Boy, That Escalated Quickly
The latest inflation read... Boy, that escalated quickly... We're about to see 'bigger than Volcker' rate hikes... What the world looks like a year from now... How does this end?... Joel Litman's 'heist' warning...
'Inflation week' rolls on...
This morning marked the arrival of the last "official" inflation update we've been waiting for...
The point of these metrics is to get a sense of how much the Federal Reserve will raise interest rates to fight inflation in tomorrow's policy decision.
Today's reading – the latest Producer Price Index ("PPI") update – wasn't the worst thing we've seen... though that's relative to some real horrors.
The PPI is the Bureau of Labor Statistics' ("BLS") measurement of the costs manufacturers face for producing goods (costs that then pass through to buyers). They rose 10.8% in May on a year-over-year basis.
This is still near record-high levels of inflation. However, Wall Street had expected slightly worse: 10.9%, the same PPI increase we'd seen in April. What's more... the PPI's highest recent increase was 11.5% in March, and since then, it has now fallen for two straight months.
Let's be clear: I (Corey McLaughlin) am not calling "peak inflation" yet. Things haven't gotten worse, at least in this set of data, but the important thing to note – both for our everyday lives and our portfolios – is that we're still a long way from "normal" inflation times.
As editor C. Scott Garliss reported in our free Stansberry NewsWire today...
The data tells us the rate of increase for manufacturers' costs is going up. And despite difficult comparisons versus last year, while the pace of acceleration is backing off, it still is far from the central bank's 2% inflation target.
Take a look at the chart below:
The BLS said the largest driver for an increase in final-demand goods was the rise in energy prices. Final-demand energy prices rose 5% in May compared to 1.7% in April.
Conversely, food costs were unchanged after having jumped 1.5% in the prior month. This was the fifth straight month of an increase greater than 1%. Gasoline prices were the largest contributor to the gains in energy prices, rising 8.4%.
All in all, here's what we got from what I've labeled "inflation week": a double-digit PPI increase today and a higher-than-expected Consumer Price Index ("CPI") from Friday. Put it together and it points to record-high inflation in the real economy in the months ahead...
And that means – in another frustrating effort to save us from ourselves again and manipulate the economy – the Fed is going to keep on keeping on with its interest-rate-hike plans... And it might get more aggressive in doing so – knock-on consequences be damned.
Boy, that escalated quickly...
We've been tracking professional traders' predictions about a rate hike via foreign-exchange company CME Group's (CME) FedWatch Tool. In the past 24 hours, traders have completely reversed on the Fed's plans.
They now expect the central bank to "do more" around 2 p.m. Eastern time tomorrow, when it publishes its latest monetary policy decisions... and then Fed Chair Jerome Powell holds a press conference to explain them.
You see, the FedWatch Tool assigns probabilities for Fed interest-rate decisions based on the prices of federal-funds futures contracts – investible derivates of the Fed's benchmark bank lending rates.
There's a lot of money involved in these contracts. They trade for $5 million each.
On Friday, as we wrote, prices indicated a 92% probability for a 0.50% interest-rate raise tomorrow. Following the latest inflation data, as I wrote today, they showed an identical 92% likelihood of a 0.75% raise.
That's like if Tiger Woods in his prime somehow couldn't sink a putt on the practice range, and bettors scrambled to put their money behind a new odds-on favorite for the next day's tournament.
This is also a reminder to always leave room for the unlikely to happen.
Bigger than Volcker's rate hikes...
Not only have we seen a change in expectations for tomorrow's Fed decision, pro traders are also baking in a probability that the Fed will also raise rates by another 0.75% at its next policy announcement on July 27, too...
That would put the benchmark federal-funds rate closer to 2.5% by late July, up from near 1% today.
That might still sound paltry compared with interest rates of nearly 20% that former Fed Chair Paul Volcker famously enacted in the early 1980s, which broke inflation and brought on recession. But we're starting from a much lower bar...
A 1.5% rise in today's rates would mark a 150% hike... and in about two months, if Wall Street expectations hold.
When Volcker took over as Fed Chair in August 1979, the Fed's benchmark rate was already around 11%.
He raised rates to around 17.5%, but that took seven months... Then he actually lowered rates back to 10% before hiking them again – with inflation back on the rise – to a high of 19% in 1981, a move of less than 100%.
That crushed inflation back down to levels lower than we're actually seeing today.
But in percentage terms, with two 0.75% rate hikes in two straight months, today's Jerome Powell Fed would actually be doing more than Volcker's, relatively speaking.
I'm not bringing this up to anoint Powell a possible hero who ends inflation... certainly not after helping inflation run higher, longer than needed the past two years.
The point is, with all the debt in today's world and devaluation of dollars over the decades, a 0.75% rate hike means more than it did in 1980... because we're starting from such a low level of rates to begin with. The world is used to low rates.
And we're looking at a potential 150% increase in borrowing costs in the economy in two months, compared with less than a 100% gain over about two years in the Volcker era. I'm not sure many people are thinking of this context.
In any case, this scenario is now the betting favorite...
This change in expectations indicates a few things...
First, like we've been saying lately, until the path of inflation gets a little clearer, uncertainty will overhang the markets.
Inflation is clearly the big story of 2022. You'll hear tomorrow that the Fed is doing everything it can to attack it... What you probably won't hear, at least, directly, is that action might mean a recession, job losses, and further stock market struggles, too.
This is all to say if you think you missed the boat on preparing for another leg down in the markets or at the very least continued volatility, it's not too late...
We might be getting close to seeing the path ahead for inflation in the U.S. (lower, but still higher than average). But to use a horse-racing analogy, we're just out of the starting gate. Next month, Mr. Market will digest another batch of inflation numbers and do this exercise all over again... and maybe the race will reach Turn 1.
Second, when it comes to the possibility of Fed rate hikes for the rest of this year, it's going to be a fluid situation in the days leading up to monetary-policy decisions. For most of the past two years, the Fed has telegraphed its decisions clearly weeks in advance, and sometimes longer.
From March 2020 until March 2022, rates were simply stuck at near zero. So long as he or she doesn't mistakenly hit the wrong button, a monkey could successfully manage that policy and create a bubble – like the Fed did.
Now, the story is a little more complicated... decisions are being made on the fly... and we're constantly hearing various opinions of different Fed board members. That means more market volatility, so long as the path of inflation is in question.
Stay tuned here for more on the Fed's decision tomorrow.
Moving on, we might be getting ahead of ourselves, but...
We might have not even yet seen a "bottom" of this bear market, but I'm already thinking about what comes next... As the days go on and the general public finally catches on to our inflation problem, it makes more sense to do this to stay ahead of the next thing.
Last night, I found myself listening to more of the interview with famed investor Stanley Druckenmiller at a recent conference, and he talked about his keys to building billion-dollar fortunes... for himself and clients at Duquesne Capital...
One of them was that the stock market prices front-run what happens in the economy, which he learned early in his career as a bank and chemical stock analyst...
Over time I learned that the inside of the stock market had a very, very prescient message about future economic activity, and for whatever reason stocks tend to lead the fundamentals by somewhere between six and 12 months.
And you can even go beyond that and look at industries that lead the economy and industries that lag the economy.
He mentioned a big one – what's going on in the housing market – as a leading indicator. He noted that homebuilders are down 50% from previous highs despite supposedly good fundamentals...
There's a signal, albeit early, that there may be trouble ahead.
When I look at what's going on in the housing market, we've already seen demand for new mortgages slow sharply as borrowing costs rise, though home prices haven't gone down. Applying that trend to the broader economy, you could say we should expect "stagflation" – or slowing growth but with lingering high prices...
As Druckenmiller put it...
If you do this approach where you look at which industries lead and which industries lag and you put the puzzle together, it's been prescient over time and it's certainly allowed us to consistently, the last 20 or 30 years, outperform the Fed in terms of economic forecasts...
This is how many of the best professional investors think... with stocks, six to 12 months ahead... to get a picture of what's really going on in the economy... and where prices could go... and prepare your portfolio accordingly.
According to the latest monthly Bank of America survey of professional investment managers – covering 300 people in control of a combined $834 billion of financial assets –they don't expect the story to change until inflation does.
Half of the respondents think the Fed won't stop raising interest rates until its preferred year-over-year inflation measure – the Personal Consumption Expenditures ("PCE") Index – goes back below 4%... It's at 6.3% as of the most recent data in April.
Another 20% of money-managers surveyed said they expect the Fed to pause or pivot policy if weekly jobless claims remain above 300,000... and another 14% think the Fed will step in to ease the market's troubles if the benchmark S&P 500 falls below 3,500, which would be an additional 6% decline from where it's trading today.
These are opinions, of course, and none of these scenarios are guaranteed to happen. But I share these findings with you because they give us a good idea of how Wall Street is thinking today... and that's information to consider on its own.
It tells us professional investors – in control of a lot of money in the markets – are still wondering: How does this end? And that means they're still uncertain... and fearful about what could happen in the meantime with inflation.
Speaking of looking around the next corner...
You've likely seen a few e-mails lately from Joel Litman, the founder of our corporate affiliate Altimetry... But, if not, I wanted to make sure you saw this information.
If you don't know Joel, allow me a brief introduction. Among other things, he has guest-lectured at Harvard University and his research is widely followed among pro investors. As our colleague Dr. David "Doc" Eifrig wrote on Friday in his free Health & Wealth Bulletin...
More than a decade ago, I met one of the smartest guys I know – so smart, in fact, that after our first meeting, I would have given him all of my money to manage. (He wasn't managing money, but I thought he was that good.)
For years, Joel Litman's research was reserved for only the highest echelons of investment management. Now, he shares it with readers all over the world.
According to Joel, Wall Street has been keeping the most successful investments to itself for decades. And it's able to do this legally through an obscure set of regulations.
If you're able to see the real, true financial numbers behind a stock – which is what Joel's system allows him to do – he says there's always a moneymaking opportunity, in any market... bull or bear.
We've spent a lot of time lately and again today talking about the risks for stocks, but as far as Joel is concerned, there's an even greater problem than a crash heading our way. And that's saying something, considering he called the 2008 and 2020 stock market crashes.
In short, Joel now predicts a massive financial "heist" could sweep the country soon... He has already warned the Pentagon and the FBI about it. But few people are willing to admit that what Joel is warning about could actually happen on U.S. soil.
And they're certainly not aware of how one move right now could make you massive profits as it unfolds... far greater than anything you could make on gold, ordinary stocks, bonds, or cryptocurrencies, he says.
Click here to learn more. Just for tuning in, you'll hear two free recommendations – one stock to buy right now, and one to avoid at all costs – and learn more about the "heist" Joel is predicting and how he goes about his work.
The Highest Inflation in More Than 40 Years
Senior analyst Matt McCall has more on the latest inflation data... and has two big, related thoughts to share: Could an economic slowdown be a self-fulfilling prophecy? And what happened to innovation? Find out on this episode of Making Money With Matt McCall.
Click here to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 6/13/22): None.
In today's mailbag, feedback on yesterday's Digest about the market sell-off, inflation, and the Fed's next move... and a note for Ten Stock Trader editor Greg Diamond, who we quoted yesterday... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"[That inflation] was transitory was not true... and now [Powell] is stuck with all the economic, financial and the geopolitical headwinds and consequences he has to contend with... and this is not transitory either." – Paid-up subscriber Gurdev N.
"Fundamentals first. Emotions next. Then add computers' algorithms to the mix. Panic? We are nowhere near there yet. Machines rule this game now." – Stansberry Alliance member Joseph C.
"Dear Greg, I can't thank you enough for the clarity you bring for me to all my trades.
"I love your philosophy of – it doesn't matter what we think should happen, all that matters is what is actually happening.
"I appreciate your patience. Because you are patient, I trust your recommendations 100%. I know they won't all be winners, but I also know enough of them will be that I come out ahead. I don't know what other subscribers are telling you, but I would rather have no trade from you when it makes sense to wait.
"Finally, and most importantly, I want to thank you for your insight around BTC and Crypto. In a recent publication, you showed us that BTC and Crypto were currently acting the same as tech stocks. You said maybe one day they will be seen as a separate class and you hoped they would, but today they are moving with tech stocks. That observation gave me the clarity I needed about what to do in Crypto. I had sold some, but was unsure when and if to bail. As soon as I read that, I got it. I bailed on almost all of my holdings and I'm so glad I did. I have no doubt Crypto will come back and be important one day, but that's not today and that's probably not anytime soon.
"As an Alliance subscriber, I get a lot of emails from Stansberry. I almost always read yours, which says a lot. Thanks again." – Stansberry Alliance member Anne W.
All the best,
Corey McLaughlin
Baltimore, Maryland
June 14, 2022