2022 will hopefully be the year that ends the pandemic. And that may happen towards the front end of the year. But the pandemic to endemic stage may not be the biggest ‘story for the year’. 2022 is shaping up as a year with solid economic growth and earnings prospects. A very good year may be in the cards for investors. The party pooper might turn out to be the Fed and other central bankers. The year is shaping up as growth vs the Fed.
That was the lead story in Making Sense of the Markets, my weekly column for MoneySense.
The post attempts to set the table for the story that will likely dominate 2022. While we are set for growth, the Fed has to get serious about inflation. They are set to taper bond buying and then increase rates. The task is to tame inflation without spooking the markets, or creating a recession. They are looking to thread the economic needle. That task is more than tough.
2022 will write the book on Jerome Powell (the Fed Chairman). How will he go down in history? Does he have the courage to attack inflation with the dedication that many economists feel is necessary?
Will Powell go down as the worst Fed Chair in history?
Bookend for the pandemic
It is certainly time to check in with economist John Mauldin. Here is the year of bookends, how the pandemic period might be framed. John reasonably states that the beginning stages of the pandemic were easy to understand. We had the first modern day pandemic, we had to shut most everything down. Government agencies then provided stimulus that dwarfed the amount provided during the great financial crisis of 2008 through 2009. The bookend on the backend of the pandemic may be much more complex.
Though on the policy response Mauldin suggests …
When COVID hit the US, the Federal Reserve responded by firing liquidity in all directions to protect the financial system. Given what was known and feared at the time, I think the Fed’s initial moves were appropriate. Continuing them for almost two more years was not. They should have ended QE a year ago. It had significant side effects for little clear benefit, except to the value of assets held by those with investable assets, clearly not the majority of the population.
Losing another 3 million workers
Enter Omicron. My associate Patrick Watson estimated the numbers last week. If we conservatively assume 20 million Americans will get Omicron in January/February, and 60% of those are employed, and each misses five days of work on average, it adds up to 60 million lost work-days. That’s like losing almost 3 million workers for a month, roughly 2% of an already smaller labor force.
In short order Omicron will double the labour shortage in the U.S. We would expect to see the same event playing out (to some degree) in Canada and around the globe. And as a sidebar, this was an interesting description of GDP …
GDP is, at the most basic level, the number of workers times their output per hour worked.
Heading into the pandemic we had very tepid economic growth, it averaged 2.2% the ten years previous. Pre-COVID Mauldin had estimated 2% average GDP growth for the 2020’s, aka more of the same. He then lowered that forecast.
2020 and 2021 has an average of 1.32% growth. Pre-pandemic we might have been heading into a recession, we even had an inverted yield curve. From Mauldin …
Inverted yield curves don’t cause recessions. They’re more like a fever telling you something is wrong. They typically precede recessions by 12–18 months. COVID interrupted that cycle with a recession unrelated to prior economic problems.
Can the economy stand on its own two feet?
Now we have removed that stimulus from the economy, which has to stand on its own. We are back to late 2019.
I would turn the phrase to “We now return to our regularly planned economic program”.
Mauldin adds …
Analysts that I greatly respect believe Jerome Powell will elect to “stabilize” the financial markets rather than fight inflation if there is a true bear market, which the data suggests is a real possibility.
Strong words from Mauldin …
If Powell doesn’t kill inflation, he will go down as possibly the worst Fed chair in history, which is saying something. I think he’s made of sterner stuff. He doesn’t need the money being an ex-Fed chair. He is thankfully not an East Coast-trained economist. He is a businessman who recognizes the insidious nature of inflation.
And the predictions that Mauldin hates to make (as we’re only setting ourselves up to be wrong) …
So, a forecast? I think there is a 70–80% chance of a real bear market and a better than even chance of what I hope will be only a mild recession.
Making lemonade …
… private credit and growing dividends will be where you want to focus your fixed income strategies. And we could be setting up for a once-in-a-generation high-yield investment opportunity. Getting in at the bottom is so damn much fun.
Asset allocation and the impact of inflation on sectors
From Dave Burrows at Barometer Capital …
Preet Banerjee offers a very good video. There are good reasons and not-so-good reasons to own crypto. FOMO (fear of missing out) is not on the positive side of the ledger.
Readers will know that I am in at a 5% portfolio weighting. I am also building up bitcoin and Ethereum positions in a TFSA, by way of Wealthsimple Trade.
To my eye it appears that bitcoin is on the way to mainstream adoption as a portfolio asset. Once gain, here is the go-to article that helps frame what is bitcoin?
Bitcoin as digital gold is a solid investment theme, FOMO not so much. Though I’m certainly happy with the 62% bitcoin return in 2021.
More Sunday Reads
Here’s a very good mix of reads and podcasts on My Own Advisor.
On Tawcan, Bob says relax, it’s OK to slow down. As the world’s most boring man, I agree 100%.
We need to look after our well-being. And if taking some breaks, forgetting about side hustles, and spending a little extra money can lead to better mental and physical well-being, we should all do that.
Retirement and the game of poker
Fritz at The Retirement Manifesto blog suggests that retirement is like a game of poker. The odds are stacked in your favour. Don’t like the cards you’ve been dealt? Discard them. They go pick up as many cards as you like, until you have the hand that suits your style.
Is it ever too late to start thinking about retirement is asked on The Findependence Hub. That post is from Ian Moyer who operates Cascade Financial.
You can also run retirement funding models at Cashflows & Portfolios, run by Mark Seed of My Own Advisor, and Joe of Million Dollar Journey fame. That is a wonderful option for the self-directed investor. Be sure to tell them that Dale sent ya.
And also on the Hub, the tailwinds for the healthcare sector as per Harvest ETFs.
The result is a basket of companies well-positioned to capitalize on the healthcare sector’s near-constant innovation while offering diversification and stability to counteract any potential innovation-related volatility.
I am a big fan of the sector. There is growth, it can be defensive, and there is no denying the benefit of the long-term trends. We are all likely to get older 🙂 and consume greater amounts of medications and healthcare.
Andrew Hallam (the author of Millionaire Teacher), is on the Maple Money Podcast. Andrew has a new book – Balance: How to Invest and Spend for Happiness, Health, and Wealth.
We’re investing in annuities on The Million Dollar Journey.
Here’s a must read:
The Money Maaster
Checking in with Canada’s least-read financial blogger (his words not mine, ha), the year end update on MoneyMaaster.
Passive income earner has a look at Scotiabank investment potential.
The week in review on Dividend Hawk. A weekly staple.
How to leave your high-fee funds behind in 2022
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