The Infection Causing Swollen Stock Prices

Written by Nick Hodge
Posted November 13, 2019

The stock market at all-time highs feels good. 

Your account should be swollen. I hope it’s not an infection.

What we do here is only a piece of the larger puzzle. 

You won’t see me writing about low-cost Vanguard Admiral shares here, but stuff like that should be the anchor of your overall portfolio. 

Here, we do hard assets, wealth protection, and contrarian commentary and ideas. 

That last part is important. Because there’s an increasing disparity between those all-time highs and a true understanding of what’s causing them. 

We continue to hear much about job growth and the tweeter-in-chief would have you believe the economy is GREAT!!

Indeed, the economy added 128,000 jobs in October — the 109th consecutive month of job growth. And the unemployment rate hovers near a 50-year low. 

But wage growth has been slow, up just 3% in the past year. And consumer confidence is down from a year ago as well. 

Employers are afraid to raise wages for fear of being priced out of their market. Why, if the economy is so strong? 

It’s a conundrum. 

But so is the entirety of the market, which has seemingly defied all odds to rise to new highs. 

Last month, the Institute of Supply Management’s Purchasing Manger’s Index fell to its lowest level since June 2009. 

U.S. third-quarter GDP just came in at 1.9%, the lowest point of the year in a downward trend that started in 2017. Business investment fell 3% and spending on factories and offices fell 15%.

US GDP By Quarter Q3 2019

We got jobs. But not much else. 

No wonder, then, the Federal Reserve cut rates for the third time this year in October, erasing all the increases from 2018 and taking the Federal Funds rate back down to 1.75%, and has resorted once again to buying government-backed securities, which you’ll remember is Quantitative Easing. 

The Fed is now buying Treasury bills to the tune of $60 billion through the end of this month, with the actions continuing through June 2020 with an amount to be determined. 

It will also continue to intervene in the market for repurchase agreements, so-called Repos, something it started doing in September for the first time since the financial crisis

All this accommodation is the reason the stock market is at all-time highs. But it’s gotten to this point for all the wrong reasons. 

Because instead of being spent on things that truly expand the economy, like infrastructure, the cheap money has mostly flowed into investments that have improved stock prices but little else. 

Here’s legendary investor and hedge fund manager Ray Dalio in a note he penned last week:

Investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it.

As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish.

Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power. 

Preach, brother. 

It’s getting out of control, and more people are starting to realize it. Just look at the failed IPO and implosion of WeWork. 

At the same time, government debt and spending is exploding. The U.S. budget deficit has more than doubled since 2015. 

US Budget Deficit 2019

The U.S. national debt is now over $23 trillion. That’s a 23 with twelve zeros. $23,000,000,000,000.

After next year, the interest on that debt alone will be the country’s biggest expense — overtaking all other defense and nondefense spending.

Interest Payments on US Debt

This is the ulterior motive of the Fed. It’s the real reason rates need to stay low. 

And it’s the reason, again, that stocks are rising for all the wrong reasons. 

What else do the Fed and other central banks know? They know gold is going to be a major part of the financial reset they know they’ve induced. 

Why else would they be buying the most gold on record?

Growing Central Bank Demand for Gold

Maybe it is an infection. 

And it could have a golden cure. 

Call it like you see it,

Nick Hodge Signature

Nick Hodge

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Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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