A Fighting Chance Finance

The coming year is still very much uncertain and even for the most experienced finance professionals, it is hard to put one’s finger on how the year will play out. Here’s a few things I am predicting for 2022. We can look back on this article at the end of 2022 and see just how wrong I was!

House Prices

The world is still dealing with the pandemic, which means that industry is still fragile and susceptible to shocks on both the consumer side and the supply chain. Therefore I think that federal government stimulus programs will ease as the economy recovers, but nothing will happen that is drastic such as a huge increase in interest rates. Cheap money is always the biggest lever in house price increases. If monthly payments are affordable, people will lever up to their maximum to get the best house they can. It is expected that US government mortgage sponsors Fannie Mae and Freddie Mac will increase their conforming loan limits to over $1m in expensive markets, making the most affordable mortgages available for luxury homes worth over $1m. Incentives like this make pricey homes more affordable for more people, and exacerbate the high prices. Therefore, I think house prices will stay very strong, and perhaps continue to increase significantly next year. Even if interest rates rise by 25-50bps, the interest rate on a home mortgage is still at shockingly low rates compared to historical averages.

Stock Market Prices

It seems that on almost a daily basis we hear of new records being hit by the S&P 500, TSX and other major global stock indices. This, like house price inflation, is largely driven by more money in the economy from government stimulus, and the desperate search for yield in a crazy low interest rate environment. These run ups of stock prices have led to price earnings ratios in uncomfortable territory. The historical average PE Ratio on the S&P 500 is 19.4 across the largest most stable 500 companies in the US economy. Right now, Wal Mart is trading at a PE of 51. 51!!! I do think equities are overvalued now, perhaps significantly, and a rise in interest rates, even ever so slightly that signals a new trend, will cause capital to retreat from the risk of equities and into other asset classes. The higher interest rates go, the more attractive bonds are for example. So I predict in 2022 we will see a significant levelling out of stock indices and likely some very jarring corrections at one or more points throughout the year as we emerge from Covid and economic news comes out about interest rate increases.

Cryptocurrency Prices

Crypto is immune to inflation. It is viewed as a store of wealth much like gold or silver. Federal governments have caused widespread inflation due to massive stimulus cash moving into the economy to counter covid-19. US inflation exceeded 6% in late 2021, while Canadian isn’t far behind. Governments are reassuring people that they believe inflation is transitory and will revert to normal levels once the economy picks back up. There are so many inputs to inflation, from interest rates to tax rates to supply chain and consumer sentiment. The “great resignation” is causing serious issues with supply chain, making it harder for companies to produce goods and services reducing supply and driving up prices. I can’t see inflation tapering in any meaningful way in 2022 so I expect crypto prices to continue upwards as people try to protect their wealth from the crushing tax that is inflation. Remember folks – cash is trash!

Well, that’s all for now. 2022 is sure to be a very interesting year in financial markets – so much uncertainty still on how the world will return to normal, or not.