The first half of this year has seen tremendous volatility.
However, it is not that we fell that far really. It was more the nature of those fast reversals in both directions, which destroyed many a trader and investor. CNBC calculated the market had travelled 20,000 points in the course of just one week. It was one of the most treacherous trading periods we have ever seen.
My name is Clifford Bennett, global economist, previously Senior Strategist for investment banks, and even a junior officer in the Royal Australian Navy many years ago. I have seen a lot, but the most exciting thing I could say to you right now, is that this extraordinary volatility has created one of the greatest investment opportunities of the decade!
The biggest risk of all at the moment, is missing out.
You see, most people do not tell the positive story. It is in fact a lot easier to sell fear. Yet, it is the positivity of the US and global economic environment which is staring everyone in the face.
The next big short, one could say, is to short the shorts! In other words, be sure to be long and keenly invested.
The US economy is really doing extraordinarily well. There is full employment, and all the data just keeps hitting its head against the ceiling. Quite remarkable. This is a function of the strong economic growth trend that has been evident for many years now. No wonder the stock market is so high, and it is also why stocks are still cheap. Even at these levels.
We really do need to jettison the idea that we are at the top of the range, which is what record highs are of course, and embrace the idea that we are in fact at the bottom of the future range.
There are sound fundamental reasons for this extremely bullish view.
Many years ago, I foresaw that even quantitative easing would not create any significant increase in inflation. At that time, this was considered a ridiculous view. In fact, it made perfect sense. Especially from the perspective of my approach to economics, which I call “look out the window” economics. Quite simply, the application of ‘commonsense’ to what is going on in the world. Instead of the rather amusing idea of applying economic laws that did not work last century, let alone this century, to what is going to be happening in our fast changing future.
The world, as we all know, has already changed dramatically, and the reason I was invited to numerous global economic events, including sometimes as opening speaker, was because my ideas about how it all works now were new, too. So right here, right now, I am going to give you a crash course in some underlying real world, as opposed to text book, economic principles that I have been speaking about for over a decade. It is truly interesting to note, that much of what I am about to tell you, the Federal Reserve has not yet figured out.
The idea that there would be no inflation alongside quantitative easing and then strong economic growth, is still something many commentators struggle with. Yet, this was my central forecast all along.
To understand this, we need to step back, and take in the whole global picture. Why is it that we currently live in the midst of the most prosperous period in history? What is it that has changed so much?
Well, it’s quite simple really. Around 20 to 25 years ago, two major shifts took place.
- Around the world, authoritarian regimes fell like dominos, from South America to Asia. We can include China in this, for while the government system has remained what some would call authoritarian, they most certainly allowed their citizens economic freedom in an unprecedented fashion.
- The internet, the World Wide Web, came into being.
What we in the west fail to fully appreciate is just how suppressed politically, and in terms of education and opportunity, a large proportion of the world’s population was back then. We do know it to some extent, but we do not fully comprehend the nature of the suppression of the human spirit that was endured. This is important, because then we can see the power of the above two points when they occur at the same time in human history, and release that long pent-up desire for a better life.
Suddenly, people were free to aspire, and they were at the same time empowered to do so. To self-educate and interact for business purposes globally through the internet. This meant that hundreds of millions and really billions of people, could for the first time for many generations, aspire to a better lot for themselves, their family and indeed their community. It took people a while to understand what their new found freedom and opportunity via the internet brought them, but once they did, they became an unstoppable force.
It has not so much been the decisions of President’s or central banks that have led to this extraordinary period in human history, but the heady mix of the freedom and empowerment to aspire simultaneously. This process of realization, the spread of capitalism far more effectively to every corner of the world, has been the main driver of global growth.
There is more to it of course, and the stability of the USA and other nations as well as the economic leadership and democracies of the past century made it all possible. Yet, the resurgence in the US is largely due to the private sector. Large and small US companies having to respond to the challenges, and indeed the market share taking threat of the sudden rise of competitors from all around the world.
This created an internal dynamism within businesses in the USA that heralds back to the golden ages in the nation’s history. Where people didn’t wait for government handouts or protection, but simply stepped into the unknown all of their own in order to achieve and be successful.
These are some of the reasons for the sensational burst of economic activity, the expansion of capitalism in a variety of forms around the world over the past 20 years. This is also the story that has to be understood as being in back of the sustained economic growth we are experiencing, with little inflation to speak of.
From far afield locations, not previously involved in domestic or even international business, we have seen the rise of more and more competition. This results in the historically new and unique situation where from the corner store to the global corporation, you cannot raise prices without losing market share.
Market share is King. Therefore, in order to keep up with this global surge in competition, profits cannot be maintained by raising prices. They must be maintained through innovation, better technology and productivity gains. This is why we are experiencing on-going strong growth with persistently low inflation.
The old world mainstream economists still look back to the previous century where strong growth inevitably lead to inflation.
This, however, is a very different century. Companies cannot raise prices even when things are going well. This is why the central banks around the world, and of particular interest the Federal Reserve have been so slow to understand this ‘new world’ contemporary dynamic. They are basing their thinking in their now rather dusty textbooks, and in what happened before?
Once we understand that low inflation, and therefore low interest rates and even low wage growth, are actually POSITIVE outcomes of the new global and very healthy economic environment, then we have an advantage over virtually every other investor in the market. We really do as this is so fundamental to the outlook for the market and investment generally.
The old world economists still expect faster and more significant rate hikes to dampen economic growth and the stock market. They do not understand that economic growth will be strong, and yes, there will continue to be rate hikes, but that these will indeed remain at a snail’s pace. Well below any level which would even begin to threaten the economy or corporate profitability. Let alone the stock market.
Did you know stocks go up when rates are going up, just as much as they go down? This is historically correct, and it is because interest rates and profits, stock prices, were reacting individually to the exact same stimuli. That of an accelerating economy. This time the situation is even stronger however, as inflation remains low due to the intense existence of true competitive forces for the first time in history. Not to mention the fact that interest rates are still coming off historically low levels in any case. Higher interest rates in the current environment are simply not a reason to sell stocks.
From the start of the decade, my forecast has been for the Dow Jones to achieve 30,000, by the end of the decade. We may even get there in the next 12-18 months. That quickly. Which is why this is such a very special situation right now.
The recent volatility has led to endless negative exaggerations in the media of all kinds of scenarios. One by one however, indeed every time, they are defeated by the more positive reality and sustained strength in back of the US and global economy.
It is important to note this serious disconnect between the media and the economic reality. The media is, as always, selling fear. Meanwhile, stocks had previously been trending correctly higher in line with the true fundamentals, but have now been held back against this underlying positive force for too long. Almost six months. This is why I believe we are just now seeing the beginnings of what will be a very powerful up-trend period indeed. Fresh record highs for the Dow Jones yet again.
In essence, the market is already of its own accord, breaking free of the false fears and economic misunderstanding by most commentators. There is no doubt this is a Grand Bull Market, and that it still has a very long way to run. We are very keen stock buyers indeed.
One stock of interest right now is so obvious, as most people have got out of their investments during the recent correction. This sets the stage for the very same investors to begin to chase it higher again as they realize their error. We think Apple can move 20% higher over the next 12-18 months as a guide. It should prove well worth a look, immediately, at current levels.
Please review the market and economic charts provided further below, and enjoy a surprisingly strong week ahead.
Remember, we have to think bottom of the future range. Because, that is exactly where we are.
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DOW JONES INDEX
The first half of 2018 volatility, is simply one giant consolidation or flag pattern. Which is set to result in a powerful resumption of our Grand Bull Market. The one that has been running since 2009. Our consistent end of decade target for the Dow Jones, remains 30,000.
In this environment, one can only expect Apple to out-perform, as it is certainly is a dominant global company at the forefront of consumer interfacing.
It already looks to be in a significant long term acceleration phase.
US GDP: Strong with plenty of room for further acceleration.
Federal Funds Rate: Completely un-threatening.
US Un-employment: Signals on-going boom economy.