Your Playbook for the Next Five Years

Monday, 22 February 2021
Wollongong, Australia
By Greg Canavan

[5 min read]

I recently moved into a new home in Wollongong.

In between selling our house in Melbourne, and buying again, I had a decent chunk of change looking for a return.

I could’ve punted it on Bitcoin [BTC], and bought two houses, but I didn’t know that at the time, did I?

Instead, I stuck with sensible and looked for the best interest rate I could find.

It was depressing. The best rate was only payable on amounts up to $250k. On anything above that you’re looking at around 0.5%. And then, when trying to get large sums moved between banks to get ready for settlement, the ‘Big Four bank’ charged me $28 to transfer the money. They called it a ‘telegraphic transfer’. It’s so 1980s.

The other side of that equation is the stock market. It’s seemingly going up, day after day. Meanwhile, economies around the world are in various stages of lockdown or life support.

It doesn’t make sense, does it?

This is the dilemma you and I are forced to grapple with these days.

Sit in cash, feel ‘safe’, and go nowhere (or backwards as the purchasing power of our dollars decline).

Or get in the market and deal with the constant worry and anxiety that all this must ‘collapse’ at some point.

If you identify with this feeling, read on…

Because today, I’m going to give you a bit of a framework for how to think about investing over the next few years. If you follow along, and see the logic, it could save you a lot of worry, not to mention capital, over the next few years.

Let’s (briefly) go back to 2008. That’s when something in the global financial system broke. It brought about the need for central bank and government involvement and it has never let up.

It should be clear to anyone paying attention that the system can no longer function without central bank support.

COVID was sort of like a GFC Mark II. It brought about a global monetary and fiscal response that dwarfed 2008.

That kicked off a round of market speculation that defies logic. I guess that’s what extreme speculation does: it defies logic. But this has created very confusing conditions for sensible investors.

By that I mean when people talk about ‘the market’ going crazy, they are in fact talking about a relatively small number of stocks. But they are such a dominant part of the market, in terms of their size and the narrative that supports their prices, in the minds of many people they have in fact become ‘the market’.

Let me give you a few examples. When the lockdowns hit, it changed people’s behaviours very quickly. Tech was a major beneficiary. Soon, huge amounts of capital began flowing into the sector.

Valuations didn’t matter. The story was good, and earnings would benefit from everyone being locked down.

As a result, the FANG+ Index, which includes the five core ‘FANG’ stocks — Facebook, Apple, Amazon, Netflix and Alphabet’s Google — plus another five actively-traded technology growth stocks — Alibaba, Baidu, NVIDIA, Tesla and Twitter, has gone nuts since the pandemic lows.

It’s up around 200% in less than a year.

Source: Optuma

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Related to this, another investment narrative quickly sprang up…

The world is ‘going green’, and electric vehicles (and the metals required for battery development) will drive the trend.

The Global X Autonomous & Electric Vehicles ETF [NASDAQ:DRIV] is a good proxy for this trend. It’s also up around 200% from the lows of last March.

Source: Optuma

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It’s an index that includes the logic defying Tesla. There is little doubt in my mind this is a spectacular bubble. I mean, just recently Tesla boss Elon Musk spent US$1.5 billion of its cash on bitcoin, rather than invest in the actual business!

And bitcoin itself has been the beneficiary of billions of dollars of inflows over the past six months, as governments and central banks are clearly playing the devaluation game. Bitcoin is trickier to evaluate. It could easily go higher from here. But it’s also clear to me it’s a speculative play on a broken monetary system.

The stocks included in the above indices are all very large. So it goes without saying that many smaller stocks exposed to the same speculative themes have also gone nuts.

The common theme is that they are united by a positive narrative about the future. Valuations don’t matter. And they might not matter for a long time to come.

But for investors wanting exposure to the market, without the risks inherent in these ‘narrative plays’, what do you do?

The answer is simple. At least it is to me. You simply have to buy traditional ‘old economy’ stocks (not stonks) that have earnings and cash flows. They are out of favour with ‘the market’ right now. But as sure as night follows day, these characteristics will come back into vogue.

I guess what I’m saying is that yes, ‘the market’ seems crazy right now. But it’s only certain parts of it that are truly crazy.

At some point, the heat will come out of some of these sectors and you’ll see money rotate back into boring old stocks that generate boring old earnings.

Will ‘the market’ as a whole fall when the mood inevitably turns?

Sure it will.

Will you get nervous and anxious as ‘the market’ falls, say 20%?

Sure you will.

But don’t make the mistake of panicking into cash at that point.


Because governments and central bankers will not tolerate it.

Ever since 2008, they have told us this exactly. Not through words, but through actions.

In 2008, the global banking system broke. It failed to create enough credit to keep the economy expanding. That’s why central banks and governments stepped in. Post-COVID, it seems like fiscal policy is taking over monetary policy as the main stimulus tool.

In the years ahead, get ready for Modern Monetary Theory (MMT) and Central Bank Digital Currencies (CBDCs). That will take fiscal policy to a whole new level.

Government-created credit will keep the boom going. For how long? No one knows. But it’s worth listening to my old mate Ludwig von Mises, the father of Austrian economics, on how it will all end:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.’

Commercial banks abandoned further credit expansion in 2008 and brought about a crisis. But instead of letting the crisis play out, governments and their central bankers got involved. They insured the crisis will come later, as a final and total catastrophe of the currency system involved.

Here’s where it gets interesting. Note how Mises doesn’t say a ‘stock market catastrophe’.

Rather, he refers to a currency catastrophe.  

Where do you want to be in such a situation?

Not in cash, that’s for sure.

You want to be in real assets. Stocks, commodities, land, gold, etc.

When a currency dies, EVERYTHING goes up, especially stocks. Just look at the performance of the Argentine economy over the past 10 years or so. Basket case economy, basket case currency, soaring stock market:

Source: Optuma

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Volatility picked up in 2018 as the peso endured another crisis.

But over the time frame shown (from the start of 2013), Argentine stocks increased more than 1,800%!

That’s what currency destruction does. And as far as I can tell, that’s where the West is heading.

So strap yourself in for an interesting few years. There will be very enjoyable ups, and some gut-wrenching downs.

But that is the new money game we are in.

Hopefully, that gives you a decent framework to operate in as the world moves further into uncharted waters…

Continue below for Murray Dawes’ ‘Week Ahead’ update. Today, Murray shows you why he thinks we are getting close to the point where stocks will take fright at the spike in yields and gold could also fall sharply.


[WATCH] US Bonds and Gold

By Murray Dawes


The US yield curve is continuing to steepen since Biden won the US election. US 10-year bond yields are at 1.39%, rising nearly 50bps since the election.

The market has taken it in its stride so far because rising yields are inferring that growth is picking up and company profits should be well supported going forward.

But there will come a point when rising yields can’t be ignored by equities and I reckon that point is getting closer by the day.

Financials should cheer a steepening yield curve because that’s how they make money. Borrowing short term and lending long term.

But tech stocks that have been flying due to the incredibly low long-term interest rates may see stiff selling pressure, which could cause a market correction.

Gold has benefited from low yields as well because the opportunity cost of holding gold has been negligible. But that may be about to change if rates continue spiking.

The gold price is resting on the edge of an important technical level (US$1,764) below, which prices could plummet towards $1,610. I reckon it could be great buying around there but that is a story for another day.

I give you a detailed analysis of US bond yields and the gold price using my technical analysis system in the video above.


Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader