Anyone who has been following my work likely knows I have been pessimistic about the economy for a while.
I believe uncontrolled inflation is one of the worst phenomena that can grip both an economy and a society. It’s regressive – meaning it hurts those at the bottom more. As money printing has pumped assets to scarcely believable levels over the last decade, those without assets have not been able to protect themselves. But those same people are paying more for goods and services as prices rise.
Back when the March CPI reading was released, I wrote a deep dive warning that Fed hikes would come thick and fast, which the economy would not be able to handle. The US administration was arguing this was simply “a Putin price hike”, maintaining that all was well.
The Fed is out of options. Inflation is now officially scary. And while the US government continue to pretend like all is just swell, simple maths and logic dictate that there is no easy way out of this
The maths, on the other hand, didn’t lie. My position has always been the same here – it’s not complicated. If you print more money than at any point in history, the value of existing money will fall. That’s inflation, and it’s simple maths.
The fact people in power declared that inflation was “transient” for so long, before then accusing Putin of causing it, in the context of the below chart is inexcusable in my view.
Now
Fast forward to today, September, and the Fed has indeed hiked. The economy has pulled back – by the technical definition even hitting recession already. Talks of a “soft landing” by the Fed have pivoted to a “growth recession”.
The hikes were badly needed and I am thankful they have come. But I’m not ready to pop the champagne on inflation having peaked yet. And even if it has, peaked and declining are different things. Not to mention, the fact I’m writing this with a coffee hand that cost $4.80 is not exactly filling me with glee.
And to quote Jon Snow, “winter is coming”. Which means radiators, electric blankets and central heating systems. This is a problem as energy is so utterly vital to the economy, and well, we are in an energy crisis.
I think this winter will accordingly be really tough. People are going to struggle. Businesses will get squeezed. My Dad, who runs a pub in Wells, UK (where the excellent Hot Fuzz movie was filmed!), sent me a text last week.
I was paying 3p per KWh for gas. My new cheapest contract is for 17p. Crazy. A small pub like the City Arms having to pay 6x for gas
I was paying 3p per KWh for gas. My new cheapest contract is for 17p. Crazy. A small pub like the City Arms having to pay 6x for gas
As the t-shirts and suncream swap out for jackets and hot water bottles, it’s concerning to think about.
More pain to come
We got news today that payrolls rose 315,000 in August. This has slowed from its previous red-hot pace, but it’s still quite positive overall.
I don’t see how we don’t get a pullback here, with higher interest rates and energy costs baked in. See my Dad’s quote above and explain to me how we don’t see profits and employment slow down. I know that’s the UK, and a mere anecdote, but there should be more pain to give here.
I also think that the full brunt of higher rates has not been baked into corporate earnings yet – the upcoming earnings season will certainly be interesting to track, with my gut feeling that it will be bloodier than forecasts currently have.
Time to buy
So yeah, I’m buying stocks here. Hah.
Or to be exact, I just have. Despite my pessimistic thoughts on the economy, I got a limit order filled on the S&P 500 this morning at $3,950. A lot of my thesis has to do with what I wrote about here. Like every investment should be, it’s after taking into account my time horizon, risk tolerance and long-term goals – and certainly is not a wise move to be buying here for everyone.
This is not an investment for the next month or year. This is a long-term addition to my portfolio. I’ve been jumping around Latin America all year, jotting down ramblings about the economy on my laptop from cafés. The biggest purchase I expect to make in the near term is extra guacamole on my burrito. In that context, I’m happy to bear short-term volatility.
Maths is never wrong, anyhow. That was the thesis behind the above money supply chart inevitably causing inflation. Here, we have seen – as I write this – about a 20% pullback in the stock market. Let’s take a quick intermission to look at the below chart.
So yeah, there could be more pain to give. As I said above, I think there will be. But let’s be clear – who am I? If I had true predictive power, I wouldn’t be sitting here ranting about money printing and overpriced coffee. I’d be on a yacht in the Caribbean. Or on a private jet to watch the Newcastle game tomorrow. Or maybe a beach in Cuba. You get my point.
What I’m trying to say is that I’m just a punter talking about the economy. We have already seen a large pullback. While I expect the climate to get worse and an even bigger leg down, I’m also uber confident in the fact that the market will rise up beyond the current level over a long-time horizon (again, math – see above chart of stock market historically).
Money printer could return
When considering my investment horizon and financial goals, that is more powerful to me than my short-term bearish thoughts, when considering the fact that I may be wrong. While I keep reiterating my fear for the economy, part of that fear is the hunch that Powell will turn back on the money printer if markets get too bad – especially with the recent narrative around inflation having peaked seemingly lessening the disadvantage of doing so (a thought process I couldn’t disagree with more).
That’s ultimately the point that tips the scale here and lets me arrive at my ultimate conclusion that I don’t have justification to overrule my dollar-cost averaging stock buying for my long-term portfolio, which is all this really is.
One final point. I’m talking stocks here – a basket of the S&P 500 to add to my portfolio. Super vanilla. Nothing fancy. I love Bitcoin with all my soul but I’m not ready to venture that far out on the risk spectrum quite yet, and the risk profile of my current portfolio does not suit a purchase currently. But that time will come – eventually.
Anyhow, I’ll do a more quantitative report on my buy, and go into my updated portfolio allocation, with an upcoming deep dive. But for now, that’s a quick anecdote of my buy order.
I’ve just arrived for a quick holiday in Norway, having not been in Europe all year. If anyone has tips, hit me up. Let’s hope the S&P 500 isn’t zero by the time I’m back on my laptop next week – or the crypto markets, when it’s all systems go for the Ethereum Merge.
The post I’m increasingly pessimistic about the economy, but I just made my biggest stock purchase of the year appeared first on Invezz.
