No one is lifting a finger in Washington, and the markets are simply in disbelief about the lack of innovation and creativity from the administration. It has led to the LARGEST wealth evaporation since 1932 for stocks and 1788 for bonds!
Some Wall Street bears are talking about another 20% smash for the S&P 500 once recession fears are acknowledged by either Powell or Biden.
1932 is a year that economists remember and carefully study. It birthed some of the most aggressive and demanding government policies ever devised in the U.S., including gold confiscation, revaluing the dollar, many public projects, and the morale of the nation was at its lowest.
The problem back then was a deflationary one, and workers couldn’t find employment opportunities. The problem today is inflation, and businesses can’t find suitable employees.
It is quite rare to see the Fed Funds Rate below the CPI rate, creating a world of perpetual negative interest rates, but there’s little hope that this will change if governments don’t address the issues of our time: energy, food, global logistics, war in Europe, and worker shortages.
For now, I’m seeing nothing. There’s no real urgency with the governments, and that startles me because things don’t look promising.
Why is it that no major country is attempting to bridge the global gaps and bring leaders to a summit to come up with constructive plans?
In my opinion, it is because the political will to solve these issues has moved from a global scale to a local one.
De-globalization is screaming that we’ve passed the point of attempting to unify the different regions into one cohesive group. Europe, the U.S., and China all have their own problems, and the future looks more national than international.
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In the first six months of the year, the price tag for our stocks and bonds has collapsed by a record $36T. What this effectively means is that buyers and sellers are agreeing that businesses and loans are less valuable than before since we’re in this unreal transition period and the uncertainty level is exceptionally high.
What you see in the chart above is what’s called the risk premium, and it basically shows the premium that investors are willing to receive for the added risk of owning stocks rather than a fixed-income instrument like a bond, where the yield is more predictable.
Because both stocks and bonds are crashing in tandem in 2022, that risk premium isn’t enticing enough yet since both of these asset classes are falling and getting cheaper.
At some point, the bond market, which has historically led stocks, will stop falling and turn around, becoming more expensive, which is when stocks will finally be cheap enough for investors to enter back into.
We believe the July rate hike, which will bring the Fed Funds Rate above neutral at 2.25%, will be a pivotal moment.
When stocks and bonds crash by $36T from their peak and give back nearly 2 years’ worth of appreciation, it’s significant, but there have been times when the loss actually exceeded 3 years. Waiting another month until July 27th in order to have a better read on the economy at the next FED meeting could be GENIOUS.
Historically, in the years when the markets were horrific in the first half (the one that’s ending in a couple of weeks), the second half was unbelievable and indices soared.
In 1932, for example, when the S&P 500 was nearly halved, the markets steamed higher by 56% in H2.
As you can see, it’s extremely rare for H1 to be disastrous like this one is without a huge relief rally on the other side.
Will history repeat itself, or is this the outlier?
We will know in less than 75 days as the summer months expose the true state of the global economy and politicians come under pressure to DO SOMETHING… anything.
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