AI, Ukraine War and Housing & RV Bubble

Struthers Report V29 # 6.11

I have not had many new stock picks of late as markets have been churning sideways or down, other than a handful of AI and tech stocks driving market indexes. The 2023 tech rally has brought Apple’s valuation within millimeters of $3 trillion. It was one of the most purchased stocks in Q1, alongside Microsoft, Nvidia, and Amazon. I expect sector break outs to the upside and down side and will make some new picks then. This is a popular chart that shows the S&P 500 with and without AI stocks. AI really will be the next big thing.

We are at War

Most people and our governments in Canada along with most western countries don't have a clue whats going on. The pace of cyber attacks has gone through the roof. I have spoke to a number of web developers and they are all saying the same thing. One type of attack uses the Eval PHP plugin for WordPress, and its use has spiked starting at the end of March 2023, jumping from roughly 40 installations to more than 100,000 within weeks, Sucuri reports. Eval PHP allows the attackers to drop the malicious code in multiple posts that are saved as drafts and remain hidden.

I believe China, Russia and other adversaries are hacking and attacking all e-commerce in an attempt to disrupt economies among other things. This news just out, maybe some are cluing in? State-sponsored hackers from China have been targeting U.S. critical infrastructure, cybersecurity officials from around the world, including Canada, warned Wednesday. They are targeting a lot more than this.

And on the topic of war, head of the Russian private military group Wagner, Yevgeny Prigozhin, announced Saturday that after months of grinding warfare and heavy casualties, Russia has now taken full control of the strategic city of Bakhmut. "The operation to capture Bakhmut lasted 224 days" he said in a video posted to Wagner's Telegram channel. Western media reports have said they can't verify the claims, but headlines in Reuters and the Associated Press are widely reporting the Wagner chief's declaration of victory.

Now the US back tracks and is going to send F16s to Ukraine. Why? This is simply an admission that Ukraine is losing so needs even more advanced war equipment. A big problem is who will fly the F16s, it would take many months to train pilots so that leaves some missionaries to fly these. If/when they get them.

I have heard reports from good sources of one Russian killed for every 7 Ukraines, an American missionary fighting for Ukraine called Bakhmut 'the meat grinder' as a Ukraine soldier lasted on average 4 hours on the front. Ukraine seems desperate for troops, calling in the trainees early and drafting the old and young. And millions are fleeing the country. Numbers show more than five million Ukrainians crossing the country’s borders and have registered with its neighbours under an EU agreement for temporary protection. An assessment published by the UN High Commissioner for Refugees reports that the estimate excludes roughly 3 million Ukrainian refugees who escaped from the war zone without a visa into any of the 27 European nations. Who will be left to rebuild?

Another thing among the energy and food crisis and high costs of fighting putting pressure on Ukraine to end the war, is pressure by government officials at various levels in Poland, Hungary, Lithuania, Estonia, Czechoslovakia, and Latvia. These countries are all allies of Ukraine and declared enemies of Vladimir Putin. This group is led by Poland but Hungarian Prime Minister Viktor Orban has once again spoken out after F-16 fighter jets are poised to be delivered to Kiev in the near future.

The first day of the annual Qatar Economic Forum (QEF) included a speech and on-stage interview by Orban wherein he bluntly stated that Ukraine can't win the war against Russia, short of NATO directly sending troops - which it isn't willing to do, and which Hungary stands against. "The only solution is ceasefire, and then after the ceasefire, peace talks should start," he said. He explained this is the only path forward given Kiev can't win.

This group has been quietly urging Zelensky to find a way to end the war—even by resigning himself, if necessary—and to allow the process of rebuilding his nation to get under way. Zelensky is not budging so far, according to intercepts and other data known inside the Central Intelligence Agency, but he is beginning to lose the private support of his neighbours. Putin's war of attrition is gaining ground.

According to an anonymous America Intelligence official there is no support for Zelensky to leave from the Biden Administration but Ukraine is running out of $$ again. How can this group get the US to stop supporting Zelensky? The White House support goes beyond the needs of the war: “We are paying all of the retirement funds—the 401k’s—for Ukraine.”

And Zelensky wants more, the official said.“Zelensky is telling us that if you want to win the war you’ve got to give me more money and more stuff. He tells us, ‘I’ve got to pay off the generals.’ He’s telling us”—if he is forced out of office—“he’s going to the highest bidder. He’d rather go to Italy than stay and possibly get killed by his own people.”

Remember, Zelensky is one of the most corrupt leaders in the world. In Ukraine, Zelensky shut down all independent media and consolidated control over the press. Only pro Zelensky press exists, NATO and the US supported this. NATO and US press is all propaganda too. Than Russia spews out their propaganda on the other side. You have to read between the lines and gather info from unbiased sources to have any clue what is really going on. I believe the war will end this year, at some point and Russia will get most of what they want. Sanctions will not end as Russia will be labelled the bad guy so current economic challenges will be around for some time. It will be a slow rebuild. It is just shameful the Ukraine people are being used as pawns in the US/NATO attempt to over throw Putin and destroy Russia. That is the real goal here, it has little to do with saving Ukraine. Sure they would love for Ukraine to win this war, but at what cost. The US plan was botched from the get go because it was not really a plan but a poorly thought out reaction.

Anyway, enough of this, I feel for the Ukraine people and give them tons of credit for their bravery and fighting skills and determination. I hope this fighting ends soon.

Then

And Now

It appears US home prices peaked in early 2022. The median price of those homes fell by the most in 11 years, declining 1.7% in April from a year earlier to $388,800. Monthly sales have dipped in 14 out of the last 15 months.

However, this next chart is really scary for Canadian home owners.

In the US, prices are just getting above the 2007 peak. The US learned a lesson from that previous bubble, but Canada did not. Income growth in both countries is similar but not house prices. Canada housing was in a bubble before Covid-19 and than, with all the excess stimulus, it went parabolic. This bubble will pop and house prices will come down hard, as surely as you are sitting reading this.

Canadian house prices have declined some and currently have levelled off in Q2 this year so far. This is just a pause in the decline because Canadian banks just kicked the can down the road by extending amortization on variable rate mortgages instead of the full effect of rate increases being felt. The banks know bad times are coming and have started to set aside $billions for expected loan losses.

In Q1 alone, Bank of Montreal, reported provision for credit losses was $1,023-million and total adjusted provision for credit losses was $318-million, compared with a reported and adjusted provision of $50-million in the prior year.

In Q1, Scotia Bank's provision for credit losses was $709-million, compared with $219-million, an increase of $490-million. The provision for credit losses ratio increased 24 basis points to 37 basis points. Other banks increased credit loss provisions as well. The banks are preparing for shit in the fan.

The Globe and Mail reports in its Thursday, May 18, edition that Desjardins economists Royce Mendes and Tiago Figueiredo are calling Canada's mortgage debt "a ticking time bomb." The Globe's David Parkinson writes that the two men say the detonation time is still "a couple of years in the future." Their warning landed on the same day that the Canadian Real Estate Association released data showing a rise in home sales and prices in April. These guys never want to seem too alarming, this will be hitting way before their two year time frame.

Canadian households have been among the most indebted in the Group of 20 nations for some years, making them vulnerable to adverse economic developments. Canadians are facing the outcomes of a triple shock of declining purchasing power, as inflation is increasing faster than wages, and fast-rising interest rates, forcing a greater share of their income to debt repayment. And third for home owners is a coming decline in their equity that backs their high debt level. There are alarming signs that a rising number of households are struggling with their debt. Insolvencies are rapidly returning to their prepandemic levels.

I want to share this chart I came across that I like. It shows all the past crisis caused by the Fed from a tightening policy. Thus far, it appears this time they are breaking the regional banks. Perhaps there is something bigger coming as many cracks are starting to appear, such as RVs below.

Remember how popular RVs were during the pandemic, not so anymore. Results from the RV Industry Association's March 2023 survey of manufacturers showed that total RV shipments for March were 31,869 units, a plunge of 50.8% compared with 64,778 units shipped in March 2022. For the first three months of the year, total RV shipments are down 54% at 78,600 units.