Cash is king and debt is death

Behavioural finance analyst Ken Norquay warns: “Stay vigilant. Remember the old stock market slogan: “In a bear market, whoever sells first, wins.”

What financial forces are at work as the year 2022 begins? Way back in 2007 to 2011, a financial crisis occurred because so many borrowers were unable to make payments on their debts. Individuals, institutions and whole countries had over-leveraged themselves when interest rates were low. When rates went back up, they went into default. Governments and central banks ‘saved the day’ with co-ordinated monetary stimulus: easy money and bail-outs. And, it worked! Economies eventually moved toward normalcy, when a second, unexpected jolt arrived: COVID-19. Economies collapsed. In March 2020, governments and central banks cooperated once again. They started to print money aggressively again. And, once again, it worked. World economies seem to be returning to normalcy.

This time, there is a fly in the ointment: unacceptably high inflation. That newly printed money was supposed to help small and large businesses and create jobs. Unfortunately, way too much of the newly printed money went into stock market, commodities (metals, grains, energy, materials) and real estate speculation. The central bank’s job is to keep these forces in balance and keep control of inflation. They need to balance between ‘too easy’ and ‘too tight’. There are methods to achieve this economic goal other than controlling money supply and influencing interest rates. However, the central banks have not yet used them. The extreme of ‘easy money’ caused hyperinflation in post-war Germany 100 years ago. The extreme of ‘tight money’ resulted in deflation and the Great Depression of the 1930s. These are the forces in play as 2022 continues to unfold. Which way will the scales tilt?

Fortunately for us, we don’t have to guess. Put away your tarot cards, crystal balls and financial forecasts. The financial markets themselves are sensitive indicators of what’s happening. As inflation rises, the bond market falls. As deflation rises, stock markets and commodities futures markets decline. Energy stocks, material stocks and mining stocks rise as inflation rises. By following these various financial markets, we get a read on the underlying forces of inflation and deflation. The indicators aren’t perfect, but they work. Useful economic information is readily available by simply following the markets themselves. Our problem is acting on that information. “To know and not to act, is not to know.” Let’s review those financial markets looking for the inflation vs. deflation balance.

US stocks

The S&P 500 stock index made yet another new high (2,804) in December, confirming the long term UP trend that began on March 9, 2009. The S&P 500’s low in 2009 was 666. That’s an astounding 721 per cent gain in the past 13.75 years! Who expected to make that much money in the stock market? The S&P 500’s low in March 2020, just after the FED’s ‘print-as-much-as-it-takes’ announcement, was 2,192. As of year-end, it was up 217 per cent in 1.75 years! Who expected to make that much money in the stock market!? These abnormal increases are the effect of easy money policies by central banks. Cause: easy money—Effect: spectacular bull market. 2022 should include a shift from easy money to tight money. Get ready.

Canadian stocks

The overall trends in the Canadian stock market are the same as for the American, but more subdued. The TSX did not hit a new high in December, but there is no reason to believe the long term UP trend is over.

US bonds

As measured by TLT—the exchange traded fund representing long-term USTreasury Bonds—the US bond market peaked 19 months ago, in the summer of 2020. The trend is currently DOWN (i.e. the trend of interest rates is UP).

Canadian bonds

As measured by XLB, the exchange-traded fund representing long-term Canadian bonds, the Canadian bond market peaked at the same time as the US. Long-term bonds are in a DOWN trend; long term interest rates are in an UP trend.

US dollar vs. basket of non-US currencies

The long-term trend has been sideways since 2015. Within that seven-year trendless drift, the US dollar is in a short-term up trend that started about 6 months ago. There is stability in the currency markets. Some economic critics think that a currency is weakened when a country debases its currency by implementing a too-easy monetary policy. But, when all countries debase their currencies in accord, as in the past two years, it creates stability. It appears that currency strength or weakness is not so much a function of monetary policy, but of relative monetary policy. As long as the central banks play the game according to those unspoken monetary rules, currencies remain stable. But, if one country marches to a different monetary drummer, their currency can collapse. In 2021 it was the Turkish lira. The Turkish central bank would not raise interest rates as their inflation rate soared upwards. As a result, their currency collapsed. Conformity is important.

Canadian dollar vs. US dollar

The loonie has been drifting sideways since 2015 and is currently near the top of that sideways drift. The long-term trend is neutral. The Bank of Canada takes its policy lead from the US Federal Reserve Board, but recently it has been slightly more conservative.

Energy prices

Crude oil rose about 50 per cent in 2021. No wonder inflation is a problem! US President Joe Biden did his bit to counter this explosion of inflation by agreeing to dip into America’s strategic oil reserves. Selling some of their reserve will add to the supply side of the energy equation, and should cool oil prices for now. Our view has consistently been that oil prices are artificially high because central banks are massively printing money. They are doing it to stimulate a COVID-19 weakened economy—but, like the COVID-19 vaccines, the injections of printing press money can have undesirable side effects. Inflation is the biggest one.

Precious metals

The long-term up-trend of gold began in 2015, hit a short-term high in the summer of 2020, dropped for nine months and stabilized. The long-term trend is UP; the short-term is neutral. Gold is considered by some to be a safe-haven investment. When some people are really worried, they buy gold. In his 2009 research paper, Tapping the Power of Gold, Daniel L. Ascani showed how gold tends to rise in both inflationary and deflationary times. For gold investors (speculators?), it doesn’t matter what is scaring investors—as long as investors are scared!

Fixing financial bubbles

In 2022, central banks will be trying to control rising prices without raising interest rates. So far, they have been talking tough and doing little. They are printing less money. And, America is selling oil reserves, hoping to cool energy prices. In 2022, we may see central banks restrict lending to control the financing of speculation. For example, Canada may use Central Mortgage and Housing (CMHC) mortgage insurance policy to make it harder for real estate speculators to borrow money to finance real estate inflation. The FED may change margin requirements for investment dealers, to discourage stock-market speculators. These are the two most risky financial bubbles that have arisen from 2021’s ‘over-easy’ monetary policies. And, they are the easiest to fix. The problem is with speculators who borrow money to buy assets that are rising in price. The central bank’s goal is to have developers and businesses borrow money to create jobs, goods and services—to create an economic recovery in the midst of a longer-than-expected pandemic. The undesirable side effect of their ‘over-easy’ monetary policy has been massive inflation caused by massive speculation in the stock market, futures markets and housing markets. The year 2022 will see the world’s central banks trying to walk the tight rope between these two economic excesses—too much inflation and too much deflation.

What to do?

How should ordinary investors behave? If we want to bet on too much inflation, we should borrow money and invest in stocks, commodities or precious metals. To bet on deflation, buy gold. Cash is king and debt is death. But, if central bankers keep their balance and walk the tight rope, we should continue to own investments that are in up trends and avoid investments in down trends. My advice? Stay vigilant. Remember the old stock market slogan: “In a bear market, whoever sells first, wins.” Review your financial action plan. Be ready to act as the scales of inflation and deflation wobble around that mysterious, unknown balancing point.

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance. He can be reached at

This is an edited version of an article that was originally published for subscribers in the January 2022, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.