Yuck

Did cheap money spoil us?

That’s rhetorical. Of course it did. Assets values went up as the cost of cash went down. Yesterday we detailed how that impacted residential real estate. The change in valuations in one single 10-year period was epic. Houses became unaffordable, even with crazy-low loans. Now that interest is normalizing, it’s a deeper crisis.

Cheap money also messed with our heads. Now people truly, deeply believe real estate should go up every year. And their incomes. Plus their TFSAs. This inflationary psychology turned into the real thing, sweeping the price of bananas, life insurance premiums, building materials, puppies and iPhones along with it.

Concurrently, we’re becoming a paunchy, egocentric society with the largest cohort telling is they care more about experiences than accomplishments. As this paleo blog has moaned, it’s WFH, quiet quitting, FIRE and the great resignation which have helped create to record job openings, distraught employers, workplace wastelands and the feeling so many people have that the world owes them a living. After all, didn’t your house make more money than you last year? And if you don’t own property, why work? Because you never will.

Oy. It’s a mess. And now we have this – an abrupt, shocking, aggressive pivot in monetary policy. Rates are going up fast. More to come, And they will stay high in order to crush inflation. On average, it’s taken 10 years for economies to accomplish what the Bank of Canada and the Fed have vowed to do. Will this then be a lost decade?

Click to enlarge. Source: Bank of America; IMF

So everything is being whacked now. Gold. Oil. Equities. Houses. Bonds. Crypto. NFTs. The loonie. Europe. And the old guy across the street on a fixed income.

Friday was ugly.

The S&P 500 has dribbled back down to its June low, erasing the saucy little rally we saw late summer when lots of people thought central banks would cave. They didn’t. Rates are surging higher and risk is off the table. We’re back in the bear.

On Bay Street that $120 barrel of oil is now worth $78. Gold – once touted as an inflation hedge – has faded from two grand an ounce to $1,600. Commodity prices across the board are lower on expectations that the global economy will stall out or retrench as CBs turn the screws and Putin has a loose one. As a result, our market – heavy in commodities and financials – is also laying an egg.

In summery, everything sucks. The good news: it’s temporary, not permanent.

Central bankers know the pain they’re causing, and will eventually pause the rate hikes. Look for that to occur in Q1 or Q2 of 2023. Markets will love it. Additionally, if recession causes inflation to start tanking, more love from equities – which will then look forward to recovery and growth. Meanwhile Russia is losing the war in Ukraine and even a few hundred thousand more kids in uniforms won’t likely change that. At some point next year this conflict will wind down. Markets will surge.

In fact, analysts surveyed by Bloomberg predict nearly 26% returns for the S&P 500 benchmark index over the next 12 months.

What to do?

The best answer is nothing. Never sell into a storm. Do not turn paper losses into real ones unless you actually need the money right now or in the next few weeks or months. Don’t get emotional. Stop looking at your investment accounts every day, week or even month. Never, ever watch BNN. Wean yourself off the comment section. Ignore the professional market bears trying to scare you into subscribing to their newsletter or buying their latest terrifying book.

Instead, keep investing. When you have the money, buy an excellent but battered asset with it. Fill your TFSA and your RRSP, collect the free government money on your kid’s RESP, jump on the new FHSA when it arrives, put that spousal loan into operation and abandon your high-fee mutual funds for superior ETFs.

Remember the rule: buy low, sell high. This is low. Like Fiona, it shall pass.

About the picture: “Bella loves biking and the outdoors,” writes Andy. “She is interested in chasing squirrels over interest rates. She is enthusiastic about investing….her time in going for a run. Thank you for the blog day in and day out.”