Sunday, July 16, 2017

The Bubble is Still Inflating, for Now

Here's an excellent discussion between two Wall Street traders of our current economic situation, particularly the role of the Fed in directing the markets.

The major takeaway of this is that, while market irrationality is at an order of magnitude higher than we've ever seen before, expect the stock market and real estate bubbles to continue inflating in the short run thanks to signals from Janet Yellen that the Fed will continue its unprecedented era of loose monetary policy, rather than continuing with the policy of increasing interest rates announced shortly after the presidential election. The guest, Greg Mannarino, describes the conundrum the Fed is in. They still hold a ton of toxic assets from the great bank bailout of 8 years ago. Many of those are in the real estate sector. If the real estate market gets hot, those sub-prime assets get, well, less sub-prime. If the real estate bubble pops again, those assets become even more sub-prime, more worthless. The Fed is in a position where it's distorting market reality by keeping the rates low, yet it wants to be able to unload those toxic assets before the bubbles pop. That is the world we live in now. The Federal Reserve can determine not only who the economic winners and losers are but holds so many assets in the market that it can determine the direction of the market at its discretion. Buying into the stock market is no longer a chance to invest in business ventures based on performance metrics as much as it is a bet as what the fiscal & monetary policy will be. It's a big casino.

The advice given by Mannarino is as follows. This is my take on it, I'd recommend just spending the half hour to listen to the video yourself if you can.
  • Invest in hard assets, like gold and especially silver, whose prices are being suppressed by the monetary policy. Mannarino also sees cryptocurrency as being suppressed. (I don't know how this is done.)
  • Stocks are going up in the short-term, but it's hard to know how long that will last. I would not recommend investing in stocks long-term at this point, nor keeping most of your investments in stocks. 
  • The bond markets are being suppressed. These might be good to buy now while they're cheap. If you're a 401(k) holder, (and especially if you're near retirement), consider moving most of your assets into bond instruments.
Mannarino clearly takes an antifragile approach to investing. He will come out ahead in either situation by being smart about it. Follow his advice. This economy is going to tank in the short-to-middle term. Maybe we have a decade, but that's not that long. And maybe we only have days or weeks. We can't know the exact timing, but we do know the market is strongly insulated from reality, and the number one rule of economics in the universe is that the market will eventually correct itself, one way or another.

What Mannarino is doing is really an antifragile approach to investment. Yes, he has a ton of insight into market works, but ultimately his strength is that his position improves no matter when the correction occurs. Be antifragile yourself. The question you should ask yourself is, "how will my position improve when the economy inevitably disintegrates?"  You're much safer to keep 10% of your retirement investment in high-risk/high-yield stocks and the rest in bonds than you are to keep most of your investment in low-risk "safe" stocks. The stock market is not safe. In the first case you make money whether the market goes up or down. In the second you make a lot of money in an up market, but you lose your shirt in the crash. That is a fragile position.

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