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Market Update 11/17/2022

Have Rates Peaked?

October CPI was released and the monthly print was finally lower than anticipated coming in at 0.4% versus the expected 0.6%. That was welcome news for both stocks and bonds as both have rallied substantially since the release. Moreover, the data indicates that CPI peaked in June 2022 at 9.2% annualized as every month since has been lower with October coming in at 7.7%. This is no surprise as Fed policy eventually works and the massive increase in rates has caused consumer to adjust their spending. The markets now need to adjust to inflation prints that are BELOW expectations for the next few months. Layoffs are mounting as well as the tech industry has announced more than 50,000 pending dismissals. The Fed’s objectives of lowering inflation and increasing unemployment are now being validated in the economic numbers.

The challenge is how to position into a slowing economy. For the past few weeks, I’ve advocated short term treasuries as the yield is attractive. That trade has worked as rates have FALLEN 50 basis points in the past month. The bond market is much more telling than the stock market and bonds are indicating a significant economic slowdown is upon us. A balance portfolio of quality stocks, bonds and real estate will work when inflation is subdued and that is the allocation we are structuring.

My “Crypto” Warning

In the wake of yet another crypto firm collapse, I feel compelled to warn investors of the risk yet again in the crypto market. It turns out that FTX, one of the largest cryptocurrency exchange, was taking the dollars that investors deposited into their accounts to buy various cryptocurrencies and using those dollars for FTX’s own benefit. Charles “Ponzi” enacted a very similar scheme 100 years ago and that notorious name is known by even the most novice investors. With FTX, the numbers are large as its CEO Sam Bankman-Freid secretly transferred about $10 billion of customer’s funds to his trading Alameda Research. While it’s still to be verified, the $10 billion that was transferred to Alameda was rumored to have purchase a crypto called Solana. The price of Solana has fallen 95% over the past year, which eviscerated that $10 billion. When investors went to sell their crypto on FTX and request dollars to be deposited at their banks there were no dollars at FTX to deliver. Those accounts are worthless now.

As Warcap clients know, we stayed away from crypto despite all the hype as there simply is no logic to their values. The largest crypto, Bitcoin, has fallen 75% this year and dozens of other cryptos are now worthless. The trouble with all of them is that they offer NO yield and can’t be valued. Stocks and bonds pay dividends and interest and are backed by either the earnings or assets of the company. Investors get paid a yield to own those assets and we can value those yields against other investments that offer yield. The only way for an investor to make money in crypto is to sell it a higher price than purchased. If there is no reason for a crypto to go up in price other than hype, it won’t, and this year has demonstrated such. My advice to anyone holding any crypto now is to sell and transfer those dollars to your bank account. I suspect that transfer will be challenging now as well.

As always, I appreciate your continued trust and confidence.

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