Have You Taken the Red Pill?

“This is your last chance. After this, there is no turning back. You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland, and I show you how deep the rabbit hole goes.”

If you’re a movie lover like me, you will recognize this quote from the 1999 science fiction film The Matrix. It tells the story of Neo, a computer programmer who discovers the world we live in is actually a simulated world called “the matrix.”

After explaining a little bit of the Matrix to Neo, Morpheus gives him a choice between a blue pill and a red pill.

The blue pill would allow him to remain in the fabricated reality of the Matrix. The red pill would allow him to escape from the “dream world” of the Matrix and into the “real world.”

Well, today’s markets feel like “the matrix.” And a lot of people are choosing the blue pill. Let me explain…

The Central Banker’s Fabricated Reality

The markets are broken. Central bankers, like our own Fed chief Bernanke, have intervened so much in the markets that they’ve created a “matrix.”

They’ve created a fabricated reality. It’s a new world where money printing won’t allow the price of stocks, houses, bonds and many other assets to go down. Many investors believe in this illusion. They have chosen the blue pill.

But those illusions never end well.

Remember the tech bubble? In the late 1990s many believed the internet had created a new world where stocks would only go up. And in 2005 many believed we were in a new world where house prices would never fall.

Most investors got burned in those occasions because they ignored this simple fact: The Fed may be able to keep prices at an artificial level for some time, but not for very long.

They failed to embrace that reality. They chose to live in the “dream world” created by central bankers. They chose the blue pill, not the red one.

We’re now living another illusion: Markets can only go up because of money printing.

Famous Investors Agree With Me

I’m not the only one who believes central bankers have created an artificial market where asset prices don’t really reflect the reality.

In a recent interview with the Wall Street Journal, PIMCO’s Mohamed El-Erian warned that central banks are playing a dangerous game. Here’s what he said:

“They are propping up asset prices to artificial levels, in virtually every market. If these levels aren’t validated by the fundamentals, then investors will get hurt.”

Recently, legendary investor Jim Rogers also voiced his concerns. When asked what he thought about the stock market trading at an all-time high, he said this:

“It is very artificial. If you give me a trillion dollars, I’ll show you a good time too and a lot of people are having a good time. I know it’s going to end badly. I’m certainly not investing in the U.S., because the U.S. is making all-time highs based on money printing.”

So what should you do?

Make Sure you Take the Red Pill

With monetary policies driving markets more than fundamentals, it’s critical that you manage your investments in a very active way.

If you follow the “buy and hold” approach, you’re making the assumption that all is well and the market prices reflect reality. You’re choosing the blue pill. In other words, you’re essentially choosing to believe in the illusion, not the reality.

Make no mistake. At some point, this illusion will come crashing down. That’s why it’s important to avoid having a static portfolio that fails to adapt to changing conditions.

I’ve discovered an investment strategy that’s much more flexible than the “buy and hold” approach. It allows you to ride the cyclical bull markets, while avoiding the big declines that occur in secular bear markets.

With the crashes of 2000 and 2008, the S&P 500 index is up only 5% in the last 13 years. But in the back-testing I’ve done, this unique strategy, which has a built-in “safety switch”, would have returned 340% in that same period. You can find out more about this strategy by clicking here.

Make sure you understand today’s market is artificial. Take the red pill, embrace the painful truth that all this money printing will end badly and adjust your investment strategy accordingly.

Regards,

Evaldo Albuquerque
Editor, Retirement Strategist