In the Acting Man blog that I posted yesterday, they find that the money supply (by a measure they consider relevant) increased 10 times over in the last 30 years. Notice - few things increased 10 times over.
The low rates during the past couple of decades led to massive borrowing - which, under a fractional reserve system, equates to money creation by the banks.
The US national debt - about 21 trillion dollars - represents funds that have been borrowed by the government AND distributed into the system - salaries, pensions, and a multitude of other things. Most of those funds have been spent on a variety of goods and services - AND traveled into the accounts of the providers of those goods and services. Ergo, there are massive volumes of liquidity out there, looking to be invested.
Similar events and processes took place all over the world.
Why talk about it? I'm trying to make a case that there are new and massive factors playing in the markets and in the economies.
Consider the bond markets - they are several times the size of the equity markets. It would appear that the secular bear market in yields may be over, and the rates have started on a long term uptrend. What will happen if enough bond holders will decide to rebalance, and decrease their bond holdings? Considering that rising rates would probably somewhat inhibit Real Estate prices, the biggest and most obvious venue would be the stock market.
One more thing - markets and money flows are global. If Europe - or some of the major Asian nations - will have problems, the US markets may have to absorb further massive capital inflows.
Bottom line -- we may be poised for a potential (unexpected) period of major inflation in equity prices.
Now, let us quickly visit the "negative" side. The fact is - we don't know what will happen - and, no less importantly - how the markets will react to whatever may happen. We have an unusual number of massive moving parts - and the future is as unpredictable as ever.
What can be done?
I think being leveraged - or, even fully invested - is a young person's game. People who are retired, or close to it do not have the time to sit out major hits - or to start from the beginning if needed. Personally, my rule is not to be invested at any point more that 80%
The best way to participate in any potential upside - while significantly decreasing risk - is to use trend following "filters" - which would take you out of the market when the downside risk is high - and give you a signal when to get back in, when the odds favor the upside. That "filter" needs to be tested over long periods of time, during a variety of market conditions.
Here is an article written by a man who is thought to be the top authority on moving averages. This is the last part of a blog series - a summary of the other 7. The 7th blog in the series is more focused on SP500. Credible guy... enjoy the read. I think this is as good a start as ANY out there.
alphaarchitect.com
Advantages of this are a) it works, and b) its simplicity. Notice the remark that trading daily offers no advantage compared to trading once a month. I had difficulties with this idea, but read studies, and had to accept it. It does make life easier.
There are many other rules that work. Quickly, I'll mention one more idea, offered as an example by a trend follower by the name Andreas Clenow. He buys shares of strong stocks, BUT: Rule 1 - no new purchases when the SP500 is trading below its 200dma. Rule 2 - when the SP500 is under its 200dma, SELL any holding that closes under its own 100dma.
Good luck! |
