Where is the Stock Market Heading, Up or Down?

In the past few weeks, the stock markets around the world took some serious beating wiping out most, if not all, of the gains for the year and beyond. The question now is: Where is the stock market heading next? We believe that the stock market is heading up if there is going to be a third round of quantitative easing (ie, printing more money), which we highly anticipate in the near future.

Predicting the stock market is a dangerous business. However, it appears that a good indicator of what the stock market will do is quantitative easing. Two previous rounds of quantitative easing have both led to stock market rallies in the US as banks put cheap money to work in the stock markets. We anticipate a similar result if there is a third round of quantitative easing. The stock market will likely continue to decline until then. Printing money has been the only short-term solution that the US central bank seems to favor since the 2008 financial crisis. The stock market’s recovery since the crisis has been largely due to the quantitative easing and not to improving economic conditions and has mainly favored Wall Street banks and hedge funds. We believe that Wall Street will use the current market decline as a ploy to scare less sophisticated investors out of the market so that they can move in at lower prices for a rally into next year and beyond. The exact turning point for the general stock market is difficult to pinpoint. An announcement of a new round of quantitative easing may occur at any time. The previous one came during the Federal Reserve Bank conference in Jackson Hole, Wyoming and may occur again this year at this year’s meeting at the end of August.

The reason we believe that a third round of quantitative easing is inevitable is because printing more money is the only alternative the Central Bankers of the world have to forestall a collapse of the world monetary system. Europe is particularly vulnerable at the moment and may need injections of credit to support its imploding banking sector. Since the stock market is an obvious beneficiary of quantitative easing, we believe that the stock market will go up until the newly printed money from the third round of quantitative easing runs out. We hasten to point, however, that whatever gains one gets from the stock market in its next leg up will not translate into true profit, only enough gains to keep up with inflation.

Our sentiment is also shared by many economic and financial observers such as Dr Marc Faber. Dr Faber, also known as Dr Doom for his pessimistic outlook mostly on the US, European and Western economies, also believes that the stock market will go up mainly because of the money printing environment that exists today.

Faber notes that the world’s economic situation today is worse than it was in 2008; that the US economy is practically nonexistent; that Europe’s economy is stalled and that China’s economy is moving too slowly. He also notes that the world’s financial conditions today are also worse than they were prior to the 2008 financial crisis. Fiscal deficits in many countries have exploded and many political systems around the world are either dysfunctional - such as the case in both the United States and Europe - or in complete turmoil surrounded by great uncertainties.

Faber shares our views that the US Federal Reserve policy is stoking speculation over savings and debasing the U.S. dollar, that hyperinflation is a real possibility, that the stock market’s recovery since 2009 has favored the rich and powerful, that holding cash in US dollar is dangerous, and that gold and land in the countryside are the only true safe havens for investors at this time. He too raises great concerns, as we have in numerous columns before, about the money printing environment that we’re in today and wonders how to protect our wealth in this environment of money printing.

He offers a five point advice to preserve wealth that we find useful and would like to share with our readers.

1. Avoid Treasuries. “It’s a suicidal investment to own 10-year or 30-year US Treasuries” and the “US government bonds are junk bonds,” Faber said. He added that “The dollar may rally somewhat, but clearly in the long run the dollar and other paper currencies — the euro is not much better — will have a depreciating tendency vis-a-vis honest money: gold and silver.”

2. Cash is trash. Despite occasional rallies, the US dollar is in trouble and holding US dollar is dangerous and is a sure way of losing purchasing power, money value and wealth. “I don’t believe a single word of what the Bureau of Labor Statistics is printing about inflation figures. Paper money has lost its value and hyperinflation is the pattern to come.” Faber said.

3. Stocks offer some safety. “I am not completely bearish about stocks,” Faber said. “If I have cash, government bonds and stocks, for the long term, I’d take stocks.” Faber believes that March 2009 was a major low, and that we will not go back below that low since the Federal Reserve could step in with a third round of stimulus for investors to cheer, Faber said.

4. Emerging markets will expand. Emerging markets offer investors better returns than US and other developed markets, Faber believes.

5. Gold is worth its weight. Not surprisingly, Faber believes that gold will continue its upward surge and any pullback is a buying opportunity.

* With contribution from Bruce H. Pugesek, President of Voyageur Research

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