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Changing Conditions

Recent market action has been confusing. It is likely to become increasingly so. While this post summarizes recent performance, it reflects on changing conditions that will make investing much more difficult.

Recent Outcomes

Events in the last two weeks shifted toward  hope that the Fed was beginning to ease up in the size and pace of rate increases. Powell’s comments this past week suggested a softening of his stance against inflation. His comments provided optimism to markets, especially in bonds.

The standard table is used to summarize results. Usually this table is based on weekly results. The one below is for a two-week period. Unchanged is the results measured against 7/26 of this year when the Fed began to aggressively raise rates.

This Week: 12/2/22
ASSETS 7/26/2022 2Wks Ago This Week 2 Wk. Returns Return from 7/26
DJIA $31,764.00 $33,748.00 $34,430.00 2.0% 8.4%
GOLD (GLD) $160.00 $164.56 $167.26 1.6% 4.5%
TECH (QQQ) $294.30 $287.96 $292.55 1.6% -0.6%
BONDS (TLT $116.84 $97.89 $107.09 9.4% -8.3%

On Friday, the jobs report came in stronger than expected, somewhat dampening the optimism for Chairman Powell’s earlier comments. Nevertheless, markets were strong for this period although appeared to be nervous toward the end.

Shifting to the longer-term look, large companies (DJIA) fared well since tightening commenced, but Tech has not.  Gold is beginning to come back into favor as inflation fears remain. Bonds reacted strongly the last two weeks in anticipation of a Fed beginning to show signs of backing off. However, bonds are by far the worst performers since 7/26/22 when the Fed began raising rates.

It is almost impossible to anticipate Chairman Powell’s positions going forward. He talks tough (mandatory for a Fed Chair), but is a victim of the times. Inflation is far from over and Powell is far from independent. This Fed Chair (and most before him) have all been little more than puppets for the political  establishment. They don’t manage monetary policy. They pretend to manage monetary policy!

It is not difficult to see Gold continuing to perform well in the coming environment. Part of that is due to inflation but also increasing uncertainty and fear. The dollar as the world currency appears to be coming to an end, although what replaces it is still unknown. Regardless, the loss of world currency status will weaken the dollar and inflate the value of hard assets denominated in dollars.

A New Investing World

Inflation is not over. The world is awash in money as a result of profligate governments and complying central banks. But a day of reckoning is coming. Unfortunately it is difficult to see the shape of that reckoning. Does it begin and end with a Depression?  Or does it begin with rapidly escalating inflation (including hyperinflation) which is ultimately extinguished in Depression?

The timing of such events is impossible to predict. (My guess, no better than yours, is that events start to unfold as early as next week, but more likely within the next three to five years.)

Sage investors talk of changing investment styles to conform to changing market cycles. They are fond of saying that there is a time for growing capital and a time for preserving it. But this wisdom pertains to normal business cycles. What is ahead is not some normal business cycle. It is a re-formulation of the financial structure of the developed world.  Viewed in these terms,  it seems appropriate to restate the previous advice:

There is a time for increasing purchasing power and a time for preserving it.

Individuals are likely to face a world few know. They have never experienced a Weimar Germany, a Zimbabwe and any hyperinflationary environments. Are traditional investing skills useful in such conditions?  Do they translate into results that must produce profits but profits in excess of purchasing power losses? As if this were not enough, rapidly shifting geopolitical alliances and non-stable currencies will make matters even more difficult.

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