Summary
- Forecasting is largely futile because almost nobody gets it mostly right.
- Creating a forecast and preparing for scenarios though is a great way to be mentally prepared for whatever the economy, society and financial markets might bring.
- Being mentally prepared for volatility helps us emotionally make the right decisions in real time when the time comes.
- 2022 will be full of surprises and I believe the existing consensus is largely wrong, in other words, a good time to be a contrarian.
- Kirk’s crystal ball says: The S&P 500 will break 5000 and 4000 in 2022, while likely ending near the lows of the year.
In December 2017, I talked about the futility of making forecasts. But, everybody loves a prediction, so I made several.
The most important thing about forecasting and predictions is that it can help you prepare for various scenarios. By thinking through things ahead of time, we can improve our ability to control our emotions and make better decisions if we can “only” avoid being stubborn and remain flexible without becoming knee jerk. A tall order for a human.
Since now is the season for loud breathy talking heads and “viral” social media making random predictions, let’s join in once again. It’s time for my futile forecast for 2022.
Predictions Past
I was told by the CIO of a large investment firm that I’m usually right, but often about 2 years early on things. Of course, we know that early is often confused with wrong.
What we really know is that people don’t stick around long enough to reap the benefits of getting the best seats at the party. This is evident with the classic Gartner “Hype Cycle” charts:
Expressed in market terms, this is what I said to Mark Yusko in summer 2017 – where we’ll begin our stroll down memory lane.
Here is my summarized December 2017 prediction about the 2018 stock market.
“So, I see a small loss for 2018 on the S&P 500. Ah, but remember, I also see the S&P 500 going to 3,000 by late 2019, so, get ready to be a buyer on the small correction that’s coming.”
The loss on the S&P 500 (SPY) (VOO) for 2018 was 6.24%. The two corrections in 2018 were about 9% and 19%. So, pretty spot on.
My forecast for 2018 and technical/quant analysis was so spot on, we even made a rare trade on the VIX futures (VXX) in early 2018 that was highly successful (read from bottom up):
That lead to this review, which frankly will be hard to earn again as volatility trades are very difficult and only suited to a few percent of investors:
I also restated that oil was heading to $80 per barrel in that forecast. By the end of 2018 oil was approaching $80 per barrel.
The price dive in oil stocks from 2019 into early 2020 caused me to capitulate on oil stocks and pivot to alternative energy stocks from solar and energy storage to carbon capture and renewable fuels. Despite oil’s rally, alternatives did better, so from a relative performance standpoint, I did fine. However, oil stocks have done well too from the below zero oil price bottom in 2020 to recently. So, for those looking at only one half of the equation, I get credit for being wrong.
By the end of 2018, and going into 2019, I was saying that “helicopter money is inevitable.” My rationale was simple.
- “Slow growth forever” is demographically driven and not easily shaken.
- Deflation is the real enemy.
- Debt is everywhere.
- Technology is disinflationary.
- The next shock would require it.
By September 2019, the REPO market was being bailed out to the tune of nearly a trillion dollars over the next six months.
Entering 2020 I was warning about extreme overvaluations in the stock market meeting a less accommodative Fed. I projected an early 2020 correction and a year that looked a lot like 2018.
2020 Outlook: Euphoria To Despair
The stock market appeared to peak in January 2020, but by then, we know from leaked and subpoenaed emails, that some smart and politically connected money was already selling stocks as Covid first made the news.
By the end of February 2020, Covid was driving a large stock market correction. Suddenly, valuations and lack of extra QE didn’t matter, it was all about Covid.
Of course, what broke the epic stock market collapse was an epic jolt of fiscal and monetary bailouts. The Federal government ran a $3.1 trillion dollar deficit in 2020. The Federal Reserve from late 2019 to late 2020 printed about $6 trillion. This was supposedly to compensate for a $2 trillion loss in GDP.
I haven’t written much about this, but have talked about it in several of my webinars: I think the question we do need to ask is did the government and Federal Reserve pull forward anticipated bailouts we might need in the future? If so, why? Was it just a case of “never let a good crisis go to waste” or was there more to it? Ineptitude, prescience, satisfying special interests…?
I warned about a Covid correction several times ahead of the crowd.
Coronavirus Is A Match That Lit The Overvaluation Tinder
Coronavirus Will Spur Much Deeper S&P 500 Correction
And, here’s where relative performance comes in, these are some of the stocks and ETFs I said to buy coming off the Covid crash:
MoSI Quarterly Outlook & Game Plan April 2020
Doesn’t really matter if I stayed away from oil stocks now does it?
That brings us to my 2021 predictions. I had two general messages:
The first was that The Stock Market Is Delusional.
The second was:
2020 Was Buy The Rumor, 2021 Will Be Sell The News
Clearly we are well above 4000 on the S&P 500, but we didn’t get close to 3100 on the S&P 500.
We’ll see what happens in 2022 and 2023 soon enough.
I also when into the Pandemic, Debt And The End Of Falling Interest Rates.
Covid is still with us and will be for years, though hopefully in much less severe forms. Though we won’t know until we know. And when we know, that could make a big difference in government and central bank policy.
Debt is into the stratosphere, but does it really matter? As a percentage of money supply, debt is actually lower today than just after the Great Recession. Here’s a series of charts to make it easy. Blue is total public debt owned by government, i.e. Federal debt, orange is the M2 money supply.
You can see that debt grows far faster than money supply since 1970.
But, this century, since the dot com bust the two have hugged.
By just after the Great Recession, money supply starts to outpace debt accumulation.
That is since the September 2019 Repo bailout began.
That is precisely since the Covid bailouts began.
And here is what it looks like as a ratio of Total Debt to M2:
Normally printing money would spark inflation, but due to “slow growth forever” as I have described it repeatedly, we can get away with it until the secular deflationary trends dissipate – which isn’t until mid-century.
That doesn’t mean we can’t have bouts of inflation like we are seeing now. I think we are seeing the perfect storm of the Covid crisis, supply chains moving, opportunism by OPEC and shipping companies. Storms pass.
I maintain that inflation is transitory, but I am not looking for 2%ish inflation prints until H2 of 2022 or H1 of 2023. To many people that’s a long time. I think it’s a blip that will disappear into future charts.
I believe that The Fed Is Reloading Its Bazooka For Next Time. And, next time will probably be sooner than we think. I would agree with the analysts that we are already mid to late cycle on this economic expansion. But, I’d also agree that any economic retreat is short and shallow. More below on that.
We also don’t know if my doubling down on taking profits and becoming more defensive and August and October will play out yet.
Stock Market Correction Is Due And It Could Be Deep (which went viral)
Kirk Spano’s Q4 2021 Outlook & Game Plan
We will know soon. With that, let’s jump into my 2022 and slightly longer forecasts and predictions.
Kirk’s Crystal Ball
I will get this out of the way first. I think the S&P 500 will hit both low 5000s and middle 3000s in 2022. I think that 2022 will end up looking a lot like 2018, the way I thought that 2020 would if not for Covid and massive bailouts.
The simple reason why I think that 2022 will be slightly negative on the S&P 500 index (SPY) (VOO) is that valuations are at historical levels and the Fed is going to be less friendly. Not unfriendly mind you, just less friendly. It’s going to allow some price discovery.
Overvaluation is the tinder under the next stock market fire.
Now, I know some popular folks are ok with fighting the Fed. I’m not. What I do know is that the time it takes for the Fed to impact the markets can be faster sometimes and slower sometimes.
Given the huge amounts of money printed, as detailed above, maybe it takes several months versus just an announcement and initial implementation of unloosening (again, it’s not really tightening) for the stock market to react.
With the Fed bailing out pretty much everything in 2020-21, there was a great path to win on most large caps and many mid caps. I don’t think it’ll be that easy for the next year or two with the Fed being less nice.
And, that doesn’t mean we won’t see QE again. We will. But, it will be a lot more targeted next time around. The Fed has put out multiple warnings.
What’s more, the next batch of QE will be more targeted.
The first target will likely be the Repo market where the Fed has put a trillion dollar facility under their pillow for when it’s needed. As I said then, I don’t know who got bailed out in 2019, but the next time, there will be a Lehman like sacrifice. That is, the dirtiest flees will be exterminated.
So, while sentiment can keep pushing things up to even more irrational levels, at some point, liquidity speaks and sentiment listens (and that’s all I got to say about that, for now).
Peak Earnings
Given a higher floor for corporate tax rates (no more accounting for massive profits for shareholders and then crying poverty to the IRS), short-term supply chain related inflation and long-term sticky labor costs, I believe that 2022 and maybe 2023 will be flattish years for S&P 500 earnings taken together.
Maybe one year is a little up and the other a little down. Whatever the case, I don’t see earnings meaningfully advancing short-term. If I’m wrong, then I guess it’s back to “well, I guess the markets can stay irrational a long time.”
Here’s the Yardeni earnings forecast:
Even if Yardeni and others forecasting 5-10% earnings growth are right, I still think that’s recipe for a lot of price discovery with a less friendly Fed. I think for valuations not to contract, earnings will have to surprise to the upside and I see that as very unlikely.
With that, I am a seller of the S&P 500 index ETFs (SPY) and (VOO).
For those who like to stay fully invested, I’d say dollar cost average into the Invesco QQQ ETF (QQQ) and Invesco Next Gen 100 ETF (QQQJ) until the next double digit correction and look to get fully invested then. You’ll have to watch momentum indicators when the time comes.
Why do I favor QQQ and QQQJ over SPY? Three core reasons:
- The QQQ stocks have most of the corporate cash in the stock market and that won’t change anytime soon as tech, consumer discretionary, fintech and biotech, which dominate QQQ and QQQJ, lead the markets.
- QQQ has beaten SPY over all rolling 5 year periods and is coming off a year of trailing. That won’t persist. Although, I do expect the gap to narrow as more QQQ/QQQJ like stocks enter the S&P 500 index at the lower market cap end of the S&P, that is, the smaller companies in SPY.
- QQQ stocks hold the vast majority of corporate cash on S&P 500 balance sheets. That is, the QQQ stocks are both faster growing as a group and richer. That’s a pretty good combination.
Make sure to check sustainable growth rates and debt for those. There is at least one that is no growth and very heavy in debt – cough, Exxon (XOM).
Here’s another way to look at it:
What does that tell you? First off, Exxon and Chevron are not cash rich. They are investment rich. What if those assets get written down again and again, like have been written down again and again already? Short answer: don’t gamble on declining secular trends. Sell the cyclical rallies when you can. Like now. Sell Exxon (XOM) now and probably sell Chevron (CVX) soon.
Most importantly, you can see that 16 of the 40 most cash rich companies are on the Nasdaq 100. That’s 40% of the richest 40 companies. The Nasdaq 100 is only 20% of the S&P 500 index.
Remember though, the largest S&P 500 companies are the same as Nasdaq 100 top stocks and I don’t expect that to change soon. So, if I am right on that, then the differences between the indexes will continue to get smaller as QQQJ companies penetrate the S&P 500.
Eventually, I think we’ll all move to factor based indexes. For now, the quants have not figured out how to do that in an ETF, so, you’ll have to stick with stock picking.The Great Divergence
This leads me to the most important point about the stock market that hasn’t mattered as much the past two years as historically:
The stock market is a market of stocks.
I believe we are about to see a large sorting out of quality and growth stocks from high debt capital driven companies and no/slow growth companies. This will take a few years, but it’s coming.
Stock picking is going to become much more important. So, have good sun glasses, because a lot of people who think they’re great investors because the Fed paddled for them will be getting out of the waves naked.
I already hinted above what we are going to see with the S&P 500. A lot more midcaps, primarily QQQJ stocks, are going to displace S&P 500 stocks the next few years. There are already plenty that meet the market cap requirement. And dozens are at the profitability requirement (so inclusion is imminent) and others are very close (closing in on inclusion).
One of the most important things active investors can do is respect cycles. So, look there to find winners and losers. I like to buy cyclical losers that are within secular uptrends. And, sell cyclical winners that are within secular downtrends.
Record M&A And Executive Selling Are Warning Signs
That’s my story and I’m sticking to it.
If passive investors become active, watch out…
There is no doubt that passive investors are a thing now. Most retirement plan money only gets touched when people see really bad headlines or feel like their “missing it.” Right now folks are plowing money into retirement plans again. That’s good.
If they panic sell, that’s bad. Really bad.
I don’t think the panic gets too bad.
If Boomers panic sell again, watch out…
A recent study by MIT demonstrated that older men are likely to panic sell stocks. If you need to manage your risk, I suggest you do it now, don’t wait until there’s blood in the street to get queasy.
MIT Study Finds Older Men Are More Likely to Panic Sell Stocks
I think many Boomers will panic and not come back to stocks.
Millennials control a lot of the market whether you like it or not…
Millennials will be at the heart of the Great Divergence. While there are always irrational crowds to bet against, bet against the Millennials at your own peril. They are better traders than the Boomers by a mile.
Your best bet is to ride alongside, or wait for them to destroy good small caps just because they can in thinly traded markets when the collude online.
Yeah, Millennials collude. Catch them if you can. But, I don’t think anyone can. I mean heck, it would be easier to catch hedge funds and they never get busted.
They do oversell small caps with regularity. That deserves regular watching because many of the companies they shake down they buy right back up.
The Fed Is Tossing Matches
By now everyone knows the Fed is tightening. The narratives are trying to say it’ll be okay. Some authors are saying it doesn’t matter. Flat out those authors are wrong.
However, we do have to be mindful of the excess level of liquidity and the probability that interest rates don’t go up until aging demographics start to flatten out in a couple decades.
Regardless there are direct correlations abound for the Fed’s impact on markets. Anyone who says otherwise is mistaken. I’m not going to regurgitate. Please let your clicker finger do the walking.
Time frames are all that matter though if you are a trader, so, go ahead and try to be a just in time seller if you want to.
If you are an investor, a great opportunity is coming soon.
Many REITs Could Stall Or Fall
As you saw above, I own REITs, however, I don’t worship them as an asset class. They are as susceptible to secular trends and cycles as any other industry, maybe more so, due to being capital intensive, that is, relying largely on financing.
Here’s some factors I’m considering for 2022.
- Recent massive rally in most residential and much other real estate.
- Less easy financing – again, not tight, just less loose – and slightly higher interest costs.
- Continuing tightness in supply chains keeping input prices firm on redevelopment and building.
- No end in sight for semi-skilled labor for maintenance and upkeep.
- Admin costs will continue to come down as technology is further implemented and improved.
- Virtually no U.S. population growth. It was the lowest since the nation’s founding last year at barely over .1% and is looking to clock in this year at about .12%.
- Record low home inventory will give way to a large influx of new constructions in the second half of 2022, particularly multifamily.
- Continued renovation and redevelopment costs for office buildings and malls.
- Industrial looks strong as supply chains continue to move back to America.
Residential REITs
There’s no doubt that housing demand remains strong. The most recent NAHB housing market index that measures builder views of demand demonstrates that:
The “work from home” phenomena is not going away, so bigger spaces are becoming more necessary. That’s hard to get in a condo or apartment building. As a result new constructions are picking up as much as labor will allow.
For affluent buyers, new builds will take them out of the renter market. That means some turnover for REITs. In addition, there’s a significant surge in multifamily coming online in H2 2022. Some of that is certainly from the REITs, but also private equity and other investors. Higher supply will crimp margins or at least flatten them according to CBRE.
So, I’m not forecasting doom and gloom in residential REITs, but a rather a very location and company specific experience. I do think the “easy money” has been made on most residential REITs in general though.
The following chart shows where some of the top residential REITs are in their cycles. It would not be hard to see 20-30% declines in quite a few and 50% would not be mind blowing. Look at the 5-year price ranges.
I know some folks never sell, so the following is for people who do manage their asset allocation and is of course dependent on your taxes and other considerations. And, remember, taking single stock risk is only worth it if you anticipate a strong chance to beat the indexes. Also, I guess I need to say this judging from some comments when I say sell something, but, none of these are horrible companies unless I say so outright. They’re just “meh” or worse investments at this point.
Sell the following residential REITS (or just monitor for now) and look to reenter on a correction back to the middle or lower end of historical price ranges:
- Invitation Homes (INVH) which owns a portfolio of 81,000 single-family rental homes. It’s yield is lower than the S&P 500, it’s price performance has tracked the S&P 500 since IPO during a bullish period for peers and has substantial risk to its properties in the low-end/starter home market it serves.
- Essex Property Trust (ESS) own 250 apartment communities in California and Seattle with a few more coming. It’s wholly unexciting in every way and has trailed the S&P 500 the past 5 years. It has substantial risks to flight from its markets.
- Camden Property Trust (CPT) is an apartment REIT that has essentially tracked the S&P 500 the past decade with a similar dividend payout. It is susceptible to economic slowdowns due to its shorter leases.
- UDR (UDR) another apartment REIT that’s nothing special. More than anything a sell on valuation and the fact it hasn’t beaten the S&P 500 the past decade. Some of its markets are extra vulnerable to migration.
- Equity Residential (EQR) another apartment REIT that’s nothing special. More than anything a sell on valuation and the fact it hasn’t beaten the S&P 500 the past decade. Some of its markets are extra vulnerable to migration.
- AvalonBay Communities (AVB) another apartment REIT that’s nothing special. More than anything a sell on valuation and the fact it hasn’t beaten the S&P 500 the past decade. Some of its markets are extra vulnerable to migration.
My sells are similar in many ways. In general, the smaller residential REITs is where to look for value if you sift through the individual projects.
Office REITs
Office REITs are an incredibly location and project driven subsegment of the REIT space. Again, I like the smaller and midsize REITs where I can understand the portfolios and finances the best.
Office buildings are being forced to spread out work spaces and I don’t think that goes away even as Covid gradually becomes a lower attention issue (hopefully) in the future. I think more elbow room or “air space” in offices is the new thing. In addition, there is a lot more HVAC work that still has to be done, in addition to, upgrading building sustainability – which also applies to residential on a slightly lesser level.
One REIT of note is well known Vornado (VNO) which is highly concentrated in Manhattan with some San Francisco and Chicago exposure. It hasn’t outperformed the S&P 500 in a decade and has fallen on hard times with Covid due to it’s NY and California exposure. That said, if you tear this one apart based on expected costs over the next few years, there is an argument for a positive post-Covid experience. The questions are when and from what price?
Favored REITs
Obviously we don’t have time to walk through dozens of REITs, so here’s what I’m looking for in REITs for mostly my retired readers and clients. My abbreviated checklist:
- Great balance sheets or good balance sheets that are getting better, which aids them in times of financial tightness and aids them in optionality.
- Long-term secular industry growth, for example, tech, 5G, certain medical, companies that benefit from shifting supply chains.
- Lower cyclical economic risk, i.e. recession resistant.
- “Rents” that can be raised consistently.
- Strong relative performance versus the S&P 500 over the past 5 or 10 years. What’s the point of taking single stock risk otherwise?
We’re At Peak Amazon – Sort Of
I see a round trip for year for Amazon (AMZN) over the next couple years that results in them spinning off AWS, which you’ll definitely want to own, to unlock value. Buy the correction in Amazon.
Baby Googles
Alphabet merges one of their divisions into an existing company and spins out an S&P 500 size company. It won’t be the last.
Microsoft and Apple Are Dividend Beasts
Despite the low dividend yields, are the two best dividend stocks in the market because of their safety, growth, buybacks and growing dividends. Buy any double digit percentage pullback. The question is how big a correction will that be. My guess, around 20% lower from year-end.
SPACs
Most SPACs with financing and no deal won’t get a deal.
A lot of post deal SPACs are beaten up way beyond what dilution, balance sheets and just being considered small caps would normally dictate. There is a general “hate” for SPACs and while some of that is justified, it’s just way over the top now. The SPAC hate has jumped the shark so to speak.
There’s SPAC blood in the streets. They don’t all deserve to die. Find some long-term winners. We have a basket.
Here are three de-SPACs you can start to buy now:
- Blacksky Technology (BKSY) another of the satellite-as-a-service stocks I like. Dances with Alphabet (GOOG). Once full constellation is deployed, expenses will fall and subscription revenues for data will climb. Volatile with long-term big upside. Buyout target.
- Planet Labs (PL) another of the satellite-as-a-service stocks I like. Dances with Alphabet (GOOG). Once full constellation is deployed, expenses will fall and subscription revenues for data will climb. Volatile with long-term big upside. Buyout target.
- Ginko Bioworks (DNA) is a biotech development platform that is very misunderstood. It’s total addressable market is huge and it’s approach though novel makes a mountain of sense. Could easily be a $100 billion dollar firm. Currently trades around $13 billion.
I’m monitoring another dozen or so that could develop into Russell 2000 components in 2022 or 2023 (think index inclusion) and eventually, maybe, S&P 500 components.
Small Caps Will Make A Comeback
Small caps represented by the Russell 2000 (IWM) have trailed large caps in the S&P 500 and especially (QQQ). I see the Russell keeping up this year, though, that might not be great.
What I do see are select small caps that have suffered far too much. There is a basket of beaten up small caps that I think will be among the winners in 2022.
Here are two small caps you can start to buy now:
- Ontrak (OTRK) an AI powered mental health platform in the midst of a business transition. One of the Covid Meme stocks that soared and has now crashed. Is dancing with client and SAAS company rumored to be Salesforce (CRM). Huge addressable TAM as mental health is very underserved but gaining traction. Early mover advantage and some good connections should drive it back to a billion dollar market cap. Currently trading under $150 million.
- SunPower (SPWR) might be a midcap by many definitions and has a mega-cap backer in majority owner Total Energies (TTE), but this is my favorite solar play so here it is. Upside to over $20 billion in fast growing market. Trading under $4 billion. Build Back Better would help it, but it’s already growing. It’s gaining profitability on development and recurring revenues for energy management.
I’m monitoring a couple dozen others with big potential.
Communication And Streaming Are Too Beaten Up
There’s a lot of hate for a few communication and streaming stocks. The sector has been a laggard in 2021. That changes in 2022.
Here are three communications companies you can start to buy now:
- AT&T (T) has gotten some attention from others since I mentioned it around $24 per share. Their mission to focus the business on fiber and 5G while dramatically improving the balance sheet will cause a rerating to be more inline with Verizon (VZ) which should drive a double in the next few years. On top of that there are a few potential catalysts, including share buybacks, that could blast AT&T into a new trading range above $60 per share by mid-decade. It’ll pay a top quartile dividend along the way.
- Discovery (DISCA) is in bed with AT&T to acquire Warner Bros and merge it with their network offerings. Discovery has huge global penetration and reality programming. Warner Bros has creative chops on par or better than the field. I see this new company reaching a market cap over $100 billion by mid decade. It’s trading around $16 billion now.
- ViacomCBS (VIAC) is ripe for an M&A deal. I don’t know who they merge with, but there will be synergies. If I had to guess, I’d guess AMC Networks (AMCX). The company has a deep content library, studios, a strong news division and good global reach. It’s too undervalued for such a strong company and pays a good dividend. This one should be a triple on total return by mid to late decade.
I’m monitoring several others, but the prices are not right (in honor of The Price Is Right 50th anniversary. Hi Bob!).
Weed
Buy a towel and a weed ETF.
Oil & Gas
Will remain range bound between $50 per barrel and $80 per barrel for several years, before transitioning to a lower range as petroleum producing nations and companies panic sell as EVs change the oil demand equation.
Only about a half dozen U.S. oil stocks are viable long-term according to Pioneer Resources (PXD) CEO Scott Sheffield. I agree with him.
Oil pipelines are also mostly overvalued. I would not own an oil pipeline with a fox or in a box and expect most to drop like rocks.
Natural gas has a longer runway than oil by a couple decades. I expect prices to rise throughout 2022 after a recent pullback reset the market. I see Henry Hub over $5 again in 2022.
Natural gas producers are hard to own from rally prices. I do like natural gas focused pipelines that are into CO2 and represent a backdoor play on hydrogen.
You can buy Kinder Morgan (KMI) along with its 8% yield right now.
Clean Energy Stocks
I mentioned SunPower above. The full complex has not completed correcting yet, but it’s close. See the Invesco Clean Energy ETF (PBW):
I like this ETF, but it is just entering our buy zone that we set up nearly a year ago for monitoring. I’d love to buy it somewhere in the $50 per share range which would represent a lot of value for the massive growth that basket of stocks has. I think we’ll get a chance to buy it.
Commie Stocks
I said throughout 2019 to sell commie stocks [China] and that’s worked out. I will not own a Chinese stock individually again ever. Never. Not as long as President Xi can wake up on the wrong side of the bed and order a company to give away its assets on pain of, well, pain.
If the entire Chinese complex bottoms out to 2015 prices, then I would think about buying an ETF.
Continue to avoid commie stocks unless there is a layup.
The Dollar
Will stay in what I have been calling the “Goldilocks” zone. There will be no collapse just like there hasn’t been for decades.
The shift from oil dependence to energy independence, a resource rich country, introduction of the digital dollar and incorporation of stable coins as money market equivalent could lead to the U.S. becoming a long-term strong currency nation.
Crypto
Most crypto will go to zero.
There will be a handful of winners that have long-term staying power, but, you will not buy your pizza with it.
NFTs will be far more important as digital contracts rise and DiFi will be less decentralized.
Bitcoin (BTC-USD) is digital gold and will find a stable range in the next several years with modest appreciation thereafter. That said, I agree with Dr. Sean Stein Smith, a Lehman College prof who just made the 40 under 40 and is a respected crypto expert with an accounting angle, who predicts Bitcoin will reach $100,000 soon. He says in 2022, I’ll take the over on that, but not by much.
I have traded Bitcoin twice for a 10x gain and a 3x gain. I would have been better off buying and hodling.
I own less than one Bitcoin now because I think I can make more money reinvesting into other assets and I’d rather own land as an inflation hedge.
Ethereum (ETH-USD) is what I am accumulating with a monthly dollar cost average program through Coinbase (COIN). Ethereum is the backbone of the emerging NFT and digital contract world. Those worlds will be massive. Think of all contracts and transactions that get done. Think of how partial ownership of hard assets will work in the future.
I have no price target other than higher until the NFT and digital contract world fully emerge over the next decade or so. Earning income as a validator with ETH is a worthwhile target for most tech savvy people, that will take at least 32 ETH at a cost of around $100,000 right now.
There will be a handful of other winners, but I’m happy with accumulating Ethereum. I’ll let you know if I start accumulating something else or my technical analyst finds something to trade.
A Weird Upside Of Transitory Inflation
I warned about inflation and potential stagflation last December.
Stagflation is still a risk if Build Back Better doesn’t happen. I think Build Back Better happens soon and it’s a mostly well written bill that provides real growth incentives and a reasonable safety net improvement.
My long-term thesis is that sustainably “rebuilding the world” is a necessary component of growth. I have said it for several years. It’ll take a couple decades to do it, at least. Build Back Better is part of that. It’s sort of weird that President Biden came up with that name given I’ve been saying “rebuild the world” for a few years in my investment webinars.
Inflation will print below 3% by the end of 2022. Maybe just barely, but that’s the direction as supply chains move, shipping jams get unjammed and employees trickle back into the work force come summer.
Here’s the unacknowledged upside of the current inflation. It is getting ripely in to wages. While that might be tough on earnings, it’s great for employees because wages are very sticky. If inflation drops back to around 2% and wages stay the same with a slow rise, well, that’s a pretty good future outlook.
That means more people will join the middle class again. And, that’s good for stocks long-term as folks contribute to retirement plans and get in on the American dream.
The problem with inflation right now is that it hurts and it’s scary. I think the Fed will tame it short term and the reasons I discussed above will tame it for a long time.
Covid & Disease X
I guess this is the biggest wild card.
Will Covid or some other pandemic upend us again? The answer is probably. That’s why I think so many of the new trends for how we work, play and live are at least partially permanent. Many people are preparing, at least partially for “the next one.”
I have been monitoring the monitoring of the potential for Disease X for around 16 years now. It’s inevitable. Hopefully it doesn’t happen for thousands of years. Hopefully we handle it better than we did Covid.
Notice the following video about what Disease X is was done in 2018.https://seekingalpha.com/embed/18192
For now, I think we are nearly over Covid. The Omicron strain will peak in January in most of the U.S. Between vaccinations and infections we should reach herd immunity, at least for a while.
I’d expect a resurgence in the fall. Another wave coinciding with flu and cold season. All we can do is hope it won’t be anymore disruptive than what we are seeing now because we are at about our limits for healthcare and the economy withstanding these shocks. More people getting vaccinated rather than saying I had it would be probably help a lot based on data.
If there is another Covid economic disruption, then we are likely to see more bailouts. If we get more monetary and fiscal medicine of a higher than normal QE (wow, never thought I’d say that) magnitude, it would certainly have even more severe side effects than what we are seeing now with inflation and general economic disruptions.
You Better Have A Process For Investing In 2022
At my registered investment advisory and with my investment letter service, I use a simple 4-step process to filter and focus investment ideas that not only works, but is incredibly time efficient. Here’s the very short version:
- Identify secular trends, then bet on the tailwinds and ignore or bet against the tailwinds.
- Understand the impact on timelines from government and Federal Reserve policy.
- Do the fundamental research using Jim Rogers “read everything” advice to truly know our investments (an AI helps).
- Use technical and quantitative analysis to identify buy zones and places to capture profits that arrive early on irrational rallies like the current one.
The first step has led to our investment barbell for the 2020s.
The second step recognizes not to fight the Fed in either direction.
Our third step has helped us find over two dozen 10-baggers this century and consistent dividend payers.
The fourth step has given us better entries and exits. While I use several different technical and quant methods, including local favorite Elliott Wave, it is money flow that matters the most. Money goes into an investment, price goes up. Money comes out, price comes down. Fairly easy relationship, but requires different approaches to monitor in order to confirm trends and pivots.
In 2022 as the Great Divergence begins, I’m sure our 4-step process will protect us from risk again and help us find the opportunities.
Already I believe we have over two dozen potential 10-baggers on our “Very Short List” and some of the safest dividend growth stocks in the market. Make sure you’re following along as I release several of my top growth stocks and top dividend stocks for 2022 over the weekend.
So, to summarize, S&P 500 looks a lot like 2018 in 2022, or maybe in 2023.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.
