Get a Double Discount on One of My Favorite Assets

What’s better than a discount? A double discount! 

And right now, that’s exactly what you can get on one of my favorite assets…an asset class I’ve been successfully investing in for more than 30 years.  

I’m talking about foreign stocks…in particular foreign blue-chip stocks.  

Let me explain… 

Ironically, this discount comes to us by way of the Federal Reserve and its astonishing mismanagement of the U.S. economy. 

The Fed’s supposed mission is to poke and prod the economy to maximize wealth, employment, and financial stability and efficiency in America. 

But since its inception more than a century ago, the Fed has approached this task with all the care and subtlety of a toddler with a flamethrower. 

In just the past decade or two, it somehow managed to miss a housing bubble so big that it crashed the entire global economy and led to the Great Recession. 

For its most recent transgression, the Fed spent the best part of a year scoffing at inflation…even as alarm bells were ringing throughout the economy. 

Early last year, it was obvious to me that the vast amounts of stimulus dollars that the Fed was pumping into the system during COVID were going to unleash a prolonged period of high inflation. I wrote extensively about this here in Field Notes and in our monthly Global Intelligence Letter. 

But Fed shot-caller Jerome Powell had a different viewpoint. 

He insisted that inflation was “transitionary.” A short-term problem related to supply chain disruptions. Something that would peter out as global supply chains became untangled. 

So he and the Fed sat on their hands and did nothing as inflation spread throughout the system.  

We all know how that turned out… 

Today, inflation is at a 40-year high above 8% and will very likely touch double digits, probably later this year. 

And, so, the Fed has gone into full-on panic mode trying to tame it. 

Instead of raising interest rates slowly, carefully, incrementally, as it should have been doing since early 2021, it has spent the past several months frantically blasting the economy with large rate hikes, including a historically high 0.75% increase earlier this month. 

This has had predictable consequences: the recent selloffs in the stock and crypto markets. 

Which is where we return to our double-discount opportunity. 

Because the Fed is raising interest rates faster than other economies, it is pushing up the value of the dollar relative to other currencies. See, money flows to where it can get the highest return, so if interest rates on the dollar are higher than, say, the euro, then investors will sell the euro to buy the dollar. 

Currencies operate on what is effectively a see-saw, so that as one goes down, the other necessarily goes up. That’s what has been happening in recent months. 

In mid-June 2021, $1 bought you around €0.85. A year later, a dollar buys €0.95. In asset terms, that implies that a €100 stock that cost $118 last year, now costs just $105 today, even though the price in euro hasn’t changed. 

All that means we now have a situation in which 1). foreign stock prices are down in local currency terms because global stock prices are down and 2). the cost of those stocks in dollar terms has fallen, as well, because the currencies those stocks are valued in are down relative to the greenback. 

A double discount, all thanks to the Fed. 

This discount, however, isn’t likely to last long.  

The Fed has promised to continue raising rates until inflation is tamed. But I’d take that promise with a giant truckload of salt.  

While appearing before Congress recently, Powell admitted that a recession would be hard to avoid. Raising interest rates increases the cost of borrowing for everyone, from ordinary consumers to businesses to Uncle Sam. All three of those need to be able to borrow to survive a recession.  

That’s why raising rates into a recession is unfathomable. It would cause a rerun of the Great Depression. 

So, my expectation is that the Fed backs off on raising rates toward the end of the year and returns to its modern-day modus operandi: cutting rates and dumping money into the economy. 

This will see asset prices rise, both in the U.S. and internationally.  

Moreover, once the Fed backs off from hiking rates, interest rates in other economies will start catching up. Which will see the dollar fall relative to other major currencies. 

So, from now until the end of the year and maybe into early 2023, we have an excellent opportunity to benefit from this double discount on foreign stocks. In particular, I’d look to blue-chip stocks in recession-resistant industries, such as pharmaceuticals, health and hygiene products, low-end supermarkets, fast food, and utilities.  

During a downturn, people cut back on luxury spending like vacations and jewelry, but you have to eat and buy medicine, no matter how the economy is performing. And you’re buying electric power no matter what. 

To be clear, these are long-term plays. It’ll take a while for all of this to shake out. And there’s likely further turbulence ahead. But history has shown time and again, that the greatest profits are made in periods of turmoil. 

That’s when you get the best discounts on quality assets. 

More on this soon…