How many of you are tired of the schizophrenia in the markets?
Barely is the market in rally mode before a sell-off causes investors to head for the exit.
It’s a cycle.
You have the central bankers announce their rate rises and economic outlook. People hang onto every word they say, dissecting it and interpreting it the same way Roman augurs read into the future by studying the entrails of a sacrificed animal.
Then the media weighs in on daily movements, adding to the momentum.
It’d be worthwhile if they could steer the ship properly.
But you’re well aware of the central bankers’ track record with managing the economy.
The inflation that they said was transitory is still roaring — the US Consumer Price Index (CPI) data for last month came out on Tuesday night. Prices were up 0.1% relative to the prior month and 8.3% higher than the same time over the last year.
Though you don’t need the official data to tell you that inflation is overstaying its welcome. The only issue I have with these official data readings is that the reality we are living in feels much worse than the data suggests.
Think about it, are your weekly bills rising more than 8% from last year? Mine are.
Sure, this is US data, but I reckon the Australian CPI data would give a similar reading when the Australian Bureau of Statistics releases it.
That’s why I believe ignoring the central bank chatter will do you a lot of good.
But clearly, that didn’t happen this week.
How low can it go?
The US markets on Tuesday trading saw the biggest slump since June 2020. The Dow Jones and S&P 500 indices fell around 4%, while the NASDAQ Index fell more than 5%.
The carnage in the Australian markets was more subdued, with the ASX 200 Index falling around 2.5%. Part of that was because the damage to the resources and mining companies, which comprise a significant proportion of our markets, was less brutal.
Nevertheless, it wasn’t a pretty sight for those hoping for some relief. After all, a small win in your portfolio could help offset rising bills.
With costs remaining high, we expect businesses and households to experience significant pressures. Many businesses are now seeing profit margins take a turn for the worse in the most recent reporting period. Hiring freezes and reduced staff counts are accelerating.
Add to this rising household mortgage repayments and petrol prices, and you have a lot of headwinds on economic growth.
So, if you are hoping for a quick dip in the markets before things become rosy again, I reckon you need to readjust your expectations.
As for how far things can fall, this is not as clear-cut.
On one hand, the argument for the stock markets to drop sharply (30% or more) is that many companies are trading at high multiples to earnings relative to the bleaker outlook on business conditions and the general economy.
But then you have the governments on the other side that have to keep a watchful eye on the official data. Governments worldwide don’t want their economies to collapse as it would ruin their chances of re-election or, worse still, face the prospect of riots (see Sri Lanka, Canada, and the Netherlands).
Their preferred strategy in recent times has been to borrow from the central bank and then pump the economy with trillions of dollars in stimulus payments.
Not to mention that fund managers and algo traders have been playing the game of buying the largest companies to keep the indices up.
That’s why we saw the markets remain levitated for so long. In fact, if you search ‘the most hated bull market’ online, you’ll see articles with this heading at different times over the last decade.
While it created an illusion of rising wealth for many as markets headed up, it could turn really bad on the way down…
Let me indulge you with this…and we aren’t just talking about falling prices.
A fearsome scenario…potential reality or conspiracy theory?
There’s an expectation that the government will come to the rescue should the markets tank heavily because of these coordinated rate rises by the central banks.
But what if it’s different this time around?
What if central banks continue to raise rates to tip the market over and governments don’t come to the rescue with stimulus payments?
It’d be a real disaster, wouldn’t it?
Higher cost of living, ballooning debt, falling asset prices, and failing businesses…
There’d be blood on the streets, with no bandages to dress the wound.
And what if governments come to the rescue by offering to take a stake of ownership of your assets to keep you from going bankrupt? So they have a foot in the door, and you don’t need to lose your house…
And what if (just what if) the central banks take this opportunity to transition into an alternative financial system? One that’s digital so that keeping records of transactions will be easier. One that is programmable, so someone could, theoretically, add or subtract wealth in people’s accounts or even shut them out of the system.
These things sound unbelievable and unfathomable, right?
Well, our recently elected Labor Government campaigned on a platform offering to take a 40% stake on a property to help first homebuyers get into the market.
And the World Economic Forum has been discussing central bank digital currencies.
What could possibly go wrong with these developments?
I don’t know about you, but I want to run in the opposite direction to what they’re doing. And if you’re the same as me, you’d want to check out our strategy to protect yourself from the potential impacts on your wealth.
Things can happen fast, so act now!
Editor, The Daily Reckoning Australia