In yesterday’s Rum Rebellion, Vern Gowdie explained how the market was obsessed with coming inflation.
Well, it may just have to wait a little longer. Overnight saw the release of US inflation numbers and the core reading (which excludes food and energy) came in at 1.3% for the year.
Hardly roaring inflation, is it?
In response, US bond yields took it easy. They are currently sitting around 1.57%. Aussie government 10-year yields are around 1.7%.
While higher than they were at the start of the year, they’re not exactly signaling spiraling inflation. And while they might go higher in the short term, again, the chances of sustainable consumer price inflation taking hold anytime soon is remote.
RBA boss Philip Lowe reiterated that inflation, and therefore interest rates, is a long way from rising. From the Financial Review:
‘Reserve Bank of Australia governor Philip Lowe has rejected market expectations of an early increase in interest rates, insisting it will not lift its record-low cash rate of 0.1 per cent until the jobless rate falls far enough to generate higher wages.
‘In a policy pivot, Dr Lowe said the unemployment rate would need to fall from the current 6.4 per cent to about 4 per cent, and possibly even lower, before wages rose above 3 per cent and the central bank could raise interest rates.
‘The bank does not expect the labour market to be tight enough to justify tighter monetary policy until at least 2024.’
So we’re going to be dealing with Life at Zero for a long time to come.
What does that mean?
Well, your cash will be worthless sitting in a bank account. Sure, keep some for tactical purposes. It’s always good to have cash on hand to buy stocks when they look cheap. But as a longer-term strategy to hide out from overpriced asset markets, it’s a bad move.
And besides, not all assets are overpriced. I just recommended a stock trading at less than half of its book value. This company is exposed to the Northern Hemisphere. So the rolling COVID shutdowns have really hurt it. But it has world class assets. As such, I believe its share price is momentarily depressed.
It’s not the only opportunity I’m seeing. There are plenty of companies out there that are reasonably priced using conservative valuation estimates.
That’s not to say markets won’t correct from time to time. But these corrections, or volatility, are just the price of admission. You have to accept that your portfolio will move around if you want to avoid death by a thousand cuts by sitting in cash.
Why am I so sure that stock markets will keep rising? As I put it in my Life at Zero Roadmap, it’s all about currency debasement:
‘When central banks and governments press the stimulus button, they are trying to create inflation…as in, inflation in goods and services prices. But as I’ve said, it doesn’t work. All it does is create financial system liquidity that leads to asset price inflation instead.
‘People treat this new money, created by governments and their central banks, like a hot potato. They don’t want to hold it because they know it will lose value over time. So they buy assets — stocks, bonds, property, gold, silver, bitcoin…you name it.
‘Here’s the key takeaway:
‘1. Stimulus inflates asset prices — while increasing debt and weakening the economy.
‘2. That leads to even more stimulus.
‘3. And so asset prices go even higher.
‘If you think anything is going to change on that front, you’re going to be sorely mistaken. That’s because there is no alternative. When the next slowdown comes, if governments and central banks do nothing, markets WILL collapse. That’s why they will act and launch larger and more insane levels of stimulus.
‘But it won’t just be QE anymore. Modern Monetary Theory is coming, along with central bank digital currencies. If you haven’t heard of these terms before, mark my words: You will. They are designed to allow the authorities to have even greater control over the money you earn and spend.
‘Politicians and bureaucrats are determined to create inflation not just in asset prices, but in goods and services prices. And believe me, you don’t want to be holding cash when they finally pull it off.
‘This process will play out over years. 2021 is likely to continue to see a “seeding” of these ideas, so they’re accepted wisdom by the time they actually come about. And by that time, markets will have priced them in.
‘I hope you’re still with me. I know this stuff sounds bizarre. That is, a structurally weak economy and broken financial system creating sky-high asset prices. It makes no sense. But when you realise that underneath it all is a failing currency system, you can see that people are escaping cash to protect their purchasing power.’
When I talk about a failing currency system, I’m not just talking about the US dollar. I’m talking about the global financial system. The whole thing is corrupt and broken. The 2008 crisis was the beginning of the end.
And despite what I’ve written above, I don’t expect the US dollar to collapse. You see, when the system becomes stressed, the US dollar rises. It’s another quirk of the system that is difficult to explain in a few sentences.
But in short, I expect the US dollar to be the ‘last fiat currency standing’, as it were.
With that in mind, it’s interesting to see the US dollar strengthening of late. Here’s a chart of the US Dollar Index:
If the US dollar is starting to move higher again (after falling for the past 12 months) that will likely create a headwind for overpriced stocks.
Perhaps that’s why the NASDAQ has been under the pump lately?
It will be interesting to see how this continues to play out…
To help you navigate these crazy markets, please check out my Life at Zero presentation.
Editor, The Rum Rebellion
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