By Andrey Dashkov, analyst, Casey Research
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The problem with the Federal Reserve is not what you probably think.
It’s not that it’s too powerful or potentially corrupt.
It’s that the tools it has at its disposal are blunt.
Raising or lowering interest rates isn’t subtle. These moves touch almost any economic activity and almost any asset price.
The ongoing “operation hike,” which has already been months in the works, produced the biggest interest increases in over two decades.
The Fed’s goal is to combat inflation. So far, we haven’t seen that happen.
But it will. Because higher interest rates lower demand across the economy and markets.
The Economy Is Slowing Down
Again, interest rates are, as the Financial Times puts it, “like a sledgehammer.” Not a scalpel that a surgeon would use to conduct precise surgery.
They decrease the demand for capital and goods.
Further, interest rate hikes decrease the demand for labor. Unemployment could go up as a result.
On net, we are looking at lower – yet still above-average – inflation and potentially higher unemployment.
This is the “cool down” phase of this economic cycle.
Until at least the end of this year, investors have to navigate an environment that’s different from the era of ultra-cheap money.
Here’s how to do it. And where to look for opportunities.
First, the Good News
Unemployment could rise in the future, but the labor market is so strong, it won’t likely return to the pandemic-induced 14.7%.
That was a disaster.
Almost every kind of economic activity ground to a halt. Empty streets and small businesses closed “until further notice.”
But even if COVID returns, we are better prepared to deal with it without resorting to all-out nationwide lockdowns.
Even if you see unemployment numbers begin to climb, keep in mind that they are starting from multi-decade lows.
And as soon as they do, they will start pushing inflation down. Higher unemployment means lower demand for goods and services. As far as inflation goes, that’s a good thing.
The Not-so-Good News
As I said in the beginning, the Fed’s tools are blunt. And the economy is complex. Adding to the complexity is the war in Ukraine, which suddenly changed key commodity markets like oil, gas, fertilizers, and grains.
The bad news is that nobody knows when the situation is going to improve. Or what an improvement even looks like. A ceasefire? A peace deal?
This is the biggest unknown.
But it doesn’t mean that investors can’t make an educated guess.
Right now, it’s best to bet on what has been performing well so far this year.
Commodities.
While the S&P 500 is down 21%, the S&P GSCI Commodity Index is up almost 35%.
Commodities haven’t been hammered like stocks or bonds. Unprecedented demand from everything, from oil to wheat to battery metals, has supported commodity prices this year, and it’s very likely that it will continue to do so in the coming months and years.
And even if the war in Ukraine stops tomorrow – which we hope it does – those bull markets will continue running.
The price of oil and other commodities didn’t start rising when Russia invaded Ukraine. Nor will it stop when the war is over.
Commodities didn’t drop because the Fed started raising interest rates. So why would they fall as the price hikes continue?
What to Do Now
The best way to play the “cool-down” economy is through commodities. And our expert Dave Forest has a score of investments to share with you in that space.
In fact, he recently unveiled a new venture, The Super Spike Advisory, using his 25 years of experience in commodities to help main street investors navigate this space for the best gains… and to protect their wealth from being inflated away.
You should check it out right here.
As the economy continues sailing through choppy waters, commodities remain one of the few “safe haven” sectors with upside potential we don’t see anywhere else.
Good investing,
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Andrey Dashkov
Analyst, Casey Research