In today’s Money Morning…the Fed’s losing street cred…follow the long-term trends…good news for lithium…and more…
US stocks sold off overnight after a report showed that US consumer confidence is tumbling.
The Conference Board Consumer Confidence Index dropped this month as inflation continues to worry consumers.
Things aren’t looking good out there.
As Lynn Franco from The Conference Board put it:
‘Expectations have now fallen well below a reading of 80, suggesting weaker growth in the second half of 2022 as well as growing risk of recession by year end.’
It’s been a similar thing here in Australia, consumer confidence has dropped, inflation expectations are increasing, and petrol prices continue to rise.
Maintaining confidence and managing expectations are critical when it comes to inflation.
The Fed’s losing street cred
For years there’s been a blind belief that central banks control the economy.
But that’s a fool’s game.
In their attempts, central banks have flooded it with stimulus and cheap money, inflating asset prices and distorting the economy.
I mean, you know things are out of whack when investors like bad news…
As the Australian Financial Review reported this week :
‘[Investors] have started to celebrate the growing signs the US economy is faltering because this fragility will prevent the US Federal Reserve from proceeding with its plan for a long and bruising campaign of interest rate hikes to curb inflation.’
With US inflation at a 40-year high, the US Fed is considering more interest rate rises in the coming months to bring inflation under control. But investors are hoping that bad news will stop the Fed in its tracks and bring back stimulus.
It’s not that simple, though.
The Fed is looking to tame inflation, but most of all, expectations that inflation could keep rising.
Hence all the rhetoric.
There’s a definite psychological aspect to markets and the economy. After all, that’s exactly what it is, the collective decision of many.
So when people expect things to be more expensive tomorrow, you buy today…which, in turn, feeds inflation.
And expectations are a tricky thing, especially when what’s pushing inflation are supply side factors such as petrol prices and supply chain disruptions.
Follow the long-term trends
What’s clear is that negative real interest rates — when inflation is higher than interest rates — are here to stay for a while, eating away your cash.
One way to protect yourself from this is by investing in real assets or trends that will play out over the long term.
One such trend is the global energy transition, which is creating a once-in-a-lifetime demand for battery minerals.
Take lithium, for example.
The International Energy Agency expects that lithium will increase by six times by 2030, or the equivalent of 50 new average-sized mines.
And while lithium stocks have sold off recently after a damning report from Goldman, lithium carbonate prices are still up 115% since the beginning of the year, according to Benchmark Minerals.
In fact, demand for lithium is still looking strong.
Last week, Pilbara Minerals was all set to conduct its sixth lithium auction.
The company started selling lithium on its Battery Metals Exchange (BMX) platform a year ago, with the first auction fetching a price of US$1,250 per dry metric tonne of lithium spodumene concentrate.
Its auctions have continued to gather a lot of interest…and higher prices.
And last week, Pilbara’s auction…well, it didn’t even get to auction. The company said the cargo sold ahead of the auction for the price equivalent of US$7,000 per dry metric tonne.
As Pilbara’s Managing Director Dale Henderson put it:
‘This is an exceptional outcome which provides further evidence of the unprecedented demand for battery raw materials being experienced across the global lithium-ion supply chain at this time.
‘Contrary to recent suggestions that the market has peaked, the evidence we are seeing at the coal-face with our customers, including this pricing outcome, suggests that demand remains incredibly strong, with a continued healthy outlook for the foreseeable future.’
Good news for lithium has followed today too, with Liontown Resources signing a five-year agreement with Ford Motor Company to supply lithium spodumene from their Kathleen Valley project in Western Australia.
This shows that demand is alive and well for lithium, and that companies involved in the EV industry are still scrambling to get supply.
Of course, stock picking will be key with lithium stocks in particular having had a good run, and markets are shaky.
But as EV sales continue to increase, so will the demand for battery metals like lithium.
Lithium may be the one getting all the press, but there are plenty of battery plays out there.
In fact, my colleague Callum Newman has put together a report on his three favourite ones. Check them out here.
Until next week,
For Money Morning
Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.