Previously in history, stock would rise when investors put money into these companies, their market capitalization increases along with the companies share price. Since 2009, this is not the case. Central banks made a pact to print excessive amounts of money and drop interest rates to the floor indefinitely. Their actions have resulted in all markets around the world no longer being even remotely real. Just computer traders and massive intervention. We allowed them to take control and so we will pay the price.
Previously in history, stock would rise when investors put money into these companies, their market capitalization increases along with the companies share price. Since 2009, this is not the case. Central banks made a pact to print excessive amounts of money and drop interest rates to the floor indefinitely. Their actions have resulted in all markets around the world no longer being even remotely real. Just computer traders and massive intervention. We allowed them to take control and so we will pay the price.
Here are the top 3 reasons why stocks have risen:
Stock buybacks
Central banks
Low interest rates
Right now in 2019, share repurchases have been the #1 reason why we have seen a rally in stocks. Not investors buying stocks like they would in the past. That’s not happening right now. We have seen equity outflows still continuing since September of 2018. This has been documented countless times on this channel using the EPFR data. EPFR grabs all of the data from over 100 countries and countless markets. They see where the money is going in and out of. This has been determined that stocks are not being purchased by individuals right now and instead are actually being sold. On average, investors have been net sellers for several months. If you would like to check for yourself, seek the EPFR data or check my previous videos. This is completely against what people believe. They see the stock market rising and to them that means, the company is good, consumers are buying things, inflation is low, unemployment is low, therefore things are good, right? Well not exactly. Just as those who criticize suggest not looking at the full picture will make things seem negative, only looking at the figures such as the unemployment rate, gives you a completely skewed view of the economy. What needs to be understood is that all figures are important to track. However, we need to know which ones have been manipulated. Also, to what degree have they been manipulated and by what mechanism. For example, if a company is buying back its own shares, this gives the impression that investors have a demand for the stock. It’s a false indicator. Along with central bank purchasing assets, it’s just like if the government started buying houses that weren’t selling in your area. It would support the value of the homes when in fact the prices should be allowed to rise or fall based on market demand. Not some senseless idea that market cycles are a historic relic to be forgotten. A cycle can be long or short. But all are finite. All will end.
Central banks have been purchasing stocks, toxic assets such as mortgage backed securities, bonds, and practically anything else that the market doesn’t want. This has created a moral hazard but nobody has objected because their investments, their 401k’s, their retirement accounts are at stake. Of course, the insinuation that a central bank would permanently intervene in the market was considered to be laughable. Today, it is actually encouraged. If we seek historical data about central bank intervention, we know that there has never been a single country that has ever successfully created a permanent boom. Japan is often cited as the best example of an market that can still live and thrive on central bank stimulus. But upon closer inspection, it isn’t difficult to see that Japan is permanently destroyed. There is no possible way this country will grow ever again, not even factoring in their aging demographic. Regardless, what we have seen is that leading up into 2018, central banks have been buying assets. In fact they bought $15 trillion worth just since the financial crisis. That’s only including that which they have publicly disclosed. This doesn’t include the $16+ trillion that the Fed gave out to institutions all around the world for example. But even still, $15 trillion by these central banks and when they decided that 2018 would begin the year of quantitative tightening, markets weren’t initially worried. And why should they be? Stocks has risen so much. It was time for a tightening cycle as long as they would go slow and steady. Barely any QT actually occurred and the markets started to go into panic mode. Literally shaking in fear. Jim Cramer actually started advising to buy gold as he cursed the Fed for ever increasing interest rates at all. How dare he try to slow down the bubbles. Beyond all of this, it’s important to understand something that the media refuses to touch on. Central banks are not your friends. They don’t give a damn about you. You’ve given them not only permission but encouragement to buy everything in sight and you will pay the price for that.
Overall, low interest rates have allowed stocks to rise very high. In an environment where interest rates are low, this reduces the desire to buy fixed income assets or simply saving money in a bank account. It’s intentional desire is to give lack of incentive to save money. It will be worth less tomorrow so spend it today. But it’s a known fact that savings will in fact increase production long term (Not short term thinking). Those who save will make more wise, thought out investment choices later. Sure, casinos add to the GDP. But is that really wise? I would argue not. It would be better for someone to save their money for a few years and put it down on their mortgage to buy their home. Instead of spending it at the casino and then rack up credit card and student debt. Then when it’s time to buy their house, they put the absolutely minimum downpayment and struggle through life. 99% of people encourage low interest rates because they’re borrowing money and obviously lower borrowing costs is good for those in debt. What they have remained ignorant to is that a central bank like the Fed for instance must proceed with Open Market Operations in order to manipulate interest rates. It’s not as simple as adjusting the chosen interest rate on a computer screen. They literally print money to keep rates down. Do you think these misguided people are aware of this? Low interest rates come at a price. Low interest rates encourage speculation in markets whether that’s in stocks or real estate. Gambling comes in all forms.
It must be understood why exactly stocks have risen. Just as you would study a company for weeks and months before ever putting your hard earned savings into it, right? You wouldn’t just see what Warren Buffett bought and think it’s good. You wouldn’t just think a stock like Apple is good because you have an iPhone and see people everywhere are addicted to Apple products. You would really do your research, right?… But sometimes when you look around, it seems as though those with the most at stake, those who have taken the most risk, those who have trouble sleeping at night, are those who haven’t done their research. Sadly, this group who thought the Fed was their friend will soon become their worst nightmare.
Wake up.