One of the World's Best Businesses, According to Buffett – And Us

'Double rate hikes' are on the table... Here's hoping for a 'soft-ish' landing... Prepare accordingly... One of the world's best businesses, according to Buffett – and us... The magic of 'float'... An industry for higher rates...

The Federal Reserve might hike interest rates higher and sooner...

A week ago, Federal Reserve Chair Jerome Powell stood before the media, as he so frequently does... and presented one approach about how the central bank's monetary policy might react to rising and persistent inflation...

Essentially, it was "slow and steady," and we'll win the race...

Powell did nothing to indicate that the Fed would do much more than raise interest rates by the bare minimum at each of its policy meetings the rest of the year, eventually reaching a 2% rate in an effort to temper demand in the economy...

But evidently something happened over the last week to change his mind... to the thinking that "more could be needed, sooner"...

Yesterday, while speaking at the National Association for Business Economics annual conference, a venue slightly less in the spotlight than a live press conference, Powell floated the idea that the central bank is prepared to raise interest rates more aggressively...

In response to a question at the conference about what would prevent the Fed from raising its benchmark federal-funds rate by 0.50%, or 50 basis points, at its next policy meeting in May, Powell said...

Nothing... No, as I've said, that's not a decision that we've made... What I've said is that if we think it's appropriate to raise 50 basis points at a meeting or meetings, we will do so.

Two things of note here... We hear Powell talk a lot. Maybe it was the light-hearted context of the exchange with event moderator Constance Hunter, but we haven't heard him say anything about a rate hike such as this in so few words before...

Second, this might seem like small potatoes – talking about a 0.50% increase in something – but consider that the Fed hasn't put a "double hike" into action at all since 2000... and a lot of other lending rates take their cues from the central bank's policy.

I (Corey McLaughlin) will get to that today in a moment, but first...

Powell also talked yesterday about aiming for a "soft-ish" landing for the economy as the central bank hikes rates, hedging the common Wall Street term "soft landing," referencing bringing the economy "down" smoothly from a low-interest-rate environment.

It was comical, what Powell said...

Soft, or at least soft-ish, landings have been relatively common in U.S. monetary history... [but] no one expects that bringing about a soft landing will be straightforward in the current context...

Very little is straightforward in the current context.

In other words, he has no idea what's going to happen...

Here is what's happening already...

Amid the Fed's initial 0.25% rate hike last week, the average rate on a 30-year fixed mortgage, for example, jumped above 4% for the first time since May 2019... and is now above its five-year average.

Mortgage rates have risen more than one percentage point since December, when the Fed first signaled higher rates to come, and the trend is going to continue... Government-sponsored home-loan lender Freddie Mac wrote in its most recent mortgage rate report last week...

The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year.

The central bank offering higher lending rates has an influence on how debt is valued all throughout the economy... from credit cards to car loans... and typically, stock prices too. Lower rates are generally good for stocks... Higher rates not so much.

Now, Powell is talking about the possibility of doing something the Fed hasn't done in more than 20 years – raise rates by half a percentage point in one day – and more than once in the next nine months. The Fed has six more policy meetings this year.

As Stansberry NewsWire editor C. Scott Garliss wrote in his regular morning commentary today, more is needed and Powell is saying he is willing to adjust policy accordingly...

The central bank needs to do much more to increase the buying power of the dollar. That includes more rate hikes and shrinking its balance sheet. And due to the rapid rise in inflation, the Fed needs to move more quickly than it has recently.

The federal-funds rate target range prior to the COVID-19 pandemic was 1.50% to 1.75%. After last week's change, the same range is only up to 0.25% to 0.50%. At the same time, the balance sheet total currently sits at close to $9 trillion. Pre-pandemic, the number was around $4.2 trillion.

That's a lot of dollar liquidity that needs to come out of the system. The change could weigh on the economic and earnings growth outlook near term.

To which we say, prepare accordingly... for economic growth to slow... for dollars to become relatively more expensive... and, as we've said here for months, for inflation to remain higher than normal until further notice.

One way to prepare... Own shares of the world's best businesses... and ones that can benefit from rising interest rates in the economy... Here's one of them...

We recommended it... Did you buy it?

Warren Buffett just did...

Just a few weeks after he lamented a lack of good buying opportunities, Warren Buffett's Berkshire Hathaway (BRK-B) signed a deal yesterday to buy insurance company Alleghany (Y) for $11.6 billion...

The company joins a few other notable insurance names in the Berkshire portfolio, most notably the ubiquitously advertised auto insurer GEICO... The name Alleghany should also be familiar to subscribers of our flagship Stansberry's Investment Advisory newsletter.

Our team recommended buying shares nearly two years ago... back when it wasn't considered as much a "good opportunity" to buy shares of an insurance company, given the uncertainties surrounding liabilities from the COVID-19 pandemic.

But as longtime subscribers know, property and casualty insurance and reinsurance (which we collectively refer to as "P&C insurance") companies are among the most recommended in the history of Stansberry Research.

Analysts Bryan Beach and Mike DiBiase consider the industry "the best business in the world." They wrote as much in the July 2020 issue of the Investment Advisory, where they recommended Alleghany for the second time in the newsletter's history...

So does Buffett and several other wildly successful investors. The Oracle of Omaha has famously ‒ to close market-watchers, at least ‒ owned insurance companies to build his fortune over the decades, just like his mentor Benjamin Graham did.

There are a few simple, yet grossly overlooked reasons why...

First, as Bryan and Mike wrote, P&C insurance businesses are set up for greater profits than any other form of insurance company, such as life insurance names, whose rates are based on the certainty of death, to put it plainly. On the other hand, Bryan and Mike wrote...

With P&C insurance, the insured event may never happen... Or it may happen tomorrow... or in 20 years. These variables allow for a lot of leeway when assessing risks. That's why the potential profits (and losses) are so much higher.

Buffett barely deals with life insurance. He has relied on P&C insurance and reinsurance to fuel the explosive growth of his holding company, Berkshire Hathaway (BRK). That's because P&C insurance is the only business in the world that routinely enjoys a positive cost of capital... That is, P&C companies get paid to use other people's money.

No other business enjoys this luxury. In every other industry, companies pay for capital. They borrow through loans and pay interest. They raise equity and pay dividends. Even banks have to pay depositors. Everywhere you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations.

But a well-run P&C company not only gets all the capital it needs for free, it will actually be paid to accept it.

Why you should know about 'float'...

Perhaps the greatest money-making feature of P&C companies is the ability to use other people's money, as Bryan and Mike wrote... The "float," as it's called, are the premiums collected by a company but what's not yet paid out in claims.

In other words, if we're talking about health insurance, it's the money you and I hate paying out of pocket or out of our paychecks... and never see again...

Essentially, that mechanism, and the natural human fears of trouble or loss, allows P&C companies to make a lot of money. You can think of float as "free capital."

While customers pay premiums, the companies collect them and the insured events might not ever happen... and in the meantime, the companies can invest these premiums as they see fit and keep all of the income.

As Bryan and Mike wrote...

That is the model of a successful P&C business... getting paid (via underwriting profits) to hold other people's money and keeping all of the investment income for yourself. There's no other business like it. As Buffett said, "It's like taking out a loan and having the bank pay you interest."

The thing is, though, this part of a business is hard to value, even if you know it exists. It's not reported in Securities and Exchange Commission ("SEC") statements, for one thing. And traditional accounting rules consider float to be a liability... which technically, it is.

That's why nine years ago, our team built a model to identify the best potential P&C investments. Every quarter, our researchers analyze this data and share the best and most likely insurers to produce market-beating returns.

Of course, it all comes down to the timing...

The best time to buy P&C companies is when they're cheap and hated, which is exactly when most people don't want to buy them... because they're cheap and hated.

The few months after the onset of the pandemic qualified as one of these times... We never know exactly what's coming next, but very few people alive had seen a real pandemic, and it raised a lot of insurance questions, among other things.

Insurance stocks, like shares of travel and other businesses, got clobbered.

But as Bryan and Mike explained, what most people didn't realize was that this was a "hard" insurance market, meaning premiums were rising, which was good for business.

Hard insurance markets often follow crises, as pain and suffering are fresh in people's minds, and they are willing to pay up for protection... and companies are rewarded for taking on the risk of providing insurance.

Many people hate paying insurance premiums, but they do it anyway. In recommending shares of Alleghany back in July 2020, our research team noted Alleghany's strength as a company in a "hated" market...

Today, Alleghany generates more than $5 billion in premiums from its P&C insurance and reinsurance businesses. Alleghany's reinsurance business, led by Transatlantic Holdings (or "TransRe"), brings in around 80% of its premiums. The company is one of the top-15 global reinsurers, according to insurance ratings agency AM Best.

And they showed why it was so cheap, given its $11 billion of float. Alleghany had accumulated so much cash on hand a few years ago that it started its own private-equity business a few years ago.

Mike and Bryan used Buffett's preferred valuation metric – which considers its "float" value – to recommend the company in July 2020. As they wrote... "the stock is rarely as cheap as it is today," and was well below its 10-year average and pre-pandemic levels...

Shares would have to increase by nearly 30% just to get back to its average valuation – and around 70% to get back to its February valuation.

That jump is exactly what happened as the world has inched toward some semblance of a "new normal" and people keep buying insurance as usual. Subscribers to our flagship publication have been along for the ride higher...

As of exactly one week ago, shares of Y were up 37%. Buffett agreed to pay a 25% premium over Friday's closing prices for Alleghany's shares, and after the deal was announced yesterday, shares popped 24% in afternoon trading.

As for our initial recommendation in the Investment Advisory on July 2, 2020... the Alleghany position is up 72%.

In other words, our research team was thinking the same way as Buffett on this one... except it made the decision to "buy" well before he did.

Kudos to Bryan, Mike, and everyone involved in recommending shares of these kinds of businesses over the years... and to subscribers who are enjoying the benefits... especially in an environment where a lot of other stocks are selling off...

This is why P&C insurance is the 'world's best business'...

These companies can thrive in tough times. Today, we're still in a "hard" insurance market, Mike told us today, meaning there's high demand compared to supply.

Plus – with the Fed doing what it's doing – a rising-interest-rate-environment boosts the return on the float that property and casualty insurers invest.

This is one big reason why in the next issue of Stansberry's Investment Advisory, our team is planning to recommend another insurance stock...

While shares of Alleghany are now well above our recommended buy-up-to range, Mike tells us our team's next pick is trading at even bigger discount to its value than the deal Buffett just got for Alleghany...

To get access to our team's next pick immediately when it's published, each and every issue, terrific insight, and all of the great resources from our flagship publication, click here to get started with a subscription.

Given everything we've just written on this topic, we've arranged for a special offer for Digest readers today. You can access Stansberry's Investment Advisory newsletter for a full year for only $49. That's 75% off the regular price.

If you sign up and don't like what you see for whatever reason, you can cancel within 30 days, and we'll refund you every penny, no questions asked. And you'll still get to keep everything you received... the recommendations, special reports... all of it.

Click here to take advantage of this risk-free offer now.

The Fed Is Flying Blind

Steve Hanke, applied economics professor at Johns Hopkins University, asserts that the Fed has created a "monetary bathtub overflowing" into the economy, which is the main contributor of inflation.

Hanke tells our editor-at-large Daniela Cambone that anything the Fed does now is "too little and too late," and the central bank is flying blind because, "they are not looking at the money supply."

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 3/21/22): Alcoa (AA), AbbVie (ABBV), Bunge (BG), Bristol-Myers Squibb (BMY), Berkshire Hathaway (BRK-B), Cameco (CCJ), Continental Resources (CLR), Mosaic (MOS), Nucor (NUE), Pure Storage (PSTG), Royal Gold (RGLD), Sprott (SII), Travelers (TRV), W.R. Berkley (WRB), SPDR S&P Oil & Gas Exploration & Production Fund (XOP), and Alleghany (Y).

In today's mailbag, Dan Ferris answers a question about his latest Friday Digest... and we have a correction to share... A chart we cited in yesterday's Digest included incorrect information about gold's performance following yield curve "inversions"... The average return for gold during the six periods cited is 81%, not 140%.

We apologize for the error. The main point remains true, though... Historically, after the yield curve has inverted since 1973, gold's price has, on average, risen considerably over the next year. It's a good place to invest today... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"After reading Friday's Digest I still have one question, why would Eric Sprott, who knows the mining industry like the back of his hand, invest in a mine that will never produce any more gold – at least not profitably?

"You said he is OK with high-risk investments, but there's a difference between a high-risk investment and just flushing money down the toilet. Am I missing something here?" –Stansberry Alliance member Greg F.

Dan Ferris comment: Greg, I alluded to this point in the Digest when I wrote...

If you're thinking that AMC investing alongside Eric Sprott is smart, I disagree.

Eric is comfortably operating on his home turf and Adam Aron has somehow stumbled onto the wrong planet. Aron should be looking for hospitality assets, not gold mines.

It's bizarre and totally inappropriate for AMC to be anywhere near this deal. AMC shareholders should be outraged.

Eric is one of the wealthiest, savviest, most successful and experienced mining investors who has ever lived. He's probably lost more money at it than Adam Aron and his apes will ever make in the aggregate between now and the end of time ‒ and he's still made a huge fortune.

Eric probably owns 100 or more different mines through various investments, and he's probably owned stakes in thousands of them over his long, mining-focused career.

Adam Aron and his AMC apes own one gold mine, which went bankrupt once and was shut down as uneconomic in November and for which its management says it has "no specific plan" to get it up and running.

AMC is playing this game all wrong, and it's embarrassingly obvious to anyone who knows the game.

Also, it's a mistake to believe that the quality of Aron's decision is based on the outcome. That's an error called "resulting," which poker player/author Annie Duke and I talked about on the Stansberry Investor Hour. It's backward-looking, not forward-looking.

Just imagine if Warren Buffett said he was going to turn Berkshire Hathaway into a venture capital firm focused on technology startups with him making all the capital allocation decisions. That would be a horrible decision. That's how you should look at AMC's investment in Hycroft.

AMC is all-in on one distressed, uneconomic mine. Eric just took another of the many mining bets he has taken and likely will continue take over the course of his ongoing career, no matter how Hycroft works out.

The decisions are night and day. Eric is doing what he does better than just about anybody, and AMC is out of its depth.

Eric isn't responsible for AMC's capital. Adam Aron and the AMC board of directors are responsible. They know absolutely nothing about mining.

And yes, I can certainly be wrong ‒ about the outcome of AMC's Hycroft investment, as we look backward some months or years from now. But it's a horrible decision looking forward from today. All the relevant facts about Hycroft are public information, and it doesn't look good on AMC at all. AMC's board should admit its mistake and put Aron on a short leash starting right now... and he should be fired if he tries anything like this again.

"As usual, great piece, Mr. Ferris. There wasn't much nuance to dissect in the deal. My first impression when I saw the lead was that it was an early April Fool's article. Clearly, fools abound in that landscape. Then, I thought it was a case of not doing the requisite due diligence. But, again clearly, that is not in Aron's DNA. Eric Sprott, however, should know better. The type of gold ore that Hycroft is banking on requires the type of processing that may not even be profitable at current or reasonably foreseeable prices. The best explanation is the one you have posited many times; just find the bigger fool.

"Thanks for the keen observation and the keen wit." – Paid-up subscriber Eric A.

"The Hycroft mine... I was thinking about buying a few thousand shares but glad I read today's article that the mine isn't even operational. Thank God I read it. However, someone is putting out info that it's an open-pit mine and has 50 million tons of gold and 600 million tons of silver... Someone should go to jail for putting out false misleading information." – Paid-up subscriber John M.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 22, 2022