Markets cycle. It need not necessarily be so, but it is so in a world driven by central bank manipulation of money. As per the Austrian school of economics, central banks drive interest rates below their free market rate resulting in an inflationary boom brought about by credit expansion rather than genuine savings. The boom ends when the cluster of errors caused by this funny money is revealed. The bust is merely the period of adjustment where unprofitable investments are liquidated and the stock of capital passes on to the more capable producers.
We have had an epic boom all over the world where wave upon wave of freshly minted money has flooded the economy, with each wave doing its best to prevent the bust which is so necessary to liquidate unprofitable investments and restore capital to its most productive uses. Each time the bust was hampered, the bubbles have gotten bigger. Now, the entire world monetary system is one massive bubble in fiat money. The central bankers of the world control the markets (or so it seems). This is a new paradigm, The Golden Age of Central Bank Omnipotence. When central banks say they will run their printing presses red hot, the markets like it, and lower interest rates. When they announce multiple rounds of money printing, the market likes it even more. Banks cheer because they need to just pay out a pittance to the holders of bank deposits, while they can use those funds (and create more) to buy financial assets which only go up in value. Markets can never fall; the central banks will always print more money to make sure of that. Heck, they would just print money to buy stocks, following Japan’s lead (although they don’t mention it, they must have learned this trick from John Law).
And they can print with no consequences. Well, destroying savings, causing scarce capital to be diverted to unproductive investments, and impoverishing pensioners and people living on fixed income doesn’t count. There’s no inflation (in places they look for it), the big institutions which make their living trading financial assets are happy, and stock markets are at all-time highs, proof that their strategy is working.
If it doesn’t work the first time, it’s only because they haven’t printed enough. If the situation gets worse enough, they can always charter some helicopters, load it up with banknotes, and let the money fly. They know how to tame the markets. They are smarter than the rest of us, supported with reams of data and rooms full of PhDs.
This is the lie which most investors have swallowed.
When everyone believes something which isn’t true, it’s a great opportunity for a contrarian. It’s the reason why fortunes were made during the subprime crisis of 2007-08. It will soon be the reason why fortunes will be made by those who bet against the central banks winning over markets. We’re entering an era which will be extremely rewarding for non-mainstream investment portfolios, while savagely rending the traditional “safe” investments. This will be a binary world where you’re either a bold contrarian or a victim to forces far beyond your control. Legendary investors such as Jim Rogers, Kyle Bass and Doug Casey, to name but a few, are already aware of this and have positioned themselves accordingly.
Maybe you should too.