Bank Failures, De-Dollarization, Sticky Inflation, and Higher Rates for Longer - Oh My! What is a Red Zone Investor To Do?
Are there asset classes or sectors that may have an advantage in this environment?
Is there a sector that may become the next wealth creator of the future like Tech and Real Estate were in the past?”
That noise you hear in the background is most likely the ground shifting under your feet.
With the fears of inflation, a looming recession, and news of recent bank failures, many investors have asked where they can invest their money to acquire potential growth while remaining thoughtful and prudent about the potential risk. Considering the tectonic shifts we have experienced in interest rates, currencies, and commodity prices over the past 18 months, it’s a sensible question—and it’s being asked now more than ever.
In this edition of Quiver Financials’ Investing in the Red Zone, we discuss how rising interest rates, higher inflation levels, de-dollarization, and the reversal of globalization may create opportunities and havoc for investors over the next few years.
In many ways, 2023 could be a watershed year. For one, it could usher in a new bull market for certain sectors that typically benefit from some of the challenges we’re currently facing. At the same time, it could stomp on the hopes and dreams of disruptors that need a rich uncle to help them get their enterprise off the ground.
Wealth Creation to Wealth Destruction
The past decade saw a trend of declining interest rates and a Federal Reserve issuing cheap money, making it rain for investors and industries alike. With these trends, sectors like technology and real estate had a significant advantage in their risk-reward metrics compared to other sectors, which helped many investors create wealth. As a result, over the past ten years, institutions, family offices, and retail investors have overweighted the exposure of their investment portfolios into these sectors while ignoring and neglecting other sectors like energy, materials, and metals.
But now, the macro environment is changing, with higher interest rates, higher levels of inflation, and a reversal of globalization. These same sectors that have been wealth creators of the past decade are most at threat of losing their growth advantages. They could even become wealth destructors for any investors that have become overly complacent.
At the end of the day, Wall Street is a zero-sum game. If one sector has money exiting, another sector or asset class is likely Hoovering up those dollars like a vacuum. This back-and-forth is what creates relative strength or weakness, as the money flows from one sector or asset class with perceived headwinds to one with perceived tailwinds. The demise of one sector may be the fuel that propels subsequent growth sectors, potentially giving savvy investors an avenue from which they can benefit.
The institutions, family offices, and retail investors are now starting to recognize and acknowledge how the macro environment has changed on an intermediate and longer-term time horizon. They will most likely shift their allocations away from Tech and Real Estate and into sectors that tend to have a more significant advantage in the current macro environment, such as Metals and Energy.
2022 may have been the start of this trend. If this thesis becomes a reality, the charts suggest 2023 could be a watershed year. That makes this an important time for investors to pay attention to the strategies and tactics that allow a portfolio to change with the times.
The Threats of Digital Currencies and the Reversal of Globalization
In 2023, multiple threats are converging at once, leading to a possible crescendo moment of globalization, de-dollarization, and the ushering of digital currencies to trade commodities like oil and metals.
In our recent quarterly Livestream, we discussed how this is unfolding in front of our eyes. We noted the recent announcement from The Saudi Arabian Oil Ministry at the Davos convention that they’re willing and able to trade oil in currencies other than The U.S. Dollar. The anticipation is that, in the near future, you may have a trade coalition between countries such as Saudi Arabia, China, Russia, and anybody else that is not pro-U.S. Dollar. An alliance like this could create a digital currency with backing from a hard asset (like Gold) that they could use to trade oil and other commodities.
In the past few months, there have been more and more rumblings that the central banks involved in this potential trade coalition have been some of the largest purchasers of Gold over the past two years. The assumption is they intend to use this accumulation of Gold to back a digital currency and build confidence in its use for trade.
There is much-warranted fear circling regarding the future of The U.S. Dollar. How will it interact in this shifting world where trade may take place in multiple mediums?
This is a substantial departure from the past that can raise a lot of fear. But it could also create a lot of opportunities for those that are prepared. While this sounds scary and threatening to the current world order, those prepared for this potential could find a valid investment thesis within.
Curious to hear more on this subject? Watch our discussion in our last quarterly livestream Investors in The Red Zone - How to Prepare for De-dollarization:
The next creators of wealth?
As mentioned above, Wall Street is a zero-sum game. One player’s losses are another player’s winnings. And the players know this. They feed off it; it’s part of how they live and is crucial to the ecosystem’s survival. One player can create an advantage over another by seeing trends early and positioning their capital before the trend hits the tipping point of mass recollection within the investing community. As the saying goes, “You want to be ahead of the curve.” Or, in Quiver language, “You want to catch the next wave” before everyone else.
So, with the fears we noted before (rising rates, higher inflation, bank failures, de-dollarization, and the reversal of globalization), what actions can a prudent investor consider right now?
Are there any asset classes or sectors that may be advantageous in this environment?
Is there a sector that may become the next wealth creator of the future, like Tech and Real Estate were in the past?
Watch us explore these questions and more in our most recent live stream, Market Minutes From The Boardroom April 2023:
As a preview of what you can find in the livestream, here are some charts and comments from the event related to finding possible investment opportunities in a potentially historical tipping point.
Metals and Miners
After being a profound disappointment as an inflation hedge in 2022, Gold appears to have awakened in 2023, breaking out of the fourth-wave consolidation phase that it had been in since June 2020.
Now, Gold appears to be in the early phases of wave five.
Eventually, the old adage “Bulls make money; Bears make money; Pigs get slaughtered” will come true of this trend.
Find out more by watching Investing in The Red Zone - Should you invest in Gold in 2023?
Texas Tea and Black Gold
It has been a wild ride for Oil prices since the depths of Covid, with prices reaching a high near June 2022. The rally off the 2020 lows is impulsive, and prices have been consolidating since the June 2022 peak. This leaves us with the impression that if critical support holds, we may see another impulsive rally similar to the one off of the June 2020 lows.
Watch Should You Invest in Oil in 2023:
Note: Since the creation of this OIL chart, critical support has held as OIL rebounded out of the critical support zone.
Bottom line: if you are an investor in the Retirement Red Zone, where you may need to use your retirement savings for living expenses or healthcare in the next 5-7 years, you might wish to invest in trends that may have both technical and fundamental support. Keeping metals, miners, and energy-related investments in mind may be helpful.
If you would like to know if investments related to metals, miners, or energy are right for you, contact us today. Connect with Quiver