Don't Let the Crocodile Eat Your Money

Waking up from a nightmare... The financial threat on my mind... Inflation is taxation... What to do about it... The 'hated' sector that benefits... Don't let the crocodile eat your money...

The crocodile was gnawing at my hand...

It came out of nowhere...

One second, I (Corey McLaughlin) was laying peacefully on a beach chair. The next, an anxiety-provoking crocodile appeared across the sand. And it was getting closer...

The person next to me didn't move. Apparently, he wasn't scared at all. But I was startled...

When I got up to run away, the crocodile came after me. And as I looked back, I watched as it slithered right past the person who had been sitting next to me. What the—?

Before I could get off the beach... it caught me... and started nibbling on my hand.

Surprisingly, it didn't hurt as bad as I thought. The croc was small... It must have been a baby... A zoo worker happened to be nearby and intervened. They shooed the reptile away, looked at my wounds, and pulled out a few baby teeth from my skin.

And then...

I woke up.

It was all a dream... thankfully. More precisely, this was a nightmare that I had last night. (Sorry for the graphic nature if it was too much.)

Now, I know most people don't care about anyone else's personal dreams...

When I awoke, I wasn't planning on sharing any of this with you today. (I fear it falls into what my editors call a "boring personal story.") But here we are...

You see, as it turns out... It has a lot to do with our economy.

A baby croc bit my hand, so what? Practically speaking, when I woke up, my right hand was numb, and I realized I must have been sleeping on it the wrong way... That made sense.

Maybe that was it, nothing more.

But I'm a believer that dreams do have meanings. They tell us what's really on our mind. So this morning, I did what many people do... I went to Google and tried to find a "dream meaning" for crocodiles eating my hand.

I found a variety of answers – everything from good luck (hard to believe)... to that I have repressed thoughts that are seriously bothering me (who doesn't?)... to a big financial threat that is lurking.

Ah, that makes sense...

Before going to bed, I was doing a little 'light' reading about taxes, debt, and inflation...

I've been flipping through a new book, Daylight Robbery: How Tax Shaped Our Past and Will Change Our Future. It's written by Dominic Frisby, a recent interview guest of our editor-at-large Daniela Cambone.

We shared a link to the great interview in the February 23 Digest, and it convinced me to get a copy of the book myself... The book is all about how taxes are at the heart of every great revolution you've likely heard about.

(When I told my wife what I was reading, she said she was sorry she asked. I told her she should be happy.) I'm not even halfway through the book... I just finished reading up on the Magna Carta and the Peasants' Revolt in London. It's a great read so far...

It has been so good that last night I skipped ahead a bit to skim what's coming next – including a few chapters titled, "The Unofficial Taxes: Debt and Inflation" and "Crypto Money: The Taxman's Nightmare."

My nightmare suddenly seemed to apply as I sat down to write today's Digest...

A small crocodile taking a bite out of me? A financial threat on my mind?

Of course.

Maybe the idea of taxes, government debt, and inflation eating away at the value of a U.S. dollar – and the true value of my financial assets – is bothering me more than I'm willing to admit.

We've written about these ideas plenty of times before...

Taxes are as certain as death. And higher taxes have always been a big threat whenever there is unrelenting government spending...

But we're not going to get directly into the influence of higher corporate taxes or the richest 1% of individuals paying more, which is already becoming a talking point for the "next big bill" out of Washington.

It's the same with debt... What else do we need to say? The U.S. debt-to-GDP ratio reached 127% in the third quarter of 2020, and it has risen as if nobody in power truly cares about it.

We've also talked about inflation here in the Digest many times before, as recently as last month. But we want to talk about it again today because it's a critical concept to consider when building a portfolio that can weather any storm.

Rising prices are always on our minds, now that we think about it...

But they're often hidden, like that crocodile.

And inflation – even just the word – is equal parts confusing and "mysterious," as our colleague and Retirement Millionaire editor Dr. David "Doc" Eifrig likes to say.

Some of you shared your observations on inflation a few weeks ago... like higher prices for lumber and other building materials, and more expensive gas at the pump.

Others wrote in to say that these examples were more supply and demand imbalances than anything, which also play a part.

For our purposes, we're using what Frisby defines as "the traditional definition of the word" inflation...

The expansion in the supply of money and credit with the consequence of higher prices. An economist might call it "expanding the money supply" or "artificially stimulating credit"; a historian might say "debasing money." Whichever words you care to use, the process is the same.

Here it is today...

Just last week, the economy string-pullers at the Federal Reserve again doubled down, at least publicly, on what True Wealth editor Steve Sjuggerud calls the "Melt Up"... It's the idea that previously unimaginable government stimulus will fuel previously unthinkable asset prices.

Fed Chair Jerome Powell is telling anyone willing to listen that's essentially what we should expect...

The Fed says it's willing to let inflation run above its previous 2% target (as measured by its own preferred metrics of everyday goods, like the Consumer Price Index) for a "sustained" period of time... until it sees unemployment numbers get to where it wants to.

On paper, which is where the Fed sees the world, that probably won't happen for years... if at all. Remember, since previous Fed Chair Ben Bernanke declared the central bank's inflation goal was 2% back after the financial crisis, it barely ever got there.

But ask anyone who has tried to pay for college, health care, or childcare over the past two decades if prices have gone up... They will surely tell you they have, and that these things eat giant chunks from their everyday budgets.

It's textbook inflation...

The Fed isn't necessarily hiding it, but it also isn't using real-world numbers. Frisby notes that central banks' measures of inflation ignore sectors of the economy altogether, like property prices and financial assets.

We don't ignore these prices... Those are two pretty important ones. But by using the measures that central banks do, Frisby says...

It means they can declare that inflation is low and set low interest rates, thus stimulating debt and creating more inflation. If interest rates in the 200s had reflected money supply growth, they would have been double what they were and it would not have been possible for the housing bubbles to take hold. This was taken one stage further after the 2008 financial crisis, when interest rates were slashed close to zero and quantitative easing was introduced.

These are the means by which currency is debased and the inflation tax is exacted today. The ultimate purpose, almost invariably, is to erode the value of debt, particularly government debt, and to enable government spending. The effect is to transfer the value of that money – i.e. people's wealth – to the state.

Today, the Fed is planning to keep interest rates at rock-bottom numbers for years. And it also plans to keep buying $120 billion in bonds each month to cheapen its self-created government debt, even as the economy grows...

Last week, the Fed governors updated their projections for 2021... They projected substantial gains in real U.S. GDP growth (6.5% in 2021) and inflation (2.4% in 2021) – up from 4.2% and 1.8%, respectively, with projections just three months ago.

That may not seem like a lot of change on the surface... But 2% more GDP equates to roughly $420 billion, and the inflation expectation in everyday items is nearly 1% higher than just three months ago...

Meanwhile, the Fed is telegraphing near-zero benchmark interest rates through 2023, keeping money cheap.

This is all to say that the crocodile is lurking...

While taxes reduce folks' purchasing power on the front end – through income and sales taxes, for instance – inflation hides in the water but is just as potent as a tax. In other words... get a $1,400 check today, pay a bigger bill tomorrow.

It nibbles at your hand, or your portfolio... But you can't necessarily see it as much as a down day in the market or the taxes that are taken out of your paystub.

But the "easier" money gets... with the Fed and Treasury continuing to pump gobs of digitally-created dollars into the economy, absent of rising wages or owning a portfolio that outstrips inflation in what you spend your money on... the easier it gets for inflation to creep into your pocket.

This is why inflation is a form of taxation, as Frisby describes it. And by any measure you want to look at, the Fed is inflating the economy... which means it's already raising taxes on everyone, rich and poor.

So what can you do?

We read with interest this note that came in recently from paid-up subscriber Gary S...

One of the things I love about the Stansberry group is that your analysts all seem to lean toward a contrarian viewpoint. If everybody is doing or thinking X, then maybe we should be doing or thinking Y. Makes sense to me.

But haven't we all fallen into the "inflation is coming" mindset based upon the Fed's actions? Could there be a different – a contrarian – approach to this issue?

Have any of your analysts applied contrarian thinking to the inflation issue?

Thanks for your thoughts.

We love questions like this... And as Gary notes, we see value in taking the contrarian approach. So, if everyone is worried about inflation coming today, it would make sense to say... well, maybe it's not.

And in a way, this is what we have said, at least in these pages... Back in the February 23 Digest, we shared highlights from a recent issue from Doc's Income Intelligence newsletter, which focused entirely on the topic of inflation.

To start with, here's an important distinction to understand...

Inflation is different from runaway inflation or hyperinflation, the kind seen during the 1970s. Nobody wants that. As Doc wrote in his January issue of Income Intelligence...

At this point, we're not fearing hyperinflation – the phenomenon by which runaway prices turn a currency worthless. Our modern monetary system isn't perfect, but policymakers have a simple remedy for inflation: higher interest rates.

And if you are to believe Powell, he says the Fed wants to see rates higher again, which would slow inflation. In the Fed's latest release last week, it said it sees 2.5% on its benchmark rate in the long run.

If you're thinking in the global picture, Stansberry NewsWire editor C. Scott Garliss told us today that the idea of hyperinflation becomes less of a concern, too.

Central banks around the world all have "the same 2% target for inflation" and are weakening their currencies like the U.S. to spur growth and encourage buying and lending.

Scott also said that GDP growth numbers in the U.S. this year, of say, 7%, aren't likely to be sustainable – given the numbers today reflect that we're comparing the economy with a lower floor of 2020.

Still, bond market investors are expecting U.S. inflation in the years ahead to reach a rate not expected since the summer of 2008. Here's the latest five-year U.S. inflation "breakeven" rate...

This chart shows that we're at a decade high in inflation expectations. At first glance, that might be a stunner. But if you go back further in history than this data goes and look at real inflation readings, we're still near historic lows when it comes to this overall discussion.

For example, by the Fed's preferred measure, inflation was 13% in 1979 on GDP growth of 3.2% that year. The highest the five-year breakeven rate has reached since the data was first published in 2003 is 2.9%.

At the same time, though, every tick up in these expectations (and reality) today is significant. As Doc said in January...

The difference between 1% inflation and 4% inflation is significant. Due to the power of compounding, a $100 weekly grocery bill turns into $110 over 10 years at 1% inflation... or $148 at 4%. If you spread that across all of your daily costs, retirement gets a lot more expensive.

If taxes are as inevitable as death and inflation is a form of taxes...

First, this tells us inflation is something everyone with any amount of money must consider when building their portfolio. To finish out today, we have a few thoughts on how to do this...

We'll start by re-sharing the idea penned three decades ago by the late financial-newsletter writer Richard Russell in his Dow Theory Letters newsletter.

As we said back in the September 9, 2020 Digest, in Russell's most iconic essay "Rich Man, Poor Man," he said that while predicting the direction of the stock or bond markets can certainly help you make money, truly wealthy investors know about a few more important fundamental secrets to getting rich...

The little guy doesn't understand values so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money.

He's never heard the adage, "He who understands interest – earns it. He who doesn't understand interest – pays it." The little guy is the typical American, and he's deeply in debt.

The little guy is in hock up to his ears. As a result, he's always sweating – sweating to make payments on his house, his refrigerator, his car, or his lawn mower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money – fast.

The way to be the "rich man," as we offered up last September and again today, is to stay ahead of the interest you are paying on, say, a home mortgage or any debt you might owe. More from that Digest...

You must realize if you're borrowing money for a house, a car, or anything else (unless, on balance, you're making more in interest in investments than you are paying in interest on the loans), you will never, ever be rich.

Today, we say you can think of tackling inflation the same way...

You need to own assets that will, on balance, keep your portfolio out of danger of the crocodile of inflation. We're talking about things like stocks, "hard assets" such real estate, and the best and most generous income-generating investments you can find (like in the crypto world).

As Frisby writes in Daylight Robbery...

If you own the assets that operate in the sectors that profit from all this newly created money – the financial sector, for example, or the New York or London property in which it mostly lives – you make spectacular gains. But if you don't own these assets – and most young people don't – you get left behind. And the wealth gap gets bigger.

What's more, when inflation expectations rise, typically so do bond yields... That's why you've heard so much hullabaloo over the rising 10-year U.S. Treasury yield in recent months.

Higher bond yields mean lower bond prices.

I want to highlight one part of that today... the "yield curve." Regular Digest readers know we've cited this concept – which represents the difference between short-term bond yields and long-term bond yields – before as a pretty solid predictor of a recession.

Short-term yields, which are more Fed-driven (since they buy up those bonds every month), are usually lower than longer-term market-driven yields. When the opposite is true, it's a sign the system is awry.

This has now happened before each of the past eight recessions – going back 60 years.

But importantly, this is NOT what we're seeing today... Longer-term bond yields have been rising with inflation expectations. In fact, the spread between the 10-year U.S. Treasury and the two-year Treasury is at 1.58% – its highest reading since 2015.

One big 'winner' from inflation is financial stocks...

In short, big banks make more money when the yield curve is wider.

That seems kind of messed up as the Federal Reserve regulates the banking system, no? As Stansberry NewsWire analyst Nick Koziol wrote on January 6...

Banks make their money by borrowing money at short-term interest rates, and then lending it out at long-term interest rates. The spread between the two is called net interest margin ("NIM").

So with the Federal Reserve keeping short-term interest rates near zero, banks don't have to pay much to borrow money. And now, with long-term interest rates rising, banks can see their NIM expand. This will likely boost their earnings.

We don't like it, but higher inflation – by definition higher prices created from money made out of the thin air – helps the whole banking system. It's one of those things that makes too much sense.

You might remember in December, we wrote that the Fed gave the "green light" to banks again to buy back their own stocks and reward shareholders because of their strong balance sheets in the central bank's view.

We also mentioned Steve's recommendation in True Wealth last August, when banks were really hated, of a select group of banking stocks. This position is up 85% today... And it has more than doubled its overall return since we last mentioned it in December.

In any case, you might be saying, "C'mon, I hate the banks." They are the problem not the solution, right? We will not argue with that.

But Gary asked for a contrarian view... We also like going "outside the system" to bitcoin, gold, or silver as a way to fight inflation. However, if you're looking to profit from inflation in stocks, consider the banks.

If you can stomach adding exposure to the banking sector, you might want to look at a basket of stocks like the SPDR S&P Bank Fund (KBE)... It includes shares of companies like Wells Fargo (WFC) and Bank of America (BAC).

Your money actually in the bank, making barely any interest, very likely won't keep up with inflation.

But owning shares of bank stocks could help your money from being eaten by the proverbial crocodile.

Money Is Looking for a Home

Dr. Pippa Malmgren, a former adviser to President George W. Bush, says the recovery is real and we will see a series of rate hikes, accompanied by more stock market highs. She told our colleague Daniela Cambone that we will experience the results of major pent-up demand...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 3/19/21): ABB (ABB), AutoZone (AZO), Annaly Capital (NLY), and Oshkosh (OSK).

In today's mailbag, feedback on another paid-up subscriber's letter from Friday and more thoughts on the American Rescue Plan. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thank you for printing John C's lengthy comment, it was very helpful. I would expand it to say that back in my business school days we had sayings like 'the customer is always right.' In other words, never lose a customer over a minor complaint.

"Nowadays, we see businesses making political statements, removing products from their shelves, and donating to political causes. Why would you alienate 50% of your customer base in this polarized political environment? It seems like dumb business to drive away customers, but maybe that is what the B-schools are teaching is more important now." – Stansberry Alliance member Mike K.

"The Fed wants to fuel inflation fears in order to speed up the velocity of money. Money invested doesn't generate tax revenue to the extent spending in the real economy does." – Paid-up subscriber Eric G.

"If you sow the wind (debt) you will reap the whirlwind (economic destruction). I am 82 and not worried about my future but my children and grandchildren will have to deal with the whirlwind. The idiots who passed this legislation won't have to deal with it either as they will either have passed or be isolated from the consequences, as they always are." – Paid-up subscriber Reed B.

"The rescue plan is a typical government program, with lots of waste. The ideal plan would be focused and plan the money tied to the local cost of living. Many people in the lower rung of the economy are hurting badly and need and deserve help. Their jobs were closed by the effort to protect us from COVID-19. It is real, it is deadly. We barely prevented the hospitals in California from being overwhelmed.

"I see my daughter who teaches dance and son in law who works for the state having their income drop and they are lucky enough to still be hanging in there. I see many local businesses closed up and gone forever.

"Democracy is the best and the worst of governments, people vote for those who promise them the most without seeing that it will cost us and our children down the road. I pray that enough people will get the vaccine and that the case count will decrease to a fraction and allow us all to get back something close to normal by summer.

"Many year Alliance member, and a believer in the Melt Up! Thanks Steve S.!" Stansberry Alliance member Mike B.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 22, 2021