Inflation is Dead
If inflation is solved, what’s left to celebrate?
Ask yourself this: if we’ve put this borderline hyperinflationary crisis behind us, what is there for the market to price in as the next reason to celebrate?
I don’t see anything too promising:
- War in Europe: right now, we haven’t seen any signs that the Russians want a truce. To us, this seems to be a prolonged situation that won’t come to an end anytime soon. With new countries formally joining NATO in 2023, it could get even more tense.
- Energy Crisis in Europe: this is still a baby in its infancy. No, I don’t expect the crisis to get worse, but I do expect it to bring a recessionary wind to the continent.
- China and U.S. Tensions: these don’t seem to go away. Trump started with tariffs, and Biden is continuing with more rules and regulations around competition while both empires chase military and cybersecurity dominance.
- Aging Population: in our view, this is the mother of all problems to the global economy. Right when workers are needed most and globalization is coming undone, Baby Boomers are retiring at a record pace and prolonging the imbalance in the job market.
As you can see, investors are incredibly bearish, which gives me a sense that we’re forming bottoms for the indices, but in order to fund retirements, the dreaded demographic cliff is finally turning into a reality.
Until millennials are able to fill the gap, Boomers exiting stocks and buying more real estate and bonds for the income they provide will put a cap on valuations in an era of higher inflation.
Even more interesting is that 2022 showed investors that building a 60/40 portfolio isn’t a real hedge since they can fall together.
This is a significant takeaway from 2022 since it calls for adding other non-correlated asset classes to portfolios after a decade of not even considering them — commodities, for example.
If inflation is unpredictable, infrastructure projects such as roads, bridges, airports, and government contracts, which have fixed contractual quotes, are great inflation hedges.
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Wall Street must become convinced that a recession is not a catastrophe.
In other words, we’ll form the new bull market once Wall Street sees enough data showing that the worst of this reset is in the rearview mirror, but stocks will only roar back after millennials come back to the table and buy equities and real estate (which will be in 2024, in our opinion).
2023 will likely see the bottom for stocks when the FED pauses rate hikes:
Betting against stocks in the third year of a presidential term is not a good idea but we would rather get aggressive as the tides turn towards March, May, and June, when the FED is slated to halt interest rate hikes.
Between now and then, we think gold will perform as a hedge.
Exactly seven years ago, on December 14th, 2015, the FED announced their first hike after years of ZIRP, and that was the bottom for gold and silver.
Could this be a repeat?
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