Bill’s Blog | May 13, 2022
We had the worst first quarter (2022) in the stock and bond markets in 100 years. Why? Many significant shifts are happening geopolitically. Global trade relationships are breaking down, the world economy is slowing, and overly inflated assets (Stock, Bonds, Real-estate, Crypto) are experiencing a reality check. Many Nasdaq stocks started crashing last year (meaning over a 30% decline), and now the big FAANG stocks, Meta (FB), Amazon, Apple, Netflix and Alphabet, have joined the party. Netflix has crashed by over 70%.
For over 13 years, the markets were juiced by the FED and Central Banks with cheap money (ultra-low interest rates), and the major corps were averaging 400 billion a year in share buybacks, and two of those years reached over 1 trillion dollars in SBB. Unfortunately, the SBB scheme artificially made the markets go into nose bleed territory, and we had the highest overvaluations in stock market history. The S&P 500 peaked in November 2021 and just broke a technical support level of 4000, and I suspect we could see another 10 to 20% fall or more in the coming months. The other factor that has changed this year is that the FED is tightening. Meaning they are reducing their balance sheet and not flooding the market with liquidity as they have in the past. They are finally increasing interest rates to stop inflation (almost laughable) and would need to take the FEDS rate to double digits (not happening). So they will continue until something breaks (markets) and most likely reverse course, back to lowering rates and printing money until the cows come home. Then we will see worse inflation if they do this!
As I warned for months, Cryptocurrencies are now seeing a crash and have accelerated this last couple of weeks. Bitcoin (the leader) has more than halved since its November 2021 high of nearly $69,000 US price. I foresee more pain as it has dropped below a critical support level of $30,000. The next support level is around $20,000, and if it breaks below 20K, that may be time to consider possibly taking a modest position. Bitcoin has dropped several times by 80 to 85%, and if it happens again, that will take us to the $12000 mark.
Real estate in many markets has been in extreme overvaluation for the last few years. For example, the average house price in Canada is $825,000 (single detached) and has become unaffordable for millions of Canadians. However, rising interest rates are a significant risk to Canadian real estate. What concerns me is the number of Canadians who have leveraged themselves up with massive debt loads in a buying frenzy, especially in the last two years. If the housing market corrects back to 2020 levels, that would be a 25% decrease in home prices and cause significant numbers of people to have underwater mortgages. The same phenomena occurred during the great recession of 2007-2009 in both the USA and EU; over 20 million homeowners defaulted. Also, when Canadians have to refinance at much higher mortgage rates, many will not be able to afford the mortgage payment. Finally, 52% of Canadians went for a variable rate mortgage to afford their dream homes in the last couple of years. There are enormous risks in the housing market, and will it be a soft or hard landing? Only time will tell.
To grasp what is happening, this is just a normal economic cycle. Four stages reoccur in this cycle: Expansion, Peak, Recession and Trough. The cycle since 1945 has lasted 58.7 months on average. However, with extreme manipulation by central banks over the last 13 years (QE and 4000-year low-interest rates), the cycle has broken all records time-wise (over 150 months), and it appears it peaked in late 2021. As a result, many financial experts are forecasting we are entering the recession stage.
The final shift that few are grasping is the severe consequences of the Russian invasion/war and subsequent bifurcation of Nations. As a result, there is a growing divide between Nations and which side they choose to partner with economically in trade. As a result, global trade, which we have all benefitted from, has broken down. As a result, the BRICS (Brazil, Russia, India, China and South Africa) and dozens of African, Asian, South American and Middle East countries are turning toward China and forsaking reliance on the USA. The reality of this has far-reaching consequences as millions of companies for profits shifted their manufacturing to China and other low-wage countries since the early 1990s. What happens to the millions of products we depend on and are no longer available as global trade breaks down? It will take years and 100s of billions of dollars to bring manufacturing home or relocate to a friendly country. Expect high inflations for years!
As I have encouraged those reading my Blog, this is not a time to be complacent with your investments or adjust your budget. Expect high volatility to persist and continued correction in most asset classes. If you need guidance or a second opinion, please reach out to me: at fivefoldfinancial.ca or bill@fivefoldfinancial.ca.
All the best,
Bill