Update - March 15, 2022

A Critical Week for the U.S. Economy

Very interesting things are happening in the market right now.

For one, the price of oil is back down to where it was before the Russian attack on Ukraine.

That’s a big change from a week ago.

The slide comes thanks to calmer heads and backroom negotiations that ensure Russia can keep trading with some of its key energy partners (we wouldn’t want the sanctions to hurt that much, would we?).

The slide in energy prices – which will, of course, take time to be reflected at the pump – has big effects on much of the calculus that’s out there these days. With the Federal Reserve meeting today, that’s surely a relief to Jay Powell. Crude oil at $130 per barrel has a much harsher effect on the economy than a quarter-point rate hike.

Unfortunately, the prices of wheat, corn and soybeans are not seeing similar declines.

The latter two remain at their multiyear highs and are threatening to add to their gains. Wheat has come down a bit, but it remains about 30% higher than it was before the invasion.

It’s not good news for Powell and his Fed this week. Oil prices, as we know, can be influenced by turning a few spigots and ramping up supply.

That’s not the case for crops.

Ukraine is a major producer of agricultural commodities. But its farmers are too busy pulling tanks out of ditches to put their crops in the ground. Now is the region’s critical planting season. If farmers don’t get their seeds planted, the season will be a bust.

It’s looking like that will be the case.

Worse, in news that didn’t get much press, Argentina just closed its borders to new soybean exports.

The government did it for two reasons.

First, with rising inflation within the country, it wants to keep as much supply at home as possible, forcing prices lower. And second, it’s a sign that the government is likely to soon raise the tax on soybean exports even higher. It currently charges 31% on foreign sales. That figure will soon rise.

It will affect prices across the globe. It already has.

This all greatly complicates the decision for the Fed this week. Its inflation fight is no longer about too few goods chasing too much money. It now has to deal with too many politicians with too much power.

Like most investors, I anticipate a 25-basis-point hike tomorrow afternoon. If it happens, it should have little effect on the market.

As always, what’s more important to watch is the real yield on the 10-year Treasury. Again, most folks don’t know this, but it dipped close to record territory last week. That’s the result of falling rates and increased inflation expectations.

This week, rates have rebounded, but inflation expectations continue to grow. It means the real yield remains at -0.78%.

This tells us money is still dirt cheap and a couple of hikes from the Fed aren’t going to change that.

Once this latest round of volatility wanes, folks are going to realize just how cheap things are.

There is a lot of money growing on the sidelines once again. It will soon need to find a home. And since money goes where it’s treated best, it has no option but to find its way into stocks.

Bottom line… it’s a buying opportunity.

Stocks are one of the best inflation hedges. Plus they’re cheaper than they’ve been in months.

I’ll dig into Powell’s announcement tomorrow afternoon and let you know what I hear… and think.