- More stimulus and no new taxes are music for investor’s ears
There were two major announcements this week that will add fuel to the stock market’s fire:
- On this week’s 60 minutes, Fed Chairman Ben Bernanke, affectionately known as Helicopter Ben because he is famous for saying that he would drop money out of helicopters if the country were threatened by deflation, said the Fed may expand its stimulus program and drop even more money through its QEII bond purchases beyond the $600 billion already scheduled to revive the economy. The one benefit to all of this is that it will keep rates low.
- President Obama reached a deal that would extend the Bush tax cuts to everyone for another two years. Not only are income taxes not going to go up, but capital gains, dividend taxes and the estate tax will stay low.
The Good News:
Continued government stimulus and low tax rates will create more growth and keep the market chugging in the short term.
The Bad News:
That “chugging” sound of stocks going higher is a bubble being formed. Although bubbles create fantastic opportunities they always burst, so it’s critical to know how to Play with Bubbles. The combination of tax cuts and more spending only increases the deficit.
It is apparent that there is a major contrast between the European and US approaches to their respective economic crisis. In Europe, virtually every nation in the EU has adopted austerity measures, both spending cuts and tax increases, in order to deal with the current economic situation. In the US, we have embraced a completely opposite set of policies that include massive amounts of deficit spending, enormous tax cuts, and an incredibly accommodative monetary policy. In Europe nations are preparing themselves for very low economic growth rates for years, in order to get their financial/fiscal house in order. Here in the US, we are doing everything we can to spur economic growth and worrying about the costs later. The bond vigilantes will start pushing rates higher on bonds, which heavily concerns Pimco’s Bill Gross, who believes the bond market rally is likely over.
Investors have a great opportunity at hand, if you know the 6 steps on how to play this market. Our nation can’t just keep borrowing indefinitely. Eventually the walls will certainly come crashing down, so be sure to have your personal exit strategy at the ready.