Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
Before I get to your questions, I want to take a moment to address the extreme volatility we’ve been seeing in the markets. Especially since the Federal Reserve raised interest rates by 50 basis points last week.
First of all, I do understand how stressful it is to read the headlines about market sell-offs. And worse, to see how that impacts your investments or retirement funds.
What we are seeing is a period of markets trying to come to terms with uncertainty. And that’s against a wider backdrop of distortion between the markets and the real economy.
Right now, the markets are dealing with the war in Ukraine, inflation, the ongoing Covid-closures in China, and supply chain disruptions.
But the overriding uncertainty of the markets relates to what the Fed will do with respect to interest rates.
And I can’t stress enough how much the markets hate uncertainty.
There’s a lot of fear in the headlines. Will the Fed raise rates to the double-digit levels we saw in the 1980s, when inflation was also in double-digits?
I don’t think that will happen. For one main reason – Distortion.
The Fed and other global central banks have fabricated too much money over the past 14 years to take it all away.
The markets have relied on this fabricated money. First between the 2008 crisis and the pandemic. Then between the pandemic and recent talk of that cheap money policy ending.
But even if the Fed raises rates, they remain at historically cheap levels. At some point, the Fed will have to come to terms with the havoc it is creating for the markets and the real economy.
It can’t really control the inflation of food or oil prices (for instance). For this reason, the Fed will ultimately have to retreat from its recently hawkish stance.
At that time, the markets will feel more certain about the cost of money. Then, we will see rebounds from these dips.
It’s not a good idea to sell into panic, even if it seems like everyone else is doing it.
In fact, I believe these volatile periods and dips are excellent buying opportunities, even if it’s difficult to wait them out.
I’ve been through many times like this during my career on Wall Street and since. From the 1987 crash… to the dot-com crash… to the Long-Term Capital Management crisis… to September 11 and beyond.
So I know that the best thing to do during these times is to focus on a longer-term time horizon. And wait out the turbulence.
I’ll have more to say about this on Monday. For now, let’s get right to the mailbag…
First up, a question from reader Frank about the Federal Reserve’s cat-and-mouse game with the markets…
Why can’t the Fed simply tell Wall Street (i.e., the managers of the major stock investment funds) and independent stock investors what it will do with short-term interest rates through 2022, and be done with it? Then stock investors and CEOs of companies can plan accordingly.
Instead, I read about various Fed governors being all over the place in this regard, from a quarter-point to three-quarters. I can only think these celebrity-wannabe Fed governors, each with their Ph.D. in economics, are trying to convince Americans that this is a very complex problem… that can only be solved via their brilliant financial acumen (such as waiting until this year to raise rates).
But I would think such hubris could result in greatly complicating the matter, causing needless market turmoil.
– Frank W.
Hi Frank, I could not agree with you more. It’s absolutely ridiculous and irresponsible for the Fed to not articulate its plans more succinctly.
Not having a clear strategy causes so much market volatility. And that hurts real people, with real investments that they count on for their retirement or other critical points of their lives, the most.
If the Fed were more straightforward and unified in its message, it could alleviate a lot of angst for retail investors, the markets, and the economy.
There are 12 Federal Reserve districts – Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis.
There are currently four members on the Federal Reserve Board of Governors – Jerome Powell (Chair), Lael Brainard, Michelle W. Bowman, and Christopher J. Waller. Usually, there are seven, but three seats are yet to be officially filled by President Biden.
Each Fed president and board member anonymously gives his or her projections for what the interest rate should be at the end of each calendar year. Here’s what they all thought to be “appropriate monetary policy” ahead of the March 2022 interest rate hike (when they raised rates for the first time since 2018, by 25 basis points).
Source: Federal Reserve Board of Governors
As you can see from the “dot plot” above, the projections vary wildly. One thinks the interest rate should go to between 1.25% and 1.5% this year. Another thought it should go as high as 3-3.25%.
But one thing is clear… most believe the rate should be between 2% and 3%… or higher, by the end of 2023.
Now, it remains to be seen if that comes to pass. And personally, I’m not sure anyone at the Fed has the stomach for the market backlash such an about-face in interest rates would bring.
Remember, the Fed hasn’t had much luck in previous attempts to raise interest rates, as I told you in my essay on the subject a couple of months ago.
But unfortunately, the markets will likely continue to be rocky amid such uncertainty.
A portfolio that is spread across a variety of asset classes should help hedge against volatility.
But as always, my main advice is to keep calm. Don’t panic sell. And always be on the lookout for opportunities to buy great companies at a discount during market selloffs.
Next, a topic I’ve written quite a bit about over the last number of months – the energy crisis.
The war in Ukraine is just the latest catalyst for global governments to fast-track the adoption of renewable energy sources. But reader Bill thinks this reaction is all wrong…
We need to understand that the war in the Ukraine is financed by Russia’s sales of fossil fuels. We must do what we can as soon as possible to produce as much as we can in this country to keep Russia from profiting on their sales of fossil fuels.
Alternative fuels are of secondary consequence right now. Additional fossil fuel production will not only save lives but will deter Russia from expanding its efforts to start other wars.
There is much more that you need to know prior to recommending alternate fuels that will only reduce our global efficiency.
– Bill W.
Thanks for your comments, Bill. I aim to always weigh near-term and future trends and provide my readers and subscribers with the best investment opportunities. That’s my primary goal in these pages and in my paid monthly subscription, Distortion Report.
Now, let me clarify that I believe the U.S. should be energy independent and a net exporter of oil and gas. That should be a goal of any administration. And, of course, recent geopolitical events have proven just how important this is.
But alongside traditional fuels, we should be producing alternative forms of energy for tomorrow’s energy needs. In my five-theme investment view, I refer to this category of energy as New Energy.
My reasoning for that is that this classification is about where money is flowing. I analyze where money is flowing from and to. This helps me pinpoint the best investment ideas to protect and grow your wealth.
And, for the next decade, at least, money will be flooding into sustainable, clean, and transitional energy.
And I’ll continue to publish my investment insights, so you can position your portfolio to profit.
In the meantime, I just put out an urgent briefing on a massive corner of the New Energy market…
It highlights one key area where money is set to flood in. Half a trillion worth, to be exact.
And I’ve identified a tiny company I believe is best positioned to profit from this. If you missed it, watch it here.
Meanwhile, Peter wonders about the effect the ongoing war will have on the gold price…
Dear Nomi, the Russian central bank has been a major accumulator of gold recently. Now with sanctions, surely it will stop buying and will start discharging its holdings on the world market to support Russian imports. Won’t this reversal have a major effect on the price of gold?
– Peter W.
Hi Peter, thanks for your excellent question. Russia has indeed been on a gold-buying spree.
Russia boosted its gold holdings from just over 400 tonnes in 2020 to more than 2,300 tonnes in 2021. From 2000 to 2022, its holdings averaged 1027 metric tons.
Crucially, Russia continued to buy gold after its economy took it on the chin from Western sanctions in 2014. This was after it invaded the Crimea Peninsula.
And, despite all speculations to the contrary, Russia has never sold its gold. Instead, it opted to buy more of it.
This tells me that, unless its finances are in utter shambles, it likely won’t sell it now, either.
Plus, keep in mind that today, with oil selling at an eight-year high, Russia has oil prices exactly where it wants them to be. Oil and gas account for up to 40% of Russia’s revenue.
That said, it’s quite possible that Russia will halt gold purchases for a period of time.
On the other hand, Russia has been far less bullish on another asset: U.S. Treasury Holdings.
For example, between March and May of 2018, Russia’s holdings of U.S. Treasury bonds plummeted from $96.1 billion to $14.9 billion. In other words, Russia dumped 84% of its American debt.
If I had to guess, I’d say Russia will sell any American debt it still has before even considering reducing its gold holdings.
And finally, the stock market isn’t the only one in turmoil at the moment. Crypto investors are having a hard time of it, too. But as with stocks, market turbulence doesn’t take away from the long-term picture.
So here’s a great question from Edward about the feds’ intentions towards crypto…
Hi Nomi, I have resisted crypto investments because with the stroke of a pen, Congress or the Fed could lock out every crypto investor from exchanges and force them back into the international monetary system.
It sounds like a conspiracy theory, but with every country printing money to save themselves, what would keep central banks from allowing investors to crowd into crypto (the rich and poor) only to lock them out? The billions or trillions moved into crypto would simply evaporate!
Governments could care less about investor losses in a competing crypto system, when survival of the central banks demands it. Any thoughts?
– Edward R.
Thanks for your question, Edward! The idea that the U.S. government will ban Bitcoin is a popular notion – and for an understandable reason. Crypto could threaten a major source of the government’s power – the power to create money out of thin air and force everyone to use it.
That said, that hypothetical situation is still a long way off. The crypto space, as it is right now, poses no existential threat to the survival of the central banks.
It would also be entirely impractical for governments to ban Bitcoin and other crypto assets.
Governments in Argentina and Venezuela have laws restricting their citizens from accessing U.S. dollars. But these laws have little effect on their citizens’ desire and ability to use them. These actions just create a thriving black market.
While they may definitely restrict things, governments cannot make something that is valuable and desired by lots of people just go away by passing a law.
And in the case of crypto, it doesn’t really want to.
For one, it doesn’t want to miss out on any income from the industry. See, the crypto market is no longer just a fad. It has increased substantially in recent years. At the start of 2020, it was worth $191 billion. Last November, it was around $3 trillion. That’s a lot of taxable revenue.
Under the current tax code, if you hold cryptos for 12 months or less, you must pay short-term capital gains tax (CGT) on any profit made on the sale. That’s up to 37%, depending on your circumstances.
If you hold them for more than 12 months, your profits are subject to long-term CGT. That’s up to 20%.
So, instead of fighting it, we could see the government help crypto. President Biden’s recent executive order on crypto is a case in point. I wrote about why it legitimizes the space not so long ago. (You can catch up here.)
That said, I don’t recommend you put all your savings into crypto (or any other single asset, for that matter). A diversified portfolio is the best way to protect your wealth in times of volatility.
Cryptos are speculative assets. Remember, the world’s first cryptocurrency, Bitcoin, is just 13 years old. So it’s still a very new form of currency. So, as with any speculation, don’t bet the house on it. Just allocate a small portion of your portfolio to cryptos.
That’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins
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