The pending recession might turn out to be the most advertised and expected recession in history. It might be so expected that it doesn’t happen. Or perhaps the economic shifts are now happening in slow motion. We appear to be in a Goldilocks scenario with falling inflation and a consumer that refuses to cooperate with the recession narrative. Is a soft landing possible, or are we just delaying the inevitable? Hold the recession, on the Sunday Reads.
From Bob Eliott, in this post – Transitory Goldilocks.
There is little indicating an immediate recession. If anything, recent months show strengthening. Inflation also moderated as transitory inflation in supply-chain constrained sectors has shifted to disinflation. Put together, it looks like the perfect picture of goldilocks – decent growth, secularly low unemployment, moderating wage growth and low inflation.
The trouble is that this dynamic is unlikely to persist for too long. The labor market remains tight, and that means that growth and incomes are likely to continue given the current economic momentum. If economic momentum continues, it will sow the seeds of the tightening needed to generate the economic slowdown.
This is playing out in slow motion …
So while the Fed is getting a great outcome for now, once the disinflationary dynamics from goods wash through, income growth is likely to drive continued elevated spending growth, driving inflation that is higher than desired. Said differently – the goldilocks period is most likely transitory because the strength it creates sows the seeds of the need for tighter policy.
While there will probably have to be a recession at some point in order to get the type of weakening of the labor market necessary to ease inflation pressures and that will eventually cause the Fed to ease, what is currently priced in looks like a very fast shift to easing during an inflationary cycle. Investors (the market) think, are betting, that the Fed will choose continued stimulation of growth over the inflation fight.
Stocks and bonds and 60/40
Bob says buy bonds when the Fed begins to ease. No need to jump ahead. That said, we get paid to wait. Perhaps at a yield that will soon be on par with core inflation.
Bob thinks the chances of stocks and bonds both working in 2023 is quite low. For bonds to work, stocks will likely have to fall due to economic weakness. Essentially, either the bond market or the stock market is ‘wrong’. I’ve suggested that how the 60/40 balanced portfolio can work is by providing a rebalancing opportunity. That’s exactly what we want – bonds going up in price as stocks go down. Investors can accumlate the greatest growth asset (stocks) and then wait for sunnier days and higher stock prices.
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Bob offers that commodities look attractive and provide a good hedge for the stocks and bonds. Yes we’re back to the simple all-weather portfolio model that includes dedicated inflation protection.
Bob was on the Macro42 podcast. It is very good. I watched and tweeted a “summary” …
I would add that the market is not fighting the Fed, but does not believe the Fed (perhaps). North of the border, Scotiabank doesn’t believe the Bank of Canada will soon do the hard work to bring inflation back to the 2% target range. Perhaps Macklem has his fingers crossed behind his back during press conferences?
Cash is Kinging again
For years, holding cash was not a useful alternative asset because it was so poorly yielding. In this cycle, it is worth recognizing that cash may also be one of the better assets to hold. It allows investors to reduce their risk while enjoying modest return.
For more on the inflation fight we have – All good things must come to an end: There by the grace of Paul Volcker went asset prices.
On RIA Advisers – Lower stock prices are the Fed’s goal.
And John Mauldin says Powell has taken away the punch bowl.
Perrault added, “He would never, ever, ever — I’m sure — agree with anybody suggesting that he’s misleading folks, but I’m sure a little bit of misdirection is helpful in this context. Whatever you can do that’s going to make people believe you’re going to do your job or achieve your objective is helpful in the current circumstances.”
Offices sit empty as vacancy hits an all-time high.
Oil and gas gushers
Oil to average $80 U.S. in 2023 leaving producers flush with free cash flow. Of course that free cash flow ends up in my pocket as I moved to the energy dividend approach. I was happy to see that Tourmaline (TOU.TO) announced another $2 special dividend this week.
I recently updated my energy post for Million Dollar Journey. Tourmaline was added to make the Big 4 energy stocks that you might hold as your energy core.
Also on Million Dollar Journey, I updated – investing in Canadian retail stocks. That is more that surprising. Retail is terribly underrepresented in the market indices, but there is a robust collection of Canadian retail stocks available from the grocers to the strong brands of Canadian Tire and Tim Hortons to the international stalwart known as Couche-Tard.
More Sunday Reads
On My Own Advisor, Mark offers the dividend cut edition in response to …
In the post Mark offered this chart from RBC.
Algonquin is part of the Beat The TSX Portfolio. At times the investment approach will find very good value (that’s why it beats the market) and along for the ride will come companies that are cheap for a reason. In the end, the strategy works very well.
I like that in tandem with the Canadian Wider Moat approach.
On the My Prudent Life blog, they’re putting their TFSA dollars to work. That’s a nice mix of 5 stocks, built around 3 Canadian banks.
Of course, we have the week in review courtesy of Dividend Hawk.
Bob at Tawcan offers his favourite Canadian stocks for 2023.
On the retirement front, is bucketing a cheap trick strategy? asks Fritz at Retirement Manifesto.
And on Findependence Hub, despite inflation Canadians continue to contribute to RRSPs and TFSAs.
And last week on the Sunday Reads, Canadian dividend investors were leading the charge.
An interesting Tweet on the escalating floor prices for bitcoin. Bitcoin is on a nice run thanks to the FTX scandal – as I had suggested might happen several weeks ago.
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