By Andrey Dashkov, analyst, Casey Research
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The Nasdaq is down more than 13% so far this year.
We expected interest rate hikes… but the news is pushing some investors to hit the “sell” button.
Against this backdrop, the Fed will likely go on a massive interest rate hiking program.
Future markets are pointing to four interest rate increases this year.
Why?
Because the Fed thinks the economy is doing well.
But the mainstream media hasn’t considered one certain scenario… and, if you position yourself right, it could benefit your portfolio. I’ll explain how in a second.
But first…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
I’m Andrey Dashkov, and I’ve been a Casey Research analyst for over 11 years. Incredible investing minds like Nick Giambruno… Louis James… Doug Casey… and Dave Forest have all helped shape my writing and thinking.
I’ve learned a lot over the years – including how to make huge gains from smart speculations…
Let’s see what the Fed is missing about today’s market and where we can look for investment opportunities…
This Chart Shows the Economic Consensus Is Wrong
High economic growth is good, so the Fed thinks the U.S. economy can survive higher interest rates.
It’s another way to slowly “tighten” the country’s monetary conditions. A healthy economy should be able to handle it.
But we don’t know if 2022 or 2023 will show the same economic growth as 2021.
And that growth only happened after the huge economic slowdown during the pandemic.
In other words, it’s high growth from a very low start.
The chart below sums this up. It shows “economic surprises,” or market expectations versus reality.
After the initial COVID shock in 2020, the U.S. economy delivered a series of positive surprises. The government stuck to an “all it takes” policy to provide support for the economy and the markets.
And by the end of 2021, things looked good… for a moment.
But the latest data show that the economy isn’t offering any more pleasant surprises.
The index turned negative at the beginning of this year.
So the post-COVID euphoria could be ending.
Rich Countries Are Flatlining
The U.S. is not alone. The chart for G10, a group of rich countries like the United Kingdom, Germany, and Japan, has been flatlining since mid-December.
The Fed may be wrong about the U.S. economy being able to handle less stimulus with higher interest rates.
We could be looking at low growth and strong inflation, which has been running at multi-decade highs for months now.
Here’s David Forest, from back in December 2020:
Over the coming years we expect the dollars needed to produce a sufficient [investment] income will keep growing. That doesn’t mean we’ll see massive inflation like some analysts are predicting. We could see something more like stagflation. That’s when growth stalls while prices rise. This is the deadliest combination possible.
But low growth and high inflation are good for our favorite insurance at Casey Research…
… And that’s gold.
For exposure to the yellow metal, look at the SPDR Gold Trust (GLD). It is a physically backed ETF (exchange-traded fund) that closely tracks the price of gold.
While the Fed could still try to make a graceful exit out of its money-printing spree… we doubt it. We think this plan could run into sluggish growth.
And then the market will bet on assets, like gold, that do well when “there is blood in the streets.”
Good investing,
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Andrey Dashkov
Analyst, Casey Research