🌀Is This The Calm Before The Storm?

US stocks soared higher, marking their best month since 2020. Bear market? What bear market? From where you and I are sitting (or standing), things are looking pretty great. Tesla up 32%, Amazon up 25% and Apple up 17%. (Psst: I had to edit those numbers as they kept on going higher!) Oh, and as I’m writing this, the Nasdaq is up a cool 2.63%. Sweet stuff. Ain’t nothing to worry about here. Move along! All is back to where it once was, or at least making the moves to get there.

I have a niggling feeling that we’re in the midst of a bear-market rally. The next few months, in my opinion, will be painful. I hope I’m wrong though! I’ll do anything to be wrong. But just look at what fund managers are (or aren’t!) up to: they’re beefing up on cash while trimming their stocks. They’re scared. If they thought markets were going up, they’d deploy that cash of theirs but they’re doing the exact opposite. Smells awfully similar to the scene right before the credit crunch of ’08.

The US has officially entered a recession and there’s a chance things could get real ugly from here on out. Walmart (a good barometer for how consumers are feeling) is laying off hundreds of workers following a profit warning while Robinhood is busy laying off 23% of its workforce. And there’s plenty more where that came from. Something tells me our tight labour force, sorry – our unusually tight! – labour force might start to come undone. (Read here how you can make yourself recession-proof).

But most of us (cough, cough Mr Powell) are acting as though it never happened to begin with. We’re choosing to close our eyes to what’s smack in front of us: the fact that our economy is slowing down. (Read here what you can do to recession-proof your portfolio). We’re getting so desperate that we’re even changing the definition of a recession! Hint: it’s 6 months straight of negative economic growth. Has been the case for donkey years. Wikipedia has even had to bizarrely restrict its ‘recession’ page so that its true definition couldn’t be meddled with!

Bricks are talking. Will the entire house come crashing down?

While there’s talk of stocks rebounding from their bear market lows, house prices have barely budged. In fact, house prices (especially in the US) have gotten outa hand. I’m not just saying this from a buyer’s perspective (like 10 years down the line!) I’m saying this from a number’s one. In 2021, house prices went up by 20%. To put that in context, it’s their biggest advance. Like ever. Then, looking at the house-price-to-family-income ratio, it has a higher multiple than it did at the peak of the housing bubble. Yikes.

What many aren’t taking into account is that a whole lotta wealth can be wiped out when this asset class starts to go from hot to warm to lukewarm to cold. The truth is, how severe the drop will be will largely depend on interest rates. (This also applies to the stock market, btw.) Interest rates are already on the rise, and yesterday, the Bank of England raised rates in what was their biggest move in 27 years. Bringing our interest rates to 1.75%.

When interest rates rise, people don’t wanna move house since their mortgage will cost loads more. People just won’t want to expand. They’ll most likely stay put and not risk moving jobs to get a bigger pay check to feed an even bigger mortgage. But the opposite happens when rates are low: folk take on bigger houses (since mortgages are cheaper) and they hop around a lot more. Expect this trend to reverse itself at some point.

Why the hate for moderate rate?

Moderately high interest rates aren’t something we should be hating on. It stops all that ‘silly money’ – the chance of us speculating on nonsense (ahem GameStop) and others such things while also encouraging more prudence in our borrowing. It will mean some of us will actually be able to afford houses and build a stock portfolio, too. When rates were super-low, young ‘uns like me can only dream of buying our first house (just look how many millennials have moved back in with their folks) and we also can’t buy an equity portfolio without paying over-the-odds. Stuff’s just become too expensive.

Looking at the debt picture, things are nasty too. In the ’70s, the debt-to-GDP ratio was 30% rather than 130% what we have now! We’ve got a riskier world thanks to stupidly low rates. More debt means more risk, multiplying the bad times (and the good, of course).

I welcome a world where there is an actual price tag attached to money. Because for my entire (two-decade!) existence, the cost of money aka interest rates has been zero. This is unnatural.

The cost of money is rising

There’s good reason to believe we are entering a period of increasing cost of money. You wanna know why? I reckon inflation will stick around for a lot longer (it’s said to hit 13% in the UK come year-end!) which will mean rates will follow. There are structural changes that are happening right now which will raise prices, for everyone, everywhere. That’s without mentioning the energy crisis and cost-of-living crisis we’ve got going on that is literally squeezing people’s incomes. Or what’s left.

But what was it that kept inflation (and thus interest rates) so low for so long? The answer: plentiful and cheap resources like labour for starters. You can kiss that goodbye. The birth rate in every developed country has fallen. We aren’t having enough babies so the number of 20yo’s entering the market will be few and far between. China went from tons of babies to a baby drought. Almost overnight. We’re gonna have a hard time getting labour and this is a real problemo. If we accumulate loads of old people, they need a lotta people care. Who’s gonna look after them?

Moving on from babies and oldies. Looking at commodity data, the picture is grim. Essentially the best, the cheapest and most plentiful resources have already been pumped and we’re running into second-tier. The amount of copper in 1 tonne of ore has fallen to 1/3 of what is was. The result: we’re having to use a LOT more energy (costing more) to mine roughly 1/3 of the quality of copper ore. Let’s pray tech keeps up with it. If not, oops.

All of this is by definition inflationary.

I think we’ve gotten used to having zero (or little) inflation that we can’t imagine anything else. I myself don’t remember a time when inflation was high and I bet you can’t either! We’ve had a blissful 20 years of this. Workers were always available. Inflation was invisible. And rates were stuck to the ground like gum.

The problem is that most of us are under the impression that rates are gonna go back to where they were. To ground 0. High(er) rates aren’t something we think will actually stick round. Or if we do, we certainly aren’t giving much thought about it. Or are dodging it altogether!

I urge you to think about this scenario and to plan accordingly! This isn’t the time to be accumulating whopper levels of debt or splurging on (already) expensive stocks.

A high-inflation, low-growth economy (stagflation, as they like to call it) is a real bummer. So make sure you’re prepared. There’s nothing worse than being caught off-guard thinking conditions like these will go on forever.

Jam tomorrow may sound delicious, but jam today is certain. And tasty, too!

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.