May 16, 2022
The phrase ‘never better’ is often used to imply that things are as good as they can be, it simply fails to suggest the trajectory of the changes. Currently things are heading down and it may seem like things will not improve, but they will.
This isn’t to say that readers should become optimistic all of a sudden because many of the ills of the world are now coming to light in the post COVID doldrums. In 2020, many things economic were looking stretched already, but then the markets crumbled and the government response, almost everywhere in the world, was to throw money at the problem.
As reviewed here over and over, that has left a dramatic mark on government finances and demand for everything. In a headline from last week in Canada’s Globe and Mail, Canadians are sitting on $300 billion in cash and there is no precedent on what they will do with that cash. Meanwhile in America, average household wealth is up dramatically since the pandemic began.
It is easy to assess the gains in real estate, stock markets, bond markets, NFTs, Crypto and your bank account as some sort of genius move, but it isn’t. It is a direct result of trillions of dollars being unleashed into the economy without any real goal other than to ensure markets remain liquid and prices don’t crash. The key argument is that a collapse would hurt participants unevenly, with the poor being most likely to be negatively affected. These sorts of events also tend to be systemic risks which can bring down the whole system, leading to instability in government and society. Not an enviable outcome.
But what now? Markets in the US are down 10-25%, Canada’s TSX is down about 10% and illiquid assets like real estate are starting to roll over. In a quick market scan this morning, there were about 480 large companies trading in the USA that are more than 70% off their high for the past year. If you add in smaller companies and ETFs, that number is over 2000. Should you buy now?
The quick answer is no. Perhaps it is worthwhile to nibble on some good quality companies that can withstand the recession that is almost certain to overwhelm the world, but patience is likely to offer more significant returns.
One problem is that I made this same statement in spring of 2020, just as the market was rising ever higher. Certainly I thought rational minds would prevail, but I was wrong. This time, the central banks of the world have signaled, almost unanimously and in sync, that they will stop flooding the markets with money. Indeed they are going to start to pull money out of the markets.
In the USA, that process will begin in 2 weeks. It hasn’t even started and markets are off 10-25%!! It hasn’t started, and they expect to take many months, perhaps years to ‘normalize’ monetary policy. They also now have to battle inflation which can take years to control.
Perhaps there is room for optimism given the number of equities that are trading at a 70% discount, but the effects on humans have just begun. Evidence of this can be seen at the gas pumps, at the grocery store and on your news feed. People are now being harmed in almost every possible way by the largesse of the past 2 years and it isn’t clear when the world will be able to stabilize let alone return to growth.
[Note that the three largest expenses for most families are in Shelter, Food and Transportation. The prices for these have skyrocketed and that means less money to be spent on other items. The outcome will be a slowing of the economy and likely a recession.]