Saturday, December 1, 2018

The bear market that did not come

2018 was a poor year for stock investors; for investors in commodities; for those investing in banks.  Every investor is afraid of what crazy Trump may do next. Every investor is expecting another 2008 hidden behind the bushes. Then there is the trade war and Brexit and… a whole wall of worry to be climbed.  

Many markets, not only Canada’s have back paddled in the wake of rising interest rates and FAANG has fallen nearly 25% or more. This is not market euphoria; this is a market of fear and uncertainty. As such, there is little to trigger a major down turn. Yet, earnings are very good but again many fear that this is the peak of earnings growth.

Well, maybe the economy and earnings will slow in growth, but both will still grow!  Dividends will increase to stay competitive with interest rates as well. Fixed income is often exactly that… the interest rate these investments make are ‘fixed’ while dividends payments often increase to reflect higher earnings or to compete with rising interest rates. To top that off, there are the tax credits on dividends from great, but undervalued Canadian Banks. Insurance companies are currently somewhat less than banks, but they are also to benefit from this new environment of rising interest rates.  Will rates go up along a straight line?  No, I am pretty sure they won’t but overall this trend of rising inflation and interest is likely to last for a decade if not longer. 

Just like rates declined from 1982 until 2015-2018, today we are starting the upward leg. First to ‘normalize’ at around 4% and then government deficits will balloon, and Canada will have to pay higher interest on the debt left behind by a certain Trudeau; the same in the U.S. with the escalating Trump deficits.  Remember the Mulroney era?  Higher rates meant larger deficits and thus more taxes which in turn caused higher inflation which triggers yet again higher interest rates. Thus, I am sure that interest rates will not peak at 4%.  And, yes oil and natural gas demand will unavoidably rise and thus there will be energy shortages which also translates into higher inflation and yet higher interest rates. Will we in a decade or two reach the 14% inflation and 22% prime interest rate of the 1980s?  Possibly, maybe not that probable – after all, we have learned from the past or NOT!  So yes, I bet on 22% mortgage rates and escalating tax rates based on trends starting today.

We will see many market set backs or bear markets over the next decades. But it is now the era of the Millenniums. It is their turn to belatedly start families and then there are the economic refugees that will try to live in the more prosperous parts of the Western economies. You bet, they will be motivated to earn money and to invest. The bull market of the 1990s then caused by the baby boomers will repeat with the Millennium generation and the new immigrants.  Just like with the baby boomers these new families will take on a lot of debt and both inflation and interest rates will grow even more.

Will there be a bear market soon? Not likely we are still way too pessimistic and we’re still carrying the fears of 2008. There is currently no market euphoria; more likely the opposite. First people must think that the market ‘cannot go down’. That the economy this time is different. Until then you can buy on the dips. Once many are convinced that there will be no bear market then we will likely be hit. 

Next year is one of the best performing stock markets in the presidential cycle; just like year 2 (that is this year) traditionally is one of the worst. So, we seem to follow that scenario to the ‘T’. I think this year’s pessimism has prevented a major market crash in 2019. Trump, oh I hate that guy nearly as much as Justin, will likely have a good economy and stock market next year and he will blame all his failings on Democrats who now control the house. I wouldn’t have believed this until recently but I think we’re in for a 2-term Trump presidency. Oh… my G…

The U.S. dollar is still the safe-haven for uncertain times; more so than gold. Gold’s time will come but not right now. Use this time to build up your gold hoard because your dollars in cash will rapidly depreciate in the coming years of high inflation. 

Canada, ohhhhh…. Canada when doeth thou come to thy senses… or something like that. Kick out that trouble maker of a Trudeau and live up to your potential!  Maybe a pipedream. So, unless the coming resource boom (and it is coming if not tomorrow then shortly thereafter) is completely wasted by Canada, our banks and resource stocks will do just fine. For the rest invest in the U.S. and maybe a bit in Europe and China. 

I do not know how peaceful the coming century is going to be. That is my biggest fear – China turning totalitarian again believing in the hubris of a superior millennia old culture with the right to dominate the world. China supported by a has-been Russia could still be a formidable threat to world peace. As such, I support Trump and I beg our governments (for whatever that is worth) not to fall asleep at the military wheel. Remember Chamberlain’s attempts to appease an aggressive Nazi Germany. Let’s not play that game over with China. In that, Trump’s Fire & Fury talk against North Korea’s bluff seems to have merit. China’s Xi Jinping may require a similar treatment. I think there is a chance for a third world war now focused on Asia. Heaven forbid! 

Overtime, Muslim extremism is likely to recede. I see the state of Islam as that of Christianity in the 1950s when we were afraid of the devil and dreamed of heaven. In 20 or 50 years, Islam maybe as sleepy as the Pope is right now and with mosques empty as are today many Christian churches in Europe. I think the greatest threat to world peace is an escalating confrontation between a growing China and a declining U.S.  It is just a matter of population numbers. But there may be a third surprise contender – Africa with a future population even larger than China’s. We’ll see. That scenario may still be long off.

But for now, a reinvigorated stock market in 2019-2020 and a bull market even longer than most can imagine. But remember that rising energy prices are as much a retardant of economic growth as interest rates. Thus, investors be alert for set backs. For now though, I don’t see a major market crash (until tomorrow 😊).

No comments:

Post a Comment