Huge news broke from the US late last week.
It’ll set the scene for a shaky start to our trading week today.
And it adds to the evidence that the real economy is slowing down faster than central bankers seem to realise.
As I pointed out last week, Europe’s energy situation looks like a complete shemozzle. And it’s only a matter of time before something breaks there.
But this latest news was as big a clue as you can get that economic conditions are already bad.
There’s a potential silver lining to this, though, if you can see past the here and now.
Let me explain more…
FedEx doesn’t deliver
On Friday, FedEx Corporation [NYSE:FDX] — the huge logistics company — surprised the market with a big earnings downgrade.
Earnings per share fell to US$3.44, well below analyst expectations of US$5.14.
That’s a big miss for such a big and widely followed company. And the share price got absolutely hammered.
It fell more than 20% on the day, as you can see here:
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| Source: Trading View |
FedEx warned earnings could fall to as low as US$2.65 per share next quarter, and they’ve withdrawn any guidance for the year in the face of high economic uncertainty.
Their CEO said (my emphasis added):
‘Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.
‘We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations.’
Make no mistake, this isn’t just bad for FedEx investors.
This is a bad sign for the global economy as a whole.
Logistics is one of those industries linked to almost every other. So the extent of the shock here is a big ‘tell’ things aren’t right beneath the surface everywhere.
But counterintuitively, that should make you more optimistic from an investing point of view.
Let me explain why…
Bad news is good news
Now, as many long-time readers will know, my central thesis has been that central banks would pivot faster on interest rates than markets expect.
So if this FedEx result is indicative of a fast-slowing economy, we could see that pivot come soon, maybe even before Christmas.
In other words, interest rate rises will stop…and in the event of something extreme, maybe even reverse course.
That would open the door for money to pour back into the stock market.
This is known as the ‘Fed Put’ — the idea that if things get too bad, central banks flood the world with cheap money again — and as an investment strategy, it’s worked pretty well for decades.
So any sign of a pivot could mean party time once again in markets.
The curveball this time around, though, is inflation.
It remains stubbornly high. And there’s a chance central bankers will keep raising rates, even into a slowing economy, until it’s clearly defeated.
No matter what.
That would mean job losses, bankruptcies, and further falls across all markets — stocks, property, bonds…everything.
But here’s the thing…
A government that looked on and did nothing as this was happening would be strung up by angry voters.
So if central bankers don’t react, expect governments to do so and get their unlimited chequebooks out.
Indeed, we’re already seeing that start to happen…
Follow the money trail
For example, the US government’s recent Inflation Reduction Act — a name loaded with Orwellian double-speak if ever I saw it! — is going to pour money into several key industries.
There’s cash for health insurance and prescription drug costs, as well as some reform on corporate tax.
But the most notable item was probably the various incentives for clean energy.
Subsidies are mentioned for everything from electric car vehicles to heat pumps. Solar and wind are a key focus, too, as is battery technology.
How this brings down inflation is anyone’s guess (spoiler: it won’t, and it’s not even designed to do that).
But for Australian investors, this is music to our ears.
We have a plethora of mining companies on the ASX that supply the key materials needed for this once-in-a-generation energy transition.
Materials such as lithium, copper, cobalt, rare earths, and nickel.
Make no mistake, the world is going to need a heap of this stuff if it’s to get anywhere near 2030 emissions targets.
And we’ve got this stuff in spades at a time when the US needs trusted supplies of critical materials more than ever.
Talk about the ‘Lucky Country’…!
But interestingly, there might also be lucrative downstream opportunities too, if we’re alive to them.
Dare I say it, manufacturing jobs even.
This isn’t me saying this, but Tesla Inc [NASDAQ:TSLA] Chairwoman Robyn Denholm.
As reported in InnovationAus.com:
‘Australia should be doing almost everything in the electric vehicle value chain from mining and refining critical minerals to building batteries and even manufacturing cars, Tesla chair Robyn Denholm says, declaring that no other country has more to gain from the move to zero emission vehicles.’
Incidentally, Tesla alone already spends US$1 billion a year on Australian minerals for battery components.
But the knock-on effect of getting across the entire battery supply chain could be immense.
For example, consider a smaller company like Queensland Pacific Metals [ASX:QPM].
They’re set to create key battery materials (mainly nickel and cobalt) using harmful methane waste emissions from coal mines as feedstock.
It’s an ingenious idea and a double win for the environment.
This world-beating technology is backed by none other than the huge Korean company LG, amongst other notable investors.
But as of today, our ingenuity stops at creating the raw materials.
Imagine, instead, QPM could use it to create batteries in house or with other partners in Australia.
You’d be talking about Australia entering a US$27 billion-per-year business, and there’s no real reason why we couldn’t or shouldn’t.
Anyway, my overall point is…
Be prepared to act
At some point, a few tactical investments in key industries with long-term trends behind them become no-brainers.
Is that now, or do we have one big down leg to come?
Who can say for sure…
But don’t wait too long. By the time the fear is gone, the opportunity usually is too.
Do your research now and be prepared to act when you think the time is right.
You might be wrong in the short term, but if you invest with the tailwinds of a strong global trend behind you, then, in my experience, good returns are there for the taking.
Good investing,
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Ryan Dinse,
Editor, Money Morning
Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
