A Visual Guide To The New Cycles For Stocks, Bonds, Homes & Gold

Stocks, bonds and homes account for the great majority of the net worth of most people - and all of these asset values are up by 30% to 50% over the last 20 or so years, when compared to long term averages (even after accounting for inflation).

As explored in this analysis, there is a shared reason for these much higher valuations. There is also a reasonable chance that they could eventually go much higher still, and perhaps persist for many years to come - though the path to that possible future would be a surprise to most people.

On the other hand, if we at any point merely return to the average valuations of most of our lifetimes - then what could be the loss of most or all of their home equity and much of the value of their retirement accounts could have long-lasting consequences for many millions of households.

The graph above shows asset prices from 1975 to 2018, as a percent of the long term averages for each class before the year 2001. Whether we are looking at stocks, bonds, homes or gold - the trend lines are all up sharply since 2001, even in inflation-adjusted terms.

This perception is confirmed when we knock out the "zig-zags" by averaging the prices from 2001 to 2018 for each asset category, and then compare the results to the averages from 2000 and before, as shown in the graph below.

Each dollar of earnings for stocks in the S&P 500 is being valued by the markets as being worth almost 50% more, compared to the prior long term average.

Single family homes are worth about 32% more, even after adjusting for inflation and changes in home sizes. Equivalent ten year Treasury bonds are being valued as being worth an average of about 34% more.

And while gold is quite different from the other categories - it shares the dramatic increase in value since 2000, with the inflation-adjusted price per ounce being up by almost 50% compared to prior long term averages.

While the specifics vary widely on a year by year basis for each asset class, the dramatic average price increases for stocks, bonds, housing and gold are no coincidence. Instead, there is a common causality in play, and all can be traced to the same source - the unprecedented and heavy-handed policies that the Federal Reserve adopted in response to the asset bubble collapses of 2001 and 2008.

As we will individually explore for each major asset class in this analysis, we now have more volatile investment markets - and, on average, substantially higher valuations. Understanding what happened and why is particularly important when it comes to the future, and seeing how asset prices in each category could travel to still higher places - or what could quickly bring them back down to historic averages.

Read the #1 analysis.

The Lucrative Profitability Of A Move To Negative Interest Rates

"Following the money" can be a good way of unraveling complexity. Sometimes what the technical jargon is covering up can be as simple as Insider A handing money over to Insider B in massive quantities - and when we understand that, our whole perspective can change.

In this analysis, we will explore how a potential future of negative interest rates in combination with quantitative easing could become one of the largest redistributions of wealth in U.S. history, with hundreds of billions of dollars in profits going disproportionately to insiders - at the expense of the general public. As illustrated with a step by step example, when we follow the money - $279 billion out of every $1 trillion in newly created money could end up going straight into the hands of organizations and individuals who make up a relatively small percentage of the nation.

If there is another recession, then the Federal Reserve intends to engage in what could become the largest round of monetary creation in U.S. history. Those dollars will be quite real, and the reason for their creation is to spend them. A big chunk of that spending will become profits going straight into the pockets of investors. This won't actually be a closed game - anyone can try for a share of those new Federal Reserve dollars, but first they have to understand that the game exists, and then they need to learn how it is played.

Read the #2 analysis.

Five Graphs That Explain How The Fed Creates Extreme Investment Price Movements

As explored in this analysis, the fundamentals governing investment valuations have changed in the last 20 years. Using real estate as an example, we have seen increases in price that dwarf historical averages - even in inflation-adjusted terms. Yet, the losses can be much greater as well, as can be seen in the graph below.

The five graphs use the tools of financial analysis to explore in detail an aspect of investment valuation that is counter-intuitive for most people but yet is likely to be essential for investors in the modern era: how what might seem to be bad news can in a logical and rational process create new levels of investor profits that may substantially exceed historical averages. These new relationships have changed not only real estate investment, but have also changed investment performance for stocks, bonds and precious metals.

When we understand why the recent past has been so different from long term averages, then we can also understand why some of the largest profits and losses in history may still be ahead of us - but what will govern those profits and losses are factors that few homeowners and investors are taking into account today.

Read The #3 Analysis

The Wealth Function, Fed Cycles & Permanent Losses

In a previous analysis we explored the relationship between a new generation of heavy-handed Federal Reserve interventions - and the highest asset prices in history. There is a problem, however, with asset prices that are based on extraordinary interventions - what happens to the asset prices if the interventions cease and we return to average?

As explored herein, the simple stress test of assuming a return to the normal investment valuations of most our lifetimes could inflict investment losses that are not only crippling - but are effectively "permanent" as well. There would be no reason to expect a cyclical recovery of those losses, even when the economy itself fully recovered.

Read the #4 analysis.


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