A Potential Bull Market in Everything
Editor's note: Investors were scared.
Coming off the 2008/2009 financial crisis – which caused the stock market to fall more than 50% over a 17-month period – most folks weren't interested in dipping their toes back into the market's waters.
But investors who listened to our colleague Steve Sjuggerud made a FORTUNE.
Today's Masters Series is adapted from the August 2010 issue of Steve's True Wealth newsletter. As you'll read, he nailed the market's subsequent rise... told subscribers why the Federal Reserve's "playbook" would eventually cause bubbles in different assets... and essentially foreshadowed the current "Melt Up" scenario we're seeing seven years ago...
A Potential Bull Market in Everything
By Steve Sjuggerud
I know it feels scary out there right now...
But personally, I believe we could be on the brink of an incredible move higher in asset prices.
Conditions are ripe for some crazy upward moves in all kinds of assets – stocks, real estate, commodities – you name it.
Some assets could go up hundreds of percent in value within the next three years.
I could be wrong about this, of course. I am fully aware of the risks out there. I feel with certainty the U.S. is nearing the point of no return when it comes to its government debt. But I believe the reckoning day is a ways off. Let's get started...
16 Years of Zero-Percent Rates? Could It Happen Here? Yes!
The Fed will create new, bigger bubbles... And it won't even care.
In 1995, the Bank of Japan cut interest rates below 1%... Today, 16 years later, Japanese interest rates are STILL below 1%.
I bring this up because Japan was in a situation similar to ours today...
In the early 1990s, Japan was struggling to recover from an extraordinary real estate bubble (like we are today). Residential real estate prices there peaked roughly in 1991.
The Japanese government threw everything it could at the problem – it cut interest rates to zero, and it went crazy borrowing and spending to try to keep the economy afloat.
We are doing those same things today in the U.S. You could easily argue these things didn't work in Japan...
Today in Japan – two decades later – real estate prices and stock prices are still well below their peak back then.
Meanwhile, with interest rates below 1% all this time, retirees in Japan earn next to no money on their savings. And all that government debt is still there – it still has to be paid back, somehow.
Japan's government debt is now at a crushing level... near 200% of the economy (in GDP terms). That's the highest in the world, except for basket case Zimbabwe. (As you might guess, the endgame in Zimbabwe was hyperinflation. The Zimbabwe dollar is now so worthless, it basically doesn't exist. People in Zimbabwe accept U.S. dollars or South African rand... or pretty much anything but a Zimbabwe dollar.)
The U.S. isn't nearly in Japan's trouble... yet. U.S. government debt is just 52% of GDP. But the U.S. is heading down Japan's road. The Congressional Budget Office forecasts government debt will hit 180% of GDP by 2035.
When will Japan's debts come home to roost? They haven't yet. Keep this in mind. And keep in mind, the Japanese currency hasn't crashed either.
We have a lot further to go before we are in Japan's situation. Japan is 20 years into a bust. Interest rates have been below 1% for 16 years. And the government has borrowed and spent for 16 years to try to stimulate the economy.
It's easy to see the same thing happening here. Could interest rates in the U.S. stay below 1% for 16 years? You don't think so? The people of Japan wouldn't have believed it either if you told them that 16 years ago.
But in the U.S., rates went below 1% back in 2008. It is now 2010. And there is nothing on the horizon that suggests rates will be going up. It's quite the opposite actually...
The Fed's Playbook Revealed
The folks at the U.S. Federal Reserve – the people who set short-term interest rates in the U.S. – just showed their cards this week...
We now know what Fed Chairman Ben Bernanke's playbook is, looking out three years.
He's making it easy for us. In short, he will keep money as "easy" as possible, for as long as possible – likely beyond 2012.
For a visual... Bernanke is trying to light up the U.S. economy like a grill. He's dousing it with fuel and pumping away on the "start" button. We're just waiting on the "WOOSH!" We're waiting on the big flame... We're waiting for Bernanke's eyebrows to get burned off.
Chances are, he won't see a "WOOSH." Or more specifically, he won't see the economy light up like he wants. Instead, all Bernanke's fuel will do is light fires somewhere else.
He'll create asset bubbles – like tech stocks in the 1990s or housing in the 2000s – that will eventually result in spectacular busts. But Bernanke won't care about those. All he cares about is the grill in front of him.
The minutes to the latest Federal Reserve meeting showed his cards – it showed what Bernanke is looking at. The Fed expects:
- The economy will grow a bit slower than it thought.
- Unemployment will be a bit higher than it previously thought – between 7.1% and 7.5% by the end of 2012 (in the last 60 years, the unemployment rate has been higher than 7.5% only twice).
- And core inflation will be lower than previously thought – only around 1% through 2012.
If those guesses from the Fed are even close to correct, interest rates will remain below 1% for longer than anyone else believes...
The Fed wants the economy to grow. It wants unemployment to get better. And it actually wants inflation to be higher.
Here's what you need to know:
Unemployment is extremely high. And inflation is not a problem. As long as this situation persists, the Fed will keep interest rates near zero for a very long time.
This will create asset bubbles. But Bernanke won't care... They'll just be the collateral damage of his efforts to fix the U.S. economy.
Good investing,
Steve Sjuggerud
Editor's note: Steve has been quietly working behind the scenes on the "Melt Up Millionaire" Project. It's controversial and secretive. But on Wednesday night, he's sharing the details in a free live event. He'll offer an urgent update on how long the Melt Up will last... reveal the details behind the Melt Up Millionaire Project... and explain how you can double the value of your portfolio over the next 12 months. Reserve your spot right here.