The $6 Trillion in 'Fuel' for the Next Great Asset Boom
Editor's note: Many investments are cheaper today than a lot of folks realize...
In fact, we're seeing tremendous opportunities in housing and stocks.
And Steve believes the stage is once again set for a "Melt Up"... Investors who put aside their fears could benefit from significantly higher prices in the months ahead.
In today's Masters Series – pulled from a special report that Steve and his team are updating as we speak – he explains the driving forces behind these Melt Up conditions. As you'll see, the money pouring into the U.S. economy today dwarfs anything we saw during the Great Recession...
The $6 Trillion in 'Fuel' for the Next Great Asset Boom
I never expected to be writing this essay at the start of 2020...
The year kicked off with a bang. Stocks were soaring. And I was certain the "Melt Up" was fully underway and heading toward a peak.
Then, the black swan of all black swans crashed the market, the economy, and the lives of just about everyone on Earth.
In a matter of months, we've faced a total shutdown of the U.S. economy... a stock market crash... more than 30 million lost jobs... and an economic recession.
That's what makes the next reality so surprising. Because of what's happened, the stage is perfectly set for a Melt Up in stocks.
I realize that's about as contrarian a position as you could have today. What investors usually expect after a bust is, well, another bust. But as I'll share today, the Melt Up is already here – and it's certain to reach a dramatic peak in the months ahead.
The reason is simple. COVID-19 hit the market like a meteor. Now, though, the upheaval is fading... And in its place is trillions and trillions in economic stimulus.
This is the same setup we saw coming out of the Great Recession... except today, the amount of money pouring into the system – thanks to Congress and the Federal Reserve – dwarfs anything we saw last time around.
I expect this fuel to light an incredible fire under the U.S. economy and stock market.
More than that, the Melt Up is now lighting a fire under the average investor. And as you'll see, the final push of this furious boom is underway.
In short, you need to own U.S. stocks.
But before we go any further, let's cover the basics. It's time to get a handle on what a Melt Up is, and why it's such a powerful idea...
The Most Powerful Idea in Finance: The Melt Up
The Melt Up is an important idea... But few investors truly understand it.
It's based on a simple premise... Stocks often have their biggest, most explosive gains at the ends of major bull markets.
In short, before the big "Melt Down" arrives, we have the big Melt Up. It's the final push higher before the bear market kicks in.
The most recent major example of this happened at the end of the 1990s bull market. The Nasdaq Composite Index soared more than 86% in 1999 alone.
Now that was a Melt Up. And it shows us what's possible in the months ahead.
Importantly, the Melt Up typically begins after a time of extreme fear...
In late 1998, stocks had fallen dramatically in the wake of the Asian Financial Crisis. We hit a fear extreme. Then, stocks surprised everyone and soared higher – the Nasdaq rose 200% in 18 months during the dot-com bubble. Take a look...
I can't guarantee a massive move like that again, of course. But I do believe that the coming years could resemble the late 1990s.
That might be hard to believe, considering we just saw a bear market in stocks. But even with the major decline from COVID-19, there are still plenty of reasons to expect a Melt Up from here.
To put it simply, stocks are acting a lot like they did back in the 1990s. Stocks crashed late in that bull market... And then they soared to new all-time highs.
A new bear market is typically marked by a fall of 20% or more. That means the bull market of the past decade technically ended in March.
But it has since come roaring back... Now, we're near new highs again. And there are plenty of reasons to believe what's happening is another stock market Melt Up.
Let's take a closer look at the Melt Up setup conditions this time around...
Fear Spikes... Then Stocks Soar
In the past two years, we've seen two major pullbacks. And each major pullback led to major extremes in investor fear.
You can see them clearly by looking at this chart of the S&P 500...
The bull market nearly ended in late 2018. From the end of September to the end of December that year, stocks lost nearly 20%.
It was a kick in the gut... Investors had gotten used to consistent gains and easy money over the previous four years.
Then, at the beginning of this year, COVID-19 shut down the U.S. economy and crashed the stock market. The total decline was 34%. It was the quickest bear market in history. And it caused plenty of fear.
How do we define fear? It's more challenging than you think – you're trying to put a number on a human emotion.
We can look at it in a variety of different ways... But the most common way to size up fear in the markets is through the Chicago Board Options Exchange's Volatility Index (the "VIX") – which is often called the market's "fear gauge."
When stock prices move wildly, the VIX goes up. When stock prices are steady, the VIX moves down.
The VIX spiked during both of the recent falls. Generally, a VIX reading of more than 20 shows fear in the market.
During the December 2018 correction, the VIX soared to 36. And the decline when COVID-19 struck in March 2020 led to the highest VIX reading in history. It peaked at 83... even higher than what we saw in the financial crisis.
Take a look these past two spikes in volatility...
This is the setup we're looking for. It's exactly what happened before stocks experienced a Melt Up in the late 1990s.
Investors hit a patch of fear... stock prices fell... but then they recovered. They reached new all-time highs and continued to soar during the final stage of the bull market – the Melt Up.
That's happening this time, too. Many folks are scared. But thanks to the incredible rally we've seen, their fear is beginning to change to greed.
It might sound crazy, but that's the exact setup we'd expect to see in a Melt Up.
Now, let's look at a major reason stocks were able to bounce back so quickly... one that also tells us this Melt Up could soar to stratospheric heights.
It comes down to what the Federal Reserve has been up to. As you'll see, its response to the COVID-19 shutdown is what could send stocks to incredible heights. And it's part of a classic playbook we've seen before...
The Powerful Force Driving This Melt Up
In late 2008, during the worst financial crisis of our lifetimes, Ben Bernanke did the only thing he could...
He fueled the fires of the recovery. He did everything he was allowed to do. Then he went to Congress so he could do even more.
Bernanke was the Federal Reserve chairman during the 2008 financial crisis. And he had one goal in mind...
He wanted to stop another Great Depression from happening... at all costs.
Bernanke was uniquely qualified to do just that. He was a student of the Great Depression, describing himself as a "Depression buff, the same way people are Civil War buffs."
As a result of his studies, Bernanke decided that the big problem during the Great Depression had been the Federal Reserve. Specifically, the Fed didn't fuel the recovery nearly enough.
Bernanke wasn't going to let the financial system fail on his watch. He wasn't going to repeat the mistakes of the Great Depression. Instead, he acted swiftly...
You see, money dries up during a crisis. And if companies can't borrow money, more and more find themselves unable to fund short-term operations. Paying employees – or even keeping the lights on – can become impossible. And that can cause the economy to fall into a serious and prolonged slump.
Bernanke wasn't going to let that happen. So he cut interest rates to zero for the first time in U.S. history. And he didn't stop there.
He also went to Congress and helped orchestrate $700 billion in stimulus. Much of it went into the heavily criticized bank bailouts you probably remember from that time.
After that, Bernanke kicked off years of quantitative easing. That eventually pushed trillions worth of liquidity into the system.
Bernanke lit the coals to save the economy. And it worked... We didn't spiral into the depression that he feared was possible. But his policies had some side effects...
In short, they became the cornerstone for the longest bull market in history. It was a trend I saw coming...
I told my readers about it in an issue of my True Wealth newsletter, published in July 2010. Here's what I wrote back then...
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 rocket fuel and pumping away on the "start" button.
Again, Bernanke's playbook worked. The U.S. economy recovered. And while we didn't see the runaway inflation in consumer goods that many feared at the time, we did see another type of inflation...
A massive inflation of asset prices.
I called this the "Bernanke Asset Bubble." I saw he was doing everything in his power to boost the economy. And the obvious result would be a massive increase in asset values... specifically stocks and housing.
Now, it's all happening again. But the fuel is coming from a new leader.
Jerome Powell is the guy calling the shots at the Federal Reserve today...
Powell took over as Fed chair in 2018. And when COVID-19 stepped onto the world stage in March, he jumped into action.
At first, that meant following Bernanke's playbook. In two quick moves, interest rates went from 1.5% to 0%.
Those are just Fed-controlled short-term rates, though. Longer-term, market-controlled rates followed suit as well. The 10-year Treasury yield fell from nearly 2% at the start of the year to a low of 0.5%... the lowest we've ever seen.
The Fed also dropped the rate it would charge banks to borrow money. And it cut reserve ratios, too, which meant banks could lend more without holding more in reserve. That sent more liquidity into the system.
But these types of actions are nothing new. They're basic Fed tools. Powell's next steps were brand-new... And now, they're pumping trillions in liquidity into the financial system.
These moves are basically massive lending facilities. They allow the Fed to either buy assets or provide liquidity to a market in need of it. Powell's actions included...
- A way for the Fed to buy commercial paper (short-term debt).
- A lending option to keep money market accounts running.
- A plan to buy municipal bonds.
- A literally unlimited amount of quantitative easing. (The original plan was "only" $700 billion!)
- A $300 billion lending program for businesses.
To be clear, these moves make what Bernanke did look like child's play. If Bernanke baby-stepped into his massive stimulus program, Powell jumped in headfirst.
The list above isn't complete, either. It's missing Powell's biggest move – by far.
That huge move was a $2.3 trillion lending program. It was designed to lend to certain banks... make up to $600 billion in loans to small and medium-sized businesses... and even buy corporate bonds from certain business.
In total, Powell's stimulus plan will inject more than $6 trillion in new liquidity into the system.
It took Bernanke seven years to rack up half that amount. And Powell's measures are dramatically beyond the scope of anything Bernanke ever put into motion.
Now, I realize the details of these plans are confusing. It's hard to get a grip on how they actually work, who they help, and what their long-term effects are.
We don't need to understand them inside and out, though. All we need to know is this...
Money is now cheaper than ever. And the Fed is pumping more cash into the financial system than ever.
As we saw during Bernanke's time as Fed chair, that's a recipe for a massive asset boom.
Powell is stoking the same coals that sparked the last massive bull market. But he's got a heck of a lot more of them... And he's also pouring fuel on them that Bernanke never knew existed.
I want to be clear about one thing... I'm not saying this is good. The long-term consequences could be severe. We simply can't know today. We don't know if or how it could go wrong.
What we do know is the likely benefits of this in the near term... It's $6 trillion of fuel for the Melt Up. And it's already working...
Stocks have soared since the Fed moved into action in March. And more importantly, investor psychology is starting to change.
Retail investors are starting to get darn bullish. And that's something that has to happen for the Melt Up to reach a dramatic peak.
There are finally names and faces being attached to this phenomenon, too. Just this year, the Melt Up got its spokesman. I'm going to tell you all about him in tomorrow's Digest.
For now, stay tuned... and make sure you're ready to take advantage of this opportunity.
Good investing,
Dr. Steve Sjuggerud
Editor's note: Something big is brewing in the financial markets... and Steve believes the decisions you make in the next week could impact your wealth for the next 10 years.
That's why on Wednesday, October 21, at 8 p.m. Eastern time, he's sharing everything you need to know to prepare right now. He'll go over exactly what's happening... why it's happening... and what you can do with your money to get ready.
Plus, everyone who attends Steve's FREE event will receive the name, ticker symbol, and all the specifics about an incredible way to profit during the Melt Up. We only ask that you reserve your spot ahead of time. Click here to get started.