by JDH on June 3, 2023

Let’s discuss a commodity we never discuss on this little blog: oil.

Oil is down 13% since April 12, 2023, and down 43% since the peak in March of last year.

Does the WTI chart look inflationary to you?

After the spike, the price of oil is unchanged since the beginning of 2022.  That doesn’t look inflationary to me.

Here’s the thing: while the media focuses on labour costs, it’s oil that drives inflation.

Higher labour costs do not cause inflation.  It’s the other way around: as inflation increases, labour costs go up (because workers demand higher wages).

If you want a correlation, look at oil and inflation.

Oil is used in everything, so the price of oil is 85% correlated to the CPI.  As oil moves, so does inflation.

If you drill down to the components of the CPI you see similar correlations with goods, shelter, food, air fares, delivery services, and so on.

As I mentioned last week, there is always a time lag between when something changes and the full effects are felt in the broader economy, but the direction is clear: lower oil prices lead to lower inflation.  That’s how it works.

But wait, there’s more! Higher interest rates caused the banking crisis in the USA, and as a result commercial bank credit is shrinking.  If you are a regional bank on the verge of going out of business, you aren’t increasing your lending to small and medium-sized businesses.

That’s deflationary.

The forces are aligned: inflation is dropping, rapidly.

The personal savings rate is dropping.  Consumer debt is increasing.

The recession is nigh.

I expect the Big Stocks (like Apple) to have one final blow off top, and then the recession and contraction will be here.

Govern yourself accordingly.

See you next week.


Time Lag

by JDH on May 27, 2023

I will keep this short, and only say two words:

Time Lag.

I believe we are in a recession.

Unemployment will increase.

Interest rates will fall.

The markets will fall.

But inevitable and imminent are two different words.

It may not happen tomorrow, but it will happen.

I’m increasing my cash allocation, and I’m waiting.

That is all.

The Summer Lull

May 20, 2023

And so it begins. Nothing. Sell in May and go away. We are in that weird time where we are obviously in a recession, but the Bank of Canada, and the Fed, continue to chirp about raising interest rates.  The betting odds for a 25 basis point increase in June is now a lot more […]

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The Bitcoin Collapse

May 13, 2023

Okay, that headline is a clickbait title.  Bitcoin has not collapsed.  However, as I write this early Saturday morning, May 13, 2023, Bitcoin is down 17% over the last 28 days, so if that’s not a collapse, it is certainly entering bear market territory.  But that’s what Bitcoin does every few weeks (or months). As […]

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The Fed will Pivot (But Not Soon)

May 6, 2023

The U.S. unemployment rate dropped to 3.4% in April, down from 3.5% in March.  I did not expect to see a dip. The Fed wants to cool inflation.  A declining unemployment rate tends to lead to increased wages, which can lead to higher prices, which appears to be inflation.  (Inflation is an increase in the […]

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Short Term Yields

April 29, 2023

Today I present two charts for your consideration. First, the United States 1 Month Government Bond Yield (a one-month chart): Next, the United States 3 Month Government Bond Yield (a one-month chart): See the difference? In the last week, the 3-month yield has dropped from 5.29% to 5.09%, which may not sound like much, but […]

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Heading Towards the Inevitable Recession

April 22, 2023

While the NBER has not yet declared a recession, it is apparent to the “Person on the Street” that that’s where we are headed. Inflation is easing, as expected, which is good, but why?  Two reasons: reduced government stimulus and reduced consumer demand.  “Reduced demand” is a code word for “imminent recession.” Unemployment still looks […]

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Bitcoin and Bonds

April 15, 2023

My thesis for 2023 is simple: the economy is heading into a recession (or is already in a recession), and therefore, “risk on” assets (stocks and Bitcoin) will go down, and “risk off” assets (bonds) will go up. So far this year, my thesis has not played out as expected. Am I wrong, or early? […]

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When Will Interest Rates Break?

April 8, 2023

“Break” is perhaps the wrong word.  A more appropriate question will be, “when will the recession become obvious, leading to a decline in interest rates?” Here’s the Canadian 5-Year Bond yield, over the last five years: It collapsed to close to zero at the height of the pandemic, and then peaked around 3.8% in October […]

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Interest Rates Up

April 1, 2023

The 5-Year Canada Government Bond yield started the week at 2.77% and ended at 3.02% (after touching as high as 3.14%). Who cares? Everyone who has a mortgage cares because it is the 5-year yield that directly determines mortgage interest rates.  (That’s not surprising since historically, the most common mortgage term is 5 years). Perhaps […]

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