Waiting for Trillions' Worth of 'Melt Up' Fuel to Burn
The proposed solution to our ills? More stimulus... Waiting for trillions' worth of 'Melt Up' fuel to burn... Where money is moving... At the end of the day... What 'Bretton Woods 2.0' could look like...
We've outlined our colleague Steve Sjuggerud's 'Melt Up' thesis here many times before...
But for those unfamiliar with this idea... Vic Lederman, an analyst on Steve's True Wealth research team, most recently described it best. As he wrote in the October 15 Digest...
Steve may not have been the first to identify [the Melt Up]. But from the beginning, he sure as heck made it his mission to communicate his insights to mom-and-pop investors.
The idea behind it was simple...
- The world had just been through a major economic crisis.
- The Federal Reserve and the U.S. government were taking massive action to end the crisis.
- That meant interest rates would stay at rock-bottom levels for longer than anyone could possibly imagine.
- And the net result would be an asset boom... one that could be larger than any of us would ever see again in our lifetimes.
Those four components are the core of Steve's Melt Up thesis. And the philosophy behind them is simply that policymakers will push markets to ridiculous extremes just to keep things rolling in the "right" direction.
And as we wrote less than a week later in the October 21 Digest...
If you run down the list of Steve's four main points that define a Melt Up, it doesn't take a market wizard to realize the same thing is playing out today – only with different circumstances.
This time, instead of a mortgage crisis and housing bubble, followed by a market crash and a Federal Reserve-fueled record bull market... it has been a pandemic and ensuing lockdowns, a simultaneous market crash, and an even bigger Fed-fueled end to the shortest bear market in history.
Every word of the above idea is true today...
COVID-19 may have postponed Steve's Melt Up thesis earlier this year... But if anything, it now appears to have hit the proverbial gas pedal on the whole idea...
Just look at the narrative out there in Washington (and Wilmington, Delaware) today, as reported COVID-19 cases rise... We've seen record stimulus in the trillions of dollars already. And the proposed solution to our ills again? More stimulus.
Steve talked last month in his "State of the Melt Up" event about why policies like these serve as fuel for his thesis...
And importantly, he shared how individual investors could best position themselves to take advantage of a raging bull market that he sees unfolding – AND protect their portfolios from the inevitable Melt Down that will follow. (And it will.)
But the point we want to make today is...
Plenty of Melt Up fuel still hasn't been burned yet...
First off, some of it might not even have been created yet by our dear government...
But primarily, a lot of money remains sitting on the sidelines of the stock market as we write... that is slowly making its way back "in the game."
Stansberry NewsWire editor C. Scott Garliss previously spent two decades working on Wall Street. And he says the smartest investors look where money from institutional investors, businesses, and individuals is going... where it's leaving... and where it's sitting.
This behavior can tell you a lot of different things...
And today, Scott says it's telling him that more and more investors are looking past the heated presidential election and instead focusing on positive economic data... solid numbers in the housing sector (new home sales hit levels we haven't seen since 2006)... and even more recent news like positive COVID-19 vaccine trial results.
And they're putting more and more money into stocks... but they're only just starting.
Scott writes an excellent morning market commentary each day (and it's available for free through our NewsWire)... And he wrote on Monday about "what the big money flows are doing," because "they're going to tell us about bets being made on the future direction of the economy."
Here's what the 'big money flows' look like...
From here on out, this is Scott's analysis...
First, I (C. Scott Garliss) want to look at domestic "M1" money supply. That's a measure of households' most liquid assets or funds most readily accessible for spending. It includes traveler's checks, demand deposits, and other checkable deposits.
Those data continue to make new records. Take a look at the chart below from the Federal Reserve Bank of St. Louis...
As you can see, household cash grew by around $2 trillion over the past 10 months.
That's the opposite of what one would expect during a recession, let alone a pandemic. Forget about the two combined like what we have in 2020. But that also speaks to the spending power of the U.S. consumer... And don't forget, that makes up 70% of the economy.
Now, let's take a look at a measure of money flowing in or out of bond mutual funds... This is an indicator of the current appetite for risk. The trade association Investment Company Institute ("ICI") compiles this measure weekly.
When investors are nervous, they tend to rotate out of stocks and into "safe haven" assets.
And as you can see from the chart below, this indicator recently turned negative – meaning money is leaving bonds. (You'll also notice that during the peak of the crisis back in March, this indicator also went sharply negative for a brief period. Investors were liquidating pretty much every investment at the time, which isn't a normal occurrence. Stocks were falling then, too, as opposed to rising today.) Take a look...
This means investors are rotating back into more volatile "risk assets" like stocks.
Let's look at another 'safety gauge'...
This is ICI's Money Market Mutual Fund Assets measure...
When investors are uncertain, they tend to run to cash. As you'll see in the following chart, the flow of funds into money-market accounts (the equivalent of cash) exploded higher back in March...
In the spring, due to the uncertainty of the COVID-19 pandemic, many folks sold much of their investment portfolios to seek the shelter of an investment that wouldn't "blow up" on them.
The problem with staying in cash is that you'll eventually start missing out on returns. At some point, that money begins to seek higher yields. As you can see in the chart above, those investors are starting to exit the cash positions they built up.
It's even more interesting to see what happens to the S&P 500 Index when the rotation out of cash begins...
As you can see in the next chart, the stock market has marched higher since this behavior started happening (with a few pullbacks, another hallmark of a Melt Up)...
And here's the thing...
Roughly $1.1 trillion went into these safety assets between March and May. Since then, only about $400 billion has come back out. That means a lot of money is still out there ready to chase higher-yielding assets.
At the end of the day...
I learned throughout my career that you want to avoid the emotional drama of the moment.
Because of the COVID-19 pandemic, many of us are working from home... We're in front of the computer and TV more. It's hard not to get caught up in what we see on our screens.
But we must remember, TV channels and websites are places we tend to visit because they cater to our beliefs. They're going to have stories that incline you to click or watch. Those stories will tend to evoke some sort of emotional response.
We need to divorce ourselves from that so-called "reality" as best we can – with what's actually happening, which less people are talking about.
By looking at what the "big money trends" are telling us right now, we can see that assets are flowing out of safety plays. And with record low interest rates in place, that means they're heading back into the so-called risk assets like stocks.
Don't get me wrong... This may not end well, though no bull market does.
But this information tells me to expect stocks to continue to rally. Said another way, there are trillion of dollars' worth of fuel remaining that can be thrown on the Melt Up before it peaks.
And there might be more – via more stimulus – that hasn't even been created yet...
As Steve wrote in a recent special report to his True Wealth Systems subscribers, the stage is set perfectly 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 in this report, 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 economic stimulus – trillions and trillions of dollars' worth.
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.
For better and worse, be sure to get as prepared as you can... Stocks have room to run higher, but you want to protect yourself with a properly allocated portfolio that includes "chaos hedges" like gold for when the bubble pops.
Along these lines, if you're a believer in Steve's Melt Up thesis, his most recent event is a must-watch. If you missed it last month, we have good news... You can watch the replay for free today right here.
What 'Bretton Woods 2.0' Could Look Like
Last month – in a big item that fell through the cracks of the news cycle – the International Monetary Fund's managing director talked about a possible "Bretton Woods Moment" nearing right now... via the rise in popularity and use of bitcoin and cryptocurrencies.
What exactly would this mean for money and the global financial system? A lot – potentially. Bank to the Future founder Simon Dixon talks about it all, including a possible "reset" and bitcoin's place in the future, in an interview with our editor-at-large Daniela Cambone.
As Dixon says, the stakes are high and central banks will be exposed once the pandemic nears its end, setting the stage for a monetary "renegotiation" that will be 100% political...
All central bank balance sheets are completely out of control. Globally, we're at $250 trillion in global debt. I think the next stage after this election, after this health crisis, is bank's balance sheets being exposed for what they actually are.
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In today's mailbag, a response to feedback from yesterday. Do you have a comment or question? As always, send it to feedback@stansberryresearch.com.
"Bret R., as a sixty-something now, and in full retirement, I sadly couldn't agree more with your observations regarding the present state and future direction of our country... and thanks to Dan Ferris for his valuable advice over the years." – Stansberry Alliance member Jeff S.
All the best,
Corey McLaughlin and C. Scott Garliss
Baltimore, Maryland
November 18, 2020