Where to Invest in a World of Resource Scarcity
The market is dealing with something different: world-wide physical scarcities in energy and food. In this environment, what worked in the past can backfire.
The monetary sanctions against Russia are proof. After sanctions initially caused a quick 70% decline in the ruble, Wall Street and Western governments predicted Russia’s economy would collapse by 35% or more.
Instead, the ruble has soared from its initial low and is the world’s strongest major currency so far this year.
Predictions of a mild Russian recession have replaced forecasts of a catastrophic decline. Meanwhile, food and energy prices have continued to rise, and the odds of recessions in Japan, Europe and America have increased.
A happier surprise is that despite the sharp market decline, the technical picture doesn’t suggest an economic catastrophe. Smaller-cap stocks have been outperforming the heavyweights, an historical pattern pointing to inflation rather than economic doomsday.
The market seems to be betting that the war, and the shortages it is accelerating, will force the world to come together in world-saving efforts.
I continue to believe that investors can make tons of money in the right stocks, but I think intense volatility in everything is here to stay.
The possible silver lining to higher energy and food prices is that they may push the world to come together and move faster to develop a sustainable economy. It is my profound hope that the war in Ukraine, terrible as it is, will be a wake-up call.
The Fed’s Futile Attempt
My major worry is that the Federal Reserve, in trying to fight an inflation that’s outside its control, will overreach. Very dire economic consequence would then likely follow.
The Fed so far has raised the federal funds rate three times in 2022: a 25 basis point bump in March, then a 50 and a 75 basis point increase in May and June, respectively. The June rate hike was the largest rate increase in nearly 30 years.
By initially downplaying inflation and waiting as long as it could, the Fed ended up tightening aggressively. Unfortunately, I don’t think the Fed will be able to do much about the fundamental issue of resource scarcity underpinning inflation.
Tightening credit conditions will slow down the economy, and that may slow down inflation, but at the cost of jobs and income to Americans. And when things get dire, the Fed will have little choice but to ease again.
The Two Sides Need to Work Together
I mentioned that countries need to cooperate. Specifically, I mean the developed world, which is financially wealthy but generally lacking in natural resources, needs to work closely with the developing world, which is less financially wealthy but richer in natural resources.
Alas, instead of cooperation, lately it seems the division between the two sides (the developed world, led by the U.S. and the EU and the developing world, led by Russia and China) is widening. The Ukraine/Russia situation show why access to resources is so important. By sanctioning Russia, the EU is denying itself critical natural gas and shooting itself in the foot.
I am still holding out hope that cooler heads will prevail and leaders will realize that if they continue to fight, the future will be bad for everyone.
Commodities Positioned to Thrive
I think the good times for the stock market (where all you had to do to make money was throw money at some fast-growing tech stock) are over. My prediction is that over the next decade, natural resources, such as energy, metals, and food, will be among the best performing assets.
To go where the world wants in terms of renewable energies and for the developing world to continue to modernize, the amounts of commodities needed are just unprecedented. There will be ups and downs, but I believe real assets are the place to be.
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