-Capitulation of the short-term downtrend?
-Based on the chart and market action, the Russian invasion of Ukraine was priced in for the most part.
-Unless there are other unexpected developments, I see a short-term stabilization of the major stock averages.
-Now that the Beijing Winter Olympics have concluded, we must never discount the increased likelihood of Chinese incursions. I believe that this factor is not yet priced into the markets, but this will have a much more profound impact on the stock averages than the Russian/Ukrainian conflagration.
-A resumption in the weekly downtrend could resume if the world is confronted with more unforseen military circumstances
-My prediction for 2022; the S&P 500 will break above 5,000 sometime between now and the end of the year. Very likely, we could see a touch above 5,200. This would translate into a 18.5% rise in the S&P from current levels to 5,200.
-The amount of money in the financial shell is too great to stop this freight train, and the reasons why price inflation and housing and rent growth are so strong provide the same catalysts for higher stock prices over the intermediate term. None of these markets are mutually exclusive of one another anymore.
Geopolitical events, bond yields, and the central bank softening
-I find the timing of these military actions peculiar, as they are auspiciously timed to benefit the Western governments and their central banks. NATO is an outdated relic of the cold war, yet both sides are using it (Russia, especially) as a reason for their sudden recalcitrant militarism. The U.S. was never truly intent on having Ukraine join NATO, but this allowed Russia the excuse to invade Ukraine.
-Regardless of price pressures, this sudden geopolitical tension translates into a more dovish trajectory for the Fed over the intermediate term.
-We notice how GDP growth predictions are falling, and thus, the upcoming tightening campaign would put GDP measures in great peril.
-My prediction for 2022; Softer monetary policy will prevail regardless of inflationary outcomes, while fading GDP growth and geopolitical “problems” will increasingly concern the monetary authorities. Bond yields will not rise to levels much higher than the two levels of resistance I listed above, and should provide a ceiling.
-Currency collapses usually result from persistently large budget or balance of payments deficits when compared to national GDP. This was the reason for the Soviet Union’s collapse. Our concerns last year regarding the ballooning US deficits were assuaged as the recent multi-trillion dollar spending initiatives were curtailed.
-For 2020, the federal budget deficit as a % of GDP was 15%. For 2021, the level was 12%. For 2022 and 2023 they are estimated to drop to 7.7% and 5.2%. While still historically high, they buy the system some more time.
-This has helped bond yields to remain at these relatively lower bound levels.
-My prediction for 2022; I suspect real yields will remain low throughout the year. Given the recent lower spending levels of the USG, the Fed is still very dovish and will remain so indefinitely; even if price inflation remains stubbornly high.
-QE is deflationary by function, so eventually price growth should abate. This includes rent rate growth.
-With the amount of money in the financial shell, the amount of leverageable collateral will prove auspicious to perpetuate the higher sovereign deficit spending… and higher asset prices.
Housing and rental markets; Income generating asset prices will continue rising
-There is a “tag-team” between central bank QE and asset price levels. Both act as catalysts to keep bond yields low. When the Fed and other central banks pull back on QE and its sister programs, the higher asset prices that resulted from QE in the first place can then be counted on to do the heavy lifting. If asset prices fall, the Fed will have to goose them with QE, so the nation-state deficit spending can continue.
-My predictions for 2022; though I anticipate the rate of rent and house price growth to fall off after the Spring selling season, prices and rents will still continue rising, but their second derivative will decline.
-Home sales will continue to fall as this has become a permanent feature of the real estate market. House price multiples to household income will climb over time and the larger transaction cost burdens will de-incentivise homeowners from selling and moving.
-I estimate that it costs at least 10% to sell a house and rebuy one at the same price. Thus, it costs about $50,000 to sell and rebuy another $500,000 house, and this does not include potential capital gains taxes. Broker commissions, title costs and insurance, local transfer and recordation taxes, and mortgage costs amount to about 10%. Moving costs and the aggravation involved at looking for another property are just more added burdens.
-Large institutional money pools are buying as much housing according to a set of algorithms as possible, and I assume this will be a permanent feature of the marketplace. This trend has only intensified since 2012, so why will it stop?