You (Probably) Shouldn’t Buy The Dip[Part 2]

I had made a prior post amount why you shouldn't buy the dip. Part 1

Comments on the last post were a real ride and a mixed bag. Thanks for those who read it and gave responses to the actual content and didn't react solely on their own feelings and sentiment. To the rest, well here we go again I guess. Many people are right in their responses that you shouldn't take a random post's advice as gold. I'm just laying out facts and the mostly likely possibility based on economic conventions, to my knowledge/POV anyway I suppose. Anyways here we go.

Europe

• In July, the Euro fell to parity with the US dollar. As of recently the Euro has fallen below the value of the US dollars. For reference, the 1 Euro = 1.2 USD in July 2021. If you know anything about forex you'd know a change in value of over 15% is absolutely MASSIVE, and fairly rare if we're speaking of developed nations economies. This is in addition to the 1% change in a month or so since July 2022. The Euro is at it's lowest value in 20 years.
• The Bank of England has officially predicted a recession. Citibank predicts UK inflation at 18% next year, a near half-century high, with inflation currently at 10%, a four decade high. This morning, OFGEM, the UK energy regulator, increase energy price cap by an unbelievable 80% with further room for revisions that may imply further increases.
• Germany has lost between 30-40% of their energy supply since the war's start due to cut-off from Russia. A complete cut-off could have Germany lose 225 billion dollars over the next two years. Further, droughts and high temperatures have resulted in water levels on the Rhine, a key transport route, dropping below the critical 40cm mark, limiting capacity, and causing delays and cancellations. Germany is expected to impose a gas levy on households.
• Italy has seen inflation ~8% a 36 year high. Prices surged for processed food (from 8.1% to 9.5%) and transportation services (from 7.2% to 8.9%). It sees growth forecasts slashed by almost 3%.
• Estonia, Latvia and Lithuania see inflation at 23.2%, 21.3% and 20.9% respectively.
• The trend continues across Europe. The euro-zone in general sees annual inflation is expected to be 8.9% in July 2022, up from 8.6% in June. Energy prices increase a whopping 39.7% since last year, the highest on record. The EU accounts for about 15% of world GDP. Hard times in Europe means no funds left to trade.

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US Job Cuts

• It is actually simpler for me to link here. It gives a LONG list of just some of the largest US companies laying-off tens of thousands of workers over the past few months. The list of company lay-offs grows by the day. That's a lot less income to spare to trade for a lot off people. More importantly, it's just a sign that company profits are drying up so there's no little money or appetite for risky crypto plays.
• Unemployment rising (and it's persistence) is a hallmark of a recession.

Car Repossessions

• Car repossessions are surging and Lisa Beilfuss Popeo, who covers the economy for Barron's, have reported a doubling of repossessions among prime borrowers. To be clear, prime borrowers are individuals/firms who the banks are generally certain would repay their loans and the first approved for loans. They are the last people you would ever want to hear not being able to replay loans because if they can't repay their loans, it's likely that very few others can either.

US Individuals and Households

• The last reading of US Household Net Worth is actually negative meaning households owe money(or assets) more than they own.
• The Graph below shows the Household Net Worth vs S&P 500 with a visual correlation. For those not convinced, the correlation value from 2013- 2022 is 0.414, a moderate correlation for economic data. However, if we use the post-Covid values to determine the lasting effects of the COVID economic fallout and response to date we get a correlation value of 0.643, a strong correlation value for economic data.
• From the graph, the most recent Household Net Worth Reading is from Q1 2022, while the most recent S&P value is from Q2 2022(hence the cut-off). This implies that we expect the already negative household net worth to fall quite a bit further, likely pushing us into a recession.
• I have already highlighted the 60% rise in consumer debt from May to June in my last post.
• With further regard to the falling S&P, crypto as of recent(July-Aug) has a 0.8-0.9 correlation with the S&P, an extremely high correlation.

China

• China accounts for about 18% of global GDP and is the world's largest exporter. It is fair to say that, as the world's largest export, any slowdown economic activity in China would mean an slowdown in the global economy.
• China continues their zero-Covid strategy as many millions have endured lockdowns to varying degrees in large such as Beijing, Xinjiang and Shanghai. While lockdowns have been officially lifted in many cities, even more like parts of Tibet and Hainan see fresh lockdowns. This is along with restrictions and controls across the entire state.
• Real estate drives about 25-30% of China’s economic activity, and housing represents 70% of household wealth. Almost 30% of all bank loans are property-related. 21 major developers have defaulted on their debts in the last year.
• China's real estate market stand at 2.4 trillion dollars. Housing sales volume fell between 30-40% year-on-year since the beginning of 2022 across 100 major Chinese cities. Consultancy firm Capital Economics estimates that about 30 million newly developed properties remained unsold last year, while about 100 million more were likely to have been bought but not occupied. Home prices dropped for the 11th straight month in July. Many Chinese have chosen to not to pay their mortgages which ANZ Research estimates to affect about $222 billion of loans.
• Some property developers have gone so far as to accept watermelons, wheat and onions as payment for property. The government has been encouraging citizens to purchase more property. One government official has gone as far as to tell citizens to two purchase as much as four homes. The panic is obvious.
• 6 billion dollars have been stolen from the customer's deposit due to fraud by Henan Xincaifu Group Investment Holding Co. and citizens are in uproar amid chaos in the banking system.
• China is in a terrible position that feeds upon itself. Property developers are see falling sales and are going bankrupt/defaulting, so banks see less profit and/or take losses on non-performing loans, while lockdowns further limit appetite for healthy business loan while increasing distressed/risky loans, all the while everyone's value fall as real estate crashes.
• China has actually cut interest rates, twice in two weeks, in an effort to stimulate growth while most other countries raise rates to fight inflation. The Chinese remninbi or yuan has declined, falling as much as 7% in 3 months earlier this year. It recently fell to a 2 year low.
• China is also facing climate change problems as their rivers dry up such as the Yangtze, the world’s third largest river, seeing water levels in it's main trunk fall below the average of the last 5 years with entire sections and dozens of tributaries disappearing. This has then further created shortages of energy from hydropower. Companies such as Toyota, Foxconn and Tesla are among companies who have been forced to temporarily suspend plant operations.

Food Prices

• Per national geographic, the world diet is 45% comprised of grains. Of this, 19% is rice, 18% is wheat and 5% corn(3% other cereals). Between Ukraine and Russia, the amount of percentage of world grain supply is 14% of corn, 30% of barley and 27% of wheat(Radio Free Europe/Radio Liberty 2022).
• Now by various studies, lack of fertilizer can reduce crop yields by 30-60%. Corn in particular is sensitive to nitrogen(fertilizer) levels.
• Per CNBC, again, Russia and Ukraine together make up 28% of the fertilizer exports. Further, Russia accounts for 11% of the world’s urea, and 48% of the ammonium nitrate, key ingredients in making fertilizer.
• We have seen effective prices for fertilizers climb ~3X – 5X times(~300-500%) where they were before the pandemic. They are up ~1.4- ~3X(140%-~300%) since the start of 2022.

Prices of inputs to fertilizer

• You may have notice the prices of at least two of the inputs fall and seem to be leveling off. This might be a good thing, kinda except for the fact that these prices are still sky high and have simply just stopped increasing. But keep this in mind.

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Grain Prices

• (I found out how to make the graph less ugly)
• These three commodities largely account for around 50% of the world's diet. They have increased 30-40% pre-pandemic. They increased a few percentage points since the beginning of 2022. But the point is the prices are still high.
• Again we see prices decrease after a massive surge earlier this year. This should be good.
• The problem is that food prices(among almost everything else) falls during a true economic recession. It's either we have sky high prices with inflation or low(er) prices but the value of all your possessions and net worth fall. Same difference. That by the way is the "secret" to the Fed fighting inflation. They can't. We either have high and rising prices and struggle to keep up or stable prices but we fall into a recession and our asset value falls amid mass lay-offs.
• EDIT: Just a few minutes ago, Fed chain Powell warned that inflation fight will "bring some pain". How ironic life is sometimes. Expect high rates, and you know what that means for markets.

Russia accounted for around 3% of global GDP. Sanctions have written off much of that value from global trade. I'm not sure I need to speak at length about the collapse of Sri Lanka and Pakistan. Bangladesh has now approached the IMF for a bailout. Cuba has been suffering daily blackouts and fuel shortages and has devalued the Cuban peso by 500%. Chile also is on the brink of a recession. I could go on. I have highlighted a number of countries in this article but of course, we also know that high inflation is a issue in virtually every country worldwide while also having to struggling with huge floods, high temperatures and droughts. These are global issues.

[Warning – the following paragraph is for economic nerds]

We are also seeing the beginning of what is called contango in oil futures(WTI) which basically implies a falling demand for oil immediate oil access which typically precipitates recession in addition to treasury bill shortages as the Fed reduces its purchases, and eurodollar and treasury curves being heavily inverted. I may do a deep-dive on bond and futures curves another another time as it's a pretty complex topic.

Believe me when I say I left out quite a lot of data that could be seen as questionable even if they were particularly damning. I made sure to include statements like "at a three decade high" to indicate that citizens are not accustomed to coping with such high prices and likely that wages would not be able to keep pace with inflation. I realised only near the end of writing this I maybe should have added sources but, c'mon this in Reddit. But seriously, pretty much all this data is very easily verifiable within a single google search. So sure, you should take some random dude-on-Reddit's advice but the fact is the economic fundamentals look pretty terrible. I don't wanna be that doom and gloom guy but simply believing markets will pump won't make them pump.

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Protect your pockets. That's all from me. Take care out there.