So what’s the reading now?
DEEP into Euphoria territory
What’s that going to mean in 2022 then?
According to Citi (emphasis added):
‘“Our panic/euphoria model remains very elevated and is warning of coming losses,” the analysts said in a Citi research note…
‘This is the longest period of ebullient readings without a market correction since 1999/2000 and we anticipate that something will give.’
The longest period of ebullient readings since 1999/2000…
That’s rather sobering.
No market ever stays on a permanent high.
Yet, that’s what it SEEMS to have been doing for years now.
The prevailing idea is the Fed and other central banks are going to be there with outstretched arms to cushion investors from any nasty fall.
But what if it’s too much to stem?
What if the strains you’ve seen in the markets since mid-August are just the beginning of something much more cataclysmic?
In previous upcycles, you wondered how they would end. You knew they would. Good times don’t last forever. You just didn’t know when.
Today, the very concept of ‘an end’ is being challenged.
Thanks to the actions of central banks, there’s an entrenched belief this isn’t a bubble.
It’s just how things work now.
That even if there is another crisis, it’ll be followed by another big ‘stimulus’ push…which will lead to yet another flourish in asset prices.
Here’s the question Vern is asking in ‘Four Code Red Investments to Sell Now’.
Do you really think this just goes on forever?
What Vern has done is identify four key risks capable of subtracting the maximum amount of capital from your portfolio if the trend finally turns.
Not only that…
These four Code Reds, says Vern, each have the potential to break the central banks’ spell.
Now, that’s a big call. Lehman Brothers was the last catalyst to cause financial contagion. Since then, central banks and governments have done everything they can to avoid another Lehman Brother-style Code Red.
In this new world, any crisis that would end a normal cycle is just a ‘blip’. Because Jerome Powell & Co will come to the rescue and make everyone’s dollar whole again.
And to be fair, that’s exactly what happened when the pandemic hit, right?
After a big scare, central banks stepped in, and prices soared to new records.
But again, I ask you — do you think this goes on forever?
In that case, Vern’s new sell report will likely be of little use to you.
But as the founder of Vanguard Investments John C Bogle said:
‘Reversion to the mean is the iron rule
of the financial markets.’
‘To me, investors are playing a game of Russian roulette…with at least four code red bullets in the chamber.
‘Soon, something will happen central banks can’t fix with more printed money.
‘Then the biggest boom in history ends. You will no longer be able to blindly buy stocks, or property, or cryptos and just expect prices to rise.
‘The opposite will likely happen. Most prices will start going down, not up.
‘Most prices…but not all prices…’
That’s why, as well as giving you a specific plan to help your portfolio avoid the worst of the pain…Vern will talk about several investments that are most likely to go UP when the trend changes.
Click here to read ‘Four Code Red Investments to Sell Now’.
Until next time,
Editor, The Daily Reckoning Australia Weekend
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.