When the music stops . . .

Behavioural finance analyst Ken Norquay warns no investment strategy works forever. It’s like a game of musical chairs: when the music stops, don’t be left without a chair.

Don’t be caught without a chair when the stock market’s music stops going around.

Since The Ides of March, 2020, the US Federal Reserve Board has been aggressively printing money by buying US treasury bonds. But just how aggressively?

Google tells us that from December 2008 to March 2010, the FED printed $175 billion. That’s just under $12 billion per month for 15 months: they called it Quantitative Easing.

From November 2010 to June 2011 they printed $600 billion: that’s just under $86 billion a month for 7 months: QE2.

In March 2020, the FED’s chairman, Jerome Powell, announced that they would print $500 billion a month and a week later upped it to: “Whatever it takes…”. As of January 13, 2021, the FED had printed $2,700 billion. That’s $270 billion per month for 10 months. That’s “what it has taken” so far.

Powell is hoping that all this stimulus money will flow into the economy in these uncertain pandemic times. He’s hoping it will not be squandered on speculation in the stock market, real estate or commodities futures. When someone borrows money and buys a new car or a new home, the money goes into the economy, creates jobs and gives rise to ‘the multiplier effect’.

But when they borrow money to buy stocks, existing real estate or commodities futures, it gives rise to inflation. In the past, central banks have aimed for 2 to 3 per cent inflation and another 3 or 4 per cent as economic growth. The problem this time is the pandemic. Powell is getting inflation without growth. When this occurred in the late 1970s they called it stagflation. At that time, the FED jacked US interest rates very high (over 20 per cent) to end it.

How will today’s unique economic problems end? Don’t even try to guess! The best economic minds in the world are all offering their opinions. But their wisdom is not in their thoughts and opinions: it’s in their actions. What is their strategy? What are they buying and what are they selling?

A market overview

Let’s review the markets, searching for clues as to what big money minds are thinking based on what they’re buying or selling, not on what they are saying.

US Stock Markets: The long-term uptrend of the S&P500 began on March 9, 2009 and registered a new high on St. Patrick’s Day, 2021. From low to high, the index has increased 590 per cent in 12 years. This spectacular gain was ably assisted by the FED’s ‘over-easy’ monetary policy. In previous articles, we have drawn readers’ attention to a series of increasing market swings since 2018. Our interpretation is super-bearish: the ever-increasing volatility of these up and down swings is a sign of increasing speculation. The bubble is ready to burst. Other signs of excess stock market speculation are: (1) the action of Game Stop and similar examples of gambling (see last month’s article), (2) the presence of small, new investors in the market through apps like Wealthsimple and Robinhood. Furthermore, there is a short term divergence between the NASDAQ index, which peaked on February 2 and the S&P500, which reached its high March 17. The NASDAQ has been the powerhouse leader until recently.

Canadian Stock Markets: The TSX Composite Index is tracking its US counterpart, but with less volatility. Until recently, it is under-performing the American market, mainly because of the strength of US high tech stocks. The long term trend is up and the caution flags are out.

US and Canadian Bonds: American officials have announced a huge sale of long-term treasury bonds during 2021. They need the money to finance the huge deficits incurred by their government’s counter-COVID-19 money giveaways. The bond market has reacted by collapsing to 2019 levels. After such a large short-term decline, we should expect a short-term recovery in bond prices. For now, we continue to rate the trend of both US and Canadian long-term interest rates and bonds as neutral, although the short-term swings have been wild.

It is very interesting to observe the cross winds in the 20-year+ bond market. The FED is buying and the treasury is selling. FED Chairman Powell is walking a delicate line. It is important for us not to develop an opinion about these treasury bond auctions and Powell’s policy statements: just pay attention. We are in a critical time of action-reaction. The bond markets will react to FED policy, but we should not. We should react to the markets. We are players in this game, not fans in the audience. The long-term bond market is a lead economic indicator for the stock market and this is a dangerous high-risk stock market. The recent sell-off in US long- term bonds is a warning of trouble for the stock market. Please stay alert and react when the time comes.

US Dollar vs. The Basket of non-US Currencies: The short-term down trend of the US Dollar is over. The high occurred shortly after Powell’s Ides of March print-as-much-as-it-takes announcement. The low point occurred in the first week of January 2021. The short term trend is up and the long term is still neutral.

Canadian Dollar vs. US Dollar: Since the loonie’s long term decline from 2011 to early 2016, it has been swinging up and down with no progress in the long-term trend. Snowbirds and other Canadians who like to maintain cash or investments in US funds would have done well by buying loonies under $0.70 US and selling them over $0.80 US. This is a good time to sell the loonie and buy US dollars.

Energy Prices: Crude oil speculators are benefiting from the FED’s over-easy monetary printout. Oil prices had collapsed from January to April 2020 in the 02-20-2020 financial crisis. Over the past year, it has doubled from the low. That’s a recovery of just over half of the previous decline. These are big, profitable swings for traders who know what they’re doing. But long-term investors think differently.

We observe that energy prices entered a volatile long-term down trend in 2008, collapsed into 2009, rose into 2011 and collapsed into 2020. It is possible that this 12-year down trend is over and a new long term up trend has begun. Usually at a major trend reversal, there is a ‘test’ of the previous low. If the test holds, (i.e. the price of oil holds above $6.50, last April’s low) then the long- term trend reversal would be confirmed. But the FED’s over-easy money policy has created an artificial bubble of inflation in oil prices. There has been no ‘test’ so far. For now, the short-term trend of oil prices is up; the long term is neutral.

Gold: Gold is continuing its step-by-step short-term decline within a long-term uptrend. Since the 02-20-2020 financial melt down, both gold and the US dollar have sometimes been perceived as ‘safe havens’ for capital. But, after the crisis, as investor panic subsided, the price of these two havens declined. The US dollar declined when the FED, on March 15, 2020, announced it would be printing money aggressively. Gold peaked in August 2020, 5 months later. The US dollar bottom occurred on Jan 5, 2021. So far, the low for gold has been March 8, 2021, two months later. The short-term decline of precious metals is near an end. I recommend that readers use the recent 10-month decline in gold prices to increase their holdings.


It is important for investors to not be over confident at this juncture. There are many unknowns in the economic world. And there are many well-trained minds following these unknowns, fighting for economic survival. As small investors (under $10 million in the market), we are not going to get it right, except by luck. We will make investment errors. It makes sense for us to plan those errors. I suggest that we plan to err on the side of being too cautious. Err on the side of being under-confident and unsure. Err on the side of keeping what wealth we have, rather than trying to make even more.

Most investment professionals err on the side of being overly optimistic and confident. And why not, with the stock market only a whisper away from its all-time high, bullish optimism has worked! But no strategy works forever. COVID-19 is taking its toll. It’s like a game of musical chairs: when the music stops, don’t be left without a chair.

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.

This is an edited version of an article that was originally published for subscribers in the April 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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