Boom or Bust

by JDH on January 28, 2023

I must admit that I am confused.

My “Big Picture” thesis is that the economy is already in a recession.  Interest rates are high, the yield curve is significantly inverted, and those conditions lead to a recession.  We also have a war, massive government debt, and increasing consumer debt, which leads to lower growth, which is the very definition of a recession.

And yet:

The stock market is up over 6% year to date, and January isn’t over yet.  Gold, and Bitcoin, are up even more.  The shorts are getting crushed.

Is the bear market over, or is this merely a bear market rally?  That’s a tricky question.  Here’s the S&P 500 Index:

Since the peak at the start of 2022, the SPX has been in an obvious downward channel.  But this week it broke out of that channel and is now testing the highs from December.

The SPX hit highs of just under 4,100 on

  • December 1, 2022
  • December 13, 2022
  • January 27, 2023

That 4,100 level is either a triple top, and a resistance level, in which case the bear market rally is over, or a decisive breakthrough that level this week will indicate the end of the bear market.

My guess is that we will see continued strength this week, perhaps up to the 4,200 level.  Perhaps the market is strong for the next month or two.  I don’t know.  But I don’t expect to see a new high (4,800) this year, or next year, or anytime soon.

Interestingly, bonds remain strong, so my bets on fixed income are working out well.

Given my state of confusion, I will sit tight, hold my positions, and see what happens.

Time will tell.

See you next week.

The Official Recession Declaration Date

by JDH on January 21, 2023

The recession will be declared on April 1, 2023, because that would be funny.  Sad, but funny.

My working hypothesis is relatively simple:

Inflation

As we learned in introductory economics, prices are determined at the intersection of supply and demand.  Inflation, which the consumer sees as increasing prices, can be caused by supply or demand.  Why do we have inflation now?

Is it demand driven?  No, our current inflation is caused by supply shocks.  The world shut down due to the pandemic, and the war made it worse.  With constrained supply, costs increase.

But we all know that the cure for high prices is high prices.  Prices are high, so we spend less, decreasing prices, ending inflation.  This is why I predict that by the summer, inflation will be much lower, and by the end of the year, we may be experiencing deflation.

The biggest component of CPI is residential rents.  When the real estate market crashes, as it has, rents do not immediately drop.  Tenants sign one-year leases.  It takes many months for reduced rents to flow through to the CPI.  This will be obvious in the second quarter.  Rents will be much lower than they are now, as will the CPI.

The Fed and the Bank of Canada will raise rates one or two more times, probably 25 basis points each, and by the end of March the rate increases will be over.

As the expectation of falling rates takes hold, bonds go up (as they have already started to do).  That’s obvious with the inverted yield curve.

Bonds rally before stocks.  It is always thus.

So, bonds are rallying now, and will through the summer.  The stock market will bottom in the fall, and we can turn bullish for 2024.

Falling interest rates is bullish for gold, so now would be a fine time to begin accumulating gold.

So there you go.  Simple.

For now, buy bonds and gold.  By the summer or fall we will be selling our bonds and moving into equities.

Or not, what do I know?

We shall see.

Bond ETFs: The Play on Falling Interest Rates

January 11, 2023

As I have explained in these virtual pages over the last few weeks, I am of the view that: Inflation has peaked; A recession will be declared in 2023, leading to higher unemployment; As a result of 1 and 2, the Fed will raise interest rates two more times, 25 basis points each, and then […]

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Cash is King, but What is Cash?

January 7, 2023

As I have elucidated previously, 2022 was not a great year, and I am preparing for a 2023 recession.  My reasoning is simple: interest rates are high, inflation remains high, and unemployment has bottomed and will likely head higher.  Add in the inverted yield curve, and declaring a recession is a certainty for 2023. How […]

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2022: Not a Great Year

December 31, 2022

As is my custom, after the last trading day of the year, I review my accounts and “take stock” of how I did for the year.  2022 was not a great year. My entire portfolio was down 9% on the year. I could make the case that that is a very good result, given how […]

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Preparing for the 2023 Recession

December 24, 2022

On this very cold and windy day here in Ontario (and most of North America), our thoughts turn to the holiday season (Merry Christmas and Happy Holidays to all) and to the impending recession in 2023. Obviously, we are already in a recession, but I get it: until unemployment increases, the Powers That Be will […]

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The Week Before Christmas

December 17, 2022

‘Tis the week before Christmas and all of the traders are completing their tax loss selling, for which there are many candidates this year, and then they will disappear until January. My advice: Disappear until January. I don’t expect much to happen between now and the first trading day of 2023, so if you want […]

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Bonds: The Investment of 2023

December 10, 2022

As I elucidated two weeks ago (Is it Time to Buy Bonds?)  and last week Bonds, Bitcoin and the Big Picture, I believe that bonds will be the ideal investment for 2023. Why? Because a recession will be declared, inflation will subside, and the Fed and the Bank of Canada will do what they also […]

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Bonds, Bitcoin, and the Big Picture

December 3, 2022

Bonds Last week I asked a simple question: Is it Time to Buy Bonds?  I offered the opinion that as the fact that we are in a recession becomes obvious, the Fed will reduce the rate of interest rate increases, and then pause, and then begin to reduce interest rates.  As I said last week: […]

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Time to Buy Bonds?

November 26, 2022

As you know, the price of a bond is inversely correlated with interest rates.  As interest rates go up, the price of a bond goes down.  This makes sense. If the face value of a bond is $10,000, and the interest rate paid by the bond is 10% of the face value, the bond pays […]

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