Shifting Winds

What I’m watching right now

Have a look at this chart. It’s the latest data from CREA showing that homes across Canada have increased in price by 28% year over year. 😮

Sweet baby cheez-its! That’s very surprising for home owners, and scary for renters. Even if a renter doesn’t plan to buy a home any time soon, it would still be prudent to  expect higher than normal rent increases coming over the next few years.

There’s also a good chance crude oil is going to $100 per barrel, which we haven’t seen in many years.

But not everything is going higher. Bond indexes are down about 6% over the last 2 quarters.
Bitcoin and the Nasdaq composite are both pretty deep in the red compared to a few months ago.

 

So what is going on?

The major driving forces behind the macro landscape have not changed over the years. But events have become exacerbated now, which can be a good thing as I’ll explain further below.

Due to a skyrocketing inflation rate but continuous cheap credit in the markets, real interest rates are now painfully negative. This forces fixed income investors all over the world to seek higher returns outside of the bond market.

The consequence is a flood of capital into similar, but riskier assets such as real estate. You can rent it out for a “fixed income” plus you get that inflation protection as land generally increases in value either at the same or higher rate than the cost of living. (Depends on location too of course.)

With higher inflation readings (7.5% in the USA, 5.1% in Canada) the market is predicting central banks to raise interest rates.

A former Bank of Canada governor is pretty confident we’ll see 1 whole percentage point increase (probably 4 rate hikes) this year.

In the United States, markets are pricing in 7 rate hikes by the Federal Reserve this year. But I think the economy can only handle 2 or 3 at most.

Higher interest rates means future profits from businesses will require a larger discount applied to their future cash flows. This lowers their valuations and sucks money out of the stock market, and into the bond market where you can get higher yields for less risk.

So what does this mean for investors?

As usual, I don’t have any specific answers. But I do want to be transparent. So I’ll tell you what I’m doing with my portfolio these days. 😀

 

On real estate assets

A unit in the same building as my condo just sold for over $600,000.
The government assessed value of this sold unit is below $500,000.
Hence, there is extreme exuberance in the real estate market right now.

Unfortunately we’ll probably see prices continue to move higher as the federal government recently increased its immigration target to 432,000 for this year.

 

Housing supply cannot catch up with demand so upward pressure will be applied to home prices.

If I were looking to invest I would not be looking at rental properties in 2022. There are better opportunities out there. When negotiating, the party that’s more desperate will get the short end of the stick. There are currently more desperate buyers than sellers. Getting into a bidding war in this current environment is probably not a good financial decision.

 

On stocks

Overall I feel the market is fair to slightly overpriced. But certain names have been beaten down and are looking very attractive now. Here’s one of my tweets from several days ago.

 

I do believe this is a great time to gradually pick up some undervalued stocks, and buy into the fear.

I’m slowly accumulating PayPal, and adding to my Facebook position. The worst of the downturn in these stocks should be over. Maybe growth stocks will continue to fall before things turn around. But an investor always thinks in decades, not months or quarters. 10 or 20 years from now will Shopify, Facebook, Etsy, et al be making more money or less money? My bet is on more. 🙂

 

On stock options

Earlier I mentioned how the current uncertainty can be a good thing. That’s because I see opportunities in a choppy market. I explained this thoroughly in a January video about taking advantage of higher implied volatility.

Well I am putting my words into action this month. So far in February I have doubled the options income I normally earn in a month. 🙂

 

On alternative assets

I recently picked up a couple of 10 ounce silver bars from VBCE. Paid $369 each. The spread on physical bullion is pretty wide these days.
Historically you could trade 1 oz of gold for 60 oz of silver. But right now the ratio is 1 to 80 suggesting silver may be underpriced. That’s why I decided to buy silver instead of gold.

Real assets such as precious metals are a good hedge against unexpected or very high inflation.

It certainly beats holding cash which is losing 5.1% of its purchasing power every year if you use the official CPI number.

 

The defensive triangle

I’m focused on the following 3 areas as they are either safe or have a lot of upside potential.

  1. I’m using my precious metals to hedge against inflation.
  2. I’m using my bank stocks and other value stocks to protect me against rising interest rates.
  3. And finally, I’m buying undervalued growth stocks to take advantage of the bounce back when the stock market recovers, which is only a matter of time. I believe the economy will go into a recession this year if central banks raise rates by as much as economists expect. If or when that happens, rates will be slashed once again and tech giants like Google and the others I’ve mentioned on Twitter over the last week will outperform the broad market very easily.

And of course while I’m waiting for everything to unfold, I’m selling options to earn those juicy premiums.

Markets are always changing. When the wind shifts it’s time to adjust the sails. 🙂

 

______________________________________
Random Useless Fact:

Scientists say this is the most uncomfortable feeling in the world.

 

Subscribe
Notify of
guest
8 Comments
Inline Feedbacks
View all comments
Cam
Cam
02/21/2022 3:03 pm

I’m interested in the silver part, do you ever sell your silver back to the dealer? is the silver for a SHTF type situation? How do you realize any appreciation on the silver?

AlW
AlW
02/21/2022 6:55 pm

Sweet Jesus get f*%K out of the silver. I bought a ton of it in dental school – heard it was a great investment & thought I was a player in the market. My entry point was at $17-20/ounce, it went all the way up to $50/ounce within like 8-14 months and I didn’t sell cause I thought it had more room to run (check the chart). There was the US debt ceiling crisis that drove it up but it was lots of talking heads and difficult to decide when to jump out – no exit plan!

“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”

-Warren Buffet

That’s literally what happens with those precious metals – nothing my silver sat in a safe for years until I finally sold it to get rid of it. I might have made 13% on it over 9 years – where do I sign up?

You’d do much better putting money into a productive cash flowing asset.

Screenshot 2022-02-21 at 10.54.06 PM.png
Moe (Moementum Finance)
02/21/2022 8:32 pm

Hey Liquid, I appreciate hearing your perspective on market volatility, high inflation, potential for interest rate increase, etc. and how you’re going about it. The approximately 30% YoY increase in home prices is just insane. 😲 I feel for renters and those first time home buyers. As for stocks, I am also buying shares of some of the beaten down tech stocks like FB, ROKU, ETSY, TWLO and OKTA. 😉 Looking forward to your next post. Keep it up, man 😊

D Investor
D Investor
02/22/2022 1:42 pm

Good thoughts Liquid. For real estate I think its pretty crazy we have large catalysts that impact both sides. On one side when you look at the % price increases and stories of FOMO you wonder when this will burst. On the other side you have the government introducing new incentives, and those immigration factors that help propel it forward. Wild times.

For the undervalued growth stocks its a really good time to hunt for value. I think the companies that are yet to be profitable could continue to get hit hard while we go through this volatility. For the others with reasonable p/e and still very good growth/earnings they should be great long term buys.

PYPL (RSI of 15) and SQ (RSI of 17) both look quite oversold.