There’s an old saying in the markets: “Buy the rumor, sell the news…”
You see, smart investors often buy an investment idea in anticipation it’ll get a big boost from a future catalyst. This is buying the rumor.
And once the catalyst happens, they’ll sell it for profit. This is selling the news.
I bring this up because I believe many investors are betting on a market rally if Congress passes another round of economic stimulus.
Let me explain…
We entered this week with news that House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin are working on a new stimulus bill to help the economy recover from the coronavirus pandemic.
The two sides are close to a deal on a nearly $2 trillion package… And Pelosi says they’re “serious about finding a compromise” before election day.
Now, I believe they’ll eventually work out an agreement. But I don’t know if another stimulus package is the magic bullet everybody thinks it’s going to be…
It’s widely expected some type of stimulus bill will pass. So, it’s possible the market won’t actually move on the news since the rumor is already baked in. In fact, you should prepare for a market rollover – which will catch many people by surprise.
But there’s one thing we do know for sure: More government spending will erode the value of your savings… So you need to move now to protect yourself.
Inflating Our Way to “Recovery”
The government is pumping new currency into the U.S. economy at an alarming rate… And as more and more currency units are added, they make the rest of the dollars we hold worth less and less.
It’s simple supply and demand… the more you have of something, the less it’s worth.
Imagine if Apple doubled its share count tomorrow without a corresponding rise in revenue and profits. What would happen to the price of the stock?
Its value would get cut in half.
The same is true for currencies. But since currencies are money… the nominal amount (face value) of the currency note doesn’t change. In other words, a dollar bill is still a dollar bill. What changes is how much you can buy with that same dollar.
Just like doubling Apple’s share count overnight would cut its price in half… the buying power of each dollar diminishes as more are printed.
And despite this reality, the government is flooding the U.S. economy with more dollars.
In March, Congress passed the first $2 trillion stimulus package to rescue the U.S. economy from the coronavirus pandemic. And the Federal Reserve is expected to print twice that much or more to revive the financial system.
My team estimates the government and Fed have pumped a combined $6 trillion into the economy. If another stimulus bill passes – and in all likelihood, it will, regardless of who wins the presidential election – that’ll add another $2 trillion.
All this money-printing weakens the U.S. dollar and makes everything else more costly. This is known as inflation.
Anyone born within the last 25 years probably has no idea what inflation is. Those who are still kicking around from the 1970s and ’80s are much more aware of how devastating inflation can be.
So why do they keep doing it? When you owe a lot of money that’s been issued in U.S. dollars, a weaker U.S. dollar is a blessing. It allows you to pay back your debt in watered-down currency. You literally just print more to cover your debts.
Here’s a simple analogy that shows you why the government will love a weak dollar…
Let’s say I borrow $100 from you with a 10-year loan term. Today, I can buy about 25 Big Macs with that $100.
In 10 years, I’ll pay you back your $100. But by then, the value of the $100 will have declined so much you’ll only be able to buy about 22 Big Macs with that same $100.
That’s assuming a normal rate of inflation.
Of course, this is a simplified example. But it illustrates my larger point. The more money the government prints, the less it’s worth, so they get to pay back their loans with weaker dollars.
Playing Inflation Defense
Until the world returns to a reliable currency standard, everyone needs to own assets that can’t be created by government fiat money. As investors, we need to look elsewhere for alternatives… and assets like gold and crypto in particular.
Every government is feeling the economic pinch of COVID lockdowns. They have to borrow money like never before. That’s why just about every central bank that matters is prepared to dilute the value of their paper money like they never have before. And that makes holding paper money dangerous.
That’s part of the reason why investors flock to assets that can’t be printed out of thin air. Specifically, assets like gold and now bitcoin.
Since the Fed turned on its money spigots in March, we’ve seen gold climb as much as 28% and bitcoin leap as much as 51%. Over the same span, the S&P 500 is only up about 16%.
And I believe there’s plenty more upside for both gold and bitcoin. We could see gold eventually reach as high as $15,000 from here, and bitcoin could crack $100,000.
The key point is, out-of-control money-printing will massacre the buying power of fiat currencies. So it’s imperative you hedge your buying power with gold and bitcoin.
Look, Congress and the White House will eventually agree on a new stimulus package to help the country. Those trillions of new currency units will drive up inflation. But you can’t inflate bitcoin and gold. They’ll preserve your wealth.
So, consider a small position in SPDR Gold Shares (GLD) and bitcoin if you haven’t already. If central bankers keep printing money out of thin air, these assets could break out like we’ve never seen before.
Let the Game Come to You!
Editor, Palm Beach Daily
P.S. Negative interest rates are quickly becoming a massive tailwind for hedges like gold and crypto…
But unlike gold, bitcoin’s underlying blockchain technology does much more than protect against inflation… It’s poised to disrupt multiple industries, from finance to national security.
In fact, I consider blockchain to be my No. 1 investment of the decade.