#138 - The Canadian Budget Opportunity and Inflation Signals A Peak
In this week's episode of Reformed Millennials, Joel updates listeners on the market and gives his take on the most recent US CPI inflation print. He also has on Podcast Favorite, Mel Caouette to talk about the Canadian Budget and Upcoming Alberta UCP confidence vote.
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Most of the first quarter was all about rising interest rates and inflation expectations. As a result, oil & gas, coal, uranium, metal, potash, and other basic material stocks have outperformed substantially year-to-date.
There is a new major market theme that emerged in the past couple of weeks.
Now, the market is not worried only about inflation. It has begun to discount a potential recession later in the year. Look at the best performers the past two weeks – so many came from defensive sectors like healthcare, utilities, REITs, and consumer staples (discount stores, auto parts stores, farms).
186 stocks went down 10% or more last week. Tech stocks (semis, cloud, Internet), financials and US Treasuries were hit the worst. Anything cyclical and related to growth is under pressure. Tech is looking heavy and on the brink of breaking down. QQQ managed to finish right on its 50dma.
34 stocks went up 10% or more last week.
The winners – oil & gas names, discount stores, uranium, potash stocks – typical stagflation move. The next earnings season and CPI report are right around the corner. Maybe, the market has begun to price strong earnings in energy stocks and inflation that is likely to remain elevated for the foreseeable future. If the same trends remain, we should see a continuation higher in many of the energy names that started to break out last week.
Inflation Is Served 📈
What you should be paying attention to?
Price increases over last year (CPI report)
Used Cars: +35.3%
Gas Utilities: +21.6%
New Cars: +12.5%
Food at home: +10%
Overall CPI: +8.5%
Food away from home: +6.9%
Apparel: +6.8% Shelter: +5.0%
Shelter is the single biggest component of CPI (33% of Index) and is still being wildly understated (@ +5% YoY) with rents up 17% over the last year and home prices up 19%. The actual inflation rate is much higher than 8.5%.
How are markets reacting? Up
Joel here - Likely we are near a cyclical high for both inflation + long-dated yields, which (if true) will be a big plus for the long-duration growth stocks. Notable most growth stocks didn't crack March lows despite a big rally in rates.
2-10 year yields are steepening (this is healthy)
Full story from Bloomberg here on CPI https://www.bloomberg.com/.../u-s-inflation-quickens-to-8...
💸Reformed Millennials - Post of The Week
“Permanent residents, foreign workers, and students will be excluded from this new measure. Foreigners who are purchasing their primary residence here in Canada will be exempt.”
Without getting into the specifics of whether this is a good thing or a bad thing, the 2030 Emissions Reduction Plan and Budget 2022 together send a strong signal that the net-zero debate is over in Canada. If the Liberals remain in government until June 2025 as their confidence and supply agreement with the NDP stipulates, I anticipate that global investment sentiment will have changed course, likely for good.
The political implications here are far greater for the CPC than for the government. Industry and investment have largely adopted and adapted to the energy transformation. Without the opportunity to form a government until 2025, Canadian conservatives will have to think about how they will strategically approach this issue.
When the carbon tax was first introduced, there were clearly impacts on the oil and gas sector. The global price of oil was already down and the increase in taxes cost more money for businesses and households. In Alberta, where the majority of oil and gas companies are headquartered and operate, the timing of a provincial carbon tax overlapped with an NDP government, which further politicized the issue.
We’re now in a spot where the debate about whether we are aiming at net-zero is over, though the government could still work to attract investment into the industry as well as embrace the opportunity Canada has to be a global energy superpower, especially within the context of what is happening in Russia and Ukraine.
Rhetoric about transitioning off of fossil fuels, and switching primarily to renewable energy creates a perception on the part of the public that we don’t need new pipelines or new forms of energy transportation. In advancing an aggressive clean growth agenda, the government is signalling to investors that they aren’t as interested in certain types of projects unless they align with the new policy direction–not such a big deal, but we’ve got to spend time retraining people so they can work in diverse industries.
🔮Best Links of The Week🔮
Ted Merz, former journalist and product manager (Bloomberg) had an idea to use tweets from a person’s timeline to build a mosaic.
Robinhood added four major cryptocurrencies to its trading platform today and they all registered gainz. 🤑 Shiba Inu, Solana, Polygon, and Compound are the newbies on $HOOD.
🇺🇸 The Pentagon is meeting with the defense industry’s top 8 weapon makers to discuss Ukraine’s needs as its war with Russia persists. - Reuters