Part one of a two-part series: This year is the first year of an actual decline in the S&P Index ‘top 10’ in terms of both revenues and free cash flows. Lower price/earning ratios as a function of both low/no growth and high interest rates will drive both stock and bond prices lower this year. Stay tuned for part two where we cover U.S. government spending and dollar substitution in global trade.

The Fed is only at the starting line in mitigating bank insolvency issues. Their additional money creation ( or “lending” ), new buying of government securities ( instead of selling them), making up for China’s sale of U.S. government securities, and making little or no progress on systemic inflation will pretty much guarantee a long Stagflation, if not severe recession, for the U.S.

January-February bounce in the stock and bond markets ending with inflation gaining more traction globally. Natural resources needs are escalating due in part to EV car and battery plant expansions but global oil and metals inventories are at multi-decade lows. Get ready for a take-off in oil and metals prices which will bring forth a new, possibly, violent uptrend in global inflation. Higher and longer interest rates are choking new investments in tandem with lower demand for future manufactured products. We are in a Stagflation spiral!

Rising wage costs and growing global energy demands both present continuing high inflation risks. Coupled with decreasing consumer demands and higher interest rates, the future earnings of companies are in the process of downward revisions. Lower earnings and decreasing P/E ratios both generate much lower stock price expectations this year.

Prior long-term periods of increasing interest rates by themselves have dropped stock prices as P/E ratios have declined. Present value analysis argues that high long term interest rates as we’ve been experiencing drives down the present value of long-term corporate earnings which, in turn, drops the P/E ratios across the stock market. Several periods are referred to in this podcast have witnessed P/E drops of approximately 50% during decades of interest rate increases. If the lower P/E is coupled with a weak stagflationary economy we have a double set of red flags for stock prices.

Credit card debt is at a new all-time high while personal and business bankruptcies are ramping up. With high inflation since last year consumer purchases mainly on the credit card as savings balances return to all-time lows. Meanwhile, the Federal Reserve with “only $42 billion of capital” is set to lose approximately $240 billion this year and next. These losses which have already started with have impact on Congressional regulation of the Fed and a significant potential impact on confidence in the world’s largest central banker. Possible result: return to quantitative easing later this year.

Many parts of the U.S. economy are crashing with inflation down but not heading to the 2% Fed target area. The U.S. government must sell approximately $6 Trillion (20% of all federal debt) of new and refinanced debt this calendar year but who will buy it? The Fed is facing the possibility of a depression or a return to higher inflation with the fall-out of either creating significant impacts on our lifestyles.

With a growing global influence of China, Russia, India, and Iran vs. the West, we close out the year considering the future role and power of the Shanghai Cooperation Organization in economic and military contexts. Energy prices and U.S. unemployment issues will return as significant “impactors” on the real estate, stock, and bond markets. Happy Holidays, everyone and we’ll be back next in January!

This week we discuss Russia building their own oil tanker fleet to bypass Western sanctions (the war in Ukraine continuing with additional “worst case” risks), U.S. unemployment becoming the key topic for 2023, and inflation remaining a multiple of Fed target but ‘easing’ in the cards to avoid a major recession.

Central themes supported with substantial data references continues: crypto currencies are not investments (since our initial Podcasts two years ago), a severe global recession is gathering momentum, and debt is swamping our economies. Unemployment is an emerging issue promising to hit 2023 in a major way starting with tens of thousands of recent layoff’s in hi-tech, spreading to our construction industries, and soon threatening substantially more retail and services jobs. Please be mindful to repay any and all debts sooner rather than later as borrowing costs are rapidly escalating in tandem with new credit risks highlighted by increasing personal and business bankruptcy filings.