Market Overview

Fed Policy And Commodities As Inflationary Hedge Assets

Fed Policy And Commodities As Inflationary Hedge Assets

What did the Fed do when they printed so much money in 2020?

1. The Fed bought government bonds. In other words, they basically lent money to the government to issue stimulus bills.

2. The Fed has been buying up corporate bonds from zombie companies with cash flows less than their debt service requirement. In short, these companies are basically borrowing money to service their debt.

These zombie companies are not only wasting societal resources that can be used for well-run companies, but they also no longer have the fear of bankruptcy that would incentivize them to make prudent business decisions.

This massive injection of liquidity into the bond market decreases bond yields, which will only force people to invest in higher-risk assets like the stock market.

In fact, the only place for capital to flow into is the stock market because interest rates have been so low that nobody wants to keep their money in cash either.

This is why the S&P 500 looks like this during the 2020 recession…


S&P 500 historical Chart and Fed Policy


While it’s unlikely for the stock market to face any major crash (due to the Fed’s help), here are a few “fun” facts about stock market corrections and crashes…

  • There have been 14 bear markets (market corrections/crashes) from 1927 to 2020.
  •  7 of these were greater than a 30% decline (versus 8 bull markets of over 100% gain).
  • What this means is, whenever you invest in the stock market (through index funds) you’re more likely to make +100% than -30%.
  • The S&P 500 averages a 10% correction every 16 months since 1920 versus 20% every 7 years.

One thing to be aware of is…

The Fed’s continual creation of money out of thin air whenever the economy shows signs of trouble will ultimately lead to currency debasement.

In short, continual injection of such a massive amounts of capital will lead to hyper inflation, meaning rising cost of goods while each USD loses its intrinsic value.

Even though the Fed believes that they can easily tame this inflationary beast, We believe this won’t be easy.

That’s why many investors have allocated a significant amount of their portfolio’s in inflationary hedge assets like commodities. This may very well be the next market sector that experiences exponential growth. Some of the commodities we beleive will participate in this growth are; battery metals such as copper, cobalt, vanadium, lithium, nickel, lead, and graphite. In a addition to battery metals gold, silver, cannabis, blue gas, coffee and wheat.


Commodities to S&P chart fed policy

Commodities have been getting destroyed over the past decade and they are currently trading at historical lows as inflationary forces like de-globalization and money-printing have been accelerated by the coronavirus pandemic.

It’s a cyclical asset class that’s set up perfectly for a mean reversion and overshoot to the upside, yet everyone seems to be focused on large-cap tech stocks.

Inflationary assets (energy, materials, commodities) are a great hedge right now in the coming decade, as that’s where mass capital flows may very well be.


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