The Russcession is coming!

There is a growing chorus that the invasion of Ukraine will lead to a global recession. The economic destruction and inflation that is being unleashed is formidable. We have spiking oil prices. Oil spikes cause recessions. Throw in the fact that central banks have to increase rates (tighten) into an already slowing economy and the recessionary risks are growing. The Russcession is coming!

The recession (or depression) threat was the lead topic of my MoneySense weekly. And don’t be scared off by this post, stick with me here. The key is to be prepared. Also, there is no guarantee that a recession will appear. We might want to be prepared for most anything.

Of course, nothing is more important than the tragic situation on the ground in Ukraine. At the same time we will consider the economic and investment impacts.

And here’s the key quote from that MoneySense post –

“ ‘Not every recession has been caused by an oil price spike but every oil spike has caused a recession. This is likely to be a drawn-out affair and will have a sustained impact on commodity prices,’ said Brian O’Reilly, head of market strategy at Mediolanum International Funds. ‘Perhaps the scary part is that in 1990 [during the Gulf War], the Fed funds rate was 8% and eventually embarked on an easing cycle. Today, the Fed is at the beginning of a hiking cycle. It seems more and more likely a recession is unavoidable,’ added Ryan Grabinski, a strategist at Strategas Securities.”

We’re in for another strange recession

The COVID recession was not a normal recession. It was not part of the ongoing business cycle, it was created by a health crisis that came out of nowhere – except for aware epidemiologists who were calling for a pandemic at some point.

Economist John Mauldin says we’re in for another strange recession.

Now it’s 2022 and another strange recession looms. That’s right, I’m calling it: Recession is here, or will be soon. And unfortunately, it will be a global recession. Like the COVID recession, this one has little to do with the business cycle. It’s a recession of choice—not your choice or mine, but Vladimir Putin’s. He clearly miscalculated how hard capturing Ukraine would be and how the West would react.

Mauldin did correctly call the recessions in 2001 and 2007.

And more than predicting this looming recession, Mauldin says we’re in for the worst of the worst – stagflation. Inflation will stick around and offer the worst conditions for stocks and bonds. We don’t have much to go by for stagflation historical reference, but during the stagflation of the 70’s, not much worked. That is to say, not much worked to help an investor keep up with inflation.

That is a must-read post.

Not much is working these days

We are getting a taste of what works during stagflation or a period or rising and persistent inflation. In 2022, commodities (PRA.TO) (DBC) are working, gold (KILO.TO) is working, energy (XEG.TO) stocks and other materials stocks (XMA.TO) are working. And that said, the Canadian stock market (XIU.TO) is delivering positive returns. The Canadian high dividend route is working very well thanks to pipelines and energy producer exposure

Here’s a post on the big dividend ETFs in Canada. That post features Vanguard’s VDY vs XEI.

and Oil stocks avoid depressions ( my early morning bad rhyming attempt ) 😀
Pretty graph thou you have to admit pic.twitter.com/SCOcqjHhNc

— Burnsco (@garquake) March 12, 2022

From my post on Seeking Alpha – what works for stagflation.

Covering more modern periods of inflation …

For the above chart, GSCI TR represents the returns of the commodities index. CPI is the rate of inflation. We also see gold and REIT returns.

Commodities are reliable and explosive. You can look to that Purpose Real Asset ETF in Canada. That is a hybrid of commodities and commodity stocks.

For U.S. accounts you might consider the Invesco Commodity Index ETF – DBC.

Sue Wang, Ph.D., an assistant portfolio manager in Vanguard Quantitative Equity Group, found that over the last decade, commodities’ inflation beta has fluctuated largely between 7 and 9. This suggests that a 1% rise in unexpected inflation would produce a 7% to 9% rise in commodities.

Free gas?

From the launch date of this blog, I have suggested that investors consider an inflation hedge or three. That includes investing in Canadian energy stocks. The tanks of gas that I buy these days are courtesy of our energy investments. On an energy-friendly day, we might see those ETFs increase by $1500 to $2000. We’re hedged.

For further reference please have a read of oil spikes and economic outcomes from Lance Roberts (no relation) at RIA Advisors.

The inflation-fighting bolt-on

Because commodities and energy stocks are quite explosive it does not take much to provide a considerable lift for the balanced ETF portfolios. We might bolt-on that inflation protection to your ETF or stock portfolio or one of the asset allocation ETFs.

Here’s a simple exercise; I will bolt on 10% PRA and 5% energy producers onto iShares XBAL. I’ll run the portfolio from January of 2021 through to end of February 2022. Inflation fears and inflation picked up in early 2021.

Here’s the sector weights and breakdown between equities and commodities exposure in PRA. We are adding more equity exposure, I have accounted for that to at least get the stock to bond allocation on near equal footing, on VBAL vs VBAL and inflation fighters.

The returns for the individual assets for the period.

Recession, market correction, or continuation?

As always, we don’t know the future. Known risks are building. There is clear and present danger. And there are always those black swan curve balls. We might even be surprised by good events – perhaps a cease fire in Ukraine or a regime change in Russia. Markets might simply absorb the war and inflation risk and return to positive gains.

If we’re worried about World War III (who isn’t?). Here’s a chart for reference.

That said, if you want to be prepared for a ‘run-of-the-mill’ market correction, bonds and cash and gold might do the trick.

If you’re young and in the accumulation stage you might ignore all of the above and add to stocks, REITs and more as those assets go on sale. Make sure that you are investing within your risk tolerance level.

If you want to bolt-on some inflation protection, you now know the route, and I’ll leave that decision up to you. And I do hope that most readers on MoneySense and Cut The Crap Investing did take me up on the suggestion of some inflation protection.

Keep in mind that if inflation fears melt away, your commodities and gold will likely be a portfolio drag, reducing returns. Commodities have a history of doing nothing (for long periods) and then doing everything when you need them. I don’t know if you’re late to the inflation party, or if the party is just getting started.

What say you? Please join us in the comment section. Did you enter 2021 with some inflation protection? Or are you now considering that hedge?

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Helping Ukraine 

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