Daily Gains Letter

How “Market Knowledge” Is Robbing Investors

By for Daily Gains Letter |

How “Market Knowledge” Is Robbing InvestorsI have a friend who inherited a large amount of money just before the markets crashed. He bought a house and “Rolex” watch, retired, and decided to become a day trader. Unfortunately, he has no experience with the stock market, but it seemed easy enough to him.

Since then, despite the five-year bull market, he has managed to lose a fair bit of money. This does not prevent him from telling those around him how they should invest—after all, he has a Rolex watch and no debt. Even with a dwindling bank account and an embarrassing investment portfolio, he still fashions himself a stock market dandy.

Over the last number of years, he has been the markets’ biggest cheerleader. The markets are going up—the definition of a rebound. I, on the other hand, am an unrepentant bear. I’m not saying the markets aren’t bullish; I’m saying the markets are bullish because of the Fed’s quantitative easing policies, not a burgeoning U.S. economy.

When the financial crisis began in 2008, the U.S. national debt stood at $9.2 trillion; today, it is near $17.0 trillion. By the end of the decade, the White House says the national debt will touch $20.0 trillion.

Yes, the S&P 500 and Dow Jones have reached dizzying heights. But it’s important to remember that, even with quantitative easing, it’s taken five years just to get back to pre-crash levels. Five years after the government bailouts began, unemployment is still high; home values have not rebounded; wages aren’t just stagnant, they’ve actually declined; and the number of Americans relying on food stamps has soared 80% to 47.5 million.

Those Americans who had money before the markets crashed have done well, but the average American hasn’t. And, thanks to the recession and artificially low interest rates, millions of Americans have seen their retirement savings decimated.

In a nutshell, everything that was supposed to happen without the intervention of the Federal Reserve has happened with it. One has to wonder, then, how things will look when the Federal Reserve begins to ease its quantitative easing measures.

Not that most will think about that too much right now. On Wednesday, June 19, the Federal Reserve said it would continue its $85.0-billion-a-month bond buying program, at least until America’s jobs market improves substantially—though it didn’t say what that would look like.

You can’t stand on the shoulders of giants and say everything looks okay. Eventually, the Fed will initiate an ill-planned exit strategy, and Wall Street will have to stand on its own economic merits.

Responding to my argument, the stock market dandy pointed to the S&P 500 rally, telling me that life is pretty good if all I have to complain about is the Federal Reserve’s exit strategy.

Investors looking to minimize the financial damage of the inevitable slump may want to avoid keeping all of their investments in cash. While no one is really talking about it, the ongoing flood of money into the markets decreases the buying power of each dollar; which will be exacerbated by inflation.

Those who think the markets will experience a significant correction may want to consider any number of (bearish) exchange-traded funds (ETFs) that correspond to the inverse of the daily performance of the S&P 500 and Dow Jones Industrial Average.

Who knows, these might even prove to be an option for bulls after America’s weak economic growth begins to slow.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Tags: , , , , , , , , , ,