Why Now Is the Perfect Time for Central Bankers to Pull Something Stupid

The media didn't pay very close attention to the World Economic Forum in Davos, Switzerland, last week. Aside from coverage of the copious amounts of snow and the quick left spin on U.S. President Donald Trump's reception by the global elite, no one was really watching the gathering of billionaires and politicians there in the Alps.

They should have. The attendees are the One Percent and the people who worked to make 'em (and keep 'em) that way. These folks can money-whip the world in any direction they want it to go.

I'm not saying it's right; I'm not saying it's fair... but it's the reality. No investor can afford to go unaware of what these folks are doing.

I mean, I'm a skeptic, and not a believer in those weird "Illuminati" or "Trilateral Commission" conspiracy theories, but the Davos crowd comes pretty close.

They can raise and destroy markets, create or eliminate jobs - entire industries, even - and make or break just about every politician in the world.

The headlines from this gathering of gatherings, what few there were, were almost uniformly bright. Trump declared America "open for business," and the sentiment was well-received by the global honchos listening in.

And that's what's got me worried...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

Everyone's Dressed for the Global Growth Party

Everyone at the forum was very upbeat about the world's big economies, and even the emerging economies seem to have turned the corner.

The Trump tax cuts here in the United States are seen as a chief driver of global growth in 2018, and at first blush, everyone is ready for a continued bull run in the global economy and the stock markets.

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But... as the world has become sound-bite- and tweet-dependent over the last decade, I've found that I can gain a huge edge over the competition simply by reading the whole article and not just browsing the headlines.

Here's what I mean...

Ray Dalio runs Bridgewater Associates LP, the largest hedge fund in the world. So Dalio, with a net worth of $17 billion, isn't just one of the One Percent, he manages another $150 billion of his fellow One Percenters' capital.

If you just read the tweets, he looks pretty bullish on the stock market for 2018.

He said in an interview in Davos, "We are in this Goldilocks period right now. Inflation isn't a problem. Growth is good; everything is pretty good with a big jolt of stimulation coming from changes in tax laws. There is a lot of cash on the sidelines. We're going to be inundated with cash. If you're holding cash, you're going to feel pretty stupid." He added "Conditions in the global economy look pretty sunny and this is likely to keep supporting equity prices for a while, particularly if investors take their cash hoards and invest them in the markets this year."

Central bankersGreat, right?

Well, if you keep reading, you'll find Dalio is very concerned about the increasing global growth rates encouraging the central banks of the world to raise rates too fast and bring the party crashing down.

In fact, he said, "Central banks will find it tough to raise rates without sparking a recession in a couple of years' time. A 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981."

Dalio's bullish in the short term, like I am, and thinks that the tax cuts will be a big plus for the economy and the stock market. But he's just as concerned that the melt-up is followed by an equally dramatic and costly meltdown.

I pay a lot of attention to what the private equity investors are doing with their cash and saying about the markets and the economy.

What the Smart Money Is Sweating Right Now

As I've said before, the private equity players are the clued-up, patient money that tends to show up in size when a sector or asset class is in the process of bottoming and exit the stage when things get a little too frothy for comfort.

Much of my approach to investing has always been to use the time-tested methods the rich used to get - and stay - rich. In other words, doing what Warren Buffett actually did to get rich, rather than what he says we should be doing.

That involves identifying the smart money and following it whenever possible.

David Rubenstein, for instance, is one of the smartest guys on the planet.

He's a very successful private equity investor, of course, but he's also plugged into Washington, D.C., and all the political moving and shaking that goes on in Gomorrah-on-the-Potomac and Davos.

While Rubenstein's fellow One Percenters partied in the six-foot-deep snow, toasting the fact that all the major economies of the world were in growth mode for the first time in a very long time, he said he was worried... that nobody else was worried.

He said, "Right now, the biggest concern I have is that most people think there is no problem of a likely recession this year or even maybe early next year. Generally, when people are very happy and confident, something wrong happens."

"I am nervous that the conventional wisdom is that we have no recession problems around the world - that everybody's doing quite well. The conventional wisdom is usually wrong, and it might be in this case.

"I do worry that governments have a little bit too much debt, and maybe they have too many entitlement programs they're ultimately not going to be able to honor. At some point, people are going to wake up and say the U.S. government has $20 trillion dollars of debt and unfunded liabilities that are hard to fathom."

Rubenstein's fellow private equity investor, Jim Coulter of TPG Capital, expressed similar concerns.

He said, "My biggest concern is how little concern there is. I think at this time in the cycle you invest in something different. You invest in companies like Uber, where the company's progress and technological progress, not the economy, will drive returns.

"As an investor, I'm concerned as we move from monetary policy to fiscal policy. I'm not commenting on the near term - I'm commenting on [TGP Capital's] view, which is three years out. If the party goes on longer, the next day may feel worse.

"I explained it to my son the other day: It's like you're at a party at midnight, you maybe should go home as an investor, and someone brings in some tequila. What is clear is that late in the party you don't want to drink as much tequila."

The private equity players weren't the only ones nervously eyeing the doors...

The One Percent's Brokers and Bankers Are Worried, Too

Lloyd Blankfein, of Goldman Sachs Group Inc. (NYSE: GS), said that he was bullish based on what he sees the Trump administration doing on the regulatory and tax fronts.

Blankfein opined, "I think the market would be lower if Trump weren't president. I'd say the 'animal spirits' are out there and a little bit more vital than they would have been otherwise."

He expressed some concerns about asset prices and what would happen when interest rates go up, telling a forum of One Percenters that he "would feel a lot better about where asset prices are, including equities, if interest rates were normalized. Very low rates mean there's a lot of investment and a lot of froth in the market. What's going to happen when interest rates normalize and get closer to where the growth rate is?"

Jes Staley, the CEO of global banking giant Barclays Bank Plc. (NYSE ADR: BCS) expressed similar concerns: "Given asset valuations, given that we've got 4% global economic growth, it seems we're in a pretty good place right now economically. But, we've got a monetary policy that's still in the remnants of the depression era. We've got very little capacity in the capital markets to deal with a real move in interest rates. There's something out there in the capital markets, given that equity markets are at an all-time high, volatility is at an all-time low. That's not a sustainable proposition."

These Folks Didn't Get Rich Ignoring Risks - Neither Will You

The headlines are pretty bullish right now, but if you dig a little deeper, you'll find that the people that literally move the world are more than a little concerned about the second act of this play.

The return to growth is a fantastic development, and the market melt-up since tax reform passed has been beautiful and profitable to watch.

The flip side - the dark side, if you will - to that melt-up is: Growth leads to inflation, which leads to interest rate hikes, which leads to... a big scary question mark in the markets. The global economic recovery, ongoing since 2009, was absolutely built on low rates as the foundation.

When those go away... it could have ugly consequences. It puts central bankers, rather than global growth, back in the driver's seat.

Rather than flooding the markets with cheap-as-free money, this time they'll be presiding over a massive asset barbecue.

The top 1% didn't get this rich by ignoring risks. They certainly do not stay rich by scanning the headlines.

Enjoy the melt-up in stock prices. Protect your profits, and take money off the table when it's prudent, but be aware there is a bear in the bushes, and when he wakes up, things could get a little nasty.

I'll do my best to keep him from mauling your money. That's my job; I've been at it more than 30 years.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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