Critical Mid-year Market Forecast

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Bill’s Blog | June 23, 2022

Before we look forward to the remainder of 2022, let’s evaluate the year’s first six months. So I encourage you to go back and read my December 17, 2021 Blog entitled: GOODBYE 2021, AND WHAT TO EXPECT IN 2022? 

Many of the things I warned about have come to pass: 

  • Wars and the threat of further escalation.
  • Very high inflation has persisted. 
  • Supply chain issues and the energy crisis have continued. 
  • My crypto warnings have come to pass. 
  • Being complacent has not been a good strategy. 
  • In addition, the failure of central banks to solve issues and the political incompetency globally have persisted. 
  • In summary, what worked in the past is no longer working, so we must learn to adjust accordingly.

As I have warned multiple times this year in my Blogs, there is still a lot of risk in the markets. Shockers have been the rapid rise of interest rates, the crash of many stocks, bonds and crypto and the vanishing 30 trillion in global market values in the first six months—the continued tragedy of the Russian invasion and destruction of Ukraine. Also, the Canadian real estate market has started to wobble, and we have only begun as interest rates rise. The growing energy and food crisis continues to be a real threat to stability globally.

Some may think I do not want to hear any more bad news. I get it, as we all have faced over 2.5 years of constant negative news, and we all want things to return to normal. But unfortunately, I do not see that happening for many reasons. So also, I will provide some positive news and sound strategies and options. 

In quality and honest financial analysis, one needs to constantly research what is happening in markets (macro, risks and trends) and geopolitical issues and provide solutions in changing times. Therefore, I continue to do twenty-plus hours a week listening to many experts worldwide on multiple topics to grasp the big picture. As I have said to clients, “anyone can tell you there are serious problems, but can they provide alternative solutions in a rapidly changing world?” So my commitment to you is honest analysis and action steps to protect your wealth. We have been in unprecedented times since the last 2008 great recession with the grandest monetary experiment in history (QE) and the constant market manipulations, so please keep your financial seat belts on.

So, let’s dive into the second half of this year’s forecast and help you navigate these very challenging times. 

BIG TRENDS:

  • High inflation will continue to be a long-term trend mainly due to government agendas, extreme debt (consumer, business and governments) and central bank policies. Inflation is a global trend, and we are seeing serious problems brewing in the EU and Emerging Markets (watch the bond markets as they are spiking). Expect continued high energy prices due to failed government and environmental ideology without a well-thought-out plan to protect Canadians. Environmental experts have admitted, “The Canadian government cannot reach 2030 goals.” Yet, federal and provincial governments take 10s of billions of dollars in tax revenues with little results or accountability and have caused record gas prices at the pump. Gas prices have doubled in the last year, and we expect gas prices to continue to increase in the coming years! Why? We have a severe supply shortage due to a lack of refineries, pipelines, and oil/gas/LNG investment due to over-regulation and punitive policies that make no sense. I am all for going green, but the investments needed (oil/natural gas, nuclear, essential commodities) will be in the 10s of trillions and a couple of decades to get us there if adequately planned and funded.
  • The inflation rate will eventually slow, reverse (disinflation), but remain stubbornly high for years to come.
  • As interest rates rise rapidly, housing will continue to slide in sales and pricing. In the next few years, when people try to refinance their homes, there will be a severe problem, especially with the 2% hurdle rate added to the cost of borrowing. A recent Canadian survey said that 25% of mortgage holders could not afford the higher payments and would have to sell: Please read the article for insights if you have a mortgage or considering getting one. 
  • The recession is almost 100% certain in the coming year, and some financial experts are already stating it is here. Why? The rising cost of debt, labour, and material/fuel costs are way up, slowing consumer demand, and all of this equals corporate earnings down. Watch corporate earnings in the coming months. Expect employment problems next year and layoffs in many sectors. Already, many big tech and retail chains are laying off or have put in hiring freezes.
  • Many economists/financial analysts predict stagflation, and I agree. Stagflation is a slowing economy, persistently high inflation, and growing unemployment. We have two of the three already, and as we are witnessing, things can change fast. Most people have never experienced stagflation unless they are a boomer, and it is a challenging period to go through and can last for many years, as in the 1970s.
  • Central bank policies will drag down the real estate markets, continue to deflate the stock markets and slow the economy with their QT. 
  • Borrowing will become more challenging at a consumer level and for businesses. 
  • As interest rates continue to rise, this will increase the risk of more sovereign debt crises. 
  • The Fed and other central banks will reverse course once the economic and market pain becomes too severe. Their quantitative tightening (QT) policy (raise interest rates and stop juicing the markets) is to create supply and asset destruction, eventually decreasing inflation. We will most likely see the Fed pivot next year and reverse course, creating a new set of problems. Michael Every of Rabobank’s recent quote, “There are just two solutions to this inflation shock- one is very painful, and the other is worse!”
  • Stock market performance and the Bear arrived in 2022: As of June 17, 2022, major indexes YTD.

TSX: -10.8%; S&P 500: -22.9%; Dow: -17.75 and Nasdaq: -33%. Bonds globally have lost between -13 to -15%. Emerging market index: -18,46; EU Index: -23.17; Asia Pacific Index: -18.80%. Cdn $: -3.2. Crypto’s total market cap has dropped by over two trillion dollars since November 2021. As I warned months ago, Bitcoin has dropped below 20K US and this last weekend to 17K. I foresee further downside risk to 12K or below. We are in a crypto winter and can last a couple of years.

Ok, I did promise some positive news. Gold: .56% YTD and 4.26% one-year return. Gold is significantly up in all currencies except the US dollar. The BIG winner Oil: 45.67% YTD and one year 52.93%. As I had said earlier in the year, commodities would be some of the best-performing assets in the near term, and it has played out that way. There are no risk-free assets, so when you are in sizable gains, you need to take some profits off the table. 

So, what is one to do? Action Steps:

  • Evaluate your spending (write it down or carefully look at your bank/credit card statements monthly) and remove all unnecessary spending. Business and personal.
  • Reduce or eliminate debt unless you are a sophisticated investor who knows how to utilize good debt. Be very cautious with rising interest rates. In the 2008 crisis, businesses with over a 60% debt to equity ratio had a high failure rate.
  • If you were to lose your job in the future, do you have a game plan and a cushion?
  • Consider taking a sizable position in physical gold and some silver as your savings and risk insurance to protect your purchasing power. I also like miners, precious metals royalty/streamers, senior/mid-tier producers and a minimal position in select explorers (these are higher risk). Also, commodities like uranium, lithium, nickel, and copper are 100% necessary and in a sizable deficit in the next three years for the green movement. You will need a multi-year time frame or patiently wait and buy in small tranches to build a position. Oil and gas producers have provided outstanding returns over the last year and a half, and I foresee continued substantial upside in the coming years. 
  • Have your money actively managed by a seasoned and professional manager with a proven track record who understands current risks. 
  • Diversifying is critical; having some cash (US dollar is up 14% this year) or GIAs (insurance company GICs with superior benefits and returns of over 3% now) are excellent options for liquidity for a portion of your wealth.
  • Consider investments outside the stock market, like a private apartment REIT (cash-flowing) or farmland investment. One must be very careful in the private equity or exempt markets; having proven management, low debt, and liquidity are essential.
  • In unstable markets, life insurance contracts can provide contractual guarantees to protect your wealth and have multiple benefits. 
  • Be defensive, and as I have said in the past, “there are no hero medals if you lose 30, 50 or 70% or more of your wealth.” I cannot stress enough, that now is not the time to take on significant risks and think you can buy the drips unless you are a short-term trader and know how to protect your capital.

In conclusion, many Canadians will get a wake-up call when receiving their June 30 investments statements. Yes, there is still time to rebalance and adequately diversify your portfolio. However, I encourage you not to trade in fear or get paralyzed and do nothing, as both will most likely lead to further significant losses. If you need a second opinion and want to understand your options, don’t hesitate to contact me at: bill@fivefoldfinancial.ca 

All the best,

Bill Westmacott, Owner

fivefoldfinancial.ca 

Financial Education & Honest Solutions Create Success

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