I hope you won’t be disappointed with what I am about to say. But the point is, it has to be said. And I have never hesitated to say what I think. You will always know where I stand on the most important issues facing investors, no matter how uncomfortable the truth (as I see it) can be …
As always, I may be wrong. But you can rest assured that 23 years of reducing macro to its sweet, profitable essence has given me some perspective on the nature of things.
What I have to tell you is simple. This stock market is not a bubble.
Are stock prices inflated by Fed liquidity? Yeah. Are investors whistling past the graveyard as they try to rack up years of performance through the relatively narrow window the Fed has opened? Probably…
But that doesn’t make this market a bubble.
Look, I’m not some raging bull behind my ears with dollar signs in their eyes that will say anything to justify my reckless investing behavior. This nonsense is for the young, the impetuous and soon the poorest.
I’m old and cranky and I don’t have time for all of this.
Like anything really good in this life, my point is simple. To call this market a bubble is to fundamentally misunderstand the very nature of investing.
A bubble market is a frenetic market. Do you see a frenzy there? Yes, me neither.
What about last December and January? What about all those electric vehicle (EV) stocks that are doubling and tripling in a matter of weeks? Of course, it was a frenzy. And that white-hot intensity went out. This is the nature of a frenzy.
This mini bubble burst, and it didn’t take the whole market with it. Eh. What do you know …
It is Different this … Always been this way
I won’t say the five most dangerous words when it comes to investing. The stock market does not like certainties. Proclaim in public and with conviction that investors have learned this or that lesson and the market will bring you to your knees and give you meaning.
But I think I’m safe to say that investor behavior is changing. Investors are learning and we will no longer fear tulip bulbs. Internet stocks at least looked like viable businesses …
The 2007-2008 financial crisis is a bit of a headache for the “it’s a bubble” crowd. Because the purse was not particularly expensive. And it was not the investors who brought the global financial system to its knees. It is the very financial institutions that make up this global system that have almost committed suicide.
It’s funny that many investors now know what a credit default swap is and are happy to talk about Fed-fueled liquidity over dinner and drinks.
The nature of the stock market is not about valuations and P / E ratios. Such measures are only milestones on the liquidity highway. The real nature of the market is about inflation, growth, and future bonds.
Life, death and 8% annual return
If you are engaged in any type of economic activity, you have noticed that the prices practically keep increasing. Inflation means that your future obligations will be greater than your current obligations. So whatever money you have, you just have to beat the inflation rate or else you lose.
For insurance companies, public pension funds and retirement funds, it is more than an academic exercise. This is the 8% you need to earn each year. Make that 8%, you live and maybe even prosper. Fail and, well, sorry for that …
This is why I say that the stock market is not a bubble. The CFO of the California Public Employees Retirement System (CalPERS) isn’t dancing on his desk because he just doubled his money in Tesla. Well, maybe he or she is. They are sometimes a little weird in California.
The nature of investing is stereotypical. It’s an equation to transform 1 to 1.08 over the next 12 months. And then go from 1.08 to 1.17 the following year.
Investors will buy as long as they have the money to buy. And stock prices will rise at the same time. And they will continue until investors run out of cash to implement, until cash runs out.
On Wednesday I’m going to look at a few things that could cause liquidity to dry up very quickly. At least one of them will probably surprise you …
Till next time,
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21-year veteran in the newsletter industry, Briton Ryle is the editor of The Wealth Advisory’s earnings newsletter, with a focus on dividend growth stocks and premium REITs. . Briton also operates the Real Income Trader advisory service, where its readers receive regular cash payments using a low risk covered call option strategy. He is also the editor of the electronic newsletter Wealth Daily. To learn more about the Briton, click here.
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