Ken Norquay says in times of aggressive monetary policy, pandemic, potential deflation, potential hyperinflation and economic melt down, focus on preservation of capital.
The financial winds have shifted. Eight months after central banks started printing money, there is a whiff of inflation in the air. Have you noticed a slow, insidious increase in prices at the grocery store? These are tricky times for our central bankers. Last March they announced an aggressive monetary policy to combat deflation. They were so aggressive that risk is now shifting from deflation to inflation.
I remember the late 1970s, when someone coined the term ‘stagflation’—high inflation accompanied by a stagnant economy. The COVID-19 pandemic is creating the stagnant economy and printing money is creating inflation. These are tricky times for our central bankers.
Check your own personal feelings about this situation. How hopeful are you about your investments? Specifically, how optimistic are you now, compared to your feelings last January? Do you believe the story that last spring’s sharp market decline was a complete bear market, the shortest in US history, and the risk is over?
Do you believe that the Federal Reserve Board has prevented a depression and deflation with its ‘print-as-much-money-as-it-takes’ monetary policy? Do you believe that a vaccine is almost ready for distribution and soon our lives will return to normal? Check your own mind: do your feelings and beliefs match your investment allocation?
What do I believe?
Classic stock market theory tells us that bear markets unfold in at least three distinct stages, three ‘waves’. The first wave is down hard and investors become concerned. The second wave is an upward rebound that restores confidence and optimism. The third is a down wave—the big money loser that buy-and-hold investors dread.
Sometimes this long down trend sub-divides into three or more sub-waves. The 1929 to 1932 bear market lasted 3 years and took the Dow Jones Industrial Average down 90 per cent. The 1966 to 1982 bear market saw a series of sub-waves: 50 per cent declines and recoveries, one after the other, for 16 years.
I believe that the 02-20-2020 decline was the first down wave. The second wave, the rebound, is at or near its top now, in November 2020. And the long drawn out decline is just ahead. This down trend will continue until ‘buy-and-hold’ thinking gives way to ‘buy-low-sell-high’.
Diversification is no longer wise. Instead, we need to focus our investing on securities in up trends. Avoid securities in down trends.
Hold or fold? Let’s turn our attention to those financial trends. What investments do we want to hold and what do we want to avoid?
US stock market
The market touched a new all time high on Remembrance Day 2020, the day Pfizer announced that its new cure for COVID-19 was 90 per cent effective. In previous articles, I have described the ‘broadening formation’ market top that is in place for both the Dow Jones Industrial Average and the S&P500 Index. It consists of a series of violent up-and-down stock market swings with no real net progress. This pattern indicates that there is dramatically increasing speculation in American blue chip stocks. Statistically, the long term is up. The broadening formation is showing us the most graphic market top in US history.
Canadian stock market
The TSX composite has not yet reached its February 2020 high, so we cannot say with confidence that the trend is still UP. The TSX also shows a broadening formation. Although it is not identical to that of the American market, it does indicate an increasing level of speculation in Canadian stocks, although not as severe as that in the USA. Like its American counterpart, the long-term trend of the TSX is UP and a massive stock market top is in place.
US bond market
Bonds are usually the most sedate part of the financial markets. But not this time! In Mad March 2020, the ETF representing US long- term treasury bonds (symbol TLT) hit both a high of 180 and a low of 140. On Sunday March 15, Chairman Jerome Powell announced that the US Federal Reserve Board would buy “as-much-as-it-takes” long term treasury bonds. Economy pundits refer to this as ‘printing money’. Normally, mega-buying drives prices up. Bond prices should have gone up, driving long-term interest rates down. But not this time. TLT is right around 160, at the mid point of the March madness swings. Technically, since March 15, the US bond market has been in a slight down trend. For now, we’ll call the long-term trend neutral. With inflation starting to appear and the stock market recovery in place, it is possible for Mr. Powell to return FED policy to something more normal, less stimulative.
Canadian bond market
The basic trend of Canadian long-term treasuries is the same as in the US, but our bonds are closer to the top of the Mad March range. This means Canadian interest rates are being kept somewhat lower. The Bank of Canada seems more interested in continuing stimulus than its US counterpart. The trend of long-term interest rates is neutral.
US dollar vs. basket of non-US currencies
The US dollar has been going sideways since December 2014 and is currently in a short-term down trend that began right after Mr. Powell’s aggressive monetary-easing announcement. It registered a new short-term low in late November. The long-term trend is neutral.
Canadian dollar vs. US dollar
The Loonie’s trend has been neutral since 2016, trading in a range between approximately 74 and 79 US cents. It had dipped sharply during the melt-down of oil prices in spring of 2020, then recovered.
The current long term up trend began in December 2015 and was confirmed in June 2019. Since its high in August 2020, gold has been in a short-term decline: use this decline to add to your investment position. The short-term decline is almost over—don’t miss this entry point.
In our last article we said: “Our working hypothesis is that a long and volatile downtrend in oil price began in 2008 and may have ended in March 2020. The end of the downtrend would be signalled by (a) a sharp decline accompanied by an extreme in investor pessimism, (b) followed by a bounce back up and (c) followed by a renewed decline where investor pessimism is even higher than at the March low, but the price holds up.” Now, in late November 2020, this scenario is in place for energy stocks, but not for oil itself. The ‘test’ low for energy stocks occurred on October 29: since then oil stocks have gone straight up. For example, Suncor went from $15 to $23 in just 17 trading days this month. Canadian Natural Resources went from $21 to $31 in the same time. A down-to-up trend reversal has occurred in energy stocks. However, we are not as confident about the price of oil itself. Because of the Fed’s emergency policy of printing money, it is possible that, when the emergency is over and monetary policy becomes sober again, oil prices could test the March 2020 low as in our scenario above. Energy stocks and oil prices are reminding us that these are wild and woolly times in the investment world. For now, the long-term trend of oil is neutral, but energy stocks are in an up trend.
What, me worry?
Last spring, when investors were worried about deflation, collapsing stock and energy prices and a pandemic-inspired economic melt-down, both the US dollar and gold were considered safe-haven investments. Now, eight months later, both are hitting new short-term lows. This indicates that investors are no longer worried. The reasons to worry are still present, but the worry has passed. Stocks are up, safe haven investments are down. Is it reasonable for us to guess that 2021 could give rise to new worries? If so, it is reasonable to re-allocate some of your investments from the high-flying ‘no-worries’ stock market to those safe havens that were so popular last spring?
Some still believe in owning stocks, no matter what. So why not allocate some stock market capital to resource funds—mutual funds that hold energy stocks, materials, commodities, or precious metals? Investment strategies that worked in normal times do not necessarily work in wild-and-woolly times like these.
In times of super aggressive monetary policy, pandemic, potential deflation, potential hyperinflation and potential economic melt down, our main concern should be preservation of capital. Make money by not losing money.
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 firstname.lastname@example.org.
This is an edited version of an article that was originally published for subscribers in theDecember 2020, First Report of The MoneyLetter . You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter. 
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