The economy is not in a good shape especially after Covid-19 pandemic. Therefore, many investors has been asking same question. Why stock prices increase continuously thought there is no prospect. Here is good and practical summary what is going on in share prices
Why stock prices increase is also related the factors that controls the bond market.
The stock market is dictated by what happens in the bond market.
And guess who and what controls the bond market?
Read what legendary investor Stanley Druckenmiller has to say…
Earnings don’t move the overall market; it’s the Federal Reserve Board…
Focus on the central banks and focus on the movement of liquidity…
Most people in the market are looking for earnings and conventional measures.
It’s liquidity that moves markets.”
Did you know that the universe of financial assets consists of…
- Money (cash)
- Credit (bonds)
- Equity (stocks)
In fact, these three asset classes are always competing for capital.
What can cause a huge surge or decline in the stock market is usually related to what happens in the bond market.
And the Fed and the Treasury have control of the bond market.
Now, a ton of capital has been flowing into the stock market even though the economy is doing poorly because
- People don’t want to save their money in cash (the Fed lowered interest rates, so it’s unattractive to save money).
- People also don’t want to own bonds because the Fed’s extravagant buying of bonds (printing money) have caused bond yields to decrease, which makes them an unattractive investment.
And so, mass capital flows into the stock market, causing it to rise.
So what will happen next?
While the Fed is targeting above-normal inflation rates, we know they will eventually have to raise interest rates to cap inflation. But guess what?
They can’t raise interest rates because it would bankrupt the government due to an inability to service their debt.
In short, the Fed is stuck.
In order to keep this stock market extravaganza going, they will have to keep printing money (issuing and buying bonds) and interest rates low. But they simply can’t continue doing both if they want to cap inflation.
This is why tech stocks like Amazon who reported record-breaking earnings in Q1 of 2021 got destroyed…
Like it or not, the market is pricing in the Fed tapering (halting their money-printing machine) and higher interest rates…
This is why you want to be positioned in stocks that tend to do well in inflationary periods.
It doesn’t take a genius to figure out where mass capital is going to flow in the coming decade as currency debasement continues to take place.
This is why my entire portfolio is basically full of hard/real assets, energy, and commodities-related stocks.
This will be one of the biggest wealth transfers in history, and if you’re on the right side of the wealth transfer, it’d be hard NOT to multiply your capital.
Don’t know where to start?
Chris retired in his late-20s, having turned pennies into pounds in “when-not-if” investments like…
- The New Zealand real estate (64x return)
- The last commodities bull market (10x)
- Bitcoin (35x)
- Shipping (17x)
I’ve personally been subscribed to his newsletter since 2016, and he has helped me a lot in my journey as an investor, so I highly recommend checking it out.
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