On today’s Money Morning, the most basic way to make money in the market is to buy scarce items that will increase in demand. Free markets respond to these moments by increasing supply in response to rising prices. But now, distortions by government and central bank policymakers are killing those signals. I think this opens up two huge opportunities. Read on to learn more…
There is a time-honored way to make money.
Buy something in limited supply that many people will want or need in the future.
Then just wait…
If you do it right, prices will rise as demand exceeds available supply.
If you don’t…well…you might be left with a garage full of toilet paper, as some pandemic hoarders have discovered!
That’s the trick, isn’t it?
Predict what people will want or need in the future before scarcity value is factored into the price.
Picasso paintings, rare baseball cards, stocks or commodities… it’s just the laws of basic economics at work.
In an odd way, the current market downturn is driven by the scarcity of a unique thing.
Namely, a shortage of dollars.
And that in turn distorts the market for real commodities.
Certain commodities may be in short supply for longer than under “normal” market conditions.
This is because the market is reacting to changes in the money supply, not a signal from the market.
For me, it means opportunity.
Let me explain…
Well-known investor Ray Dalio quipped a year or two ago that “cash is garbage‘.
Well, not in today’s market!
In fact, the dollar is now a prized possession.
Everyone wants them the moment they can’t get them.
An excellent interview with macro strategist Jeff Snider explains this dynamic well.
Basically, Snyder points out, quantitative tightening (QT) — the process by which central banks pull dollar liquidity out of markets — is starting to cause real problems in the global economy.
He talked about a huge and almost hidden market — known as the Eurodollar market — that uses artificially created dollars to issue credit to non-U.S. countries and companies.
Here’s the thing…
As interest rates rise, the need to get more dollars to pay off higher repayment or rollover debt that comes due is increasing.
Meanwhile, USD availability is shrinking thanks to QT.
That means investors who are stuck in this are selling everything they can — stocks, bonds, real estate, you name it — trying to get dollars.
This process also explains why the dollar is surging relative to all other currencies.
This is the simple law of supply and demand at work…
But for a reserve currency, it has an impact on every other market on the planet.
Really gives you a real sense of the dollar’s dominance as the world’s reserve currency.
The Fed now controls virtually every other country’s fate.
I think this explains why so many investors spend their time focusing on the Fed.
As stupid as this rigged system seems to me, in reality, before they start pivoting and loosening QT – which they will have to do at some point – investors will need to manage their risk carefully.
But don’t forget this…
Market downturns always provide opportunities for those who can withstand short-term volatility and participate in the long-term.
My personal strategy is to look for assets that will become scarce in a year or two.
I think we’re close to the sweet spot to take some tactical positions.
Below are examples of two areas I’m currently working on…
Two assets I want to lock
By now, you may either love or hate the world’s number one cryptocurrency. I think you know where I stand.
In fact, Bitcoin is the ultimate scarce monetary asset.
This is the exact opposite of the unlimited money printing we often see in the fiat world.
Only 21 million bitcoins will ever exist.
as the picture shows:
As of this writing, 19,190,886 bitcoins exist. The remaining 1.81 million were released over the next 135 years or so.
Consider this fact…
Every millionaire in the world doesn’t have enough bitcoins to own a full bitcoin.
However, it is divisible to eight decimal places (0.00000001 BTC is called one satoshi), so there is a lot of “money” to spend.
That said, I’d wager that demand for scarce bitcoin will increase when the Fed’s money printing presses inevitably restart.
To some extent, this has already happened.
Take a look at this chart of bitcoins held by exchange addresses:
As you can see, Bitcoin has been flying from exchanges into private wallets for the better part of the past two years.
If this trend continues over the next two years, few will come sooner than most people realize.
I generally like resources for the next five years.
I think we’re at the beginning of a shift away from technology-driven markets to commodity outperformance.
This graph shows this relationship over time:
As you can see, there is an inverse relationship between commodity investment and the technology sector (capex).
Commodity companies’ spending as a percentage of total business investment is at a new low.
And the consequences of this underinvestment are coming.
A looming supply shortage of many much-needed commodities, from oil to wheat to fertilizers and more, is looming…
But copper is my favorite game.
Copper grades have been declining for decades, meaning new copper is more expensive to mine.
This is the key point now, although…
Copper has always played a key role in spending on infrastructure such as roads, bridges, airports.
But it also plays an important role in a “green” economy.
Solar panels, electric vehicles and other renewable technologies are huge users of copper.
As our new in-house resource expert James Cooper pointed out last week:
‘Copper will play a key role in our green energy transition, and despite rising prices, this has not coincided with an increase in exploration.
‘This is the reality for most of the world’s critical metals; aging mines with rapidly depleting resources continue to supply just enough metal to meet current demand.‘
We will need a lot of supply to meet this growing demand.
As Streetwise Reports pointed out last week:
‘The world’s copper miners need to discover Equivalent to an Escondidathe largest copper mine on the planet, maintains current production at ~20Mt per year.‘
Is that realistic?
Maybe, maybe not.
If not, it will have ramifications for how the energy market develops over the next decade.
My colleague Greg Canavan just released a free report on barnstorming on this topic last week. If he’s right, you can bet on an outcome that few expect.
It follows the same principles I wrote about today.
Make sure you read it.
I fully expect volatility in both areas in the near term.
But it will give you the opportunity to do your research and learn how to invest wisely in any downturn.
If you’re looking at individual stocks, a strong balance sheet and free cash flow are more important than usual.
If you believe in future demand – whether in these two areas or any other asset you like – and you know that supply may be constrained in the future, there is no better market to help you take action than the one we have .
As I said at the beginning:
Find scarce assets that may be much needed in the future.
Then just wait…
edit, money morning
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