"Money is the Mc-mansion in Sarasota that starts falling apart after 10 years. Power is the old stone building that stands for centuries. I cannot respect someone who doesn’t see the difference.” - Frank Underwood in The House of Cards
One of the main reasons for limiting my
blog posts is that they were starting to sound a bit like a broken record. Since I started them almost 10 years ago it
seems like I have spent the majority of my time warning against the excesses of
money printing. These excesses have to
lead to a monumental market capitulation unless money printing continues
unabated AND at an accelerated pace. As
both of these criteria continue my doomsday predictions have been wildly off
the mark. Not only has money printing continued,
but after the Federal Reserve reduced its money printing efforts the combined
might of the rest of the world’s central bankers jumped into the fray not just
offsetting the Fed’s reduced participation but expanding the global monetary
base. With this tinder continually being
fed into the roaring blaze that is the stock markets of the world, the result
is unbated increases in equity prices. As I write this the markets are on a
continued tear to infinity and are breaking records daily. In fact, 2017 has turned out to be one of the
smoothest periods of unabated stock market growth in all of history and this is
after 8 years of a bull market! At this
late stage in the game you would expect some form of volatility but by all
measures risk is off the table. Forget
about a correction (a drawdown of 10% or more), this stock market hasn’t even
had a 3% drawdown in all of 2017, the second longest stretch in US stock market
history. Bear funds and ETFs are closing
in record numbers and the new millennials are mega bulls as they have never
experienced a correction!
Old hands like myself are not at all
optimistic. I have seen this story all
too often before (1987, 1997, 2000, 2008) so why should it be any different
this time around? Certainly, the length of
the bull market has many professional investors amazed particularly in light of
the weak economic recovery and there is a sense of despair among many sages of
Wall Street who see the inevitable but cannot for the life of them fathom why
the market continues upward. Well things
recently changed dramatically as the Federal Reserve announced that it would
start to drain money out of the market at a rate of $10 Billion a month for the
first quarter and then increase the withdrawal by an additional $10 Billion a
month each quarter thereafter until they reach the maximum of $50 Billion a
month. Effectively they are starting
with a pea shooter (limited impact as the market has shown) and rapidly growing
to a rocket launcher which is sure to kill off the market. I doubt that the market will wait for the
rocket launcher and will wilt long before that cannon arrives so to me the time
is near. Whether the market dies this
year or next no-one can honestly say but the reality is that this market has
been propped up with the excesses of money printing and it will die with the
lack of it.
My investment strategy throughout this
period has been to ready myself for the inevitable by building up a steady and
secure cash flow stream that will allow me the opportunity to jump in when
things finally collapse. As always, I am
not looking to time the market (if I was I would still be long stocks and would
sell them all at the exact highs) but to wait patiently for the buying
opportunity to present itself at which stage I have my cash reserves ready to
take advantage of the market malaise.
This to me is the prudent way to invest and I have been encouraging long
term readers to do the same. Those that have
will survive and thrive, those that are overexposed will suffer and those that
are leveraged will see their net worth disappear. So, while it has been a long lonely ride to
this place, I expect the not too distant future will provide amply.
