The first half of 2022 was rough on many fronts. The Russia/Ukraine war is still going with no resolution in sight. Inflation, as Ronald Reagan is quoted as saying "is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman” is feeding into all parts of our pocketbooks and financial planning. Equity markets have also declined at record rates, the Nasdaq posted its largest first half of a calendar year decline, the Dow was down the most since 1961, and the S&P 500 Index posted its largest first half of the year decline since 1970. And on top of the above, there is increasing fear of recession taking hold.
A $2 Trillion free fall has rattled Crypto to the core. Bitcoin has slipped more than 60% from its record high and numerous altcoins have also plummeted. Terra coins with its algorithmic-based stablecoin started out as an experiment and ended in a bank run that made $40 billion in tokens virtually worthless. Luna coin was trading at US$145 in April and is now less than one cent resulting in a 55-billion-dollar loss. More than $200 billion was erased from the entire crypto market in just one day. Crypto has gone through several major sell-offs which are now known as “crypto winters” or in simple terms a bear market. Bitcoin has recently dipped under US$20k as pressure mounts on the Crypto market. Three Arrows Capital has fallen into liquidation following the crypto crash. The meltdown can be partially attributed to greed, overuse of leverage, and a belief that crypto would always continue to rise. The current overall crypto capitalization is approximately $950 billion according to Coinmarketcap which is down from $3 trillion in November 2021.
Buyers Market in Housing
For the first time in many years, the words are being spoken that it’s a buyer’s market in Real Estate. Rapidly rising interest rates and increased borrowing costs have house buyers stretched to their financial limit. The effects can be seen in Canada and the USA where once hot residential real estate markets are turning cold. Falling home prices will have a direct effect on consumer spending and the overall economy, as real estate makes up a significant part of household wealth. We expect further pressure on the housing market as interest and mortgage rates continue to rise. After years of bidding wars and houses selling mere hours after being listed in some cases, it is unusual to drive around Toronto neighbourhoods and see the same house for sale for several weeks.
CPI Measures Inflation
In Canada the Consumer Price Index (CPI) rose 7.7% on a year-over-year basis in May, up from an increases if 6.8% in April. This was the largest yearly increase since January 1983. Energy prices rose 34.8% on a year-over-year basis in May, driven by the largest one-month price increase since January 2003. Food prices along with shelter remained elevated in May as well. Consumers paid 48% more for gas in May 2022 compared to May 2021. Crude oil prices rose in May as a result of supply uncertainty over Russia's invasion of Ukraine, as well as increased travel as COVID-19 restrictions are eased, prices could rise further as the summer travel season gets underway. With inflation still well above target and inflation expectations rising in the near term, many are calling for the Fed and Bank of Canada to continue raising interest rates in the next few meetings.
The Fed and Bank of Canada are increasing rates quicker than expected at the beginning of the year to catch up and fight rising inflation. Quickly raising rates helps to dampen demand to meet supply, however the probability of recession is rising as rates rise. China has made it clear that its Zero Covid Policy isn’t going anywhere; and has suggested that it will maintain a Zero Covid policy for at least 5 years. These restrictions and lockdowns will keep supply chains strained and add to the higher price pressures. The war in Ukraine and subsequent sanctions continue to exasperate world economies and energy prices will likely stay elevated for the foreseeable future, and oil prices in the range of $150 are not out of the equation for this year. A sign of trouble in the household sector is the consumer credit update which showed a record surge in credit card usage.
Stagflation is a term that is used to describe a stagnant economy hampered by slow growth and high inflation. The word stagflation has not been used in many decades but currently, it has become a buzzword used to describe our economic situation. The war in Ukraine, continuing challenges from Covid-19, China’s Covid-Zero policy, and hawkish sentiment from Central Banks make stagflation a real possibility.
Bonus Tip: Turbulent markets are likely to continue over coming months. Have some gold & silver exposure.
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