Operation Break Stuff?
Happy Chrismahanukwanzakah! and Hello December.
The season of hot cocoa and Hallmark movies is upon us.
Does it seem that the cold weather came earlier this year? Or is that just me?
Either way, we are especially excited this December as Letty and I are awaiting the arrival of our second daughter.
As many of you already know the official due date is December 25th, but given that babies come when babies want, we are naturally on high alert.
I guess we can make that the official theme for 2022. On alert and waiting.
Waiting for economic news, market news, or some other type of news to determine the direction of the stock market or which way Fed policy will go.
Are they going to "pivot" or are they going to continue on with "operation break stuff"?
I know the face-melting rally mid-last month may have instilled some confidence but let's remember that inflation is measured in terms of the rate of change from one period to the next and a move from .75% rate hikes to .50% is not a pivot.
As I have covered over the last several months, the market is exhibiting more signs of a topping process than signs of a bottoming process, despite the hopium-induced rallies that come now and again.
Either way, the Fed shifting rate hikes clears a hurdle for investors as it allows us to put focus on where economic damage may be emerging.
Real Estate…Ouch
One such area is real estate. Take a look at the FHFA House Price Index from Q3 2022 (Q4 out in January). According to Nataliya Polkovnichenko, the Supervisory Economist for the FHFA, “House price gains have substantially disintegrated in the 3rd quarter with a pace comparable to the one we observed during the great recession”.
To be clear, just like inflation, this is a rate of change calculation from the same quarter in the previous year. Notably, real estate prices did have growth, however, the rate of change in growth to the downside is what is concerning. What took 3-4 quarters of growth compression during the Great Recession has been unwound in about a quarter.
Of course, much of this is rising rate-induced destruction of demand. But come late January, when Q4 data comes out, I will be interested to see if this data was the start of a trend or simply an outlier.
As a side note: If you are a renter, an exodus of real estate buyers at this juncture may not spell well for rental prices as upward pressure may persist.
Even with .50% rate hikes "operation break stuff" is in full effect and with the potential for an earnings recession, more layoffs, and real estate weakness; I just do not see strength entering the capital markets, at least not yet.
But there is something that is potentially gleaming in the distance.
All That Glitters is Gold.
I'd say the overall general consensus is that gold is a "good" hedge against inflation. However, that is not really the case. The reality is gold is more sensitive to real interest rates (interest rates less inflation) rather than inflation itself.
But one thing gold is typically seen as is a safe haven asset. This is thought to be because investors see gold as a real asset that has a store of value. So why has it not performed well this year?
Well...not all environments are the same and in this case, the strong US Dollar has taken a lot of wind from a plethora of other assets including gold.
But that may be changing. Take a look at the chart below.
The chart reflects a divergence between gold and the US Dollar that started in early 2022, a signal of a downside break for the US Dollar and an upside break for gold shows a potential convergence developing. This may imply a positive trend change starting to develop in gold prices.
Let's keep an eye on this one.
Conclusion
As we enter 2023 the airwaves and inboxes will be full of pontification and conjecture in regard to the direction of the capital markets. Of course, the direction is out of our hands.
But what is in our hands is staying present this holiday season.
I wish nothing more for all of my clients and potential clients than for all of us to be surrounded by family, friends, and loved ones this holiday season and soak up the final few weeks of 2022!
“The desire of gold is not for gold. It is for the means of freedom and benefit.” ― Ralph Waldo Emerson
Thank you for reading,
James Anadon
