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Thursday, October 4, 2012
A massive asset bubble is possible from here...
For years, I've been telling DailyWealth readers that stock prices could soar to never-before-imagined heights – well beyond reason or "fair value."
Gold and real estate could do the same.
The reason is simple. It's due to Federal Reserve Chairman Ben Bernanke. And this week in a speech in Indiana, Bernanke laid his cards out on the table...
Here's what Bernanke said: "We expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015... so long as price stability is preserved, we will take care not to raise rates prematurely."
He will keep this interest rate policy in place "for a considerable time after the economy strengthens."
He didn't come out and say it specifically – but what he meant is that we'll have "low interest rates – indefinitely."
With interest rates near zero for years, investors are being forced to get their cash out of the bank and into other assets, like stocks, gold, and real estate. Because of this, asset prices can and should soar for years.
What will cause him to change his line of thinking? He explained his situation...
The goals of the Federal Reserve are "maximum employment and price stability," he said. These Federal Reserve goals are "given to us by the Congress."
Let's look at these two goals of Bernanke's and where we stand with them today...
1) Employment. The unemployment rate is over 8%, so Bernanke will keep interest rates low to help stimulate the economy and improve this number – but that will take time.
2) Price stability. Right now, the inflation rate is forecast to be around 2% for 2013 and 2014. So inflation is not a problem... yet.
In short, based on where both of these are today, Bernanke is comfortable keeping interest rates at zero for a very long period of time – to "at least mid-2015."
Bernanke has laid his cards out. We know his intentions. We expect his actions can and will drive asset prices to crazy levels.
You have to position yourself for this...
Buy some real estate. Get a new mortgage on your home. (I'm getting one.) Own stocks. And own gold.
As I said late last month, this "Bernanke Asset Bubble" may be due for a short pause. But this idea will take time to cook – possibly years.
You can't speed up that Thanksgiving turkey by cranking up the temperature – you've got to sit and wait. So get yourself positioned... and then sit.
The time to sell will be when inflation shows its head or the unemployment situation improves. That could be years.
Bernanke has given us the playbook for what to do in the meantime. He reiterated it this week.
It's up to you to profit from it.
P.S. If you're interested, Bernanke gave his speech in clear, plain language. And he answered a lot of questions in layman's terms. You can read it here.
Steve is convinced stocks are headed much higher in the long term, thanks to the Bernanke Asset Bubble. But with investors pouring into stocks and precious metals over the last month, he's wary of a short-term pullback. Get the full story here: Time For A 90-Day Pause in the Bernanke Asset Bubble.
And as Steve explained earlier this week, with mortgage rates now lower than the historical rate of inflation, banks are essentially offering folks free money. "What are you waiting for?" he writes. Read more here: Mortgage Rates at 2.75%? Yes! I'm Refinancing RIGHT NOW.
THE "RISK ON, RISK OFF" TRADE IS STARTING TO BREAK
One of the biggest trends in the market is showing signs of easing.
Over the past few years, we've noted the extreme "correlation" between stocks and commodities. Since the 2008 financial crisis, different asset classes have moved together in lockstep, making it difficult for investors to diversify their portfolios. In other words, stocks and commodities have been joined at the hip in one big "risk on, risk off" trade.
We've kept tabs on this trend by noting the tight relationship between the S&P 500 and the CRB Index. The CRB Index holds a basket of 19 different commodities, including crude oil, corn, soybeans, sugar, cattle, gold, silver, copper, coffee, cocoa, natural gas, cotton, and aluminum.
As recently as last December, the "risk on, risk off" trade was going strong. But as today's chart shows, stocks have pulled away from commodities over the past 12 months. The correlation is breaking down.
– Larsen Kusick
In The Daily Crux