#159 - Fantasy Football Is Back And So Is The Bear Market + Canadian Immigration and How It's Tied to Post Secondary Education
#159 - Fantasy Football Is Back And So Is The Bear Market + Canadian Immigration and How It's Tied to Post Secondary Education
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Stocks in a typical retracement… will it hold?
Inflation is dissipating
Russia Sanctions are working
the University of Canada
Apple is building a Facebook ad machine
Fantasy Football is back!!!
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
📈📊Market Update💵📉
I have been closely following the markets this week because it feels really heavy again.
The ‘go to’ risk model for investing the last 50 years is having the worst year since 1976:
The price action in most stocks has been notably bearish in the past few weeks.
We saw quite a few green opens (gaps up) and red closes – the morning gains faded throughout the day and the indexes closed near their lows of the daily range. S
PY and QQQ slashed through their 50dma very easily; then bounced back and found resistance right under their 50dma.
In the meantime, correlations among most stocks have increased and they started to move together – something we typically see during corrections.
The market reaction to earnings has completely changed – only a few weeks ago, stocks were rallying on missed estimates and lowered guidance.
Lately, the market has been selling both positive and negative earnings surprises.
Sentiment has changed since Powell’s remarks at Jackson Hole.
Now, the market is worried that the Fed will keep tightening until inflation or job numbers fall significantly, whichever comes first.
As a result, most stocks are under pressure. Nothing is safe. Even energy and metals that held relatively well until last week, are starting to sweat a bit.
Can Alberta and Canada Kiss and Make Up?
💸Reformed Millennials - Post of The Week
Does Anyone Remember 2017, Crypto, and the Market?
Friends and family were hosting crypto investing gatherings... pooling money and asking about how to buy bitcoin and other altcoins during Thanksgiving and Christmas.
Everyone was texting about "which cryptos" to buy. Not whether or not to invest in cryptocurrencies, but specifically which ones!
And then the market peaked and came tumbling down over the next few years (2018-2019).
After Covid, the total market cap of all the cryptos together was finally able to exceed those late 2017 highs...
Why does that matter?
WE ARE BACK! TO THE SCENE OF THE CRIME. LOOK AT THIS CHART FROM ALL STAR CHARTS:
Bitcoin is worth a little under $400 Billion and Ethereum is worth just below $200 Billion. That means all the other cryptocurrencies combined are worth just under $400 Billion bringing the Total Crypto Market Cap to just under $1 Trillion.
The bigger thing here to focus on, I think, is the fact that the Total Crypto Market Cap is still above the prior cycle's peak.
If they lose that, then there's no bottom in sight.
For cryptocurrency enthusiasts, I think it's critical that they hold above the prior cycle's highs.
If you're a Bitcoin maxi or Ethereum Perma bull, then there's nothing I can do to help you here.
For those of you who are open-minded and are willing to participate, or not, depending on what the market dictates, these are the levels that matter.
In this case, if the Total Crypto Market Cap is above the prior cycle's highs, investors would do better to buy positively trending cryptocurrencies.
If that changes, investors in crypto should change their approach to perhaps a much more defensive one.
And that's ok.
I change my mind all the time. The market encourages this kind of behavior.
But remember, it also punishes those people who refuse to change their minds.
What the hell is QE and QT FFS?!
explanation below: from the Grit Capital Newsletter
“Easy Money.”
It’s what your drunk friend says when they’re about to lose $2,000 at the blackjack table in Vegas.
It’s what TikTok day traders will tell you while trying to sell you a course on their BS strategy.
But it’s also what the smartest hedge funds in the world will talk about when referring to the asset price bubbles that we’ve experienced over the last couple of years. Except these guys and gals are talking about easy monetary policy that has led to the runup of everything as capital flooded into the system.
While inflation and rates have dominated headlines, there is also something going on behind the scenes that is equally important, but less understood.
Quantitative Tightening.
Last week, the Federal Reserve stepped on the gas of its Quantitative Tightening (QT) program by accelerating the rate at which it unwinds its balance sheet.
But what does that mean, and how does it affect markets?
WHAT IS “THE CENTRAL BANK (BANK OF CANADA/FEDERAL RESERVE) BALANCE SHEET”? GENERAL LEDGER OF THE NATION
ASSETS:
Treasury Securities(TBILLS) are IOUs issued and backed by the US or Canadian government and considered one of the safest investments. The buyer pays money, earns an interest rate (yield) on this investment, then receives the principal at the end of the term. These IOUs (T-Bonds, Bills, Notes) trade on a secondary market and rise and drop in price along with interest rate movements. Treasuries are the government’s way of raising money to fund spending. This is the largest asset on the Fed’s balance sheet.
Mortgage-Backed Securities entitle buyers to cashflow from a basket of mortgage loans. These fixed-income securities are created and sold to investors by banks and financial institutions, including government-sponsored enterprises like Fannie Mae and Freddie Mac.
Other Assets include loans extended to banks through the repo and discount window, lending under a variety of credit facilities established to support the smooth functioning of credit markets and economic growth, and foreign currency held under central bank liquidity swaps ensuring the availability of dollars for foreign institutions.
LIABILITIES:
Currency in circulation includes the dolla bills in your pocket as well as a significant portion overseas and was the highest liability on the balance sheet until 2010 when it was passed by bank reserves.
Reserves Deposited by Commercial Banks are the cash minimums that financial institutions must have on hand in order to meet central bank requirements as expressed by a reserve ratio. Since 2019, the overnight rate the BoC/Fed pays on bank reserves has been its primary tool in setting the Bank/federal funds rate.
We know that the Bank of Canada and Central Bank of the United States (the Fed) have the two primary goals of maximizing employment and price stability. They can target these goals by using their balance sheet to accomplish them.
The BoC and Fed decide what it owns (assets) and what it owes (liabilities).
Assets and liabilities must always balance. An increase/decrease on the A side leads to an equal decrease/increase on the L side.
When the Fed is said to “expand their balance sheet” they buy debt instruments like Treasuries and MBSs in order to increase their price and lower yields, which is said to be a looser monetary policy.
On the other hand, they can sell debt instruments to lower prices and increase yields, which is said to be a tighter monetary policy.
Now that we understand what “the balance sheet” is, let’s see how it’s used.
A BRIEF HISTORY OF QE EVENTS THAT DROVE A NEW ERA OF MONETARY POLICY
JAPAN (2001-2006)
QE first began in Japan when it fell into a recession back in 1985. To combat the recession, Japan unleashed a massive stimulus program, which created a stock market and real estate bubble. When it imploded in 1992, Japan was forced to bail out its financial system.
This sounds oddly foreshadowing…
Because of the massive amount of debt that the Japanese government took on to bail out the economy in the 1990s, the Bank of Japan (BOJ) was forced to begin QE in 2001.
Under quantitative easing, the BOJ flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves and therefore little risk of a liquidity shortage.
However, easy money policies from the BOJ harmed domestic asset returns by suppressing local interest rates.
UNITED STATES (2008-2017)
The global financial crisis and the Great Recession led to widespread unemployment and reduced business output. By December 2008, the Fed had lowered the Fed funds rate from 5.25% in September 2007 to near zero. With interest rates near their lower bound and the economy continuing to contract, the Fed announced a plan to purchase large quantities of securities in an effort to put further downward pressure on yields.
In three different rounds, between 2007 and 2017, the Fed’s assets increased from $882 billion to $4.473 trillion.
While the effects of QE were widely considered as a massive bailout of the “too big to fail” banks, the long-lasting impacts of QE are really yet to be realized with a lot of polarizing opinions.
THE COVID CONUNDRUM LET’S THROW SOME MORE MONEY ON THIS PROBLEM
Building on the lessons of the Great Recession, the Fed in the USA relaunched quantitative easing in response to the economic crisis caused by the Covid-19 pandemic. Policymakers announced plans for QE in March 2020—but without a dollar or time limit. This also occurred here in Canada at much the same time.
The unlimited nature of the Fed’s pandemic QE plan was the biggest difference from the financial crisis version. Market participants got comfortable with this new approach after three rounds of QE during the financial crisis, which gave the Fed flexibility to keep purchasing assets for as long as necessary.
The stock market took off in response to the new plan. The S&P 500 surged nearly 68% from its March 2020 lows through the end of the year, at least in part because of the safety net of QE.
Over most of this period of QE, the monthly pace of purchases was $80 billion for Treasury securities and $40 billion for agency MBS. Overall, as shown in the Federal Reserve System assets graph, securities holdings more than doubled, from about $3.9 trillion in early March 2020 to $8.5 trillion in May 2022. As a percent of GDP, the holdings rose from 18% to 35%.
WHAT DOES IT MEAN?
This month, the central bank in the united states will let $95 billion in Treasuries and mortgage-backed securities mature, which is nearly double the peak rate of $50 billion the last time quantitative tightening was in effect from 2017-2019.
The runoff will increase the scarce bill supply that has been forcing investors into the Fed’s reverse repo program which is currently at an unprecedented $2.4 trillion.
BofA strategists are estimating the unwinding could ultimately knock 7% of the S&P 500 next year.
Just as quantitative easing drove down rates, we can expect QT to put upward pressure on them now as liquidity is removed from the system.
HOWEVER.
While there is worry about the impact that a scheduled increase in QT could have on stock prices, the unique situation with the large reverse repo balance could mute any potential effect.
If the Fed had securities on its balance sheet that matched the maturity profile demanded by the institutions engaging in reverse repos, it could sell an amount equal to the total reverse repo balance to these institutions thereby reducing the need for reverse repos and eliciting no change in the financial or real economy.
Though there might be a duration mismatch in the type of assets demanded, an actual withdrawal of liquidity is not the problem.
We are in largely unchartered territory here.
I think the best thing to do is to do your homework and listen to the experts. Dismissing QT as, “Oh we’ll figure it out” could end VERY badly.
🐦 Twitter Thread of The Week 🐦
Advertising changes bigly: Winners and Losers
$META, $GOOG, AAPL 0.00, $SHOP and small businesses
🔮Best Links of The Week🔮
Western Arms Support for Ukraine - Peter Zeihan
Reflections on the Investing Process with Michael Mauboussin - Compounded
A Dad Took Photos of His Naked Toddler for the Doctor. Google Flagged Him as a Criminal. - New York Times
Store Of Value - The Compound (Best Podcast of The Week)
Amazon Introduces Storage As a Service To Tackle Supply Chain Woes - Reuters