It seems that week after week we continue to see the economy getting weaker and weaker, more people losing jobs and prices continue to fly higher. Not exactly the best environment for stocks and bonds. Even so, we have seen a decent rally recently in “markets”.
I believe, as I have written many times before, that this appears to be a managed implosion being managed by the Fed in particular, and other central banks also. The action in the “markets” are clearly bear market moves. Large moves up and down are classic signals of bear market action.
I wrote a few weeks ago about how if you are buying the rally this time you may actually be fighting the Fed- which as many have learned the hard way- is usually a bad idea. Many insiders are clearly saying that the Fed wants to get the froth out of the “markets” and are likely engineering a hard landing but can’t come out and say it or they would risk a sudden implosion of asset prices.
Even the FDIC, in a leaked tape, are discussing bank runs after a market implosion and how they can prepare without spooking the public into a bank run prior to the event.
Whether the Fed is looking to engineer a hard landing to reduce inflation or to get “markets” back to their traditional role of determining fair value- which they haven’t been doing for at least over a decade- I still believe that the stock “markets” will have a bad year in 2023.
That may seem counterintuitive since the year has started on a positive note, but I will lay out my case.
#1 Businesses are seeing the cost of labor rise, they are seeing input and energy costs rise and also delays in getting goods in some cases. All of these costs eat away at profits. When you buy a stock, you are really buying future profits so you may not be getting what you are bargaining for. As Warren Buffett would say- you are paying a high price for the value you are receiving. Most likely why Berkshire Hathaway (his company) is sitting on a record amount of CASH.
Having said this many may say that “inflation is peaking”. Yes- just like it was transitory. The facts are that the ONLY things that are giving the illusion of lower inflation is the cost of energy and used car prices. Keep in mind that China was locked down and at the same time many countries- with the US leading the way were dumping hundreds of millions of barrels of oil into the market (250 MILLION BARRELS JUST HERE IN THE USA) Now, prices are rising at the pump and unless we are willing to EMPTY the strategic reserve it appears that respite from higher prices is over.
#2 Rising interest rates act as a drag on profits also BUT the most important point here is that MANY companies are GROSSLY overindebted. Many very visible companies that many consider iconic companies actually have MORE LIABILITIES THAN ASSETS. This is where I believe the tightening of interest rates is going to hit later on this year. Keep in mind that when a company defaults on its bonds the first losers are the common shareholders. Someone paying $100.00 per share should expect that they would receive ZERO in a bankruptcy. Once the first domino falls many will be asking “Who’s next?” and the exit doors will be VERY busy.
While some companies will be able to handle higher rates- even with increased labor and input costs- MANY WILL NOT. Those companies that, in particular, took out floating rate loans are likely to be most at risk. Many may have been financed at 2-3% and may be looking at 6-10% now. This could easily be the straw that breaks the camel’s back. In this situation, if a company defaults and their liabilities are higher than their assets you can bet that preferred shareholders will get ZERO, non-secured bondholders – ZERO and secured bondholders will likely get a debt-for-equity swap that will take some time to hammer out. I believe that a few VERY large name companies are in danger of this taking place in the near future. This is just one more reason that I believe ”financialization” is on its way out and hard assets are on their way UP.
If these things aren’t enough even Jerome Powell (Fed chair) is talking about his actions working through “financial conditions”. Where Bernanke wanted to spur spending with a wealth effect it apears that Powell wants to subdue spending with a poverty effect or at least a reverse wealth effect.. With inflation continuing to rage- despite the 24/7propaganda to get you to not believe what you are seeing-the likelihood of higher rates is certainly in the cards.
I just saw for the first time on my energy bill that the rate I am being charged went up 40% from one year ago. That is just the increase in the rate I am paying. The actual bill rose 68%! That is in a household. Think of the impact that would have on an energy-intensive industry.
To me, it appears that the outlook for the “markets” are not good in any way I can imagine.
On the other hand, I also believe that many companies could thrive- like oil, energy, food and uranium companies. I also believe that the actual commodities like oil, gas, silver, gold, copper, Iron Ore, Uranium, etc. will continue to rise because there is a LACK OF SUPPLY. Remember the Fed can reduce demand, but it cannot produce supply. It is also apparent that in the many years where financialization has ruled the day there has been a lack of goods produced and a lack of exploration for new sources of energy, food, etc.
I believe that lack of demand for marginal goods will see some steep deflation as people adjust their spending on necessities and forego prior luxuries. Too bad the Fed can’t print up food or energy- only computer blips or green pieces of paper. They also can’t reduce demand for food or energy without reducing the amount of people on the planet. Demand will stay strong for necessities and all arrows appear to be pointing UP for these things.
In the meantime- gold and silver are rallying and this is with the manipulation by the banks so they can get as much as they can for as cheap as they can still taking place- For Now. I believe that this is a gift for anyone who still needs to build a position in metals.
The times are changing right before our eyes. This is similar to the sea change that took place in the 1970s where interest rates were raised to near 20% and then gradually fell for the next 40 years or so. It took a while for people to adjust to the new paradigm of lower rates. I believe that today we are seeing a similar sea-change where rates are likely rising long-term and the tail wind that has been propelling financial assets is now becoming a headwind. In English: Don’t expect the same outcomes that we had in the past 20 years during the next 20 years because the paradigm has CHANGED. I believe that anyone who is looking to thrive in the next few months or years had better CHANGE with it.
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