The most important week of the year... The 'great unwind' could soon go global... Trump and Kim make a deal... A big day for 'M&A'... What to expect from the Federal Reserve tomorrow...
The financial media are calling it 'the most important week of the year' for the global economy...
We would argue they're taking some liberties, but a number of notable – and potentially market-moving – events are scheduled for this week.
We noted one of the biggest yesterday...
On Thursday, the European Central Bank ("ECB") will hold its latest monetary policy meeting. And while the bank isn't expected to make any immediate changes, it is likely to officially announce an end to its $2.99 trillion quantitative-easing ("QE") stimulus program.
As regular Digest readers know, the Federal Reserve has already done this. It announced the end of its own QE program last summer... And it officially began to reverse this stimulus in October.
Why is this important?
The following chart – which we originally published in the September 21 Digest, shortly after the Fed made its announcement – puts this news in perspective...
As you can see, since the 2008 financial crisis, global central banks have flooded the world with more than $10 trillion. But virtually all of this "money printing" came from just three central banks: the Federal Reserve, the ECB, and the Bank of Japan.
The Fed has already reduced its balance sheet by nearly $150 billion since the "great unwind" began.
This has clearly had an effect on the "cost" of credit here in the U.S... The benchmark 10-year U.S. Treasury yield has surged nearly 50% since September. But it has not triggered an end to the massive global debt bubble... yet.
The chart above may explain why...
You see, while the Fed was unwinding, the ECB and Bank of Japan – which together have accounted for roughly two-thirds of the global stimulus since the financial crisis – have continued to ease.
But now, the ECB is set to reverse course, too... In short, it appears the great unwind is about to go global.
But this isn't the only news we're watching this week...
This morning, the widely anticipated meeting between President Donald Trump and North Korean leader Kim Jong Un finally took place. And by most accounts, it went well. As the Wall Street Journal reported...
In a two-page document signed by both leaders here on Tuesday, North Korea committed again to "complete denuclearization of the Korean Peninsula," while the U.S. offered unspecified security guarantees in return...
Speaking to reporters after their summit meeting, Mr. Trump said that Mr. Kim had pledged to start denuclearization "right away," but that there hadn't been time to codify details in Tuesday's agreement. Mr. Kim "might want to do this as much, or even more, than me," Mr. Trump said. "I know when someone wants to deal and when they don't"...
Following the meeting, which Mr. Trump said had led to a personal bond, both sides pledged to work toward the denuclearization of the Korean Peninsula and to begin high-level negotiations at the earliest possible date.
While some criticized the lack of specifics about how the agreement would be carried out, the news was generally seen as a positive first step. And whether or not the two eventually reach a deal, it should help ease tensions in the region.
The next big event was scheduled for this afternoon...
By the time you read this, U.S. District Court Judge Richard Leon will have likely announced his decision on the government's lawsuit to block the merger between AT&T (T) and Time Warner (TWX).
As you may recall, the telecom giant reached an agreement to buy the media giant for $85 billion in October 2016, in one of the largest corporate deals in history.
While we have no "horse" in this particular race – and we remain skeptical this deal will actually benefit shareholders – the outcome is important for another reason.
As regular readers know, the boom in mergers and acquisitions ("M&A") – along with record levels of share buybacks – has been among the biggest drivers of stock prices of late.
So today's decision could not only have sweeping effects on a number of other M&A
According to Thomson Reuters, there have been $816 billion worth of mergers and acquisitions ("M&A") deals announced in the U.S. through May. That's up 71% year over year. So, not including AT&T/Time Warner, that's another $731 billion in deals. They will be paying close attention to the outcome.
If the judge decides to let the merger go through in its current form, expect a positive market reaction. This would set off a wave of additional acquisitions as companies look to expand their growth and scope.
As Scott noted, this would bode well for the stock market...
This would signal that companies can still move forward with relatively aggressive expansion plans.
If the deal falls apart, expect a negative market reaction. This type of ruling could be incentive for the government to try and break up deals more aggressively. It would also take the underlying bid of M&A potential away from the market. In addition, it could be cause for risk/arbitrage related funds to exit widely held positions due to increased risk.
Analysts are largely expecting an outcome in AT&T/Time Warner's favor. The markets are hoping they're right.
And finally, the Federal Reserve will announce its latest interest-rate decision at 2 p.m. Eastern time tomorrow...
As we mentioned following its May policy meeting, the Fed is expected to raise rates by another 0.25 percentage point this month, to a range of 1.75%-2.00%. This would mark the second increase this year, and the seventh since the Fed began "tightening" in December 2015.
Again, this move has been widely expected for months. But if there was ever any doubt, the latest government report on price inflation likely erased it. From a separate Wall Street Journal report this morning...
U.S. consumer prices last month notched the heftiest annual growth since the beginning of 2012, a further sign price pressures in the economy are solidifying.
The consumer-price index, which gauges what Americans pay for goods like lettuce and toys and services like haircuts, rose a seasonally adjusted 0.2% in May from the prior month, the Labor Department said Tuesday. Prices rose 2.8% last month from the prior year, the strongest reading since February 2012, when inflation was 2.9%...
When excluding the volatile energy and food categories, so-called core prices also rose 0.2%, signaling broader inflation.
The central bank prefers a slightly different measure of price inflation, known as the Personal Consumption Expenditures ("PCE") Index. This index tends to report slightly lower inflation figures than the Consumer Price Index ("CPI"). But at 2.8%, today's report suggests PCE inflation likely moved above the Fed's official 2% target in May as well.
So while no one should be surprised by another hike tomorrow, the market will be watching to see if the Fed changes its expectations for further increases later this year.
Back in May, Fed officials said they expected to raise rates a total of three times this year. But some officials were already considering a fourth... And today's report may have strengthened that view.
One last note before we sign off today…
By now you may have heard our friend Dr. Richard Smith – the
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The result is a breakthrough Richard calls Crypto TradeSmith. And it is unlike anything else available on the market today.
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How much more? According to Richard's extensive (and audited)
Now, regular readers know we've been generally cautious on these assets...
While we're optimistic about their long-term potential, they remain incredibly speculative today. We've been clear that they aren't right for every investor... and they certainly aren't for your rent money.
But if you're going to speculate on cryptos, why on earth would you take more risk than absolutely necessary?
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New 52-week highs (as of 6/11/18): AllianceBernstein (AB), WisdomTree U.S. SmallCap Dividend Fund (DES), Quest Diagnostics (DGX), Eaton Vance Enhanced Equity Income Fund (EOI), Enterprise Products Partners (EPD), Sysco (SYY), Cambria Value and Momentum Fund (VAMO), and Verisign (VRSN).
A busy day in the mailbag: More on Father's Day... comments on Social Security... another "boots on the ground" report from China... and praise for Dr. Richard Smith's take on "cryptos." What's on your mind? Let us know at feedback@stansberryresearch.com.
"Porter, two points to my email, the first is on a business level and the second on a more personal level. I just became a Stansberry Alliance member a few months back. A high price of entry and I haven't made the money back, yet but I am confident I will. The education has been excellent so far but I would use the expression 'it's like drinking out of a fire hose.' It will take me a lifetime of learning but so far so good.
"On a personal note, regarding your Father's Day tribute: It was touching, especially so for me because of the idea of adoption. For
"[To reader] Paul W... Fantastic synopsis and heartwarming story. It isn't always fun being 'Dad,' but it sure is rewarding and you must be proud! Great job." – Paid-up subscriber Michael G.
"The problem with social security is that it pays out money to people that have never paid a penny into it. It is being used for things that it was never intended for. I paid into it for thirty years and then I got another job that has a CALPERS retirement and because of
"Porter, I know that you will not like the obvious solution to Social Security. They just [need] to raise the $126,000 ceiling for paying into it to maybe $1,000,000, or just eliminate it altogether." – Paid-up subscriber Joe T.
"I love your bias in describing Social Security's fiscal situation. You call higher taxes a 'solution,' with the quotes obviously intended as sarcasm. And you call this government's favorite solution. Like we've all been burdened by such high taxes in our lifetime.
"In case you haven't noticed, Republicans have been cutting taxes relentlessly since the Reagan years. Both Reagan and Bush passed huge tax cuts during their time and now Trump's latest unnecessary tax cuts guarantee monstrous deficits for decades to come. Does that sound like government's favorite solution to you?
"We're in our current fiscal crisis because taxes have come to be viewed as evil by conservatives, who basically act as if there is no need to pay for any of the services we receive from the govt. or the military adventures that we can't seem to resist embarking on. The sooner we are willing to admit that Social Security is good for seniors (which we will all become someday) and benefits should not be cut, the sooner we are forced to admit that very modest tax increases on the wealthy and well-to-do will put us on a sustainable path without hurting anyone's standard of living. If you've got a better solution that doesn't involve benefit cuts or requiring old people to work until they're 70. I'd love to hear it." – Paid-up subscriber Jim
"Porter & Steve, I'm a long time Alliance member who has been working with the Chinese for 20 years. My first visit in 1998 was to develop a manufacturing partnership, but since then, I have built local business activity, managed a Chinese sales team and created a distribution network throughout the country. I have watched the country emerge and mature, and I can confirm everything Steve says is absolutely true. I wish many of the conveniences that China has developed were available here in the US.
"However, the one thing that makes me laugh
"The people have no idea about property rights, and they don't challenge their leaders... they do exactly as they are told, and at the same time, they believe they are doing it for the greater good. So, yes, on occasion you will see empty housing development, or maybe a whole city. But it only takes one order to fill that city, and it changes almost overnight. People are told... 'go to this city, and find a job.' They are thrilled to have the opportunity and hurry to make it happen. If you continue to think like westerners, you won't get far in China." – Paid-up subscriber David M.
"The DailyWealth article "Why we're hoping for increased 'crypto' regulation" by Dr. Richard Smith is the very best I've seen to date on ALL sides/considerations/possibilities for cryptos." – Paid-up subscriber Al B.
Regards,
Justin Brill
Baltimore, Maryland
June 12, 2018