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2022, The Year Of The Hangover?

The global recovery has slowed down significantly since the peak of the re-opening…

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This article was originally published by Zero Hedge

2022, The Year Of The Hangover?

Authored by Daniel Lacalle,

The global recovery has slowed down significantly since the peak of the re-opening effect in June 2021. What many expected would be a multi-year cycle of above-trend growth is proving to be a more modest bounce. Furthermore, according to Bloomberg Economics, the global economy will likely grow in the next ten years at a slower pace than in the decade prior to the pandemic.

The causes of the slowdown are clear. On one hand, China’s real estate bubble is a larger problem than anticipated, and there is no way in which the Chinese authorities can engineer higher growth from other sectors to offset real estate, which accounts for almost 30% of the country’s GDP and was growing at double-digit rates in the past years. Additionally, Inflation is rising all over the world due to a combination of excessive monetary policy and supply chain challenges brought by the lockdowns. Global food prices reached a new record-high, making it more difficult for the poor to navigate the crisis. Finally, large stimulus plans have delivered no significant multiplier effect.

 

Why would 2022 be the year of the hangover? Because the signs of overheating of the global economy are multiplying.

2021 was a year of massive demand-side policies. To the effect of the re-opening, policy makers added enormous deficit-spending plans, infrastructure and current spending boosts, and a massive monetary stimulus. The triple effect of the largest monetary stimulus in years, the re-opening and enormous government spending programs have overheated the economy. It is evident in inflationary pressures, housing, indebtedness, and twin deficit imbalances in most large economies. And those effects will not be there, or at least be present in the same proportion, in 2022.

2021 was the year of binge spending. 2022 is likely to be a hangover.

The combination of those enormous demand-side effects did not deliver the expected growth in 2021 but opened the door to a ghost of crises past: Inflation. In January 2021, all policymakers said there was no risk of inflation, rather the opposite. In March they told us it was due to the base effect. In June, they said it was temporary. Now they see it as “persistent,” according to Jerome Powell, chair of the Federal Reserve.

Inflation has been a heavy burden on families and businesses. Real wages are falling, disposable income is weakening, and small business margins are suffering. If inflationary pressures persist, the impact on consumption and investment will likely be larger in 2022.

Many believe that the slowdown is going to contain the inflationary spike. It may, but we should never forget that inflation accumulates. Those who see inflation in the United States moderating to 3% in 2022 should remember that this means more than 9% in two years.

The hangover effect is likely because the large deficit approved for the United States budget and the Biden infrastructure plan are pushing inflationary pressures in energy intensive activities and current spending.

Governments and central banks are incentivising demand where there is no need to do so, as it was mostly a case of re-opening the economy, not a liquidity or spending problem, and pushing global money supply and new credit to areas that have excess capacity. Meanwhile, underinvestment in commodities remains a key issue.

More government spending and more debt are causing a weaker recovery and slower job creation. At the same time, excessive monetary stimulus is eroding real wages.

The United States may pass this difficult year because global demand for US dollars is rising as other world currencies weaken, but the eurozone, that did not even see a strong recovery in 2021, is in an exceedingly difficult position. The US and European economy would have recovered faster and created more jobs with lower government intervention in the middle of the re-opening. Now, the negative effect of excessive spending and debt is likely to be larger. After over-heating the economy with unnecessary spending, it is difficult for policymakers to stop or admit the mistake. Central banks and governments will interpret the “hangover” slowdown as a need for more stimuli. And they will be wrong again

Tyler Durden Sun, 01/02/2022 – 18:50

Author: Tyler Durden

Economics

Trusting Nikola Means Verifying That Orders Turn to Sales

Nikola (NASDAQ:NKLA) stock has been on a rollercoaster ride since its direct listing in June 2020. I don’t know if you can say stocks age in dog years,…

Nikola (NASDAQ:NKLA) stock has been on a rollercoaster ride since its direct listing in June 2020. I don’t know if you can say stocks age in dog years, but investing in NKLA stock right now is a lot like having a teenager. By this I mean — no disrespect to my teenage readers — investors need to trust but verify.

Source: Stephanie L Sanchez / Shutterstock.com

Nikola stock was punished over fraud allegations stemming from a Hindenburg Research report that ultimately resulted in the arrest of founder and ex-CEO Trevor Milton. However, Nikola stock was also moving lower due to air coming out of the electric vehicle (EV) bubble.

Investors can be forgiven for looking at Nikola as a case of “fool me once shame on you, fool me twice shame on me.” But if you’re willing to look beyond the company’s past troubles, this may be a time to take a position on NKLA stock.

The End of Legal Troubles Could Be In Sight

Milton continues to refute multiple allegations including lying about the success of the company’s Nikola One, its debut truck.

The company made claims that Nikola had engineered and built an electric-and-hydrogen powered truck, that the company was producing hydrogen at reduced cost and that the company had in-house capabilities to develop batteries and other components.

Even though Milton is no longer with the company, the legal troubles for the company have lingered. However, that looks to be coming to an end. The company announced it’s in the process of settling civil fraud charges with the Securities and Exchange Commission (SEC). The $125 million settlement would be equivalent to 20% of the company’s cash on hand.

That news falls in the category of “knowing is better than not knowing.” Investors sent NKLA stock soaring upon the realization that the company may be putting this sordid chapter in the rearview.

However, the stock is failing to hold those gains as investors flee to risk-off assets. And while there’s no telling how long this sell-off will last, opportunistic investors have reason to give NKLA stock a closer look.

A Growing Order Book

Nikola continues to grow its order book. In mid-January, the company announced its latest letter of intent from Covenant Logistics Group. The company is the third large for-hire trucking company to go on-record as potential customers.

However, as investors in the EV field are aware, letters of intention and purchase orders are two different things. And the company will have to prove that its trucks will perform well in demonstrations.

Still, investors have to be impressed that Nikola has delivered more electric trucks than Tesla (NASDAQ:TSLA). And the company has plans to deliver 25 electric vehicles this year (2022) and up to 100 production vehicles by 2024.

If Nikola hits those targets, it would be well on the way to becoming profitable by 2025.

An Idea That is Coming to Fruition 

Another long-term catalyst for Nikola is hydrogen subsidies, which may become part of clean energy initiatives proposed by the U.S. Congress. That dovetails nicely with the European Commission proposing the “world’s first market framework for hydrogen.”

If that came to pass, Nikola would have a market for its fuel-cell electric vehicle (FCEV) truck. And since the company has plans to build its own hydrogen fuel network. Plus, Forbes reports that the company has two partnerships to make building out this network a reality.

NKLA Stock is a Cautious Buy

According to MarketBeat, the consensus of seven analysts is that NKLA stock is a hold. However, the consensus price target is $14.71, a 45% gain from the stock’s current price. And three out of four ratings since the company’s last earnings report are bullish.

But I can understand why investors remain cautious. The electric vehicle market, even in the commercial truck segment, has become crowded. And the company has plenty of work to do in regaining investor trust. However, if you’re still among the cynics, it may be time to take a closer look. When the market begins to look for bargain-priced EV and/or clean energy stocks, Nikola may look very attractive.

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Markoch is a freelance financial copywriter who has been covering the market for eight years. He has been writing for InvestorPlace since 2019.

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Global bond yields slide as stocks rebound, US data, bitcoin rallies

US stocks breathed a tentative sigh of relief now that the bond market selloff appears to be taking a break.  In just a few weeks, Wall Street has gone…

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US stocks breathed a tentative sigh of relief now that the bond market selloff appears to be taking a break.  In just a few weeks, Wall Street has gone from pricing in a gradual tightening of policy to a hurry-up offense that could deliver 4 to 5 rate hikes this year and a balance sheet reduction kickoff this spring.  Fed tightening expectations have been overdone and investors are now scaling back into risky assets.

US data

Investors quickly shrugged off a rather hot initial jobless claims report that rose to the highest level since October.  Filings for jobless claims increased by 55,000 to 286,000, much higher than the expected forecast of 225,000. Holiday and covid closures were at play and likely impacted the high jobless claims reading.

The hot housing market saw a rare miss with existing home sales as record-low inventories and surging mortgage rates led to a slowdown in purchases.  This is not the top for the housing market as some seasonal factors and Omicron likely weighed on the decline in home sales. For the full-year sales hit 6.12 million, an increase of 8.5% from 2020, which was the best year since 2006.  The housing market is not slowing down just yet; that may happen after a couple of Fed rate hikes.

Bitcoin retreats on Russian threat

Bitcoin shed earlier gains after the Russian central bank proposed a ban over the use and mining of cryptocurrencies on Russian territory, claiming the digital currency poses a risk to the financial stability and monetary policy sovereignty.  The Russian ruble has been steadily declining over the past couple of decades, which made bitcoin an attractive investment for many Russians in recent years.  Russia has been a top-three country for Bitcoin mining, so if this proposal passes, Bitcoin could slide below the USD 40,000 level.

Cryptos remain the perennial risky asset and if Treasury yields continue to decline, that should be good news for bitcoin.

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Author: Ed Moya

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Economics

Investing Legend Turns Apocalyptic, Expects Stocks To Crater 50% In Largest Wealth Destruction In US History

Investing Legend Turns Apocalyptic, Expects Stocks To Crater 50% In Largest Wealth Destruction In US History

It was several years ago when…

Investing Legend Turns Apocalyptic, Expects Stocks To Crater 50% In Largest Wealth Destruction In US History

It was several years ago when Jeremy Grantham quietly turned from stock bull to vocal permabear, and while his market notes turned breathlessly alarmist (if only to those who were long his multi-billion fund GMO), such as this from June 2020 “Stock-market legend who called 3 financial bubbles says this one is the ‘Real McCoy,’ this is ‘crazy stuff’”, it wasn’t until early 2021 that Grantham’s warnings of an imminent crash became especially shrill… and spectacularly wrong. Recall, back in January 2021, Grantham wrote that “Bursting Of This “Great, Epic Bubble” Will Be “Most Important Investing Event Of Your Lives“, while was followed by warnings of a “Spectacular” Crash In “The Next Few Months.”

Needless to say, no crash followed as the Fed and other central banks went all in on stabilizing the market, resulting in an epic year for risk assets which closed 2021 at all time highs, while GMO suffered not only steep losses but also substantial redemptions, a humiliating outcome for Grantham who had previously called the bursting of both the dot com and housing bubbles, but failed to account for just how determined the Fed is to avoid another bubble bursting.

But with stocks again swooning on fears Fed support of gradually fading, it didn’t take long for the 83-year-old Grantham to publish his most apocalyptic note yet, “Let The Wild Rumpus Begin” out this morning, in which he revisits the familiar them that we are currently living in a superbubble – only the fourth of the past century – and like the crash of 1929, the dot-com bust of 2000 and the financial crisis of 2008, Grantham is “nearly certain” the bursting of this bubble has begun, sending indexes back to statistical norms and possibly further.

How much lower? The iconic value manager sees the S&P tumbling by nearly 50% to 2,500 from its all time highs of 4,800 just a few weeks ago. The Nasdaq Composite, which closed in a technical correction on Wednesday down 10% from its all time high, may sustain an even bigger correction.

“I wasn’t quite as certain about this bubble a year ago as I had been about the tech bubble of 2000, or as I had been in Japan, or as I had been in the housing bubble of 2007,” Grantham told Bloomberg in a “Front Row” interview. “I felt highly likely, but perhaps not nearly certain. Today, I feel it is just about nearly certain.”

The signs that Grantham has been looking at are hardly a secret: the first indication that the bursting of the superbubble has begun came last February, when dozens of the most speculative stocks began falling. One proxy, Cathie Wood’s ARK Innovation ETF, has since tumbled by 52%. Next, the Russell 2000, an index of mid-cap equities that typically outperforms in a bull market, trailed the S&P 500 in 2021. Indeed, many of the bubble baskets which are a proxy of central bank liquidity, have been sharply lower for the past year with a handful of exceptions.

Grantham also points to the kind of “crazy investor behavior” indicative of a late-stage bubble: meme stocks, a buying frenzy in electric-vehicle names, the rise of nonsensical cryptocurrencies such a dogecoin and multimillion-dollar prices for non-fungible tokens, or NFTs. However, while it has certainly become more subdued, as the following chart of single stock option activity from Goldman shows, retail is still solidly in the market.

“This checklist for a super-bubble running through its phases is now complete and the wild rumpus can begin at any time,” Grantham, writes adding that “when pessimism returns to markets, we face the largest potential markdown of perceived wealth in U.S. history

To be sure, Grantham admits that he may not have timed the top perfectly, but says it’s only a matter of time before the bubble bursts. In the meantime, we are living in the “vampire phase of the bull market” which will survive for a while but eventually it “keels over and dies. The sooner the better for everyone”, to wit:

… we are in what I think of as the vampire phase of the bull market, where you throw everything you have at it: you stab it with Covid, you shoot it with the end of QE and the promise of higher rates, and you poison it with unexpected inflation – which has always killed P/E ratios before, but quite uniquely, not this time yet – and still the creature flies. (Just as it staggered through the second half of 2007 as its mortgage and other financial wounds increased one by one.) Until, just as you’re beginning to think the thing is completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies. The sooner the better for everyone.

Sparing no superlatives to describe what is coming, Grantham said the coming crash could rival the impact of the dual collapse of Japanese stocks and real estate in the late 1980s, with catastrophic consequences.

Not only are equities in a super-bubble, according to Grantham there’s also a bubble in bonds, “the broadest and most extreme” bubble ever in global real estate and an “incipient bubble” in commodity prices. Even without a full reversion back to statistical trends, he calculates that losses in the U.S. alone may reach $35 trillion.

While Grantham is one of the iconic (and last remaining) value managers who’s been investing for 50 years and calling bubbles for almost as long, Bloomberg’s Erik Shatzker writes that he knows his predictions are fodder for skeptics. One obvious question: How could the S&P 500 advance 26.9% in 2021 — its seventh-best performance in 50 years — if stocks were poised to plummet, especially when Grantham was warning of an epic crash last January?

Rather than disprove his thesis, Grantham said the strength in blue-chip stocks at a time of weakness in speculative bets only reinforces it: “This has been exactly how the great bubbles have broken,” he said. “In 1929, the flakes were down for the year before the market broke, they were down 30%. The year before they’d been up 85%, they had crushed the market.” In other words, Grantham is pointing to the same lack of market breadth that prompted even Goldman to ring the alarm last month, when the bank pointed out that 51% of all market gains since April are from just 5 stocks..

Having seen the same pattern that played out in every past super-bubble is what gives him so much confidence in predicting this one will implode similarly.

Echoing what we have said since 2009, when the view was largely contrarian and has since become consensus, Grantham puts the blame for bubbles of the past 25 years on bad monetary policy. Ever since Alan Greenspan was Fed chairman, he argues, the central bank has “aided and abetted” the formation of successive bubbles by first making money too cheap and then rushing to bail out markets when corrections followed.

Now, Grantham warns, investors may no longer be able to count on that implied put. He says that with inflation running at the fastest clip in four decades “limits” the Fed’s ability to stimulate the economy by cutting rates or buying assets,..

“They will try, they will have some effect,” he added. “There is some element of the put left. It is just heavily compromised.”

Under these conditions, the traditional 60/40 portfolio of stocks offset by bonds offers so little protection it’s “absolutely useless,” Grantham said. He advises selling U.S. equities in favor of stocks trading at cheaper valuations in Japan and emerging markets, owning resources for inflation protection, holding some gold and silver, and raising cash to deploy when prices are once again attractive.

“Everything has consequences and the consequences this time may or may not include some intractable inflation” Grantham writes. “But it has already definitely included the most dangerous breadth of asset overpricing in financial history.”

Here, we disagree: yes, there will be a crash, one which will send deflationary shockwaves around the world, but it will only prompt an even bigger rescue by the same Fed which no longer has an alternative after it crossed the Rubicon in 2020 and bought corporate bonds and junk bond ETFs to avoid an all out collapse in the post-covid turmoil. In the next crash the Fed, whose only contribution over the past 100 years has been to make the rich richer and create an epic “wealth effect” bubble, will buy stocks and ETFs, transforming into the Bank of Japan, before eventually it loses all credibility. But by then, stocks will be orders of multiple higher, completely disconnected from reality and fundamentals and trading only on the quadrillions in liquidity central banks inject to preserve the western way of life.

Incidentally, the question of what happens after the next crash is one that was posed just yesterday by another market bear, Stifel strategist Barry Bannister, who predicts a market drop to 4,200 in Q1 2022, but wonders what happens post-correction, when he writes that “equities risk the third bubble in 100 years if the Fed loses its nerve and cancels much of the tightening plan. We doubt that occurs anytime soon, because we believe bubbles are exceptionally poor policy, and the prior two equity bubble tops (1929 and 2000) were followed by “lost decades.”

We do not doubt it at all, and are absolutely certain that the Fed – which has no choice but to blow an even bigger bubble after the coming market crash – will do just that.

The only question we have is how much of a crash can the Fed weather before it capitulates, i.e., what is the level of the Fed put. We are confident that another 10-20% lower – which will obliterate Biden’s ratings and Republican avalanche in the miderms, surging inflation notwithstanding – and the market will finally discover what it is looking for.

Grantham’s full note is below (pdf link).

 

Tyler Durden
Thu, 01/20/2022 – 15:05













Author: Tyler Durden

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