Law of physics: bubbles eventually burst. Law of economics – bubbles eventually burst. Especially those that are “helped along” by bad government policy.
The bubble I’m referring to – is the stock market; and the bad government policy is the money-printing madness of the last 5 years.
No one disputes that the Fed’s printing presses have been running full steam ahead since the financial collapse of 2008-09. The “distribution” system for that money is the banks. But banks were hoarding – not lending. Why? Because they could invest that cheap Fed money into government bonds and earn a spread. Why take the risk of lending (coming off record defaults in 2008-9) when we can just park it in government bonds and make a similar spread?
Not only is this both convenient and profitable for the banks – it’s convenient for the government too – who needs buyers of the bonds they have to issue to finance their runaway spending habits.
But I digress. Much of that “printed-out-of-nowhere” money has made its way – over time – into equities – the stock market; driving stock prices to all time highs. Ever wonder why markets are in record territory when our economy remains in the dumper? Now you know – and the result is the classic definition of a bubble. And back to simple physics – bubbles burst.
So how does an average investor ride the bubble while it’s still going up – yet prepare for the day it bursts – which WILL HAPPEN – and likely sooner than later?
Equity indexed products may be the answer for some. They go up as the market goes up – but are immunized from losses when markets go down. Also knows as “insured” instruments – they may be just what thsee times call for.