The following is a guest post from Troy who blogs over at GhostforBeginners.com. Troy has previously brought us posts about how economic data triggers the markets and taking profits in a bull market. Today he shares his views on where he thinks the markets may be headed in 2014.
These views are his, and his alone. Please conduct your own research or talk to your financial advisor before making any investment decisions.
The State Of The U.S. Stock Market
As a disclaimer, I am cautiously long the U.S. stock market. These are dangerous times, so don’t let the euphoria fool you.
As you’ve probably heard, the U.S. stock market (based on the Dow Jones 30 and S&P 500) is soaring through the stratosphere. Based upon federal and privately compiled statistics, the public is pouring records amount of money into the U.S. stock market, which basically screams the word “BUBBLE”. But just because U.S. equities are in a bubble doesn’t mean the bubble will burst any time soon. This is because markets take the path of least resistance. Unless there is a big trigger that can burst the bubble, the U.S. stock market will continue rising. But before I talk about what I think will happen over the next 2 years regarding U.S. equities, let’s first put this bubble into context.
What’s Causing This Bubble
As you know (maybe from personal experience), the 2008/2009 stock market crash/recession was devastating for virtually everyone around the world (besides China). In fact, the economy was so bad that things didn’t really start to improve until 2011, a full 2 years after the U.S. stock market had bottomed. So what “pulled the global economy out of a recession”? How did the U.S. stock market bottom 2 years before the economy did?
The answer is simple. Virtually every central bank in the world started devaluing their currencies via money printing circa 2009. And here’s why this bull market doesn’t make any sense. History has taught us that printing money NEVER solves a nation’s problems. Look at France in the late 1700s – hyperinflation. Look at Germany in the 1930s – hyperinflation. In the long term, printing money (essentially currency devaluation) always destroys:
A) a nation’s economy
B) a nation’s stock market
So what we’re seeing right now seems to defy history.
- Despite the Federal Reserve printing record amounts of money, inflation (at least according to the “official” statistics) is virtually non-existent (if history has taught us anything, it’s that printing money always leads to hyperinflation).
- Due to the Federal Reserve and other central banks printing so much $$$, the global economy is kicking ass.
Why This Cannot Last
So right now it seems like history has been turned on its head. Printing money can lead to zero inflation and still jump start the global economy.
So let’s assume that the above belief is actually true. What does that mean? Well for starters, there will never be another recession in the future again because every time the economy faces some headwinds, let’s just print more $$$! The future will be 100% nice and rosy, and never again will people be poor! Government can save us from all our economic woes! Just start running the printing presses! #sarcasm.
Now obviously this is not true. There will always be good times and bad times (recessions). Such is the law of this universe (cycles). One cannot have good without bad. Which leads to the obvious conclusion…
Money printing CANNOT SOLVE OUR ECONOMIC PROBLEMS. So sooner or later:
- The global economy is going to face a major problem.
- The U.S. stock market (a barometer for the global stock market) is going to crash.
But as I already said, a bubble will continue inflating (stock prices will keep rising) until a trigger comes along toe burst it. Following this logic, I’ve been thinking: what will this trigger be?
The Inflation Trigger
Right now, U.S. economic data is kicking ass. So don’t expect a bearish trigger to come from the economy. Corporate earnings are also doing ok. Despite revenue remaining flat, corporate profits continue to rise as they cut costs and layoff workers (soon to be replaced by machines).
China seems to be ok – despite their growth slowing down, China has a ton of cash on hand to deal with whatever problems it may have. India and the rest of the developing world are irrelevant (at least in terms of their effect on the global stock market). That leaves only 2 potential problems:
- The re-emergence of the Euro crisis.
- Inflation bites back.
Of these 2 problems, inflation is a much bigger worry. History has repeatedly taught us that printing money always leads to inflation. Sooner or later, inflation is going to soar (thanks Bernanke), which leads to stagflation. This is reminiscent of the 1970s when economic growth was weak while inflation galloped. Thus, stagflation leads to a pretty crappy U.S. stock market.
So until I see inflation start to pick up, I will continue riding this bull market on the long side. However, stagflation also leads to soaring commodity prices as you can see during the 1970s. Thus when inflation starts to rise, I plan on selling all my SPY’s (S&P 500 ETF) and buying gold/silver.