The Big News Wall Street Missed Last Week
The big news Wall Street missed last week... The Fed just told us exactly what it's going to do... An important update on the trade war... Three reasons the 'Melt Up' is about to resume...
Did you catch that?
Last Wednesday, during the Federal Reserve's policy announcement, Chairman Jerome Powell made an incredibly important statement. But Wall Street missed it...
The market barely budged following the news. But on Thursday morning – after analysts realized what happened – stocks shot higher.
Powell said the Fed wants to make sure it's doing everything it can to achieve 2% inflation. This was a big change from his previous statement in early January, when he said the Fed would consider pausing its rate-hike cycle.
In today's Digest, I (C. Scott Garliss) will explain why this is big news...
Last year, the Fed raised interest rates four times for a total increase of one percentage point – from a range of 1.25% to 1.5% at the end of 2017 to a new range of 2.25% to 2.5%.
Real economic growth for the year was 2.9% – the highest level since the financial crisis. The Fed's preferred inflation gauge, the core personal consumption expenditures price index ("PCE"), rose north of its stated 2% target by the middle of the year. Plus, with unemployment near historic lows, the Fed was worried the economy could run too hot.
In short, the economy was doing well. As you can see in the following chart, the U.S. gross domestic product has risen steadily since the financial crisis...
And then came the tariffs on Chinese imports...
As regular Digest readers know, China and the U.S. have been locked in a trade skirmish for more than a year.
The U.S. was concerned that China was forcing U.S. companies to transfer proprietary technology to their Chinese counterparts in order to do business. The U.S. was worried those companies would turn around and steal that data to use for their own development and benefit.
China, of course, disagreed. It argued the U.S. was making all of this up, and trade talks screeched to a halt.
Last July, President Donald Trump swung back, implementing the first set of tariffs – a 25% duty on $34 billion worth of Chinese imports. The market wasn't overly concerned at first... But as trade talks continued to go nowhere, the U.S. said it would place 10% tariffs on an additional $200 billion worth of Chinese imports last fall.
With the threat of more tariffs, the markets grew concerned that the global growth outlook could be at risk...
The Fed was focused on the U.S. economy, rather than the rest of the world. So it kept moving forward with its rate hikes as planned.
That's when Trump began to question the Fed... He was fighting a trade war with China and sensed his actions could hurt the global economy. The last thing he wanted was for the Fed to keep raising interest rates. Given Trump's nature, it's no surprise that he began to publicly call on the Fed to back off and lower rates late last year.
Suddenly, the Fed's political independence came into question.
If it catered to Trump's demands and lowered interest rates, it would look like the Fed was playing favorites. But if it felt the economy was weakening and needed a rate cut, ignoring Trump would put the Fed in a difficult spot. Powell needed to find a way to justify his actions and prove the Fed was independent after all.
Powell found just the argument he needed in inflation...
During Wednesday's announcement, he said the Fed's primary goal is to sustain the current economic expansion.
While supporting the global economy is not part of the mandate, given the importance of the U.S., our central bank must be mindful of the rest of the world. Problems elsewhere will eventually show up here.
If trade tensions between China and the U.S. are hurting the rest of the world, Powell must take actions to help offset the damage. Our interest-rate decisions impact countries other than just the U.S.
In other words, the Fed now thinks it makes sense to cut rates. But instead of saying the Fed thinks inflation weakness would be temporary, Powell said it will remain lower for longer.
That was a striking change in tune.
If you want inflation, you need one of two things: lower interest rates or higher growth. Powell said growth was slowing, so rates need to come down. That way, as the U.S. dollar weakens, it suddenly takes more dollars to buy the same amount of goods.
In typical fashion for a Fed chairman, Powell hedged his statement, saying it doesn't want to overreact to a single data point. The Fed also wants to wait and see how the situation plays out, and will react to anything that could undermine economic growth and strong employment rates... like trade negotiations.
So without telling us the Fed will lower rates, Powell told us it will lower rates. And, he did it in a way that supports the global economy and maintains the Fed's political neutrality, taking back the credibility argument the central bank had lost.
But that wasn't the only news that moved the markets last week...
On Tuesday, the uncertainty surrounding the trade war began to clear.
Trump said he will sit down with Chinese President Xi Jinping for an extended meeting at the G-20 Leaders' Summit in Japan this week. While this was nothing new, what changed was confirmation from the other side... China's Central Television said Xi is now willing to meet with Trump and exchange views on the fundamental issues related to the two countries' relationship.
Trump also said trade talks will now restart before the summit, and Xi said the two nations' economic and trade teams should keep in contact and figure out how to resolve their differences.
This is huge news.
For the first time since talks broke down in early May, both sides have agreed to meet and try to repair the damage.
It was reminiscent of the G-20 Leaders' Summit in Argentina last winter. The U.S. publicly discussed the details of the meeting, while China kept silent.
The markets didn't believe any of the reports until they received confirmation from the Chinese side in late December. Then, the sharp market sell-off reversed, and the market was off to the races...
The timing of the recent announcement was interesting...
On the same day the Chinese media confirmed the news, Bank of America released its June Global Fund Manager survey. The survey respondents manage roughly $645 billion worth of global assets, so it's a reliable look at recent market sentiment of the investment-management community.
But the survey is backward-looking, because it's an indicator of the sentiment in late May and early June. In other words, it shows how pessimistic asset managers were a few weeks ago. And boy, were they pessimistic...
Between the ongoing trade war, fears of a recession, and inaction by the Fed, respondents were the most bearish they had been since the global financial crisis.
The ratio of money allocated between stocks and bonds fell to its most extreme level since May 2009 – two months after the S&P 500 bottomed. Fund managers' cash levels jumped from 4.6% in May to 5.6% in June... an incredibly bullish market signal, as rules prevent many mutual funds from holding more than 5% in cash.
At the end of the day, the survey means fund managers were underexposed to a market rally and weren't prepared for the recent influx of good news. When they pile back into the market, it will add additional fuel to the rally.
All of this points to more upside in U.S. stocks...
The two main concerns are fading away: Global central banks are willing to do whatever it takes to support economic growth, and the U.S. and China are coming back to the bargaining table.
That assurance means the uncertainty surrounding the market can go away and stocks can surge higher again.
Considering money managers are constantly investing for where growth is going (six to eight months ahead) and not where it is right now, this market has all the runway it needs to hit new highs... and then some.
I believe Steve Sjuggerud is right: The "Melt Up" isn't over yet.
Editor's note: Today, we're adding a new feature to the Digest... The American Jubilee Watch.
Each week, we'll dedicate a special section of the Digest to current events supporting the thesis laid out in our book, The American Jubilee.
These briefs will focus on our country's intractable debt problems... and the growing calls for the government to do something about them. As regular readers know, we believe the result will be an old-fashioned debt "jubilee" – a radical and potentially violent reset of our entire financial system.
A lot of people will be excited about this once-in-a-generation event. The crowds will cheer. And politicians will promise a new and better prosperity. But what will really happen is a national nightmare...
The American Jubilee Watch
It's starting...
For well over a year now, we've warned you that debt – or rather debt forgiveness – would become a central issue in the 2020 U.S. presidential election. Now – just days ahead of the first Democratic primary debate – we're seeing that prediction play out in spades...
Earlier this month, Massachusetts Sen. Elizabeth Warren – one of the candidates for the Democratic presidential nomination – introduced legislation that would eliminate up to $50,000 of student-loan debt for 42 million Americans earning less than $100,000. In total, Warren's plan would supposedly wipe out about $640 billion, or a little more than one-third of existing U.S. student-loan debt.
But today, one of her fellow Democratic presidential candidates went even further...
This morning, Vermont Sen. Bernie Sanders introduced legislation to forgive all $1.6 trillion of outstanding student loans. That's right... Every. Single. Dollar. He also wants to make all public universities, community colleges, and trade schools completely tuition-free.
As you might suspect, Sanders proposes paying for this scheme with significantly higher taxes. According to the Washington Post, Sanders' "tax on Wall Street" – which includes new taxes on stock, bond, and other financial-asset transactions – will raise more than $2 trillion over 10 years.
Now, we're skeptical these taxes would raise anywhere near the money necessary to pay for this plan. But we are confident of one thing: It won't be Wall Street that pays for it.
Our book, The American Jubilee, explains exactly why this is all happening... how it will affect you and your money... and most important, the simple, but critical steps you can take right now to not only survive – but prosper – as it unfolds. If you still haven't read it, click here to get your copy now.
New 52-week highs (as of 6/21/19): Blackstone (BX), Sprott Physical Gold and Silver Trust (CEF), Celgene (CELG), Franco-Nevada (FNV), SPDR Gold Shares (GLD), Barrick Gold (GOLD), Kirkland Lake Gold (KL), Kinder Morgan (KMI), Lundin Gold (TSX: LUG), Microsoft (MSFT), NovaGold Resources (NG), Polymetal (LSE: POLY), W.R. Berkley (WRB), and Aqua America (WTR).
The mailbag was quiet over the weekend. Are you bullish or bearish today? We'd love to hear your thoughts at feedback@stansberryresearch.com.
Regards,
C. Scott Garliss
Baltimore, Maryland
June 24, 2019