Don't get stuck in the 'Groundhog Day' trap... This always happens after new highs... Stocks go up because of this simple reason... More room to grow than you're willing to admit... The Fed is pushing for a 'Melt Up'... And it's back in play...
We're living the same day on repeat (again)...
Every. Single. Time.
My boss Steve Sjuggerud and I (Vic Lederman) talked extensively about finance before I joined his research team here at Stansberry Research a few years ago.
But boy, oh boy... he never told me that it would soon come to feel like the movie Groundhog Day. You know the Bill Murray flick, right? It's the one where he wakes up and lives the same day over and over.
The film is nearly three decades old. But it's still painfully relevant for me all these years later...
You see, I'm stuck in some strange version of it. But for me, the day starts over every time the market makes new highs.
Every. Single. Time.
The market makes new highs and the hand-wringers come out...
They're all sure the next crash is just around the corner...
"Everything is overvalued."
"We're due for a correction."
"The end is near."
"It's time to be cautious."
That call for caution is particularly insidious... The hand-wringers are basically saying, "Ignore the growing market. You need to hunker down."
The first few times, I thought it was kind of funny. And I'll admit... I do pause at lofty valuations. The people pointing to them aren't being totally unreasonable, after all.
In fact, their arguments can be well-thought-out. And often, the data points can be compelling.
That's what makes this such a challenging battle. These folks are using their critical thinking skills to pick apart the market. And that's something we should all be doing.
There's nothing wrong with thinking critically. But the thing is, your critical analysis can't ignore this simple fact...
There's a lot of precedent for stocks going up...
Really. It's that simple...
Stocks go up. That's what they're supposed to do.
And no, I'm not channeling "Melt Up" poster child Dave Portnoy here. As regular Digest readers will recall, he famously said that "stocks only go up."
This whole concept involves more nuance than that. But once you understand it, it changes how you think about the markets.
Here's how I think about it...
The market, as a whole, is measuring the business growth of humanity. And the U.S. markets are still the gravitational center of that universe.
That might sound grandiose. But really, that is what's going on...
Stocks go up because millions of people are out in the world trying to do the best they can. And the collective outcome of their efforts is growth.
That story is as old as time... It's why we, as a species, have moved from caves to huts to skyscrapers.
Today, we see it play out in U.S. companies and the foreign companies listed on the U.S. exchanges. Everyone is focused on growing humanity into the next generation... even if they don't realize it.
Despite that, folks get so laser-focused on the details... They want to pick apart the process. But in the end, we're really talking about the continued development of humanity...
You can't lose sight of this macroeconomic story. It's the driving force behind the continued growth of markets. That was true last year... and it will be true this year, too.
Now, I'm not saying that the markets are the only way to measure that development. And I'm not saying that they're necessarily the best way, either.
But the markets do a pretty darn good job of answering two simple questions...
Are people still collectively struggling to improve? And is that struggle producing measurable results.
The answer to both questions is nearly always "yes." It takes incredible hurdles to derail that basic attribute of humanity.
So if the market is making new highs as it is again today, and you see that as a negative... what exactly are you betting on? Do you believe that humanity is capped out?
Geez... I sure hope not. I prefer to live in a world where people continue growing and improving.
Now, maybe you see my "humanity is capped out" question as a straw man. And you'd argue with me... "No one believes that. We just think that valuations are too high."
Well...
I'd counter that stocks can get more expensive than you can imagine...
I get it... Many folks are focused on the supposedly overvalued market right now.
And it's true that the price-to-earnings (P/E) ratio of the benchmark S&P 500 is a little more than 30 right now. That's roughly double its historical average. And it has been headed up since the housing bust. Take a look...
That chart might look pretty scary to you. But valuations aren't quite as sky high as they look at first glance...
Remember, we just went through a market-shattering crisis with the COVID-19 pandemic. And I'm sure many of you have heard the adage, "the market is forward-looking"...
In other words, that means valuations have rushed ahead of the recovery in earnings. And the obvious result of that is high P/E multiples.
That's OK to see. In fact, that kind of behavior is normal. After all, the market is forward-looking. And like it or not, the market can get more expensive from here.
At today's level, it looks like we're coming up on a dot-com-bubble-style peak. But really, you have to account for some earnings growth pushing those lofty P/E ratios back down...
This is exactly the type of action we saw after the housing bust. Earnings fell to near zero. And as a result, P/E ratios exploded into the hundreds. That's just the way the fraction works.
But pretty quickly, earnings recovered and pushed P/E ratios back down to more reasonable levels. We're in a similar setup today.
So let's assume that we get back to pre-COVID-19 earnings levels sometime in the next year. Based on this measure, that means the market would have to roughly double before passing the dot-com peak.
Maybe you're not that optimistic. Still, most folks are expecting to see earnings growth going forward. That's just the most reasonable outcome after earnings get clobbered like they've been.
The point is...
Sure, things look expensive right now. But despite the new highs, we're actually still in a recovery. And forward-looking optimism has the market appearing loftier than it actually is.
More importantly, the Federal Reserve doesn't care about your feelings on valuations...
And as regular Digest readers know, the Fed is pushing for a Melt Up...
Now, the folks over at the Fed probably wouldn't use Steve's exact phrasing. But actions speak louder than words...
Back in August, the Fed redefined its inflation target. This is the kind of thing that is boring to its core. But it's crazy important for investors...
You see, the Fed has been targeting 2% inflation for years. But that also means it has been treating 2% as a ceiling.
Not so surprisingly, our economy has struggled to reach that 2% number. And that has acted as a brake pedal on growth.
Now, the Fed has decided to use a historical average to measure inflation. That means it's willing to let inflation overshoot the old target to balance out the historical average.
This may sound dull and wonky to you. But it means the Fed is going to let the economy run hot... hotter than it has in years.
That alone would be a huge tailwind. But there's more...
The Fed is also keeping interest rates pinned at historic lows. And it very likely will continue to keep them there for the next few years.
The reasoning is sound... The Fed wants to keep money as "cheap" as possible as the U.S. finishes the COVID-19 fight.
Cheap money keeps credit flowing. And it prevents investment from stalling out.
It gets even more extreme... The Fed also just announced that it's going to be the market's backstop for the foreseeable future.
Chairman Jerome Powell is looking for "substantial further progress" before the Fed will consider reining in its bond-buying program.
That's right... Regular readers will recall that in the depths of the COVID-19 panic, the Fed began buying corporate debt. And today, with Powell's latest comments, the central bank is very clearly signaling that it won't be backing off any time soon.
These three factors will combine to push the market to higher highs... valuations be damned.
The Fed doesn't care. It's focused on inflation and employment... and it's willing to cook off the economy to solve the problem it's focused on today.
All of this simply means that the Melt Up is back in play in a big way today...
If you thought COVID-19 spelled the end of Steve's Melt Up thesis... you're not alone.
As the markets tumbled, Steve wrote that the Melt Up had been "hit by a meteor." But despite the terrible hardships, as we've seen, humanity has done surprisingly well...
For starters, multiple organizations have developed effective COVID-19 vaccines in less than a year. This is a record-setting accomplishment for humanity.
And most nations around the world, knowing that people would soon be heading back to work, rolled out protections to make sure the entire working class didn't go bankrupt at once.
You might not like how they went about it. But still, those measures softened the blow. And despite the bloodbath airlines, restaurants, and cruise-line operators experienced, many top S&P 500 companies have weathered the storm surprisingly well.
It's no wonder the markets are looking a little optimistic right now.
Maybe that optimism has overshot the situation on the ground today. But once again, the markets are forward-looking... And humanity hasn't been permanently derailed.
It's that simple.
And of course, the next chapter of the story is now upon us...
Nearly every government and nearly every central bank on Earth has loosened its purse strings. The world is awash in money.
The central bank of the world's most powerful economy has publicly signaled that it's going to let things run hot for a while. And it's doing that while the cost of money is as low as it gets.
Beyond that, the U.S. is loosening its political purse strings, too. Congress just passed another $908 billion economic relief package. Of course, you might not like that either...
That's OK. It's OK to be an advocate for fiscal discipline. But remember, the long-term implications of spending are tomorrow's problem...
The market won't price those problems in until they're unavoidable. And today, as we've seen, it's still busy pricing in growth.
So hand-wringers, I hear you... A lot about this market is uncertain.
But that doesn't mean it can't go higher from here. And the sooner you acknowledge that, the sooner you can benefit from the continued growth of humanity.
Don't let your feelings about politics or valuations muddle your thinking...
Expensive stocks can get more expensive. And loose money will heat up the economy.
But you still want to have an exit plan in place...
Regardless of which stocks you own or whose investment recommendations you follow, it's still vital that you have your own personal exit plan for when the eventual "Melt Down" arrives.
That's because according to Steve, the Melt Down will arrive at the exact moment you least expect it.
That's why Steve recently put together his own plan for when (and how) he'll personally exit stocks. And you should know, this same plan can work on any portfolio of stocks – not just Steve's.
So I urge you to take my advice today and get involved with the Melt Up. You don't want to miss out on potential life-changing gains in the coming months.
But I also urge you to take it a step further...
Right now is the perfect time to think about important changes you can make going into the new year. And this is a New Year's resolution that isn't difficult to keep. It's easy... Steve explains exactly what to do right here.
New 52-week highs (as of 1/4/21): ABB (ABB), Altius Minerals (ALS.TO), Alexco Resource (AXU), Siren Nasdaq NexGen Economy Fund (BLCN), Curaleaf (CURLF), ProShares Ultra MSCI Emerging Markets Fund (EET), Fortescue Metals (FMG.AX), Fortuna Silver Mines (FSM), Futu Holdings (FUTU), KraneShares Bosera MSCI China A Fund (KBA), KraneShares MSCI All China Health Care Index Fund (KURE), MAG Silver (MAG), New Pacific Metals (NUPMF), OptimizeRx (OPRX), Osisko Gold Royalties (OR), Flutter Entertainment (PDYPY), Seabridge Gold (SA), Southern Copper (SCCO), SilverCrest Metals (SILV), Scotts Miracle-Gro (SMG), Trulieve Cannabis (TCNNF), and Vestas Wind Systems (VWDRY).
In today's mailbag, Crypto Capital editor Eric Wade answers a reader's question about bitcoin's supply "cap" of 21 million... and kudos for feedback that we shared in yesterday's mailbag. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Thanks for your recent essay 'The Battle for the Soul of Money' regarding a possible role for bitcoin as a 'reserve currency.'
"Although I have a long position in bitcoin and related blockchain/crypto assets, and thus am enjoying the price appreciation, the thing that worries me most about the future value of bitcoin is the assertion that its supply is 'absolutely limited to 21 million.' I understand that this is what is 'in the code' and the 'code says' 21 million is the absolute maximum, it is hard to believe that there is absolutely no way that number cannot be increased if that is what the 'powers that be' would like to see done.
"Would this not be the ideal way to 'destroy the value of bitcoin' if it becomes too big a threat to the existing monetary power structure? As creative, and possibly unprincipled, as this power structure is, do you not think they can come up with a way to affect a 'change of the code,' or otherwise change things around, to permit a massive increase above the '21 million cap' on the number of bitcoin? This would be far less messy than trying to 'ban' bitcoin, and probably would be almost as effective. Would appreciate your views on this. Thanks." – Paid-up subscriber Brad F.
Eric Wade comment: This is one of the most important questions about bitcoin (and money) and needs to be asked over and over by everyone.
My answer might surprise you... because it has already happened. And the results of that are billions of dollars of new, "unlimited" bitcoin floating around today. They aren't worth anywhere close to bitcoin.
They are "forks" of bitcoin... or changes to the bitcoin protocol.
You see, any change to the bitcoin software can only result in two possible outcomes... Either the majority of bitcoin miners and "nodes" – a computer in bitcoin's peer-to-peer network – accept the change, or they don't.
If the majority accepts the change, bitcoin changes. An example is the changes that took place on July 21, 2017, which the bitcoin community called "Bitcoin Improvement Proposal (BIP) 91." On that date, the majority of bitcoin miners implemented BIP 91, so bitcoin changed. By August 8, 2017, 100% of miners had accepted BIP 91.
On the other hand, bitcoin can fork into two different chains if miners try to make a change that doesn't achieve a majority. This creates a "fork" of bitcoin... and it has happened numerous times.
So, it's not a stretch to think that the code could be changed to create 210 million or even 21 trillion bitcoin. A good programmer could do it in a weekend.
But where we disagree is when you say doing this "probably would be almost as effective" as banning bitcoin entirely... because, in fact, the opposite has proven to be true.
Since a group of miners, developers, investors, and users who were against the BIP 91 consensus "forked away" Bitcoin Cash from the main chain in 2017, the miners mining bitcoin have increased their hashing, or processing power, by a factor of 10.
Yes, bitcoin is literally 10 times stronger than it was when it forked.
Said another way, to implement a change that creates new bitcoin – while technologically easy – would require convincing all of the miners, all of the nodes, and all of the users to abandon the superior bitcoin and start to use your inferior version.
Making that change is not in their financial best interest or their philosophical interest... so most likely, the fork would fail.
"Hat tip to Don G. [in yesterday's mailbag] with his comment about revolution.
"Pretty much all revolutions – violent and peaceful – have been fomented by the middle class of the era. From the Peasants' Revolt of England in 1381, the French Revolution, the American 13 Colonies, the Budapest uprising in 1956, the Czech Velvet revolution in 1968, the Arab Spring and many others. The property/asset owning middle class perceive more danger from autocracy, tyranny and government incompetence to their assets and way of life than the elites who are mobile financially and personally.
"'Off with their heads' is also very dangerous, leading to impoverishment for all." – Paid-up subscriber Colin S.
Good investing,
Vic Lederman
Jacksonville, Florida
January 5, 2021