RE:So...Where are we now?Glad I dumped a ton of this at 51 taking a small loss made up in a couple days with crusie lines. Still loads of pent up demand, hot job market and wads of welfare still in the system plus the $300 B Canada pumped in COVID welfare is largely sitting in bank accounts. There are no facts to indicate a recession. The pent up demand will stabilize and free market will take care of inflation I am seeing people walk away from groceries and that means they walk away from everything else overpriced. I for one am not spending a dime on more than the basics in Canada and spend all in MX. I refuse to support lazy, entitled, poor product, lousy service companies....most of which are arrogant to mask their failing businesses haha.
Experienced wrote: One of the advanatages of being old is that very often you look at a situation and say to yourself - "I have seen this movie before"..."I know how it ends"
When I look at what is going today, I can't help but think that I am looking at the reruns of great movie for the third or fourth time.
Sooo....what is going on?
1.....inflation is not ending for a while. The producer price index which is a leading indicator for the CPI is higher than the current CPI inflation rate so there is still upward pressure on inflation in the system. Due to the war in Ukraine and higher energy prices we can look forward to food shortages world-wide over the next year. This will further put even higher pressure on future prices over at least the next year.
2....as has been the case since the US Fed was established in the early 1900s, it has been behind the curve causing wider swings in the economy than if it didn't exist at all. The current crew in the Fed are inflation debunkers and political as oposed to economists. This means that they are even further behind the curve than normal and this will result in the need for drastic action on interest rates in the months to come. As an example we just saw a .75% increase in the Fed funds rate. A few short months ago they were talking about .25%.
3....there is a long standing relationship between interest rates and the market P/E ratio. The higher the interest rate, the lower the market P/E ratio. So higher interest rates will result in lower stock prices and this doesn't matter what industry sector you care to look at.
4...higher interest rates also mean that the savings rate goes up which means that people keep more money in the bank and buy less stuff. Buying less stuff means less economic activity and that means higher unemployment and less Government tax revenue. The new wrinkle in the movie is that unlike the past, Governments are going into this situation with high debt levels and so they may be forced to raise taxes which compounds the problem.
5....from Point 4, the energy sector is particularly vulnerable. Not only from the usual demand destruction from less economic activity, but since over the past year or so the industry has enjoyed monopoly profits (read excess profits). This makes them a target for surtaxes. We have already seen that in the UK. The world-wide drift to socialism increases the chances that the energy sector will face higher taxation. This makes investment in the energy sector (at least the oil and gas part) particularly risky.
When you put all this together, there is a hurricane coming and you have a couple of choices. One is to Board up your houses and get outta Dodge or take the risk and try to ride out the storm. The story of the three pigs comes to mind here.
The choice is yours. I have made mine quite a few months ago.