It's all about Jay - Your Money June 17th 2022

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Where to begin? I guess we should start with the Federal Reserve. A month ago, Mr. Powell Stood in front of cameras and proclaimed a steady, measured approach to changes to the Fed Funds rate aka the benchmark for money market and bond yields. The stated rate came in at 0.50% per meeting. On Wednesday, he somewhat surprised the street with a 75bp increase with the option of 75bp more at the end of July. IS he taking a page out of Paul Volker’s play book? That appears to be one train of thought, especially over in Europe where central banks outside of England have been trying to keep rates near zero to stop another Greek style debt crisis. With debt to GDP ratios climbing ever higher, one has to wonder when the creditor nations of the world wake up and say “the emperor has no clothes” meaning the debtors will never be able to repay their outstanding loan obligations. It’s what wakes me up twice a month at 2 am wondering if this is the day another shoe drops. I am guessing Italy has got to be on the list.

Global investors spent the rest of the week speculating on Mr. Powell’s resolve to bring inflation back down to their long-range target of 2%. It is a tricky balancing act. If they act too passively, they will not be able to get inflation under control and that could possibly force them to react like MR. Volker did back in 1979 and 1980. If they act to harshly, the key engine of the US economy (the consumer) could shut down and kill the economy like it did in 1981.

If we look at their scheduled meetings, the next rate hike will be at the end of July and the Feds will have had a clear look at retail sales, housing stats, consumer confidence and inflation. Plus, Q2 earnings will have started with many of the bell weathers showing Wall Street what is underneath the hood. Personally, I am not so much concerned with the actual levels but the direction and change from the previous month. If the majority of the key one’s trend lower, Mr. Powell and his partners will use the time from July 27 until Sept 21st to modify their numbers. And it is critical to understand, rate changes take time to alter consumer buying patterns and the summer gap may give them enough time to see the effectiveness of the June and July hikes.

Meanwhile the capital markets are doing much of the heavy lifting to alter consumer patterns. Rising mortgage rates have already negatively affected house prices, not by much but perhaps enough to make the average consumer pause before they make their buying decisions. Falling crypto ( I cannot call them currencies) assets have also melted a hole in the net worth. According to a report on Finbold, crypto markets have lost a combined value of $1.19 Trillion dollars. Yes, we have seen an even bigger drop in equity values but many of those securities are not only paying dividends, but the dividends are rising.

Speaking of dividends, you can buy two Canadian banks with yields over 5%. It might not be the bottom, but remember, historically, banks make more money as interest rates rise. Oh and half of them raised their dividends in May. If you are looking south of the border, Citigroup now yields 4.3% and JP Morgan yields 3.5%. Other sectors that are worth looking at include pipelines, energy ( Suncor yields 4.2%), insurance, healthcare, defense and tech (IBM yields 4.8%, Cisco 3.5%). PLEASE NOTE THESE ARE NOT RECOMMENDATIONS TO BUY securities, please check with your investment advisor to determine if they are an appropriate risk for your portfolios.

Long story short, consumers are getting hit in the pocketbook with skyrocketing energy, transportation, and food prices as well as rents and mortgage payments. This is negatively affecting their monthly expenditures while at the same time asset repricing has cut into their net worth.  Combined, we should see a fundamental shift in demand and if labor markets tighten thanks to layoffs, then overall inflation could come down faster than the street is predicting. This also may mean central banks will not need to raise rates as much as some fear.

We don’t know how long it will take for Russia to leave Ukraine but the latest data shows Russia’s cashflow is actually going up, because China and India are sucking up as much supply as they can get their hands on. That tells me two things. First Mr. Putin will be in no hurry to leave Ukraine ( he may be ousted internally) and second, Asian demand must be picking up which means supply chains will supply more goods into the marketplace. Seeing oil prices at $119 US, was unrealistic in my opinion. Longer term I believe oil prices will be much higher than the last two years because both the Canadian Government and the US Government cannot approve the needed infrastructure to offset demand, so those companies in the patch will continue to see a tidal wave of cashflow with no place to go other than dividends and stock buybacks.

Next week the US markets are closed Monday which may allow enough time for rationale investors to bottom fish a boat load of oversold stocks. Also keep an eye out for earnings from empire Company (think Thrify’s), La-Z-Boy ( their order book will possibly reveal consumer sentiment), Carnival  Corp, Winnebago (again are new orders going up or down) Fedex (changes to gross and net margin will be key in my opinion) and Carmax.

Happy trading and Stay Safe.

Information contained herein represents the views of the writer and not those of PI Financial Corp., and based on assumptions which the writer believes to be reasonable. The material contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This information is intended for distribution in those jurisdictions where PI Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this article in any other jurisdiction is strictly prohibited. PI Financial and/or its’ officers, directors, employees and affiliates may, from time to time, acquire, hold or sell a position in the securities mentioned herein.

Steve Bokor

Steve Bokor

Portfolio Manager