Are Your Stocks Doing Well? You Can Thank a Central Banker for That

All the U.S. stock market major indices — the Dow 30, the S&P 500 and the Nasdaq — continue to soar higher. But do you know what’s causing stocks to break record high after record high?

You can thank a central banker for that.

That’s right. The world’s central bankers and their bands of merry money men have bet an unlimited supply of credit in an attempt to hold off deflationary forces. And to reinvigorate GDP anemic growth to lower — but acceptable — norms in today’s highly levered world.

And I’m not using the term BET loosely … I mean it in its literal GAMBLING context.

That’s right. Our financial markets are now based on a Las Vegas-, Macau- or Monte Carlo-like casino system.

Last week, I told you how the Federal Reserve’s Janet Yellen, the European Central Bank’s Mario Draghi and the Bank of Japan’s Haruhiko Kuroda have used the modern fractional reserve bank system to create an unstoppable wave of liquidity that’s swirling around the globe.

Their ideas and actions are far from original. In fact, those are pretty time-tested. And today, I am going to explain how they have gone even further and looked to an unlikely source — the Martingale betting system — for inspiration and guidance to supercharge the experimental monetary policies.

More importantly, I am going to tell you where you need to look so you can stay out of harm’s way. And how to ride the easy-money wave that comes along with the central banks’ Martingale-inspired monetary scheme.

Here’s what I am talking about …

This classic betting system is based on martingale probability theory first introduced by French mathematician Paul Pierre Lévy.

The basic techniques of this system were invented about 300 years ago. The scheme was extremely popular among gamblers, especially roulette players, in 18th-century France.

At its core, Martingale wagering is known as a doubling-up or progressive system of placing bets.

The simplest of these strategies was designed for a game with perfectly even 50-50 odds. Like a coin flip coming up heads to decide the winner, or tails to establish the loser.

The Martingale strategy has gamblers double their bets after every loss. So, the first win recovers all previous losses and produces a profit equal to the original stake.

That’s why roulette players still use the system. Roulette is a repetitive, even-money betting game — where the probability of hitting either red or black is about 50%.

A gambler with infinite wealth will — almost surely, with enough tries — flip heads in the case of a coin toss or hit on a red winner in Roulette.

So, the martingale betting strategy is seen as a sure thing by those who use it. This means that  they have no problem scaling up.

According to this theory, why not triple your bet if you’ve lost three times in a row … and, if you lose that, quadruple your next bet? And so on.

That’s because if a gambler has an infinite amount of money, it is mathematically impossible to lose.

Of course, in the real world, no gamblers possess infinite wealth. And the exponential growth of the bets eventually bankrupts them.

After all, a string of four, five or perhaps 25 straight losses cannot be sustained over the long run. That’s because the bet size eventually reaches astronomical levels.

But recall from my Nov, 24 Money and Markets article, Uncle Pennybags, of the board game Monopoly, says, “Some players think the bank is bankrupt if it runs out of money. The bank never goes bankrupt.”

And therein lies the key point for investors in the current environment.

In today’s world, it’s virtually impossible for the central banks to go bankrupt.

Uncle Pennybags had it right all along!

It’s especially true for the Fed and our fractional-reserve banking system.

That’s because the U.S. dollar emerged as the global reserve currency after the world abandoned the gold standard in 1944 at the infamous Bretton Woods Conference.

And that’s why Ms. Yellen, with Mr. Draghi’s and Mr. Kuroda’s support, has an unlimited bankroll of U.S. dollars — the world’s reserve currency.

Indeed, they can bet on the 26th, 27th,  or — to quote “Super” Mario Draghi — “whatever it takes” roll of the world’s monetary-base dice.

After all, as you can see from the chart below, the cumulative balance sheets of the Fed, ECB and BOJ have increased by more than $15 trillion since the Great Recession.

Click image for larger view

So why not try $16 trillion more … and, if that doesn’t work, let’s double down again at $32 trillion?

The central banks print for free and have bottomless wallets and purses.

As I’ve said before, it’s the New Abnormal for as far as the eye can see. That’s because the developed-world economies in the U.S., Europe and Japan are vast and deep. And they can be leveraged to the hilt in the game that’s currently being played.

That’s why GROWTH is the winner as long as the world’s central bankers continue to pursue their Martingale-like wagering ways.

Because most of us don’t have access to unlimited investing dollars, this year I’ve recommended that my subscribers — if can make just one bet — make their bet on growth stocks.

One of those opportunities is a single bet on an ETF, the ProShares Ultra QQQ ETF (QLD). QLD has shot the lights out in terms of performance this year. Since my Safe Money Report subscribers added QLD to their portfolios this summer, they’ve seen it surge nearly 19%. And there’s plenty more upside where that came from.

At the same time, I’ve also maintained positions in stock market hedges like the iShares 20+ Year Treasury Bond ETF (TLT) just in case Ms. Yellen, Mr. Draghi or Mr. Kuroda turn the martingale wheel one too many times and go bust.

Best wishes,

Bill Hall

Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.