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Chicken Little, or a little chicken

Updated: Jul 25, 2023

Is the sky falling? NO, in fact its being ignored completely. Today the BOC cranked the interest rate up again, why? Inflation is just not coming down fast enough, but the same day, the US announced "Inflation is now at 3%" but... thats not 2%... so we need to keep going...

So within 2 years, the overnight rate has gone from .3% to a full 5.0%... and no effect on the economy... yet. So why are we still buying shit like there is no tommorrow?

lets face the facts, we have never had a prolonged Pandemic, where Governments flooded money into the system, and left rates at rock bottom for too long... and now we feel the pain. So nobody knows where this will go... but lets look at a few indicators.

  1. Even with the drop during the Pandemic, this is the longest Bull run for stocks in History, enabled by plunging interest rates for 20 years.

  2. Banks are padding their cash reserves getting ready for... something?

  3. Oil is falling, indicating less demand as inflation and interest rates cut back spending and travel

  4. Large Corporations are laying off, Microsoft, Twitter, Google, GM and other auto companies.

  5. Gold is climbing, at almost $2000 an ounce, indicating safe haven investors see something is coming

  6. Mortgages are plummeting, and refi's are brutal, already news stories of defaults are coming in and the job loss's haven't even really had time to take effect.

The BOC, and Fed are in a tough place, they are trying to turn the ship, by cranking the rudder all the way over, but it still will not turn fast enough... but its turning... the problem is, not matter what they do... its still gonna hit the iceburg... Oh, they may miss the one in front of them, but will they turn the rudder back in time to keep the ship straight? Or overshoot and hit the next iceberg, sitting right next to the first one ? aka, a Recession...

The banks are all skeptical that rates have gone up too much, too fast, and I tend to agree. Its kill inflation at all cost, and if they want to bring it down quickly, which is their intend, they need to pour a lot of cold water on the incessant buying coming out of a 2 year ice age. Built up demand and supply chain disruption, fueled by a massive buyout, and rock bottom borrowing costs have created a perfect storm for an inflationary, bubble.

So, what to do? Will there be a broad Recession (suppose to happen already) or not? Who the hell knows... I don't. But there are a few things we can do, and should have already done.

  1. Its a great time to rebalance into cash. GICS and T-Bills, are the best they are ever gonna be, so if you are looking to create a cash cushion, now is the time with returns of over 5%, and 0 risk, put some money away.

  2. All indications lead to a down turn, but there is no reason to sell all your equities. Now is the time to keep your portfolio balanced, and keep some cash in T-bills for purchasing power later.

  3. Bonds are looking more attractive as both the Fed and BOC are advertising an end to tightening. Starting soon, or even now rebalance into Bonds if you are too heavy in equities.

  4. Strong dividend equities will survive, it all depends on your investment horizon. If you have 20 years to go before retirement, let it ride, over time good stocks average a 7% return, some paying a 4% dividend (RBC is one) If your Horizon is short, say a year or 2, then build a cash cushion using T-bills, GIC's, and Bonds to cover the next 4-5 years of expenses. With interest rates at over 5%, you won't get this opportunity again.

Rates are not expected to stay this high, they will drop eventually, but nobody knows when, so take advantage of them now. You simply cannot go from an average rate of 2% for the last 10 years, and expect the economy will survive at 6%... something has to give. So you can ignore Chicken Little if you want, but I would rather be a Little Chicken, and wait to see what happens in the next 4-5 months... more later

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