There is a lot of emotion charging the market, creating exaggerated moves both up and down. One day everything is fixed, the next everything is broken. Manic depression wouldn’t even begin to describe the back and fourth being witnessed.
But with chaos comes opportunity. And the opportunity here is finding beaten up, misunderstood and frankly cheap assets. Right now the areas that seem to be most attractive are commodities, commodities companies, energy and energy companies.
The global markets are pricing in worldwide depressed demand. Oil producers are pumping at frantic rates, more concerned about the flow of cash than the margin on each sale. This has created a glut of energy supply — and with little demand oil prices have crashed below $30.00 to about $28.00 a barrel for West Texas Intermediate Crude (WTIC).
Consider the following opportunity: The US dollar has had a rally which induced a de facto tightening even before the US Federal Reserve raised interest rates. As such, one can reasonably expect that the actual pace of interest rate tightening, with the backdrop of a softening US economy, will likely be subdued.
Markets have priced in a more aggressive interest rate hiking cycle, which is putting pressure on everything that’s priced in dollars. Even stocks.
I think that we’re getting ahead of ourselves here. The Federal Reserve is unlikely to let this situation turn in to a full blown 2008 panic again, unless there is a desire to bring back all the calls to audit the Fed and the political upheaval that protests and social unrest would bring. Instead, especially given that it’s a critical election year, I believe the Fed will tap the breaks and ease off the gas, leaving interest rates at 0.25% and possibly cutting them to negative levels if the global slowdown increases in momentum.