A Winter Storm Is Already Brewing... Make Sure You See It

An alert from C. Scott Garliss... Something that doesn't happen very often... Stocks and bonds are trading like each other... A winter storm is already brewing – make sure you see it... Get P.J. O'Rourke's new edition of Eat the Rich for free...

Editor's note: Dan Ferris has been tied up enough this week that he's unable to write to you today. Don't worry, though... He'll be back in his regular Friday Digest slot next week.

For today, in lieu of Dan's usual musings and analysis, we hope you'll enjoy more of our "usual" fare – which still isn't what you'll hear in the mainstream financial media...

You see, our colleague and Stansberry NewsWire editor C. Scott Garliss has sent several thought-provoking items around our virtual office lately about what to watch for in the months ahead. And I (Corey McLaughlin) want to make sure every investor reading the Digest is aware of what's coming, too.

So, away we go...

'People are not paying attention and connecting the dots,' Scott told us this morning...

They really aren't...

Much of the mainstream media is focused on talk about "reopening," inflation, supply-chain shortages, and the possible consequences on the economy. Meanwhile, Scott is seeing several other warning signs – for U.S. stocks, specifically – that concern him more today...

And – not coincidentally, we think – they happen to align with our colleague Dr. Steve Sjuggerud's "Melt Up" thesis... and his prediction that a "Melt Down" will arrive by the end of this year.

Before we get into the details, though, we should first mention that Scott is generally an optimist... He's usually spinning the big picture in a positive way. And remember, before Scott joined Stansberry Research, he spent 22 years working on Wall Street...

Every day, he analyzed the "macro" outlook for some of the world's biggest firms, so that "micro" traders had the best information they could to make decisions with other people's money.

He does the same thing for us... And while I'll never let him know it (I kid), I'm fortunate to hear from Scott nearly every day as we work on the Digest. Dan put it well on Twitter one time (and I'm paraphrasing) when he said that he can't imagine his inbox without Scott's messages.

We agree, and we believe NewsWire readers – who get Scott's updates every day – will concur.

With all that said, we received two attention-grabbing messages from Scott over the past two days...

A significant number of Wall Street investors are stockpiling cash...

This was Scott's first message, which he wrote about in the NewsWire yesterday. As he explained, a recent note from Swiss investment bank UBS (UBS) caught his attention...

UBS houses some of the largest amounts of retail and institutional assets in the world. In particular, it has a sizeable private-wealth client business. Because of that, it has a lot of big data on asset flows.

And as Scott told us, the company's clients recently have added more cash to their positions in 14 of the past 17 weeks, including $8 billion moving out of assets into cash last week. From Scott's NewsWire post...

UBS's Equity Derivatives team... said this has been taking place for the better part of this year. And the amount is significant. According to the firm, the total cash cushion has swelled to roughly $400 billion.

That tells me that one of two things is happening. Those money managers are either preparing for large amounts of money to be withdrawn by clients, or they're getting ready to swoop in and buy stocks on any pullback in the markets.

Scott believes this is more a case of the former rather than the latter...

He said many Wall Street investors, if they're raising cash now, were likely slow to pull the trigger during last year's quick stock market recovery. And now, they're trying to make up for it by planning to use cash to jump on any buying opportunities from pullbacks in stocks today. More from Scott...

Many big money managers have missed out on gains on the way up. They've been overly pessimistic on earnings, buyback, and dividend potential. They've been caught up in the now multiple instead of considering what the picture would look like if estimates kept rising.

At the same time, retail investors keep buying stocks...

They're estimated to have spent roughly $98 billion on stock purchases over the past five months.

Scott points out that this spending aligns well with Steve's "Greater Fool" theory, which can fuel the final surge of a "Melt Up." As Steve shared in our May 8 Masters Series...

What's happening today is simple... It's the "Greater Fool Theory."

Folks are hoping that by buying today, there will be a greater fool than them to pay a higher price tomorrow. But think about this for a second...

As I mentioned, we've recently seen multiple rock stars (and Elon Musk!) pushing Dogecoin – which the founder admitted was formed as a joke and should never be worth much.

Once Musk, Snoop Dogg, Gene Simmons, and all the kids in the local high school have put their money to work... where can the next greater fool possibly come from to drive prices higher?

Now, we already experienced a Melt Down of sorts in the more speculative cryptocurrency space just a few weeks ago. And as we mentioned last week, big moves in cryptos either up or down have been a leading indicator for what happens in stocks in recent years.

Today, similar to cryptos in recent months, we continue to see pockets of euphoria in stocks...

We didn't think much of the GameStop (GME) and AMC Entertainment (AMC) "meme stock" revival of late and hesitated to write about it again – we've been there, done that, after all.

But now that we've thought more deeply about it, the takeaway is obvious and relevant...

These are continued signs that the Melt Up is still running higher.

Here's the even more fascinating part from what UBS reported...

Yes, this all relates to the longer-term outlook for stocks and the timing of Steve's call, but – and please don't fall asleep or go away when I say this – it also has to do with bonds.

First off, in a world where a lot of people think we might see hyperinflation at some point, bond yields should be going higher today if the market thinks that's the case.

A general line of thinking is that people sell bonds for other higher-yielding assets if they're concerned about inflation over a sustained period of time. And then, counterintuitively, those same bond yields rise with each sale... Remember, as bond prices drop, yields go higher, and vice versa.

But, in fact, the opposite is happening today...

As Ten Stock Trader editor Greg Diamond wrote yesterday, the latest example is how the market reacted after the updated inflation numbers – the consumer price index ("CPI") – came out yesterday morning...

In May, the CPI rose 0.6% from the prior month and 5% year over year, which was kind of expected given last year's comparatively low base. As Greg wrote...

So far, stocks are shaking off the higher inflation print. Technology stocks are leading the way...

Interest rates spiked higher, but have reversed a bit as of writing. So the market may be pricing in a stabilization of inflation and rates. Basically, modestly higher inflation is OK – even for technology stocks.

In general, bond prices have been heading higher lately...

As Chris Igou – an analyst on Steve's True Wealth team – pointed out in April, history suggested bond prices may have bottomed earlier this year... and so far, he has been right.

Today, it actually looks like bonds might be on the verge of breaking out of a "technical" base. The iShares 20+ Year Treasury Bond Fund (TLT) is up 6% since its most recent low on March 18. Take a look...

(In general, as my friend and technical analyst J.C. Parets over at AllStarCharts.com often says, we like to see "smiley faces" similar to the one we can envision here from March 2021 through today... They often lead to bigger moves higher for assets.)

And we can make a reasonable guess why this is happening. Scott said some investors may be starting to prepare for the equity market to drop and the bond market to rally...

They're likely thinking the Federal Reserve will have to eventually tighten monetary policy, leading to higher interest rates. If that happens, the appeal of bonds versus stocks increases for investors seeking yield.

At the end of the day, though... the market doesn't care what we think.

But here's what does matter to us about this story in the long run...

At the same time bond prices are turning around, there are enough Greater Fools buying riskier stocks to push prices ever so higher at about the same clip.

As DailyWealth Trader editors Ben Morris and Drew McConnell pointed out on Wednesday, the major U.S. stock market indexes have traded sideways for the past couple of months...

Since March 18, the benchmark S&P 500 Index is up roughly 8% and the tech-heavy Nasdaq Composite Index has risen about 7%. Remember, TLT is up around 6% in this same period.

Whatever the reasons or motivations, here's the point...

The net result we see today is that the prices of sleepy old bonds are going higher at nearly the same rate as stock prices. As Scott says, it's all about "correlation"...

Correlation is a measure of how one asset moves in relation to another. In this instance, it's stocks and bonds. Typically, when money flows out of bonds, it's going into stocks. And the opposite is also true.

But in this case, it's being noted that the two are moving together. It's not that this is the first time it has happened, but the rate at which this is taking place is increasing. That's important because it can be indicative of a regime change.

Here's the nitty-gritty, according to UBS and Scott's analysis... Since May 26, six-month and one-year correlations between the S&P 500 and 10-year U.S. Treasury bonds have risen from +15.9% to +21.5% and -11.4% to -8.4%, respectively.

The positive number here means moving in the same direction... And the bigger the number, the bigger the correlation. Negative means moving opposite... And the smaller the number, the smaller the difference in behavior.

In plain English, this shows us that stocks and bonds are trending in the same direction, along the same path. And here's the real head-turner, as Scott told us in a private note yesterday...

If positive correlation lasts for over a month, there were only two comparable periods since 1999: 9/3/1999 to 7/24/2000 (10 months) during the tech bubble and 5/3/2006 to 7/9/2007 (14 months) during the financial crisis.

In other words, this doesn't happen very often – and when it does, you want to pay attention...

As you likely know, near each of these past two instances, the U.S. stock market ended up peaking in March 2000 and October 2007, respectively...

That wasn't immediately after these warning signs started flashing... It happened four to five months later, again consistent with Steve's expectation of a "Melt Down" this time around.

Eventually, the S&P 500 bottomed in October 2002 after a roughly 47% drop and again in March 2009 after a 55% tumble... You would've been wise to heed your stop losses back then and get out early.

You also would've been wise to own bonds...

In both instances, bond returns were flat in the first two to three months after this "regime change." And later on in each instance, they saw a 26% gain between December 1999 and November 2001 and an 8% gain between June and December 2006.

Gold also did its job as a diversifier, rising 28% and 7% in the first month after the stock-bond one-year correlation turned positive (though gold prices dropped by 14% and 22%, respectively, in the next few months in each case).

History is not guaranteed to repeat, of course... But as much as we like to hope otherwise, it often gets at least pretty close. As Scott says – and as Dan often reminds folks in his Friday Digests – the last thing you want to do is ignore the past and be unprepared today...

We can't give you exact dates. But as we look out on the horizon, we do see some more interesting evidence for a potential winter storm...

Here's something else almost no one is talking about yet...

The Fed could experience a shakeup near the end of this year or the start of 2022...

The second message we got from Scott today gets a bit into the weeds and "inside Federal Reserve baseball." But it's important because it allows you to see the big picture...

In short, while most investors are looking at the possibility of what the Fed does in the short term – whether it's "tapering" asset purchases, hiking interest rates to slow inflation, or something else – fewer people are looking around the next corner...

The composition of the Fed might look very different in 2022. And the market probably won't like it because at the very least, it will just be something different.

The terms of three key Fed members expire in the next 18 months. That includes Fed Chair Jerome Powell, whose current term runs out in February 2022.

Judging from the smoke signals about preferring slightly higher interest rates being sent by his colleague and U.S. Treasury Secretary Janet Yellen working on behalf of the White House, President Joe Biden might want a change of leadership at the Fed...

In other words, even if the central bank does start tapering asset purchases and tightening its "easy money" policy a little bit – as some Fed governors are suggesting it might do before 2021 is up – Powell might be shown the door no matter what happens over the next six months or so.

That would create a big ball of questions for investors.

Lastly, here's one more 'winter' risk that is being overlooked...

We're never sure which piece of "news" is going to be the one credited with sending an already jittery market to new lows, but we do know what caused the last major sell-off we saw in March 2020...

The COVID-19 panic.

And one thing that we don't think most people, let alone investors, are considering today is the natural uptick in reported COVID-19 cases that might happen in the fall and winter... just like the seasonal flu every year.

Rational people may understand the risks of the virus at this point, and they may be able to make adult decisions just fine. But we're willing to bet if we see any rise in cases at all – at any point – the nation's collective response might very well become more irrational than not...

We don't exactly know how that would play out in stocks, but it certainly doesn't reduce any uncertainty in the markets.

So what should you do?

Frankly, we don't really suggest doing anything rash...

But if you feel compelled to do something immediately, take stock of your position sizing and allocations in your portfolio, make sure your positions match your risk tolerance, and then enjoy the weekend... As always, our editors will be sure to alert you to important updates on the stocks they've recommended if needed.

In general, based on Scott's research, Steve's Melt Up thesis, and other risk factors we see, we're talking about the potential for a near-term top at least several months from today...

A lot can happen between now and then, though... and a lot will.

For one, you probably don't want to miss out on the final stage of gains in this Melt Up... Because no matter what we think about the market, it does what it does.

And as Scott says, institutional investors raising cash is a bullish sign in the short run...

Near term, this should point to steady support for the S&P 500, Nasdaq Composite, and Russell 2000 indexes, in addition to the Dow Jones Industrial Average. If these big money investors are waiting for a pullback, it usually means one won't be long lived. And it implies continued gains over the summer.

But we're thinking of the longer run today, too...

You see, the "meme stock" crowd out there today – the retail traders who will be the last ones buying on the worst day – have never seen a pullback that they didn't buy the dip on...

If you're familiar with Steve's Melt Up thesis at all, or a subscriber to any of our services for that matter, you're not one of those people... You're way ahead of the game and shouldn't be caught off guard by the next Melt Down.

You know that holding a well-diversified portfolio of stocks, income-generating assets, and things "outside the system" – like gold or bitcoin, for example – is advice you regularly hear right about now from Dan in his Friday Digests.

And you know that if you find yourself in a hole, the first thing to do is stop digging...

In other words, heed your stop losses. You set them for a reason. There's no shame in following them and raising cash so you can buy again when you see the next opportunity.

This is why we share this warning with you today...

It's not to scare anyone, but to suggest you prepare. As the ancient Latin writer Publilius Syrus, known for his one-liners, said 2,000 years ago...

Rivers are easiest to cross at their source.

Timeless advice is timeless for a reason. People forget it too often. In this context, we say you can't prepare early enough, especially when you see the potential for choppy waters ahead.

Practically speaking, if bond prices keep heading higher in the months ahead in tandem with U.S. stocks – and then you see some sectors and more individual stocks really taking off in a final Melt Up surge, as Steve expects – know that we're getting closer to a top in stocks than a bottom.

One more thing before we go – a free book!

Speaking of timeless ideas, we recently came across a fantastic essay from American Consequences Editor-in-Chief P.J. O'Rourke. Longtime readers will recognize P.J. as a former regular Digest contributor.

He's one of the wittiest and most insightful cultural commentators we've ever come across... and this latest essay of which we speak is a classic example. As P.J. wrote...

There is a classic definition of economics given by the late Paul Samuelson: "The study of how societies use scarce resources to produce valuable commodities and distribute them among different people." This doesn't seem to describe the modern economy.

But, really, economics is more primal than Samuelson thought it was... It's about feeding, clothing, and sheltering ourselves. How we operate economically may alter out of all recognition. Why we do it is as immutable as human nature.

We often try to get this point across... The markets are perhaps the world's largest expression of human nature. That's why a lot of stuff that happens often doesn't make sense to rational thinkers.

P.J. was writing in the context of some new updates he made to his bestselling book about economics and freedom, Eat the Rich.

With everything going on in the emerging "digital economy" today – like the frenzy around non-fungible tokens ("NFTs"), for example – he has had more than enough material to write a brand-new chapter to his already excellent book. As he explains...

When I wrote Eat the Rich nearly a quarter-century ago, the digital revolution was still in its quaint infancy. This era predated Twitter cancel-culture mobs and viral GameStop Redditors. It was before we knew what the hell cryptocurrency and NFTs were (although I'd argue most of us are still a bit hazy on this)... and when "Amazon" made you think of Brazil, not Bezos... when Google was barely on our lips or fingertips... and our far-from-smart phones were not yet bodily appendages.

But now, the digital age gleefully wreaks havoc through the corridors of Congress, the streets of America, and the floors of Wall Street – with committed, sociopathic abandon... A free-flying bacchanal of anonymous code that kills our humanity while presenting itself as progress.

And what does this mean for the American economy? Back in the day (I know, I'm old), we understood economics as the process of gathering physical resources to produce real goods and services. How naive we were to think these analog proceedings would persist uninterrupted...

In 2021, the economy is now based on the endless gathering of ephemeral content while the goods and services (i.e., the profits) go to the usual suspects: Musk, Gates, and Zuckerberg, et al.

The new version of P.J.'s book is available free to all American Consequences subscribers, which – good news – is a totally free publication itself. Digest readers can sign up for free right here.

If you're still not interested, here's one more reason to consider reading...

As P.J. describes, Eat the Rich asks two core questions that don't fade to gray or go lame with age...

The first and most important question is, "Why are some countries rich and other countries poor?" The second is, "How can an ordinary person figure out what the &%$# economists are talking about?" As P.J. explains...

How well I answered the second question is not for me to judge... But I think I did manage to find some answers to the first question.

So even though everything seems like a mess right now in this digital economy, I hope you can find some solace and clarity in this book – with the help of a new chapter explaining what's going on with all those digits. Because I figure that if even I can understand the machinations of money, anyone can.

Remember, America, money may not buy you happiness, but it does buy you freedom. And freedom leaves you free to earn enough money to make everyone happy.

That might be the most important investing lesson of them all. Like we said, timeless advice like this is timeless for a reason.

New 52-week highs (as of 6/10/21): Analog Devices (ADI), Automatic Data Processing (ADP), American Homes 4 Rent (AMH), Asana (ASAN), Biogen (BIIB), Bristol-Meyers Squibb (BMY), Crown Castle (CCI), Commvault Systems (CVLT), Dropbox (DBX), Digital Realty Trust (DLR), Freehold Royalties (FRU.TO), Alphabet (GOOGL), Intuit (INTU), Invitation Homes (INVH), IQVIA (IQV), Lonza (LZAGY), MAG Silver (MAG), Motorola Solutions (MSI), Cloudflare (NET), Nestle (NSRGY), Novo Nordisk (NVO), Invesco S&P 500 BuyWrite Fund (PBP), VanEck Vectors Russia Fund (RSX), Sprouts Farmers Market (SFM), ProShares Ultra S&P 500 Fund (SSO), Telekomunikasi Indonesia (TLK), Victoria Gold (VITFF), and Vanguard S&P 500 Fund (VOO).

In today's mailbag, an additional thought on why people are using credit cards more frequently... and thoughts about yesterday's Digest on bringing supply chains home. Do you have a question or comment? As always, e-mail us at feedback@stansberryresearch.com.

"Another contributing factor during the pandemic [for increased credit-card use]: many stores and restaurants refused to accept cash." – Paid-up subscriber J.C.

"Just so you know, a wafer is usually the size of a dinner plate and can have several hundred to several thousand chips per wafer... I've worked with TSMC a long time and they are a great company." – Paid-up subscriber Bob D.

"You note: This construction (of Taiwan Semiconductor in Arizona) comes as Taiwan Semiconductor and rival chipmakers Intel (INTC) and Samsung compete over $54 billion in semiconductor subsidies to increase fabrication capabilities in the U.S.

"Why is any incentive, especially an appalling amount (think what $54 billion could do in healthcare, public housing, addiction help, education, etc.), being offered as an incentive. It is completely obscene and superfluous.

"Instead offer a disincentive such as imports will be outlawed, except for geographical comparative advantage (e.g. diamonds, real champagne) in 3 years. Want to bet how long it takes the supply chains to become domestic?" – Paid-up subscriber Kendrick M.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 11, 2021