How to Prepare for the ‘Incredible Profit Purge’ of 2022

The incredible profit surge of 2021,’ is how Fortune sums up the year so far.

The profit moonshot in the first half of this year ranks as a landmark in the annals of equity markets.

But what if that’s about to reverse spectacularly in 2022?

Two decades on from the last tech bust, is tech about to lead the markets in a worldwide crash once more?

Yesterday, Vern Gowdie released some bombshell research.

If you haven’t already, I urge you to read ‘Four Code Red Investments to Sell Now’.

When we last had a tech bubble pop, it took the benchmark S&P 500 down 45% from mid-2000 to late 2002.

The tech-heavy Nasdaq fell even harder.

The difference today is it’s not just hundreds of no-profit dotcoms in a bubble.

It’s every kind of asset you can name…right across the spectrum.

Vern is making a definitive sell call on FOUR of them here.

But as you’ll see, it’s a certain type of tech stock that he believes stands right at the top of the risk scale.

And news of panic selling is something we could see in the headlines in the near future…something that not many are expecting.

In fact, as Vern points out, unlike every other upcycle we’ve had before, there’s the notion out there that central banks will keep this one going…forever.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

It’s easy to see why.

Asset prices have hit record highs…even as the world went through a once-in-a-century pandemic.

Here in Australia, despite much of Australia being in lockdown, property prices have kept climbing. Here’s Domain:

The number of properties failing to sell at auction is rising in Sydney and Melbourne, new data shows, as “greedy vendors” test out how far they can take the booming property market.

The booming market in both capitals, fuelled by record-low interest rates and more competition for fewer homes for sale, has seen house prices skyrocket and vendors expectations rise higher than ever.

But of course, this is all very precarious. A house of cards built off the back of record low interest rates and money printing…a mirage.

The question is when will this whole thing start to reverse…and when will central banks start hiking rates?

There’s a lot of money sloshing around in the system. And the more money there is around, the less valuable it is.

In fact, inflation is already here.

We are already seeing worker shortages…and businesses having to pay more to entice workers into the labour market.

There’s also been good shortages. In particular, the semi-conductor shortage is affecting everything from electronics to cars.

In fact, this week I looked up how much I could get for my car. As it turns out, after driving it around for a few years, I can still sell it for close to the same price I bought it for.

And then there’s supply chain disruptions, or as Bloomberg calls it, ‘supply chain hell’.

Along with struggles to find workers and truck drivers, the pandemic has meant some factories had to stop production around the world.

High demand for goods has created shipping congestion and container shortages. The price of a 40-foot container has increased by over 400% since June last year, according to Drewry’s World Container Index.

And while the US Fed keeps hammering away that this is all transitory, shippers are already signalling this isn’t going away any time soon.

As Morten Engelstoft, CEO for APM terminals which is owned by Maersk, the largest shipping company in the world told the Financial Times:

We need to work out how we break this vicious circle. We need lower [consumer demand] growth to give the supply chain time to catch up, or differently spread out growth. Over a long period of time, we will need to recover efficiency.

US imported goods in July were up 20% from 2020 and 11.5% from 2019, according to the Financial Times. As Engelstoft continued:

It’s a percentage of an enormous volume. The sheer size of business going through is so enormous that the amount of port capacity, truckers, warehouses and even labour to man all the equipment has created a bottleneck.

Of course, this is all ahead of the busy Christmas period…and a US stimulus package in the works.

So the only way that demand will drop is to increase prices. Which leaves the Fed in a bind.

On one hand, inflation is rising…but they cannot afford to raise rates with debt levels already at highs and the risk that it reverses asset prices.

But it’s a delusion to think you can control inflation.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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