As Twain put it, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
In early 2021, investors knew for sure that the already low rates would stay that way.
It was around that time that I bought my property in Canada. The mortgage broker tried to sell me on a variable rate at around 1.6%. He assured me that rates wouldn’t rise until 2023 at the earliest.
It was easy to see why he thought that…
Around the same time, Tiff Macklem, Canada’s version of Jerome Powell, told Canadians that “interest rates will be low for a long time.”
Of course, it just ain’t so…
Central banks hiked rates in unison in late 2021 and early 2022. Today, the average 30-year mortgage is above 7%. Those that took the variable rate are probably regretting it.
Just last week, news broke of a family forced to sell the home they bought in 2021. Their mortgage payments jumped from $2,850 to $6,200.
I don’t mean to make light of the situation. But in some sense, it’s a perfect illustration of the market we find ourselves in.
The New World Order
The investing world order you have understood for the past 30 years or so is over. The biggest risk for investors going forward will be relying on the things they think they know for sure.
Since the early 1990s at least, investors have known for sure that…
Inflation would stay low.
Credit would be readily available.
Central banks would always be there to save us.
If these conditions sound familiar, they should. Broadly speaking, this is the financial and economic environment we have enjoyed for the past 30-odd years. When something lasts that long, people assume it will last forever. But it doesn’t…
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Investors were pleased with the latest inflation reading here in the United States. The topline figure from the consumer price index clocked in at “just” 3.2%.
Never mind that core inflation was close to 5%. And never mind that this figure calculates a change from July of 2022, when inflation was raging the hottest. And never mind that the “official” numbers are inherently untrustworthy. And never mind that this is still a far cry from the Fed’s 2% target.
Forget all that and, sure, celebrate the CPI print.
What about credit?
In May, Chair Powell assured investors that:
Conditions in [the banking sector] have broadly improved since early March, and the U.S banking system is sound and resilient.
Maybe. Maybe not.
By the Fed’s own data, banks are tightening lending standards as if we’re heading into a recession. And that’s a problem for an economy that depends on the continued expansion of credit just to operate.
But surely, should anything go wrong, the central banks will be able to “save us.”
After all, that’s what happened in 2008 and 2020. I’m not so sure…
The Fed finds itself between a rock and a hard place.
The rock is the obvious signs of a looming recession (the yield curve is as inverted as it’s been since the early ‘80s). The typical “solution” would be to cut rates. But the hard place is the inflation levels that are still nowhere close to the Fed’s goal.
There are no good options left.
I don’t share this to scare you or make light of the situation. But if you’re relying on the things you think you know for sure, it’s going to be a very rough few years.
And don’t let the tremendous rally of the last six months fool you. Every bear market has months-long countertrend rallies that trick investors into letting down their guard. The recent decline in the Nasdaq – down some 7% in the last month – should be evidence of that.
So, as an investor, what should you do?
It’s All Vibes
One of the best indications of near-term movements in stocks is sentiment and momentum. I know this completely flies in the face of everything you’ve ever been told or believed about markets before.
Almost every financial advisor and investor out there relies on fundamental and conventional economic analysis to make decisions. For years, that “buy and hold” approach worked well. I think that’s over.
Today, the best returns will be made by traders, the individuals who buy the bounces and mercilessly sell the tops. And contrary to popular opinion, anybody can be a trader by following a few simple rules.
Over the past few months, I conducted an experiment with two novice traders. The experiment was simple. Follow a handful of rules and execute them without exception.
I think the results will surprise you. They had the chance to take more profits off the table than some of the highest-paid traders in the world.
On August 23 at 8 p.m., I’d like to show you. More importantly, you’ll see how you can immediately use this information to make better financial decisions in the future.