A plethora of financial media is talking about how overpriced stocks are in the United States. This does not mean we will see a downturn in the markets anytime soon.
“Never oppose a runaway trend; the market is always right until it is wrong.”
So while there are dire warnings of stocks being overpriced, as long as we have the central banks all over the world printing trillions of dollars, we will see asset prices inflate even further. After the financial crisis which was created by greed and excess debt, the central banks decided to cure the problem with an infinite supply of more debt.
Central banks created more money and credit. But since the household sector wasn’t borrowing, the money went into financial assets and unnecessary government spending.
Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.
One of the reasons the world is not recovering is due to the demographic trend being against a rapid recovery. All over the developed world including the U.S., UK, Japan, Europe, Australia, Canada and even the developing world such as China people are getting older.
As people get older, they change from being producers to becoming consumers of resources. They stop innovating and start stagnating as well as becoming resistant to change. They turn protectionist and block innovation.
As a result, we have nations turn against each other rather than wanting to work with each other. Trade barriers are erected and wars such as currency wars are initiated.
Given these trends where innovations are not rewarded money is spent on wasteful and useless endeavors. People who control such spending often end up rewarding their own kind or rewarding unproductive behavior when money is created by doing nothing (such as the kind with asset bubbles). As a result, we have the perplexing dual-speed economy.
One side is where you see jobs but the low-paying kind. On the other side, we have an on-again off-again GDP growth curve. So we cannot seem to decide if we are getting stronger or stagnating.
Typically, these conundrums – too much debt, too many wasteful expenses, and too many old people – lead to financial crises. Then, they are “solved” by either inflation or depression. And the solution begins when markets crack.
And since the central banks will do everything within their power to resist depression, we will see continual and meaningless printing of money. The marginal utility of money will decline to near zero before we see a total collapse of the system.
When the next crisis fully materializes, cash will be king. It will buy more goods and services and will have command over dramatically marked-down financial and real estate assets of every kind.
It is important to invest in assets that the central banks cannot tamper with too much. Hard assets such as precious metals are a good choice. An investor should not be disheartened by low yields or lack of appreciation as the microscopic yields in the short run will not matter when the markets blow up.
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