I just wanted to drop a quick note on a few of my thoughts on what is happening in the economy and offer a little guidance.
Inflation is at its highest level since 1981. We have seen a huge increase in energy prices which is having the biggest impact on inflation. Officially inflation is reported to be at 9 percent, but in several club meetings over the years I have discussed in detail how the inflation calculations are done. As an example, if they used the same calculations that they did in 1981, we would be well into double digit inflation. It is the Feds way of not panicking the public, but I think it is the government’s way of misleading the people. The Fed and the Federal Gov’t are autonomous but in many ways the Fed is influenced by pressure from politicians and other groups. Powell is meek unlike previous Fed Head Volker who was the best Federal Reserve Chair ever and did what was necessary to tackle inflation and stood his ground against special interest groups. Powell does not have a backbone and his policies change like the wind.
The good news is over the last few weeks we have seen commodity prices finally dropping due to decreased demand. Oil, natural gas, corn, copper, and wheat are all dropping. What is likely more shocking to most members is that wheat prices are now below the prices before Russia invaded Ukraine. Remember Ukraine and Russia are some of the biggest wheat exporters in the world.
It is no surprise that higher interest rates are killing demand and when people expect inflation they stop buying.
As for the economy, it has contracted in the first 2 quarters of 2022 and I guess technically we are in a Recession however, one very positive sign is the strong job market. In June 372,000 new jobs were added and this is despite low consumer confidence.
In fact, there is currently 11.3 million job openings in America and that means there are 2 job openings for every person unemployed in America. The unemployment rate is still very low at 3.6 percent. All this points to the fact that the economy is holding up as demand for labor remains high.
I remember at a club meeting in 2021 that Steve Hawks and I were talking about inflation on stage and we said that interest rates have to be increased. At the time of this meeting the Fed said they were going to keep interest rates at zero percent for all of 2022. Steve and I said that was impossible and here we are today in the situation we are in as the Fed did not move fast enough. I believe they were trying to keep the stock market party going as long as possible.
In the same meeting I stressed that members must heavily sell their stock positions as higher interest rates will mean a major stock market correction and the stock buyback scam will be less intense. (The stock buyback scam is the biggest market manipulation program that has ever been created and in Europe it is controlled and, in many cases, not legal but in America it is the artificial wealth creation program…again I have discussed many times at club meetings but this is another reason the market will see softness now). I know some of you sold your positions and took profit and some of you did not through conversations I have had with many of you over the last few months.
With the exception of commodities, all asset classes have done terrible so far in 2022. Of course, energy was the strongest performer and high dividend paying stocks also held up.
This is the 2nd worst performing 6 months since 1965 and the worst since the subprime crisis in Feb 2009. However, in 2009 the market lost 27 percent in the first 6 months and then gained 24.9 in the second half of the year. I don’t see this quick bounce back in the next 6 months until I see the direction of inflation.
Most fund managers out of self-interest due to management fees encouraged their clients to stay in the market. This was terrible guidance by putting the interests of their own first. I will not comment on the direction of the market until inflation is under control but it is also very bearish that investor sentiment is the lowest in years.
One thing I do like is stock valuations are below average for the first time in years and at 16x earnings that is slightly below the historical average.
Remember members, that stocks bottom before the economy does. On average the market bottoms 3 months before the end of a recession.