Dow 20,000 Doesn’t Even Reflect The Fundamental Change Yet

Dow 20,000 get’s a lot of people excited.  But as we discussed on Friday, there are rational reasons to expect stocks will continue to climb to much higher levels.

Yesterday we looked back on China’s currency manipulation which has escalated to a big geopolitical risk with the incoming Trump administration.  Remember, at the beginning of the year I talked about the six big global market themes for 2016.  China’s currency was one.

Given that we’re reaching the 20k level in the Dow, let’s revisit the first theme I talked about back in January.  Theme #1: The central banks are in control — Be Long Stocks

We know that the global financial and economic crisis was driven by a credit bubble and, therefore, overindebtedness. We know more than 60 countries around the world were simultaneously in recession.

If you grasp this reality (Theme #1), and are firmly rooted in the context within which the global economy is operating, respecting the role that central banks played in rescuing the world from an apocalyptic collapse, then there hasn’t been much more to talk about or to debate for quite some time, when it comes to the outlook for markets, risks, scenarios, etc. Central Banks have proven to be able to influence confidence and asset prices. Both of which are critical tools in creating recovery and continuing recovery.”

Now, remember, it wasn’t very long ago (as recent as last month!) that the outlook for the world was gloomy, and the bond markets were pricing in deflation forever. But up to that point, central banks had continued to supply liquidity to the world and fought off crises that threatened to derail the recovery.  The central banks gave us a green light to buy stocks, especially when you consider that the Fed, the ECB and the BOJ (the three most powerful central banks in the world) wanted and needed stocks higher.

Of course, we now have a hand off.  We’ve had a diver chained under water, and monetary authorities keeping the diver alive, scrambling to replenish the oxygen in the tank.  And now we have broad sweeping fiscal and structural policy change coming, which cuts the diver’s chain and oxygen is just above the surface.  It’s a recovery that can be driven by fundamental change, which has the chance to become a sustainable recovery.  That means you can no longer evaluate the market and economic outlook with the same lens you used just a little more than a month ago.

When you get fundamental change in a stock, you can see huge revaluations.  That’s precisely why activist investors have some of the best investment records in history, and have achieved some of the biggest returns overtime (like billionaire Carl Icahn, who has compounded money at nearly 30% for 50 years). They take a controlling stake in a stock. They fire bad CEOs, shake up irresponsible boards, cut costs, sell off underperforming assets — they step into deeply distressed companies and create change through their influence. And that change is the recipe for unlocking value in a stock. The  outlook completely changes, so does the valuation.

The Trump administration is approaching policy like a distressed activist investor — targeting a suppressed economy and deeply depressed industries and unlocking value through change, to drive economic growth.  When the fundamentals change, when the rules change, the outlook becomes completely different.  Just the idea that these changes are coming makes the world a very different place than what we’ve seen for the past ten years (at the inception of the global economic crisis).

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