How I Learned to Love Lockdowns — Buying Growth Stocks

What if lockdowns are the secret to getting richer? If that’s the case, lock it down New South Wales. Lock, and grow rich!

Americans grew their wealth by US$13.5 trillion in 2020, according to data released this week from the Federal Reserve. It was the biggest increase in net worth over three decades — and during a recession. How do you explain it?

There’s a lot of free money out there driving asset prices. For example, both the S&P 500 and the Nasdaq have hit new all-time highs since I last wrote to you. The Fed’s balance sheet — which it adds to each month when it buys US$120 billion worth of Treasury notes and bonds and mortgage-backed securities — has also gone over US$8 trillion.

Liquidity and low interest rates drive stock prices higher. That’s a big component of the net worth of the top 10% wealthiest Americans. They own 89% of all the stocks and mutual funds in the US. That allows them to ‘control’ over US$41.5 trillion in wealth. The bottom 50% of the population, by comparison, has a total net worth of US$2.52 trillion.

Some of those bottom 50% spent ‘stimmy cheques’ trading stocks — what else is there to do when you’re stuck at home with nothing but an internet connection and free money? But many more got a mortgage with record-low interest rates. The median price of an existing US home rose 24% in the last 12 months, according to the National Association of Realtors.

That was the biggest year-over-year increase since 1999. Do you remember what happened then? That’s when the Nasdaq Composite — the heart of the tech sector — went up almost 86% in one calendar year. THAT was the end of an epic credit bubble. And today?

Today the bubble is in everything — stocks, bonds, even houses. That’s what makes asset allocation decisions so difficult right now. When stocks are rising 40% year-over-year, how can you afford to NOT be in stocks. Cash and bonds are losing positions when inflation is taking hold. But stocks, according to Robert Shiller’s cyclically-adjusted price-to-earnings ratio (CAPE), have only been more expensive once in the last 100 years (that was also in 1999).

The obvious question is whether central banks have any interest in tapering their monthly support for asset markets. At The Bonner-Denning Letter, we think the answer is an emphatic ‘no’. Why?

In two words: Financial repression. That’s when governments rig markets to keep official interest rates below the rate of inflation. That allows them to ‘pay off’ huge, accumulated deficits with inflation. It’s better than default or a restructuring of debt. You suppress interest rates and let inflation make your loans cheaper to pay down.

It’s called financial repression because it keeps interest rates from moving up like they naturally would. This hurts savers and anyone on a fixed income. It all pushes down interest rates in the bond market as well as pushing down dividend yields on equities. So what?

You have a binary outcome in a world of financial repression. You can go full ‘risk-on’ and buy the most aggressive growth stocks and momentum plays. As long as rates stay low and stocks keep going up, you’ll learn to love it. Or you can forego the possible gains in momentum plays and try not to lose your money in what we think will be an inevitable crash.

The trouble with a crash, as with a bolt of lightning, is that you never know when or where it’s going to strike. You CAN know the conditions are ripe for one (excessive leverage, high valuations, cyclical lows in interest rates). But how long? When? What to do in the meantime?

Maybe Australia’s best hope is for another 100 days of lockdown in a major city. People will be forced to stay at home. They may even be paid to stay at home. They can trade stocks and bid on houses. They can focus on what truly matters in an economy that’s been financialised — speculating on how to make more money without doing any work.

More seriously, Australia and New Zealand nearly broke their own arms patting themselves on the back about how well they handled COVID compared to the UK and the US (where hundreds of thousands of people died). Fair enough. Island nations that suspended travel and locked down had an option that nations with tens of millions of citizens did not (for practical as well as political culture reasons).

But while the rest of the world has seen two or three waves of COVID cases but are now leaving behind mask mandates and lockdowns, it appears the madness is just beginning in New South Wales. Let’s hope it doesn’t follow Victoria’s example from last year and turn into yet another Australian police state.

Until then,

Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

PS: The Bonner-Denning Letter is co-authored by Port Phillip Publishing founder Dan Denning and legendary investment writer and publisher Bill Bonner. It connects the dots between markets, politics, and history as one of the only macroeconomic, ‘top-down’ newsletters in Australia. For a big picture perspective on the past, the present, and your investment future, click here for details on how to subscribe.


Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.


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