I have not published anything for the last few weeks, because I haven’t had much to say. Today, I have something to say:
I think we are already at peak inflation, or very close to it.
I know, the common media narrative is that inflation is only just getting started, and by this time next year the inflation rate will be 10,000%.
I disagree.
Here’s why:
The common narrative is that unemployment is very low, which drives up wages, which drives up inflation. That’s true, but the employment picture is changing.
Employment in Canada has decreased the last three months.
So, while unemployment remains low, the tide has turned, and it can be expected to increase in future months. That will put downward pressure on wages, and inflation.
But it’s not just unemployment. Take a look at commodities. Copper, for example:
Since hitting a peak on February 28 of this year, copper is down 28%, back to where it was trading at the end of 2021.
I won’t go through every commodity, but the picture is the same: they are down.
Copper, and aluminum, and everything else goes into the products we buy. So, if the raw materials are declining in price, so to will the end but products decline in price.
But here’s the key point: it takes time. The electronic device you buy today may contain copper that was purchased as a raw material many months ago. Or a year ago. So the price of the end product today reflects the price of the raw material at some point in the past.
That’s why prices are high today. It’s the time lag.
One more point: interest rates. The Bank of Canada has increased their benchmark rate by 300 basis points since March 2022. Borrowers are now paying more for their debt. That leaves them with less money to spend on everything else.
Less money = less demand = lower prices, eventually. That’s how it works.
But what about all of that government money printing? Yes, that caused an increase in the money supply, which is why we have inflation today. But the velocity of the M2 money stock is way down:
Government stimulus cheques stopped last year. In Canada, CERB was in 2020. CRB was in 2021. We are now in 2022, and that wild spending has stopped. (For now).
The money supply may increase again, and in 2023 and beyond inflation may again be a serious problem.
But, for now, inflation is likely to head lower.
That’s not good for stocks, so holding cash now is a good idea.
If interest rates are close to peaking, bonds will be a good investment.
That’s how I’m playing it. Stay tuned and let’s see how it goes.
I may or may not be back next week. You never know.
How Low Can We Go?
by JDH on September 24, 2022
The markets are going lower. I can foresee no circumstance where, while in a recession, the Fed raises interest rates, and the markets go up. That’s not how it works.
Yes, we could have a short-term bounce. That is inevitable. We will likely have one this week.
But in the medium to longer term, there is no place to go but down.
How low?
The first line of resistance on the SPX would be the pre-pandemic highs in March 2020 of just under 3,400.
That’s only about 7% lower than where we are now, so that’s almost a lock. Below that? Who knows? The next minor resistance level is around 3,200, and then below that it’s the April 2020 lows around 2,200.
The SPX is down over 24% year to date.
Gold is down 10.5% year to date, so gold has performed relatively well. I suspect gold will continue to hold it’s value better than stocks, but it doesn’t like you’ll be getting rich off gold anytime soon.
And then we have our favourite crypto:
Bitcoin
Year to date Bitcoin is down around 60%. It’s not pretty.
If you want a positive spin on it, Bitcoin is now worth what it was worth in December 2020. It’s not a decade-long collapse (Bitcoin is only 13 years old), but we have lost two years of price appreciation.
How low can Bitcoin go? $12,000 appears to be the next target, around the previous highs of June 2029 and the summer of 2020. Below that, $4,000 is in play.
I have no idea if it will get there, but here’s what I do think:
In the next three to five years we will see Bitcoin at $100,000.
Not tomorrow.
Not this year.
But institutional adoption is happening, and if you look at on-chain analytics a majority of coins have not moved in the last year. There may be no new buying, an obviously there is some selling, but Bitcoin has crashed a few times before, and eventually recovers to new highs.
Interest rates will increase again in October.
Unemployment is rising.
The recession, which is obvious in the real world, will eventually be confirmed by economists.
And then, and only then, can the Fed pivot. (A year too late, but that’s how it goes).
Then, and only then, the buying will resume.
So for now, raise cash, sit and wait.