A Bad Time for the Insolvent

Catching up on the latest news... The trigger point for Fitch Ratings' downgrade... The Federal Reserve isn't going to help now... The unemployment rate goes lower... Saudi Arabia wants more expensive oil... A bad time for the insolvent...

Before we get into the meat of today's Digest...

I (Corey McLaughlin) want to thank Stansberry Research partner Dr. David "Doc" Eifrig.

In case you missed it, Doc took over the Digest for three days last week. Among other things, he explained why "options" isn't a dirty word if you learn the right way to trade them for your benefit. (You can catch up on his lessons here, here, and here.)

I hope you enjoyed hearing from Doc. And more importantly, I hope you learned something about options.

We shared these essays, in part, because of Doc's recently released real-money trading demonstration with Stansberry Research-sponsored pro golfer Kevin Kisner...

In this free demo, Doc walked Kevin – an options novice – step by step through how to make an options trade. And as you'll see if you watch the video, the trade put roughly $4,000 in Kevin's brokerage account in just 60 seconds.

That's the kind of "private-jet money," Kevin wanted. And as Doc explained to viewers, one options strategy in particular can add steady income like that to your portfolio on stocks you love again and again and again.

Doc also shared another free trading recommendation. And he offered a great deal to subscribe to his Retirement Trader options-trading advisory as well – including six months free and a money-back guarantee. So if you haven't already, check out all the details here.

Now, let's get caught up on the past week...

In case you missed it, credit-ratings agency Fitch Ratings downgraded U.S. debt by one notch (from "AAA" to "AA+") late last Tuesday. That sent stocks and pretty much everything else down on Wednesday.

But besides that, the major U.S. stock indexes are still in bullish trends. Among other indicators, "market breadth" remains relatively strong...

Today, 64% of the companies in the S&P 500 Index are trading above their 200-day moving averages ("DMA"). As regular readers know, the 200-DMA is a technical measurement of the long-term trend.

More notably, bond yields are rising (and inversely, bond prices are falling) since the U.S. Treasury announced it would boost the size of its quarterly bond sales for the first time in more than two years. It's making the move to finance trillions in fiscal spending obligations.

Last Monday, the Treasury said it's targeting an increase in its cash balance to $750 billion at year-end. And it plans to issue more debt (in the form of Treasury bills, notes, and bonds) in 2024 as well. As Bloomberg reported last week...

According to Barclays Plc strategist Joseph Abate, [the cash-balance plan] would cause T-bills to exceed the 20% ceiling of overall debt suggested by the Treasury Borrowing Advisory Committee, a panel of bond-market participants.

To me, this development was the trigger point for Fitch's downgrade...

The next day, Fitch referred to a "deterioration" of the country's finances, overwhelming debt, and the "erosion of governance" in its decision.

Now, as you might recall, the big ratings agencies famously held high ratings on many subprime mortgage bonds leading all the way up to the financial crisis. So perhaps we should take whatever they say with a grain of salt.

But in this case, I won't argue with Fitch's take on the state of the government's finances...

Everything Fitch said is accurate. And after the downgrade, top bankers like JPMorgan Chase CEO Jamie Dimon agreed with the credit-ratings agency's report.

And of course, it must be true when Treasury Secretary Janet Yellen responds almost instantly to say that everything is OK. That's what happened Wednesday in what one mainstream media outlet described as a "blistering rebuke."

But here's the situation...

The Treasury needs more cash to fund the spending plans of Congress. And the Federal Reserve is continuing its runoff in holdings of Treasurys (up to $60 billion per month) as part of its balance-sheet trimming in the inflation "fight."

When you add it all up, one thing is clear...

The supply of U.S. government bonds in the market is going to soar in the coming months.

In turn, that will push yields higher. And it will create a situation in which Uncle Sam will potentially pay bondholders more and more, on balance, to fulfill its bloated obligations in the years ahead. That's especially likely if interest rates remain higher than they already are – which is the highest they've been in 15 years – for longer.

Over the past decade or so, the Fed might've been compelled to cut rates in a situation like this. Or perhaps it might add to its already out-of-control balance sheet to help out the Treasury over in the other part of town.

But as we've learned, inflation changes the game...

The best the Fed can do right now is hold rates where they are. The central bank is stuck unless it can find some excuse to change up its inflation-fighting stance.

After all, an excuse isn't coming from one of the obvious spots...

The unemployment rate just went even lower...

We've been keeping a close eye on the jobs market in the Digest.

That's because until companies stop hiring people at a substantially different clip than they have, the current state of the economy likely won't change much.

Although inflation has been decelerating for the past year, it's still higher than the past four decades. But at the same time, unemployment remains stubbornly low as well...

The U.S. government's latest "nonfarm payrolls" report came out on Friday. According to this data (as of July), the unemployment rate is 3.5%. That's just above the lowest level since 1969.

Wall Street analysts projected an increase of 200,000 jobs in July. And they expected the unemployment rate to remain steady at 3.6%.

Instead, the number of new jobs last month came in lower than expected (187,000). And yet, the unemployment rate also declined.

Importantly, based on average hourly earnings, wage growth also climbed 4.4% year over year.

That's a big inflation pressure on the entire economy. After all, labor costs contribute substantially to companies' bottom lines.

As long as all of these developments keep happening with unemployment, the Fed isn't going to significantly change its monetary policy stance. That means we should expect a higher interest-rate environment for longer than many people might think.

Oil prices keep rising, too...

I wrote early last week that oil prices were up 20% in a month in part because of speculation that Saudi Arabia would extend its production cut of 1 million barrels per day ("bpd") through September.

That's exactly what the Saudis announced on Thursday – and a little more. As Stansberry Research senior analyst Matt McCall wrote in his free newsletter on Friday, Saudi Arabia also indicated that it could extend cuts even further – and increase the amount of oil cuts...

This news puts its September production at roughly 9 million bpd – down from more than 11 million bpd at this time last year. The country said this will support the balance and stability of the oil markets.

Shortly after, Russia announced that it will also curb oil exports by 300,000 bpd next month.

Both of these countries are members or allies of OPEC. The entire group – OPEC+ – produces about 40% of the world's crude oil.

Said another way, the world's biggest players in oil outside of the U.S. are "all in" on higher oil prices.

That makes sense, since Saudi Aramco – Saudi Arabia's giant revenue driver – just reported a 38% year-over-year drop in quarterly net profit. It cited the decline of oil prices in the second quarter.

Saudi Arabia's public investment fund also just reported a nearly $16 billion loss for all of 2022. In addition to trouble in the oil patch, it suffered heavy losses from tech investments.

In the end, it will likely cost you more to fill up your car...

In addition to a busy summer travel season, the supply-demand dynamics at work today don't do the good ol' U.S. consumer any favors. As Matt explained on Friday...

Take a look at the chart below. The average price of a gallon of gasoline bottomed at $3.10 last December. Since then, prices have steadily moved higher and are now sitting at $3.82. That's a 23% increase.

So prices at the pump are already rising. And these production cuts mean the trend will likely continue.

Of course, higher oil prices are good for oil producers and related companies as well. Last week, energy was the only one of the S&P 500's 11 sectors to finish up for the week.

More inflation numbers are coming this week...

At 8:30 a.m. Eastern time on Thursday, the government will publish the July update of the consumer price index ("CPI"). Wall Street analysts are expecting a year-over-year gain of 3.3% – which, notably, would be higher than June's 3% year-over-year growth.

As Stansberry NewsWire editor Kevin Sanford wrote in his morning market briefing today...

This would suggest a reacceleration in inflation, though economists do expect some volatility in the results over the next few months. And they still project the larger deflationary trend to continue.

That could be true. But when I read the word "volatility" relative to "inflation," it makes me think more turbulence could be on the way later this week...

I can't help but recall the other occasions over the past three years when CPI updates have caught investors off guard or been slightly off expectations. I'm especially talking about the times when they were mostly higher than analysts' forecasts for most of 2020 and 2021.

When that happened, U.S. stocks gyrated wildly.

As Kevin also wrote, the CPI release on Thursday provides another data point for the Fed as it weighs making an interest-rate policy move at its next meeting in September. The producer price index ("PPI") for July – which will be published on Friday – matters, too.

If inflation is strong, the Fed could decide to resume its rate hikes next month. On the other hand, weaker-than-expected numbers could lead to a continued "pause" at the current federal-funds rate of 5.25% to 5.5%.

In sum today...

Uncle Sam needs cash. Everyday Americans do, too, as shown by a near-record-low unemployment rate.

But at the same time, because of inflation, dollars have less value than they've had in decades. And the cost to borrow them is the highest it has been in 15 years.

What a bad time for the insolvent. (Here's to you, Yellow, Yellen, and so many others.)

New 52-week highs (as of 8/4/23): CBOE Global Markets (CBOE), Comfort Systems USA (FIX), ICON (ICLR), Construction Partners (ROAD), Textron (TXT), and Sprott Physical Uranium Trust (U.U-TO).

In today's mailbag, a couple of readers shared their feedback on Dan Ferris' latest Friday essay. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, interesting piece. The Hindu (Vedic tradition) has intrigued me for many years (similar to 'the markets'). Interpretation of words/ideas is how humans interact with the world and beliefs. Your point regarding time as having significant import in our physical world is profound..." – Subscriber David H.

"Dan, I'm in agreement with you about meme investors and their latest target, [Yellow], but doesn't the U.S. government have a 30% equity stake in the company? Do you perhaps need to add 'USD Printing Press' to the list of assets?

"Any time the feds are involved, my 'this isn't capitalism' flag goes up. You can forget about common sense. I can see our wizards of smart in D.C. coming up with some asinine scheme to print another few billion dollars to simultaneously pay themselves back (and rescue the meme investors and buy their vote while they're at it).

"This would once again reward stupidity and encourage more future bad behavior." – Subscriber R.M.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 7, 2023