2022 was not kind to most asset prices. From David Haggith at thegreatrecession.info:
2022: The Year that Imploded … Bigly
This was the year where it seemed everything imploded. For the economy, it started with two quarters of receding GDP that everyone refused to call a recession. Whether you stand with the crowd on that or not, it was certainly not a good change and was certainly a collapse of the economy toward a smaller state based on production. But that was just where it all began. What follows is an amazing overview of a world in a state of collapse.
The stock market’s north-pole polar-bear plunge
Right from the start, 2022 became the year the stock market imploded with all major indices down and down … and down some more all year long. So far, this is the year Santa’s sleigh didn’t soar into some kind of end-of year rally. Instead, the Grinch stole the sleigh and just went down the hills and through the snow like sleds are supposed to go.
The Grinchy Dow started bounding down the mountainside at the top of year in an endless series of leaps off bluffs and is currently down 11% for the year. At its lowest point of the year, it fell 22% into a full bear market that it remains mired in.
The S&P also started going downhill at the top of the year; but it ran down in front of the Grinch like his dog, trying to keep the Dow from hitting him in the butt, to where the S&P is currently down 20% from its all-time high. At its lowest point it fell 25% from its peak.
Posted in Currencies, Debt, Economics, Economy, Energy, Financial markets, Governments, History
Tagged Bonds, Cryptocurrencies, Real Estate, stocks
Bonds are always risky assets. People just forget that after an almost 40-year bull market. From MN Gordon at economicprism.com:
“When the [credit] delusion breaks, people all with one impulse hoard their money, banks all with one impulse hoard credit, and debt becomes debt again, as it always was. Credit is ruined.”
– Garet Garrett, 1932, A Bubble that Broke the World
Down, Down, Down
Third quarter 2022 ends today [Friday]. We’re entering the year’s home stretch. Thus, we’ll take a moment to observe where money and markets have been, so we can conjecture as to where they’re going.
To begin, United States stock markets are in an epic battle between bulls and bears. For most of the year, the bears have been delivering heavy blows. But the bulls have not taken their punches lying down. Here’s a quick review of the three major U.S. Indexes…
After peaking out on January 4, 2022, at 4,814.62 the S&P 500 declined 24.46 percent to an interim bottom of 3,636.87 on June 17, 2022. The DJIA fell approximately 19.71 percent over this time.
The NASDAQ’s decline commenced on November 22, 2021, at a peak of 16,212.23. It then cascaded to an interim bottom of 10,565.14 on June 16, 2022, for a top to bottom decline of 34.83 percent.
The indexes then rallied into mid-August. Many investors thought the bear market was over. They invested accordingly. But, alas, it was merely a sucker’s rally. September was ugly.
This is a debt contraction, and when debt contracts, assets prices go down. From Wolf Richter at wolfstreet.com:
But this time, there’s over 8% inflation.
The Dow Jones Industrial Average on Friday closed about 300 points below its June 16 low, thereby having more than wiped out the bear-market rally gains. For the Dow, the bear-market rally started on June 17 and ended on August 16. During the two-month rally, the Dow had jumped 14%. By Friday at the close, it was again down 20% from its all-time high.
The S&P 500 Index, on Friday intraday, fell through its closing low of June 16 – the infamous 3,666 – and then bounced a little to close 27 points above the June 16 low, at 3,693. During the two-month bear-market rally through August 16, the index had surged 17%. By Friday, the index was down 23% from its all-time high.
The Nasdaq closed about 2% above its June low. During the two-month rally, it had soared by 23%. Many of my Imploded Stocks that are now trading for a few bucks, had shot up by 50% or more, and a bunch of them doubled, before re-imploding after mid-August.
One of the things that make financial markets so fun is their sheer unpredictability. From Charles Hugh Smith at oftwominds.com:
There would be some deliciously karmic justice in the “dumb money” driving a rally that forced the “smart money” to cover their shorts and chase the rally that shouldn’t even be happening.
Being cursed with contrarianism, as soon as a trade gets crowded and the consensus is one way, I start looking for whatever is considered so unlikely that it’s essentially “impossible.” Sorry, I can’t help myself.
The crowded trades are 1) long the Commodity Super-Cycle and 2) long hurricane-force recession for all the persuasive reasons we all know: global scarcities, geopolitical tensions, soaring US dollar and interest rates, de-risking, crazy-stupid levels of debt and speculation, etc.
The consensus holds that “Smart Money” rotated out of tech stocks and other over-valued equities into oil and commodities. That was a smart move, indeed, and the earlier one rotated out of equities and into commodities, the smarter the trade.
In this scenario, retail owners of equities are the “Bagholders,” those who continue owning the losers all the way to the bottom (Been there and done that). It’s a market truism that Bull cycles only end when retail drinks the speculative Kool-Aid of the moment and buys into the final gasp of the rally, allowing “Smart Money” to distribute their shares to the retail chumps, who go down with the ship when the market finally rolls over.
From The Babylon Bee:
CHERRY HILL, NJ—According to data analysts on Wall Street, as “timid beta-males” are selling off their stock portfolios in a panic over the tanking economy, women are coming out of the woodwork to snap up the cheap stocks now that everything is on sale.
“Hey Janie, did you see the price of Target stock?” asked Sissy Mixon excitedly to her friend over the phone. “It’s on sale for, like, 25% off! EEEEEE! I love Target!” Missy quickly hit buy on two shares of TGT at $304.92, so she could save even more money.
“Now that I own a piece of Target, every time I go shopping there I’m basically paying myself!” Missy explained to reporters.
According to sources on Wall Street, market recoveries are driven almost entirely by savvy housewives looking to snap up a bargain. “I don’t really know what ‘Riot Blockchain’ is, but it’s, like, 300% off! Whatever it is, I’m buying it!” Missy insisted.
Missy’s husband Sam tried to explain to her—as he always does—that buying things on sale doesn’t constitute saving money. “She doesn’t seem to get it,” he said.
At publishing time, Sam threw another $1000 into Dogecoin as he knows it will hit $1.00 eventually.
Posted in Humor, Investing
Economic options confronting the Biden administration and the Federal Reserve are all unpalatable, with unpopular consequences. From The Zman at thezman.com:
The government released the latest inflation data and the results were the worst we have seen in forty years. The retail number came in at 8.4% and the wholesale number clocked in at 11.2%. Of course, the retail number excludes the things that people buy, like food, fuel and housing. These numbers also rely upon the new math rather than old math used the last time inflation was an issue. By the old inflation standard, retail inflation is over 15%.
The political class is poleaxed by these numbers as they have been assured that inflation at these levels was impossible. Modern economic theory says that inflation is caused by too much money chasing too few goods. We now have top men in place to keep an eye out for this. They just need to manage the money supply to keep inflation under control. This assumption led the top men to assume inflation was transitory, the result of supply chain issues.
Posted in Banking, Business, Currencies, Debt, Economics, Economy, Financial markets, Government, Politics
Tagged interest rates, Monetary inflation, stocks
You own bonds to offset the risks of stocks and vice versa, but what happens when they both go down in extended bear markets? From Harris “Kuppy” Kupperman at wolfstreet.com:
When something that is this widely adopted blows up, it tends to blow up spectacularly.
For four decades, the US stock market has traded up and to the right. During those brief moments of setback, treasuries rallied strongly. The fact that these two asset classes seemed to offset each other, creating a smoothed-out return profile, was not lost on certain fund managers who created portfolios comprised of the two. Then, to better market this portfolio to the sorts of institutional investors who cannot bear drawdowns, the overriding strategy was given the pseudo-intellectual sounding Risk Parity moniker.
Over time, the reliability of Risk Parity funds has astonished most observers, especially after being tested by fire during the GFC. As a result, portfolio managers took the logical next step and added copious leverage—because in finance, when you do a back-test, every return stream works better with leverage.
Naturally, as Risk Parity continued to produce returns, inflows bloated these funds. Risk Parity strategies, in one form or another, now dominate many institutional asset allocations. While everyone makes their sausage a bit differently, trillions in notional value are now managed using this strategy—long equities, long treasuries. Are they highly-leveraged time-bombs??
Taking a step back, it’s important to ask, what created this smooth stream of Risk Parity returns? Was it investor brilliance or was it a four-decade period of declining interest rates that systematically increased equity market multiples while reducing bond yields? What if all the sausage-making was just noise?
Paul Rosenberg’s reasons for not investing do not include that stocks and bonds are at absurd valuation levels, particularly bonds. However, that’s not to say his reasons don’t make sense, they do. From Rosenberg at freemansperspective.com:
I’ve touched upon this subject in my subscription newsletter, but I had no plans to write anything more until I got a note from a friend, mentioning a particular investment analyst and his views on investing over the next few years. I had to agree that it was brilliant analysis, but at the same time I knew that I’d never do anything about it, because I simply can’t bring myself to put money into “the markets” anymore.
As a young man I spent time learning the nuts and bolts of investing: Price to earning ratios, book values, charting, puts, calls, covered positions, and so on. And when I had extra money, I tended to put it into the markets and use my tools. But I can no longer do that, and I think explaining why may be useful.
There are three reasons for this conviction of mine, and so I’ll list them below. But I’m listing them in reverse order, because reason number one stands above the others: By itself it would prevent me from investing in the usual way. I think all three reasons are strong, but reason number one is pivotal.
Reason number three is simply that the markets no longer make sense. In fact, I’ve now taken to calling them “exchanges,” not wishing to denigrate the concept of markets.
So far it’s just a few isolated fires here and there, but a massive global financial and economic conflagration is inevitable. From Egon von Greyerz at goldswitzerland.com:
“Everything is on fire” – Heraclitus (535-475 BC)
What Heraclitus meant was that the world is in a constant state of flux. But the big problem in the next few years is that the world will experience a fire of a magnitude never seen before in history.
I have in many articles and interviews pointed out how predictable events are (and people). This is particularly true in the world economy. Empires come and go, economies boom and bust and new currencies come and without fail always go. All this happens with regularity.
A GLOBAL FIRE IS COMING
But at certain times in history, the fire will be cataclysmic. And that is where the world is now.
Explosive fires have started everywhere already. Stock markets are on fire and so are property markets, as well as bond and debt markets. The problem is that fires are initially explosive but always end up implosive.
So right now we are in the explosive phase of the fires with markets all going parabolically exponential or should it be exponentially parabolic!
We are now at the end of a secular bull market in the world economy which on a global level has reached extremes never seen before in history.
Never before has the world seen an explosive fire of this magnitude, fuelled by uber-profligate money printing and credit expansion by central and commercial banks.
We have talked about inflation running wild and it is not just happening in stocks. Property markets are literarily exploding, especially the high end. We see this all over the world and not just in the US. In the UK for example, HSBC stated that March saw the highest number of mortgages EVER issued. In Sweden properties sell for up to 40% above asking price in a frenzied bidding war and second hand leisure boats are in such demand that they cost virtually the same as a new boat. And if you want a new boat, there is none available until 2022. It also seems that people are desperate for company after the lockdowns as prices for puppies in the UK are up to 100% higher than last year.
Yes, everything is really on fire as people are desperate to just spend, spend, spend after a year of lockdowns and restrictions.
Posted in Banking, Business, Collapse, Currencies, Debt, Economics, Economy, Financial markets, Governments, History
Tagged financial collapse, Monetary inflation, Real Estate, stocks
The percentage drops for stock prices cited in this article may be over the top, but it’s a pretty good bet that gold’s price will rise relative to stock prices. From Egon von Greyerz at goldswitzerland.com:
Most investors are more interested in getting richer than preserving wealth. This is why they will never exit the stock market. As the Dow up 39x in the last 50 years this has been the right strategy. Only since 2009, the Dow is up 5x! So clearly a Win-Win position!
But as Jeremy Grantham recently said, stocks are in an “epic bubble”. Still most investors ignore this since greed dominates their emotions. If stocks are up 3,800% since 1971, there is no reason why it shouldn’t continue.
STOCKS or GOLD
During the last 50 years we have seen 5 vicious corrections in the Dow of between 41% and 55%.
But even with these corrections, the Dow is today 39x higher than in 1971.
There is another relatively small but important investment asset which represents only 0.5% of global financial assets. That asset is up 53x since 1971.
But it hasn’t been an easy journey for this asset either. There were 3 major corrections in half a century between 33% and 70%.
I am of course talking about gold.
If dividends are excluded gold has outperformed the Dow. With dividends reinvested, the Dow has outperformed gold by 3x. Leasing or lending the gold would have reduced the difference somewhat.
But the principal reason to hold gold is that it is nobody else’s liability and therefore physical gold should never be leased as it defeats the purpose of holding it for wealth preservation.
We must also remember that a stock index doesn’t tell the truth. Unsuccessful or failed companies are continuously taken out of the index and the most successful companies added. Therefore an index gives a much rosier picture than what really happened.