Bill’s Blog | April 29, 2022
Let’s review the markets (stocks, bonds, precious metals, oil, real estate and cryptocurrency), persistent inflation and geopolitical risks. Rising interest rates have a dangerous effect on Emerging Markets, and Sri Lanka recently defaulted. Emerging Market countries have borrowed trillions of dollars priced in US dollars, and we could see several more defaults in the coming months. As I warned early in the year, we would have significant volatility and sizable risks in 2022. Another serious risk is food shortages due to many factors (war, droughts, food processing plants burned to the ground, fertilizer shortages and extreme prices). We will start with major indexes and a few commodities. The information below was as of Friday, April 22, 2022.
Level | YTD | 1 Yr
S&P/TSX Composite Index C$
21,186.38 | -0.17% | 10.91%
S&P 500 Index US$
4,271.78 | -10.37% |2.19%
Dow Jones Industrial Average US$
33,811.40 | -6.95% |-0.68%
MSCI EAFE Index US$
2,081.96 | -10.88% | -9.00%
MSCI Emerging Markets Index US$
1,075.60 | -12.70% | -20.50%
MSCI Europe Index US$
1,856.80 | -11.30% | -6.87%
MSCI AC Asia Pacific Index US$
169.44 | -12.26% | -18.59%
Fixed Income Market
Level | YTD | 1 Yr
FTSE Canada Universe Bond Index C$
1,068.33 | -10.24% |-7.98%
FTSE World Broad Investment Grade Bond Index US$
217.01 | -11.07% | -13.16%
Level | YTD | 1 Yr
0.7867 | 0.58% | -1.84%
Level | YTD | 1 Yr
West Texas Intermediate (US$/bbl)
102.07 | 35.71% | 64.26%
1,931.60 | 5.60% | 8.69%
Market Performance – as of April 22, 2022.
The only two indexes in positive territory over the last year were the TSX and the S&P (as of last Friday). The TSX is heavily weighted in materials and commodities. Both have been on a tear due to raging inflation and growing shortages globally. As a result, oil, gas at the pump and natural gas costs are way up and hurting low to medium-income families and all businesses. Remember, energy is the most critical commodity globally that impacts economic growth and stability. The second most important commodity is food availability and prices. Again, we see extreme inflation in food prices (20 to over 100% in some items), and availability is becoming a growing problem. When food costs reach about 40% of a family’s budget, this is when we see rioting, and it has already begun in many developing Nations.
The global stock markets and bonds are all in correction or bear market territory, and the trend continues this week. Remember, corrections are normal and healthy for a market, but crashes are not. Furthermore, the global economy is moving towards recession based on lead indicators (6 to 18 months out), and a bear market may become a reality. As the bond markets perceive more risk of default, bonds become more expensive. We are seeing this happen globally. Also, as interest rates rapidly rise, this further stresses the bond markets as they have an inverse correlation.
Gold as a safe-haven asset remains in positive territory. One year ago, as of this writing, gold was $1780 US per ounce, and today it is just over $1900 US. I remain very bullish on gold and silver as long as one has a 5 to 10-year time horizon. Silver is far more volatile and is down about $3.00 US from a year ago. Both metals are in high demand, and mints are running full out and having difficulty keeping up. Silver has had a very high premium (the price you pay over the spot price) over the last year for several factors. Both metals will continue to appreciate as they are critical to the monetary system, industrial applications (mainly silver), and a hedge based on extreme money printing and excessive debt. Accumulate on pullbacks in both metals.
Real estate has been on a tear for over 20 years in Canada in most markets, except for a few minor corrections. Driven by supply and demand factors in many markets, plus extreme low-interest rates and government policies. But with interest rates rising fast (2.5% to 4% on a five-year fixed in just six weeks in the last couple of months), prices are finally starting to reverse as many people cannot afford the rising mortgage rates. As a result, first-time buyers are priced out of the market, and people are starting to get a reality check. Over 50% of new mortgages in the last couple of years have been floating rate variable mortgages in the 1 to 1.75% range. In addition, many Canadians will get a rude awakening as these mortgages have a clause that can reset your rate a lot higher once a threshold is met (4.5% or so). As a result, many housing markets in Canada are vulnerable and for people who are too highly leveraged. I recommend listening to Steve Saretsky, a top realtor in the Vancouver region, if you are concerned. Steve closely evaluates the Canadian housing market and does a weekly commentary on his Youtube channel (Saturdays).
Let’s do a quick review of the cryptocurrency market. Last year Bitcoin hit its all-time high of $68,789.63 on November 10, 2021, and of course, all other crypto tokens followed. But, fundamentally, the market has been in correction/bear territory ever since, and I still see a sizable downside in the foreseeable future—crypto trades like tech stocks that are highly correlated to the stock market. Pundits keep quoting the 100K mark, but I have warned for months that I see 20K or less in Bitcoin before seeing a new rally. Nevertheless, I am very optimistic about the crypto market long-term. A handful of projects have become real businesses with significant revenues of a billion-plus and real-world applications. As I teach my clients (which I do myself), you need to trade in this market. I realized significant gains last year as I harvested profits four times before I sensed the market had stalled out. I am on the sidelines until the trend reverses. If you have not entered this alternative asset class, I recommend you do your homework while the market corrects and consider taking a small position in the future. Before speculating a penny, make sure you do your homework and understand what you are doing and the risks.
Inflation is eating people’s lunch, so start taking a bag lunch! Sorry for the crummy joke, but I see the inflation issue persisting for the foreseeable future, and you should take it seriously and adjust your budget accordingly. In addition, the lockdowns in China (1/4 of the working population) will continue to create shortages and price increases on millions of items.
The final big issue is the Russian invasion and ongoing war and the devasting impacts on many levels. The longer the war persists, my concern is that it may spill over into other EU countries. In addition, Russia continues to warn NATO, EU allies, and the USA that it is a proxy war by supplying weapons and monies. This fact may trigger broader consequences. On top of this horrible conflict, we see multiple other regions amping up the rhetoric and potential violence and war increasing. I have mentioned several times in my Blog; that we are in a “War Cycle.” History sadly repeats, and what we know is this “we have learned nothing from history as we keep making the same stupid or evil mistakes.”
In closing, this is not a time to be complacent with your money or wealth decisions. There are many risks in the market and growing uncertainty. Many people will have a rude awakening when they get their mid-year investment statement. If you need a second opinion or guidance, please reach out to me.
All the best in the remaining 2022,
Bill Westmacott, Owner