Get Set
Happy New Year to all.
As we welcome in 2022, from an investment perspective, let’s recognise 2021 for what it was for financial markets. Peak speculation.
Fuelled by the largest money creation experiment in modern economic history, speculative excesses were not limited to, Alt Coins with crazy names, Bit Coins, NFT Tokens/Art, Cathy Wood/Tesla (same), record SPAC issuance, MEME stocks, Lumber, Real Estate, a record year for M&A, a record year for stock buybacks in the US (at record valuations, while insiders are selling), record IPO issuance everywhere… it’s a long list.
This list looks most vulnerable as Central Banks continue to try and prick an array of bubbles without taking the entire system down with it, respecting the fragility. And this is why there is absolutely no way on this earth that they’ll raise rates enough to get near inflation in 2022.
Needless to say, a repeat of 2021 is highly unlikely as Central Banks assess their constituent’s temperature by continuing to threaten markets with “tightening”.
If the first week of 2022 trade is anything to go buy, we could be in for a very rough ride. The last time Central Banks did more than threaten markets with higher rates was 2017/18! The market response was swift, equity markets tanked, and rates were already on the road back to zero before COVID hit, as per the chart below.
In fact, the same thing has been happening for quite some time now.
Note: Investors should expect this next round of “tightening” to be shorter than the last!
The problem, or difference, for Central Banks this time around is the one of inflation. The not so small matter of the cost of everything rising, including goods, services, and income. True inflation. Not just too much money chasing too few goods.
As most eloquently put by Gavecal’s Louis Gave last week, “today’s inflation rate is not a bug, it’s a feature. It’s what they want, and, the only way to deal with excessive debt.”
Should rates rise? Absolutely, globally. Rates should already be 5-10% in many parts of the OECD to look after poor savers but the debt situation is so out of control, they can’t. Can you imagine what an interest rate of 7% looks like to borrowers in Australia? It’s the stuff of nightmares, and, never going to happen.
So, inflation will continue to run hot, rates will not rise. As mentioned above and worth reiterating, the problem right now for share/equity investors is how far Central Banks will let stock markets fall before bringing back the stimulus. The funny thing is, THE STIMULUS IS NOT EVEN GONE and there is talk OF BRINGING IT BACK!
Since equity markets have dropped more than 2% in the last 3 trading days since the US Fed’s last statement, many commentators are calling for a “walk back” immediately!! That’s only 4% off all-time highs in US and there is already “PANIC”!
This gives investors the insight they need as to how far Central Banks will let equity markets fall before releasing the “everything is still awesome” stimulus. This, how far they will let markets fall, should be the first consideration for investors this year.
Now let’s add rising energy costs to our little inflation problem!
From an investment perspective the outlook for oil prices has hardly been more bullish, ever, yet we’re still 50% below the 2008 peak WTI price of USD148!!
According to Andy Lee of Macro Strategy Partnership, in 2021 Oil and Gas discoveries hit their lowest level in 75 years, as demand remains robust and financial markets have lost all love for non-green “energy”.
Actually, the irony of the green/climate change agenda is the sheer amount of energy it takes to create “clean” energy.
The amount of energy required to extract and process all the key resources and components of the new green change is also enormous.
The economic reality is that the world is not ready to suddenly move away from hydrocarbons to wind, solar and other “green” substitutes but the ESG mad Virtue Signalling Davos type Climate Change Warriors are determined to push on at any cost.
Starving the current energy sector of finance and investment is going take a heavy toll. That cost is going to be rising energy prices to go with some serious inflation. Get set.
Just check Germany. Germany is about to shut down 3 of its last 6 operational nuclear facilities this month, on their way to complete 2022 phase out at a cost of 10 billion Euro!! Ouch, more irony. What are they replacing it with?
Have you seen gas prices in Europe over the last year?
Shutting down the nukes and putting all their faith in un-scalable, unreliable, non-baseload renewables with no viable economical energy storage in a northerly climate to boot has foreseeable consequences.
Good luck reducing dependence on Russia Nat Gas anytime soon. It’s either that or pay a steep premium for shipped LNG from the US, where the dimwit administration is busy trying to strangle the fossil fuel industry, which is driving up costs.
Make no mistake, rapidly rising energy prices will affect the cost of everything you consume.
Now consider this, when the chips are down and markets start demanding their easy money again, Central Banks will surely oblige, despite the inflation issue. Just watch what happens to Gold prices this happens, as it was in 2019/20.
Market expectation of rising rates has subdued the gold price in recent months, but when the penny drops on what is truly afoot luck will favour the prepared.
As inflation continues to rise in 2022 and Central banks continue to debase their fiat currencies, expect investors to flock into ALL physical assets to protect their purchasing power, not just Gold and Silver. This background will continue to be highly supportive of Commodities in general.
Furthermore, if recent rotations in international equity markets over the last few weeks are any indication of what may unfold in 2022, value stocks are coming back as the spec names get torched!
This just adds fuel for thought to investors’ minds in 2022 asset allocation, some themes are the same as those that worked so well for us in 2021, such as non-precious metal commodity and energy producers. We’ll look to add to these positions on weakness.
Valuation metrics on Australian Gold producers and the dividend many pay continue to make the sector a very important one for our portfolio. The next leg up for this Gold bull market will start this year as investors/the market realise rates will not meaningfully rise.
We’ll also continue to add, on weakness, proven industrial dividend payers whose revenue stream can withstand or benefit from the oncoming inflation wave, the usual names! More to come.
There’s also the challenge of thinking global, acting local.
Then there’s this:
Peace.
