Changes in perspective and reality influencing Markets:
- Deflation to Inflation Investing
- War Time Investing from Peace Time Investing
- A shift from Globalism to Nationalism to Tribalism
- Change in focus involving Past – Present – Future
Investing decisions change for many reasons. “The Market” direction of money flow changes based on Perceptions – real or perceived. Right now, we have to recognize the hard realities in life because it will impact our market returns until they change again. Unfortunately changes in perception have no defined life cycles.
We will spend some time on the last item above because it is the least obvious and the most recent. First some brief comments on the first three.
Deflation to Inflation Investing
We have had about 40 years of declining interest rates. The was brought about by a long period of peace. Yes, the USA has been involved in wars in Eastern Europe, Afghanistan, and the Middle East. These have been proxy wars and not at the historic levels of wars based on our human history. Globalization has also had its impact on deflation with production moving to low cost production areas (SE Asia) from the USA. Equities and bonds do best in deflation periods. We have had 40 years of Deflation. That has changed with manufacturing re-shoring back to the USA and North and South America from SE Asia. Re-building physical manufacturing is inflationary. We will now be required to be more Active Investors rather than Passive Investors. Another change in perception, not included in the list of four above.
Globalism to Nationalism and War Time to Peace Time investing
These two are interlinked. Changes from Globalism to Nationalism has already started the return to tribalism. This is both country Vs country and internally within countries as one belief system Vs another belief system fight for their voice to be heard. In the USA, we have been experiencing this with capitalism Vs socialism and the “privileged” Vs the “less privileged.” I’m sure other divisions come to mind readily. These changes from Globalism to Nationalism to Tribalism result in conflict. This can be expected to increase from crime to internal rebellion to countries fighting over natural resources and borders. This brings us to War Time investing Vs Peace Time investing. Wars consume resources as well as lives and freedoms. The biggest resource being consumed, is energy. Wars still run on fossil fuels. I don’t expect demand for oil to end any time soon. The world has under invested in fossil fuel development intentionally. We have not invested in new energy at the necessary level to replace the short falls in fossil fuels. Same is true for the other demonized resource, mineral mining. The shift to Wind and Solar is commendable, but because they are less-dense sources of energy than oil, they will fail to replace fossil fuels in what is required for base load energy supply. The only solutions on the horizon for replacement of fossil fuels as a base load, high density energy supply are hydrogen and nuclear. This will be the solution to sustainable energy supply so look at investment opportunities in Hydrogen and Nuclear, but they are at least a decade off.
The combination of War Time Investing, the shift to Nationalism, re-shoring of Manufacturing to North America, promoting the Climate change battle, all say we have at least a decade of inflation in front of us. Minimal, a decade in front of us.
All of the above will cause a shift in our perspective of investing with a forward future looking view to a present day impact of our wanting the security and needing the comfort blanket of the past. the future is less predictable and uncertain. Humans love certainty. The future is greed at work and the past is fear at work. In a Future looking perspective bad news is ignored. In looking to the past results, all news or attention is greeted as a reason to sell. In a present looking view of the market, we can get a mixed investor response to news and events.
I would like to offer to you the idea that we are in the present view perspective of market. Jay Powell in June suggest a softer stance on Fed action on interest rates and the market rallied. In August, Jay Powell suggested a harsh stance on interest rates and the market falls. The market is still reacting to the good news / bad news.
Like it or not, we appear to be heading to a looking back, past perspective, where any news is a reason to sell the market.
What LOTM will focus on are actionable ideas in the value, positive cash flow, dividends, no or low debt and commodity areas. This I think is what will be needed to be in tune with money flows.
We are of the belief that half the world wants off the SWIFT Banking System and the US dollar as a global reserve currency. This will involve 2/3 the Global population because it includes China, India, Indonesia, Russia, the Middle East and Africa. It is highly probable that commodities will be included in the new basket that challenges the US Dollar. This is of no surprise to anyone or should not be. Of greater value is the recognition that the commodity rotation has begun. It will evolve over a number of years – decades even but we can get in harmony with the trend now.
We will suggest a renewed focus on dividend paying companies with a commodity link. Military defense companies and companies with no or little debt. Safe haven assets can look at short-term treasuries.
It will not surprise me to see the S&P 500 drop by 50% from Fridays close, over a two to four-year period. Yes, we will have equities that increase in price dramatically, but they will be in the minority. Not a good environment for passive investing.
Physical Gold is the next best safe haven to short-term treasuries. Once the US Dollar begins to fall, Commodities in the USA will rally along with countries that export commodities. These include Brazil, New Zealand, Canada and Australia. Likely Vietnam as a big agriculture exporter. Maybe Argentina but they are a great country to live in but a mess financially. The USA does have redeeming factors that make it a desirable place in this story line. Our baby boomers had children while the other countries’ baby boomers around the world, did not have children. The USA has good replacement demographics. The USA will need higher than normal inflation to deflate its debt. There is no way we can grow our way out of debt especially with government policies that work against increasing productivity.
The Bottom-line is that the need for investor focus on past history as comfort about an unsure future will grow.
Risk taking will diminish and Probabilities will be more important than Possibilities.
That’s it Have a Great Day!
Two excellent Videos to recommend this week.
The first is from The Coin Bureau. The host is in my opinion “the” source for detailed information on crypto. This week takes on the World Economic Forum (WEF). In a very understandable way Guy lays out what the WEF has said publicly on what the WEF want’s to accomplish by 2030. Literally, You will Own Nothing and Be Happy. Everything will owned by “Stake Holders,” and you rent literally everything. Agree or disagree but you should listen to understand. Consider this. Blackrock (BLK) $676.78, is a leader within WEF. They are buying up residential real estate and have been for some time. We do not have a housing shortage. We have a shortage of available housing. Link to Coin Bureau presentation – How to Survive.
The second Video recommended this week, is from Blockworks Macro interview with David Woo. Of note is both hosts, Alf and Andreas, are from Europe. Denmark and Italy. In the intro, the observation is made that storage of Natural Gas in the EU is ahead of schedule and will be at full capicity by October first. This is different from what we are hearing here in the USA. It suggests that oil and gas stocks in relationship to this coming winter demands, might top out sooner than anticipated. In the interview with David Woo, done the day before Jay Powell’s presentation at Jackson Hole, Woo predicted that Powell would be very hawkish on interest rates. Spot on. He is saying the USA household balance sheets are the healthiest in 20 years. Wages are rising at a 7% rate and gas at the pump and commodity (food) prices will be down. The inflation number for Q3 will be very good (falling) in the short-term and Powell has to be very hawkish on rates to compete with the Q3 release of Inflation. Volatile market, but he is negative on equities longer term.
Written August 28, 2022, by Tom Linzmeier, editor, Tom’s Blog at www.LivingOffTheMarket.
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