He's Got the Fed's Ear
The weatherman is back... Big banks report earnings declines... Peak inflation keeps going higher... Forget what you've known... He's got the Fed's ear... Elon Musk's rude awakening... A big moment for Doc Eifrig...
The 'hurricane' forecaster is putting his money where his mouth is...
You might remember that a few weeks ago, we reported that JPMorgan Chase (JPM) Chairman and CEO Jamie Dimon warned of a "hurricane" hitting the economy. He told a group of Wall Street analysts and investors at a New York conference they'd better prepare for a storm...
As we noted, Dimon – who has been the bank's CEO since 2005 – is never one to keep his personal opinions to himself. He'll even sound off if these opinions conflict with what his bank is actually doing... like when last year JPMorgan Chase began offering clients cryptocurrency trading, only for Dimon to call bitcoin "worthless" a few months later.
In short, we tend to scrutinize Dimon's or any other CEO's public comments. But in the case of his recent hurricane warning, Dimon has been putting his money – or more specifically, clients' and shareholders' money – where his mouth is.
This morning, JPMorgan Chase reported its second-quarter earnings...
These numbers were significant for two specific reasons and one broader sentiment.
First, the bank reported a 28% decline in profits, mostly because it built up $428 million in cash reserves in the quarter in anticipation of loans going bad. Second, JPMorgan also announced it was temporarily suspending share buybacks.
Combined, these business moves signal a big-time defensive posture from America's biggest bank (by assets). Dimon said the move is in part to comply with the Federal Reserve's "stress test" requirements, which he opposes.
Opinions aside, JPMorgan is not alone in its troubles. Morgan Stanley (MS) also missed earnings expectations today and has been building up loan reserves. As our Stansberry NewsWire team reported...
Capital preservation among the biggest banks signals that they are preparing for a recession...
This further stokes fears in investors who were hoping to see some positive news following yesterday's 9.1% inflation figure.
As we mentioned earlier this week, this is just the start of earnings season...
The big banks traditionally start making headlines first, followed by most other companies in the S&P 500 Index. By the end of earnings season, we'll have a good sense of how America's largest businesses are doing... and a picture of what the economy looks like.
The early returns aren't great. Banks are preparing for individuals and businesses to stop paying off loans. Costs are going up... and wages not as much. We'll be keeping close watch on more earnings reports and keep you updated over the next several weeks.
Moving on, today we also got another read on inflation...
Yesterday, we told you about the latest Consumer Price Index ("CPI") data for June, which showed the highest year-over-year inflation reading for consumers in four decades.
Today, we learned another revealing piece of inflation data: the Producer Price Index ("PPI"), which measures the cost of raw materials.
This measure is often looked at as a leading indicator for inflation because if businesses are paying more for materials, they tend to increase prices.
The PPI for June, published this morning by the Bureau of Labor Statistics ("BLS"), came in at an 11.3% year-over-year gain. That's well above Wall Street expectations, higher than it has been in the previous two months, and just shy of the record 11.6% jump in March.
This tells us if we are anywhere close to an inflation peak, this peak keeps getting higher... or wider, meaning longer-lasting... As we wrote yesterday, this likely means the powers-that-be at the Federal Reserve are going to do what they can to fight inflation.
That means raising interest rates – increasing the cost of borrowing money in the economy – by more than expected. A few Fed officials have indicated as much in the past two days, and this reality is being considered across the markets today.
Consider forgetting what you've known...
I've also raised the possibility that eventually – if or when the economy goes into an "official" recession – the central bank will likely be motivated to then cut interest rates to stimulate the economy again. But the joke might be on me, says one industry veteran...
He does not agree that is the likely outcome – and we're listening to him because he has a direct line to the Fed.
We've mentioned his name before: Bill Ackman, the founder and CEO of Pershing Square Capital Management who's close to our friend Whitney Tilson, founder of Empire Financial Research. Ackman shared his thoughts yesterday about what could be around the next corner with monetary policy...
Ackman presented to a group that informally advises officials at the New York Fed, the largest branch of the Federal Reserve system. It focused on the details of what to consider in a "stagflationary environment."
We've warned about this – an era of decreasing or no growth and high inflation. In a Twitter thread last night, in response to yesterday's CPI report and the market's initial ho-hum reaction, Ackman shared the big points with the public...
The market appears to assume that the Fed will act as it did in the last three recessions by immediately easing when the economy goes into recession. While this seems intuitive, the lessons of the stagflationary periods of the '70s and '80s suggest a different policy response.
Today's economic backdrop with high nominal demand, limited supply and high inflation is much more comparable to the 70s/80s experience than that of the last three recessions that are top of mind for investors.
[Former Fed Chair] Arthur Burns' legacy is tarnished by his decision to lower rates as real GDP slowed during a period of high inflation. This catalyzed years of massive inflation which was not quelled until Volcker took [the federal-funds ("FF") rate] to 20%. Burns' policy error is well understood by Powell and the Fed governors and likely explains their dot plot curves. [Burns' successor, Paul] Volcker maintained FF substantially above CPI for years to moderate inflation.
There's a lot to unpack here...
The "dot-plot curves" Ackman mentions are current Fed officials' projections of its benchmark lending rate over the next few years. The most recent projections from last month show a fed-funds rate as high as 3.4% by the end of this year... 3.8% by the end of 2023... and 3.4% in 2024.
I can tell you that these projections have been wildly off as long as we've been paying attention, so much so that their only worth is to note they will likely be wrong. Ackman seems to agree.
In March, Fed officials were projecting a 1.9% fed-funds rate by the end of the year. We could be there within a few weeks... and Ackman is suggesting rates will need to go much higher to actually bring down inflation. As he wrote...
The Fed has two blunt tools, FF and managing expectations. Year-end FF projections are beginning to approach where they need to be. Market expectations for FF need to be managed upward beginning at year end and for the next 18-24 months.
Markets remain dismissive of dot plots and recent statements by Fed governors on the risk of allowing inflation expectations to become unanchored. I expect the market will adjust FF expectations upward as the Fed provides more clarity and emphasis on the need for higher rates for longer.
He says market participants will come around to this line of thinking once they "carefully review the '70s and early '80s precedents and their comparability to current economic conditions."
Said another way... Ackman is recommending doing what our colleague Dan Ferris suggested a few weeks ago and "inverting" everything you've known or expected in the markets for the last few decades.
Dan has a list of 10 investing trends of the past 20 years that could be flipped on their heads today – "buy the dip," for example. He then expanded on these ideas in his Extreme Value newsletter... Dan's subscribers and Stansberry Alliance members can find the issue here.
If you want more details on what Ackman is saying, he actually shared a link to the full presentation that he gave yesterday in the meeting, which was led by New York Fed President John Williams. You can go through it for yourself.
If that's not your thing, we just want to say we agree with Ackman on this... Keep thinking different.
Speaking of Whitney and Twitter...
In case you hadn't heard, late last week, Elon Musk pulled out of his deal to buy Twitter (TWTR). In response, the social media company sued the Tesla (TSLA) CEO to at least ensure Musk pays a $1 billion breakup fee that was part of the deal – and more.
Whitney is fully engrossed in this saga. In his free daily newsletter today, Whitney got readers up to speed on the latest details...
In his analysis, Whitney notes that the case will come before a judge in Delaware – a state known for favorable corporate laws, where two-thirds of the Fortune 500 companies are incorporated...
This is going to be a verdict in which the only two outcomes are that Musk is forced to buy Twitter at $54.20 or he walks away, paying nothing more than the $1 billion breakup fee. I think the former is 80% likely...
If Musk gets away with blatantly ignoring the airtight contract he signed, harming a major company and inflicting tens of billions of dollars of pain on shareholders, it will call into question every contract. I can't even begin to wrap my head around the chaos and damage it would cause...
Twitter still wants the $44 billion sale to go through (for the benefit of shareholders) and argues Musk made a series of misleading and bad-faith actions.
Some observers have suggested that if the judge orders him to go through with his purchase, Musk will simply ignore the ruling. Whitney says that's ridiculous. He won't be able to ignore anything...
The court will order the bank holding Musk's Tesla (TSLA) stock to sell as much of it as is necessary to get to the purchase price of $44 billion (including the debt financing in place, other investors, etc.), hand the proceeds to Twitter shareholders, and give the company to Musk.
Musk has been conditioned to think he's above the law, but he's about to get a massive, rude, expensive awakening.
We'll stay tuned to the case, of course, but for more on it today, make sure to check out Whitney's full report. You can also start receiving his free daily newsletter by signing up right here. It's a great, quick daily read with Whitney's insights on the markets.
Last but not least...
You might have seen a few e-mails about this already...
Our colleague and Stansberry Research partner Dr. David "Doc" Eifrig has an exciting new event coming up that we suggest you make time for.
In short, Doc says a retirement "shock" is coming to the U.S., one that will be bigger than anything else in the past 40 years. This isn't primarily about inflation... the downturn in the markets... or who gets elected to Congress this year or the presidency in 2024.
Doc says it's much, much more important than any of those... and it will have a bigger impact on your wealth and your overall well-being than anything else in the next decade.
Now, if you follow our work, you know Doc – a former Goldman Sachs trader, physician, and business owner who has been with Stansberry Research since nearly our start – doesn't make claims like this very often... or very lightly.
But Doc says this is the 'most important message he will ever share'...
On Tuesday, July 19 at 10 a.m. Eastern time, Doc is going on camera to deliver the message to anyone who will listen – for free...
He'll show viewers exactly what he's talking about... how to prepare for it... and how to take advantage of his warning for the chance to see 1,000%-plus gains in some cases... and consistent gains of 20% per year or more in some of the lowest-risk assets on Earth.
No one in the general public is paying attention to this story, which is one big reason why Doc wants to share it. The other is that it's the culmination of everything he has ever done professionally, and he feels he was born to tell it.
Again, we don't hear Doc make statements like this very often, so it gets our attention. Click here to reserve your spot to this special event now... and stay tuned to your inbox for more details over the next several days.
Dissecting Recession-Proof Stocks
On this episode of Making Money With Matt McCall, Matt sits down with Jonah Lupton, an entrepreneur and growth investor for the past 20 years, to talk about investing strategies for today's market...
Click here to watch 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 7/13/22): General Mills (GIS).
In today's mailbag, kudos for Ten Stock Trader editor Greg Diamond's work, which we mentioned in yesterday's Digest... and a reader calls me "daft." Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Hi Greg, Your work in Ten Stock Trader has been valuable to me beyond just the gains from trades. I sold most of my stock holdings in February and March based on your predictions and analysis, avoiding most of the bear market. Keep up the good work." – Paid-up subscriber Simon Q.
"I'm an Alliance member. I know you [Greg] work extremely hard and I'd like to say thank you for sharing such great and vital insight, and ideas. Because of your time and price analysis I have avoided potentially massive losses. Again, Thank you so much!" – Stansberry Alliance member Richard G.
"Printing all that money in March seemed like the right thing to do at the time? Are you daft?" – Paid-up subscriber Donna W.
Corey McLaughlin comment: I think there's a misunderstanding...
I wasn't saying I thought it seemed right to print trillions into existence – just observing that the Federal Reserve and Congress did so without thinking twice. I've always said there would be consequences of all this money printing, and we're seeing them today.
All the best,
Corey McLaughlin
Baltimore, Maryland
July 14, 2022