First Half 2023 Markets & What’s to Come in Second Half? 

Bill’s Blog | June 29, 2023

Another six months flew by, and lots of drama unfolded globally and in the markets. Let us do a quick review of the big stuff.

1. The Russia/Ukraine war continued to intensify, which is very concerning, especially with nuke movements and more powerful weapons deployed on both sides. Nord Stream exploded. Hopefully, this will end soon. The tension in the Middle East and China/Taiwan has increased, as in both regions’ war is very probable in the future. 
2. Several big regional US banks and Credit Suisse collapsed due to poor management of risks with rising interest rates. As I have warned, there will most likely be more bank failures.
3. Inflation continues to be a problem for central bankers, and in response continued to raise rates as I and many forecast. We have experienced disinflation, but core inflation is very sticky.
4. The bifurcation of global trading blocks (West vs East) accelerated with 20 countries wanting to join the BRICS. US dollarization continues to increase as many Nations choose to trade in their currencies and seek a new alternative which most likely will emerge with a basket of commodities (BRICS alliance). 
5. The housing crisis continues to increase in Canada (rent and ownership) mainly due to the government and Bank of Canada policies. I will share more details later.
6. All indexes rose in the first half of 2023.
7. The AI (Artificial Intelligence) craze drove the S&P up over 15%, mainly due to eight Tech companies.
8. The TSX lagged against all significant world indexes with a modest 3.05% gain YTD. Canadians are voting with their investments and sending sizable monies into GIC/GIA products and money market funds. 
9. As last week’s Blog mentioned, Debt is becoming a severe issue for many Canadians. Do not expect interest rates to go down any time soon.
10. Gold performed well with a 7.24% YTD return. Despite record purchases of Gold by Central Banks, the average Canadian or institution has still not caught on. Sadly, many Canadians seem disinterested in an average 10% annual return over the last two decades. Remember, physical Gold has no counterparty risk, as all other asset classes do. Gold is the third largest base money in the world, behind the USD and EURO. Also, Gold cannot be inflated away like fiat currencies. 
11. Oil traded from $65 to $82 in the first six months.
12. Finally, recession and slowing economic growth are taking hold in many Nations. In the EU, Germany is officially in recession (the manufacturing powerhouse of Europe). The high inflation and debt levels are devastating the EU and Britain economies. China’s growth lacks lustre and will not rescue the global economy. Beijing is looking at significant stimulus to boost its struggling economy.

So, what will we expect in the remaining six months of 2023? The Big Issues in Canada and Beyond.

• Real Estate has become a severe issue for the majority of Canadians. Here are the key issues.

1. Twenty-year low in building permits. Canadian housing experts estimate we need 3.5 million new homes to meet the demand. You cannot keep flooding the country with record immigration and expect to improve the crisis.
2. Homebuilding costs in Canada have soared 51% since 2020 as the population surged. 
3. Twenty-year low in housing listings.
4. Twenty-year low in credit growth. Builders struggle to finance at these higher interest rates; some are starting to sit on the sidelines. I also foresee eventual bankruptcies, as most consumers cannot afford these insane housing prices.
5. 1/3 of mortgage holders have refinanced at higher monthly mortgage costs, and 2/3 are to go. Refinancing will play out over the next 2 to 3 years. Here are the trends and the three critical problems. Most mortgage holders extend the amortization by double or longer (to keep payments down), and many are not paying the principal down. So, many are now renting their homes from the banks and feel trapped. Third, others have gone for shorter fixed mortgage rates, hoping interest rates will decrease. I believe this could be a big gamble. 
6. Housing prices have increased again in many markets, at least short-term, mainly due to low listings and a lack of new builds. Expect things to slow into the summer and fall. At some point, there has to be a significant correction in price so housing is affordable again for average Canadians.
7. Renters are also increasingly struggling with the high rent prices. Rents are up 20% in Toronto (meaning an additional $500 per month in Vancouver & Toronto), and it is a severe problem in major markets in Canada.

Oil & Gas, and as mentioned, we are currently in a trading range, but that will likely change later in the year. Here’s why.

1. OPEC no longer trusts the USA (current administration) and their policies. The Saudis and their allies have reduced supply due to slowing global growth, and OPEC wants higher prices ($90 to $100 range). Remember, Russia is also a part of OPEC and has a significant voice at the table.
2. Any breakout of fuller war in the Middle East (Israel vs Iran and their proxies), expect oil to blast to $150 to $200 a barrel very quickly.
3. As long as we have politicians (Federal and Provincial) pumping the climate change agenda, fuel costs will continue to skyrocket. Trudeau is adding another tax on the CO2 scam starting July 1. Those in government who track the effectiveness of government policy have repeatedly said, “The current government has failed to improve C02 emissions at all”, despite collecting billions from Canadians in C02 tax. Shameful! Canada has the worst record in the G7 for C02 performance. Even if C02 mattered, Canada is a minor C02 admitter, 2% to 3% of the world. It is meaningless when countries like China and India spew massive amounts of C02 by burning coal. If you want to understand the truth about this critical issue, please listen to Brian Gitt of https://briangitt.com/ or Robert Bryce, energy expert and host of the Power Hungry podcast, on inconvenient truths about the energy transition that politicians and climate advocates refuse to acknowledge.

Inflation Hard to Get Back in the Bottle:

1. It will be near impossible for Central Banks to control inflation when their counterpart governments are pumping inflationary policies and running massive deficits.
2. Supply chains have somewhat improved (but there are still many problems when I chat with local business owners). 
3. Food prices are still extremely high, and most are in double-digit inflation. As mentioned, fuel/energy prices continue to rise due to government policies. 100% of our food arrives at the grocery store by truck and train, using diesel which governments keep increasing taxes on and fueling rising food prices!  
4. Many commodity prices have significantly declined since the government lockdown era. Lumber, copper, lithium and Natural Gas are examples.
5. But, as long as energy, food and housing remain highly elevated, inflation will remain a critical issue for all Canadians for many years.

Recession Cometh

• Almost no one believes we will have a recession and possibly a prolonged one. Why? Well, most are still working and demanding higher wages. The stock markets remain resilient despite many companies’ profits/margins declining and revenues shrinking. The government and media always announce a recession after it is well underway. They want you to believe everything is great until the day it isn’t. The higher interest rates take a year or two to impact the real economy and businesses when they finally have to refinance. The final blow is when people receive their pink slips, the last nail in the coffin. Then we are told the recession has arrived.

Interest Rates and Direction? 

1. Canada’s CB raised a quarter point in the last meeting, and the US temporarily paused last week after ten rate hikes in a row. So, what can we expect for the remainder of the year? I expect at least two more rate hikes by year-end. Again, government policy is very inflationary, which frustrates CB efforts. PS, rising rates are a global issue.
2. There is only one thing Central Banks hate more than inflation: deflation. CB will not lower rates unless we have a severe market crash, black swan, or deep recession.

Market Reality or Facade:

1. Based on the Fear & Greed Index, we are currently in Extreme Greed, and stock market psychology is telling us one thing right now they want stocks to go higher. The stock market is climbing the wall of worry. This trend may persist through the summer into early fall. Based on everything I have shared with you, it makes no logical sense, but the markets do not care about me or logic. The VIX Index is also extremely low, forecasting little FEAR in the market. Few are fearful, and this is when I get concerned. Despite the current markets, we are overdue for a correction, but the timing is anyone’s guess. I would be surprised if we did not have at least a correction by fall (Sept/Oct). When markets get distorted by reckless policies, anything can happen. 

So, in summary, what is one to do?

1. If you have sizable profit in some of your stocks, consider selling a portion or all and go to a money market fund or three-month US T-Bill EFT. Be defensive and not greedy. I have done this myself with a portion of my portfolio.
2. Consider deploying a hedging strategy for your portfolio if you stay in the markets. If you do not have this expertise, reach out to someone who does or myself, as I can provide some guidance to protect your wealth.
3. Take a position in physical Gold and Silver to diversify and protect your wealth against inflation and our shrinking dollar. Buy on the dips.
4. Seek wise counsel regarding your real estate, as our country has a severe long-term housing problem.
5. If you have a Debt issue, develop a strategy to reduce or eliminate it. Get help!
6. Complacency is not a good strategy, so please be proactive and adjust your wealth wisely.

All the best for the remainder of 2023

Bill Westmacott, Owner, Insurance Broker and Financial Educator