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How This Bernanke Boom EndsBy
Monday, September 17, 2012
"It's going to end terribly," Jim Rogers told CNBC this week.
Jim is worth listening to...
In the early 1970s, he co-founded the Quantum Fund with George Soros, which returned 4,000%-plus in 10 years. After achieving one of the greatest investment track records ever, Jim retired.
On CNBC this week, he boiled down what's happening today:
Jim is right. We're in the middle of an artificial rally. And it will end badly.
But when? My answer is...
Not yet.
I expect it will take years... and this will be an exciting time for investors...
As I described to you last week, we've just entered what I call the Bernanke Asset Bubble...
But when will this Fed-induced rally end? That's the big question. Jim was careful not to put a date on it... I think it will take years...
You see, Bernanke is actually doing his job... His job description is to 1) keep inflation low while 2) helping to maintain a healthy unemployment rate.
Bernanke is "juicing" the economy – cutting interest rates to zero and printing money – to help stimulate investment and consumer demand... which should help with unemployment. As long as the inflation rate doesn't take off, he will keep doing this.
In the coming years, real estate prices, commodities (from energy to precious metals), and stocks will soar to heights nobody can imagine right now... to valuations that are off the charts.
In between, we will have some major downward corrections. Stocks don't go up in a straight line. Neither do commodities. On the way up, people will get scared and bail out. It is the natural "pulse" of a bull market. Up three steps, back two... up three, back two.
We've had a solid "up" lately. It's time for a "back." But the people who will get scared and pull out of the market simply don't believe in our "script."
They don't have the conviction that prices can go to crazy heights.
We do...
We intend to own all the way up. We intend to capture as much of this upside as possible. And we will use trailing stops to get us out when the market finally turns.
Jim Rogers is right – this artificial rally, created by Ben Bernanke, will end badly.
But we have a couple years before it does.
A simple indicator for when to sell your stocks will be when the 12-month inflation rate (the consumer price index) pokes its head above 5%.
At that point, the Bernanke Asset Bubble will have to end... Why?
Remember part one of Bernanke's job description – keep inflation low. If inflation moves above 5%, the game is over. Bernanke will have to raise interest rates. At that point, it is time to move on.
We have a couple years, though...
No guarantees, of course, but you can have some fun making money for a few years in the Bernanke Asset Bubble before Jim Rogers' dire prediction comes true.
Good investing,
Steve
Further Reading:
"The gains in housing prices will surprise everyone," Steve tells readers in a recent DailyWealth, "and you certainly haven't missed it yet. The trend is just beginning. And it will last for years to come." Learn how to take advantage of what Steve calls "the most awesome opportunity in American history" here, here, and here.
Market NotesTIMBERLAND STOCKS REACH ALL-TIME HIGHS Our "things can't be all that bad" thesis is turning up in all kinds of places… including timber.
This year, we've featured many charts that display how the U.S. economy, while not great, can't be doing all that bad. For example, we've noted the tremendous share price strength in high-end homebuilder Toll Brothers, giant hotel operator Wyndham Worldwide, and giant office landlord Boston Properties. These companies are enjoying rising profits and soaring share prices. Much of the "things can't be all that bad" story focuses on housing. If housing is recovering, so is the U.S. economy. And when housing recovers, so do timberland stocks. After all, timber is a major housing ingredient… and a recovering housing market boosts land prices across the board. Longtime DailyWealth readers know we love the idea of buying timberland at a cheap price and owning it for a long time. (Read this interview with Steve for the full story.) You can see that this idea is working – and that "things can't be all that bad" – in the chart of giant U.S. timber company Rayonier. The stock just hit an all-time high. – Brian Hunt
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