Showtime

Okay, Monday sucked. Let’s remember three things. First, if you’re feeling moany about equity markets, spare some sympathy for the kids and their crypto. Stocks have shed less a relative pittance after hitting a record high. Bitcoin has been crushed 50%.

Second, people with B&D portfolios got a reminder Monday of why they are invested thus… stocks went down. Bonds went up. Preferred shares held.

Third, read yesterday’s post again. Corrections are normal. They are good. They mow the weeds, prune the trees, chase away the varmints and pave the way for growth. It matters not what markets did on any one day in any year. The point of investing is to finance life’s goals when they roll around. And given enough time, markets get over everything.

Remember when Covid hit? Stocks promptly crashed 35%. They recovered. We forgot about it. Actually equities swoon a lot. In 2014 commodity prices took them down. In 2011 it was the US debt ceiling crisis. Before that we had the 2008-9 credit crisis. Seven years earlier it was the dot-com crash. Before that, Y2K. And before that… well, you get the picture. If you go back in time and read the terrified comments scratched on the innermost caverns of this blog by early online humanoids, you’ll witness the same stuff, over and again.

Our recency bias is overwhelming. What happened in the last 24 hours (or maybe a week) we believe will go on forever. Trouble is, that’s never happened. Nor will it.

So where’s the bottom? How long will investors keep selling?

No idea. Sentiment is at the worst level since the pandemic started. The reopening, ‘Roaring Twenties’ trade got ahead of itself. The immediate catalyst is hot inflation and the realization CBs are definitely going to do something about it. Rates up. It starts in two days in Canada. Mix in Putin and pandemic, and poof.

Remember, however, that the global economy is expanding. We’re just in Year Two of a recovery cycle after the worst of the plague. Less than 40% of the world is vaxed, and as the Pfizer phlows more growth will come online. In other words, we are not going backwards.

But meanwhile the bears are in control. After ridiculous levels of speculation and vats of testosterone (Reddit, Robinhood, GameStop, AMC, crowdfunding, manipulation, NFTs and crypto) those who were leveraged, on margin, over-extended or just willfully blind, have smoke coming off their rumps. Hard to be sorry. But that’s human nature.

Reasonable people will show bemusement and do nothing. Some will buy and do well. Those who sell in a storm will suffer. They always do. I ran into a woman on the weekend who sold her mutual funds at a heroic loss in the tempest of March, 2009, and has been in cash since. We ran some numbers sowing there’s a good chance she’ll now run out of money before she runs out of life. Shocked. She was floored.

Also shocked are those who thought a correction would never come. And here it is. Way overdue. Stop whining.

Now, even more people believe the same of residential real estate. It can never seriously fall, they say. If it did, people would run in fast and buy up distressed properties a bargain prices in a blink. But housing lives in the same world as all other assets. It has been inflated by a decade of ridiculously-cheap interest rates, easy credit and accommodating politicians. The immediate catalysts have been virus, nesting, WFH and a wave of real estate speculation as 25% of all sales go to investors.

Could tis turn as abruptly? Surprisingly?

You bet.

“It’s showtime!” say economists are Scotiabank, who now forecast six Bank of Canada interest rate increases in 2002 starting the day after tomorrow. Current odds are 70% in favour of a Wednesday launch for a multi-year tightening cycle. This will be like the stock market correction – talked about forever but without many really believing it. The truth is that CBs cannot leave rates in the ditch. They fuel inflation. That destroys the currency. They create speculation and asset bubbles. They make income and wealth disparity worse. They punish savers and people on fixed incomes. They put society at risk if another economic downturn comes and the central banks are unable to drop rates. The evidence is legion that these guys are already remiss.

So mortgage costs will go up. At the same time little birdies (vultures) are telling me the feds are about to bring da hammer down on investors, with a requirement for larger down payments, a beneficial ownership registry and restricted use of leverage.

And the WFH/virus/move-to-Hicksville thingy? Fading in May. Gone by August.

In short, use your noodle. You may think this is about the stock market. It’s not.

About the picture: “HI Garth, it was really a very nice event the discovery of your blog back in 2016,” writes Francisco. “I’ve been reading every single article since then and it has definitely helped me in my financial decisions and those of my closest friends and family. Please continue with your hard work, it is really appreciated. This is Carmeline. Last week was the one year anniversary of her death after 9 precious years in the family, we really miss her deeply. It would be nice if she can make the picture selection.”