A House of Cards

"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.