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.

Is Inflation Done?

by JDH on September 17, 2022

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.

 

Deflation and Recession

August 6, 2022

Yup, I said it.  Deflation.  I know, all of the stories in the media are about inflation, but look at the evidence: commodity prices are down significantly from their peaks in February.  Consumer expectations are crashing. Ask yourself this: are consumers more concerned about inflation, or about interest rates? The answer, for anyone with variable […]

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Bear Market Rally

July 23, 2022

The S&P 500 closed on Friday 6.5% higher than it was on July 14.  Is the correction over, or is this simply a bear market rally? My guess: a bear market rally. I will admit that the advance from the depths of the pandemic lows in March 2020 to the high on January 3, 2022, […]

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Bitcoin: The Story is Nearing the Next Chapter

July 16, 2022

Here’s the Bitcoin chart, as of Saturday morning, July 16, 2022: As you can see, from the top in March, Bitcoin has travelled in one direction: down. But, since the middle of June, a base may be forming. Or not.  We won’t know for a while.  So now, we watch the “fight” between the red […]

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Bitcoin: The Carnage Continues

July 2, 2022

The return on investment for Bitcoin, the last three months: April down 16.93% May down 15.75% June down 38.47% June was the worst month ever for Bitcoin. Not a pretty sight. Is this the bottom? We don’t know. Bitcoin traded at just under $17,600 on June 18.  As the chart above shows, it appears to […]

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Is the Bottom In?

June 25, 2022

Perhaps the bottom is in.  But probably not. S&P 500 Does this chart look like the markets have reached a bottom? No, it does not.  Enough said. Bitcoin The 5 year chart of Bitcoin is very informative. As we discussed last week, for the first time ever, in the current cycle Bitcoin dropped below the […]

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Bitcoin: Crash Confirmed (First Time Ever)

June 18, 2022

For the first time in Bitcoin’s history, the bottom of the cycle has crashed through the prior cycle all-time high. The last cycle peaked at just under $20,000 in December, 2017.  Bitcoin then collapsed to around $3,000 at the end of 2019, and then started an amazing bull run, taking it to almost $70,000 in […]

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Bitcoin: How Low Can It Go?

June 11, 2022

As I write this at 5:35 am on Saturday, June 11, Bitcoin is trading at around $29,000 USD.  This is not good for the Bitcoin bulls. As the chart indicates, $29,432 is a significant support/resistance level, as that level represents the approximate double bottom Bitcoin hit last summer.  It is now “this summer”, and Bitcoin […]

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Bitcoin: The Wasted Year

June 4, 2022

As I write this on Saturday morning, June 4, 2022, Bitcoin is trading at around $30,000 USD, which is where it was a year ago. Just under $30,000 appears to be a significant support/resistance level, so the strategy, for now, is relatively simple: Buy Bitcoin at under $30,000, and sell starting at $33,000, and just […]

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