Smart investors aren’t fooled by the booming stock market and the economy. To them, it’s all funny money.
They know both the booms in the stock market and the economy are not being propelled by any strong underlying economic fundamentals but instead are being fueled by stimulus money, the hype surrounding a post-COVID recovery, low-interest rates, and loose margin policies by free trading platform Robinhood.
The markets are a house of cards, and Biden maybe it’s ultimate undoing.
In just a short time in office, Biden has proposed a 70’s-era tax and spending policy that will not only throw a wrench in the markets but drive the national debt to unsustainable levels.
Any objective eye can not view his proposed sweeping tax increases on many individuals, entrepreneurs, and the same corporations that make up the market’s valuation as being good for the stock market.
Biden’s budget, which was released last Friday, pulled back the curtain on his embrace of big government. His $1.52 trillion budget request, up to $118 billion from current levels, is 25 percent higher than discretionary spending was at the end of the Obama administration. This proposal and all its government spending are on top of the $1.9 trillion COVID-19 relief bill, a proposed $2.3 trillion infrastructure package, and a subsequent $2 trillion measure focused on issues like child care and college tuition.
What is there to fear about all this free money and liberal Fed policies keeping interest rates low?
Inflation!
Biden’s plan is being perceived as the straw that breaks the economy’s back. Massive spending — coupled with the Fed’s loose policies of printing money and maintaining low-interest rates — could spark a wave of inflation and a spike in interest rates. Once the cost of borrowing increases, consumers and companies will pull back spending – sending the markets into bear territory.
What will be the biggest problem with the next bear market?
The Fed has already fired all the arrows in its quiver.
Lowering interest rates to spur the economy in the next recession will not be an option. Interest rates are already near zero from combating past recessions. Thus, the Fed has nowhere to go in the next recession, which could shape up to be one of the worst in history.
How alarming is Biden’s tax and spend approach? Even members of his party are worried.
Rep. Jim Himes (D-Conn.):
“History shows us that when money is effectively free, crazy things happen. And we are starting to see lots of crazy things in the equity market, the high-yield bond market, SPACs, and tokens. Often this kind of thing does not end well at all.”
How do smart investors hedge against inflation? They take advantage of it by investing in tangible assets that correlate with inflation – especially assets or commodities that thrive in a recession.
A simple example:
If the price of alcohol – known to increase in demand during downturns – goes up because of inflation, then invest in alcohol.
What assets do savvy investors gravitate towards to inflation-proof their portfolios? Assets that will remain in demand even in a downturn. People will always need housing, medical care, and food.
The ideal inflation-hedge is an asset with cash flow that increases along with a general rise in prices. Rents from a recession-proof housing sector and recession-proof goods by a business are two examples of the type of cash flow that rises with inflation.
Tangible assets offer the additional advantage of increasing in value along with inflation. For example, real estate’s underlying land and a business’s underlying assets increase with inflation – giving the asset two layers of inflation and recession protection.
There are cracks in the stock markets and the economy’s veneer. Biden’s tax and spend policy may break these cracks wide open – unleashing a flood of the economic pain of the type we’ve never seen.
So smart investors are preparing now to Biden-proof their portfolios. They’re getting out of the stock market and getting into assets they can touch and feel – assets that will always be in demand in good times and bad.
It’s a strategy savvy investors have used for decades – no matter who’s in office.