The 'Healthy' Economy Is a Lie

The wage-price spiral... The undisputed king of fighting the last war... Fed eve... Thank goodness for earnings season... The 'healthy' economy is a lie... Mailbag: Mr. Market, the overactive manic-depressive...

Higher costs just won't stop...

We've talked for months about "hotter than expected" inflation, mostly in consumer prices. This morning, inflation showed up somewhere else... the cost of paying workers.

The U.S. Department of Labor reported that its "employment cost index," which measures worker salaries and benefits, grew by 1.2% in the first quarter of 2024, its highest rate since the third quarter of 2022, and above Wall Street's expectations.

Year over year, compensation costs for civilian workers have grown by an average of 4.2%, and at a higher rate of nearly 5% for government workers. That's notable on multiple inflation-causing fronts... given Uncle Sam is the nation's largest employer and is already running a multitrillion-dollar deficit.

While making more money feels good to everyday people (and, by all means, if you have valuable skills, you should be compensated for them), for businesses, higher salaries and benefits can create the kind of "wage-price spiral" that can doom an economy... and keep central bankers up at night.

Higher earnings are the latest evidence in the growing pile that high(er) inflation – certainly above the Federal Reserve's supposed 2% annual target – likely isn't going anywhere anytime soon.

Of course, the timing isn't great...

In my (Corey McLaughlin) view, there's never a good time for higher-than-expected inflation, but tomorrow, the Fed "speaks." The central bank will announce its latest policy decision(s) in the afternoon, followed by Fed Chair Jerome Powell's press conference.

The markets were uneasy again today. The major U.S. indexes were all down, with the benchmark S&P 500 Index off by 1.5% to finish the month of April with about a 4% loss, breaking a five-month streak of gains.

Meanwhile, U.S. Treasury yields were a touch higher today. The 10-year Treasury yield rose to nearly 4.7%.

And the volatility could continue. If I've learned anything from "Fed watching" these last few years, it's that the central bank is the undisputed king of fighting the last (financial) war. By that, I mean the Fed reacts far too late about things that have already happened or sequences that were put in motion way earlier... and the Fed's delayed reaction inevitably causes other knock-on consequences down the line, like the type of crisis it's trying to avoid.

For example, late last year, Powell signaled that interest-rate cuts were coming in 2024. And even amid sharply rising oil prices, he literally guaranteed it in front of Congress earlier this year (without knowing the future, of course)...

The 'data' on the higher-inflation trend has been piling up...

But now, things have gotten obvious enough that the Fed has changed its tune on the prospect of rate cuts possibly happening at all in 2024.

My sense is that Fed officials have begun to fear a full-fledged inflation rebound of the 1970s variety. I wouldn't count out the idea of Powell throwing the possibility of more rate hikes on the table tomorrow, or at least alluding to it... which could stun some people.

But if he instead sounds similar to how he did at a conference earlier this month and holds the line on "peak rates" having already been reached, that could be bullish.

In the balance...

A higher cost of borrowing might be the right thing for the central bank's spreadsheet... and for the Congressional "dual mandate" world of stable prices and maximum employment (for which we have official measures). But a renewed "higher for longer" interest-rate environment is different from what many investors have been (and still are) expecting.

A notable policy shift, be it holding rates where they are through the entire year (or even the prospect of another rate hike), will have an impact on the markets... and will have more consequences on everyday Americans' budgets. It will also affect corporations and banks facing higher borrowing costs than they may have been expecting... and impact the global economy if a stronger dollar persists. (On that point, the Japanese yen, which we talked about yesterday, has held on against the dollar for the past 24 hours, but we'll keep watching.)

So we expect some volatility – one way or another – tomorrow afternoon on the Fed announcement and Powell's remarks. We've seen this story before. I'll report back tomorrow evening. We'll also update you on the Treasury's borrowing plans announced tomorrow morning.

At least there are earnings...

Bulls might be saying, "Thank goodness for earnings season."

Despite all the bad news about a relatively slower-growing economy and higher inflation, S&P 500 companies continue to report good margins overall.

As FactSet reported yesterday, the net profit margin for the S&P 500 companies that have published their 2024 first-quarter financials so far is 11.5%, in line with the five-year average and above the previous quarter's net profit margin.

Of course, individual results depend on the company or sector...

After hours today, for example, Amazon (AMZN) reported better-than-expected revenue and earnings numbers, and its shares rose, while Starbucks (SBUX) missed Wall Street revenue and earnings estimates, and its shares fell.

But the headline is that, on average, companies are still keeping margins up despite higher costs, at least for now.

But on the other hand...

There's a good argument to be made that the 'healthy' economy is a lie...

For starters, we're seeing ever-rising costs at a greater pace and for a longer duration than the U.S. economy has seen in decades. This crippling inflation and two major wars are adding $5 billion to the U.S. government's debt every single day.

Longtime readers know that we believe skyrocketing debt levels – for the government, businesses, and consumers – are a cause for concern... and will catch up with the economy eventually... if they haven't already.

Our colleague Mike DiBiase detailed this idea in a terrific Digest two weeks ago titled "There Will Be No Soft Landing." He's not the only one who thinks so...

According to Stansberry Research's founder, Porter Stansberry, only one thing is keeping most companies from plummeting, and it likely won't hold up much longer. Major cracks are starting to show. (I would also add that the longer inflation stays high, the worse this situation will probably get.)

You may have seen some notes in your inbox already about Porter's warning, but I want to make sure Digest readers don't miss it...

Take steps to prepare now...

Porter has a history of predictions that you ought to consider... like warning about the 2008 financial crash, the loss of America's AAA credit rating, and the more recent regional-banking collapses...

Porter was laughed at by the mainstream media and financial elite for each of these warnings, but each time, he was right. Now, he's stepping forward with a new, urgent warning that goes directly against the mainstream media and the U.S. government's narrative. It has to do with a $130 trillion market that's at the center of the Western economy.

If you have any money invested in the stock market, Porter says you could be blindsided unless you take a specific step today...

To find out more, click here now to hear directly from Porter and learn about what this warning potentially means for your money and how to prepare.

One sneak peek: Among other things, Porter is sharing "the most terrifying chart in finance" that he says is a harbinger of what's next for America and disproves the lies that you're likely hearing in the mainstream media. Again, click here for all the details now.

New 52-week highs (as of 4/29/24): ABB (ABBNY), Agnico Eagle Mines (AEM), Alamos Gold (AGI), Grupo Aeroportuario del Sureste (ASR), Cambria Emerging Shareholder Yield Fund (EYLD), Freeport-McMoRan (FCX), Kinross Gold (KGC), Liberty Energy (LBRT), Ryder System (R), Sprouts Farmers Market (SFM), SilverCrest Metals (SILV), Teck Resources (TECK), Teradyne (TER), Tyler Technologies (TYL), Veralto (VLTO), and Vertiv (VRT).

In today's mailbag, a great question about the nature of the stock market stemming from yesterday's Digest, and we answer in part with a great piece from Dan... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"This comment from today's 'Breaking the Yen' Stansberry Digest really caught my eye...

Plus, as frequently happens, there's a good chance Powell will make some offhand remark that will make analysts question something or cause Wall Street trading algorithms to go wild. So there's a decent chance of some volatility on Wednesday.

"Is our stock market system based on a logical thought process, algorithms not backed by a logical thought process, or on a knee-jerk reaction? Lately it seems like every piece of news causes an outsized reaction, and a few days later we see a reaction in the opposite direction. It's like driving a car fast in forward, then going into reverse, and see-sawing back and forth. Is the market truly 'surprised' at every report that comes out? And is this the best way for a system to run, or is it just 'how we've always done it.'?" – Subscriber Ellis G.

Corey McLaughlin comment: Ellis, I'm glad you asked this question because you've hit on a couple of timeless points about why the markets are so fascinating and how they reflect all there is about human nature, in my view.

We – as in, people, including myself – may like to think we're always logical, but we – including investors of all stripes – are emotional creatures, too (and, most often, fear and greed are the strongest emotions in the market). I wrote about this in the past here.

And, yes, there are the algorithms we mentioned yesterday, which (as you noted) aren't emotional but are programmed by real people trying to eliminate emotions from decision-making, for better or worse. Perhaps the machines essentially acknowledge our fragile human nature.

When I read your question, I was also reminded of something our friend and colleague Dan Ferris once wrote in the Digest about the idea of "Mr. Market" being an "overactive manic depressive" – and, most importantly, how you can avoid falling into the trap of getting caught up in the daily market gyrations that might not make any sense to you.

As Dan explained in an April 2023 essay...

Have you met Mr. Market yet?

If you've ever traded a stock, yes, you have...

In his landmark 1949 classic book The Intelligent Investor, the economist, college professor, and investor Benjamin Graham said the stock market behaves like an individual he named "Mr. Market."

Graham, who died in 1976, is widely known as the "father of value investing." He hired a 24-year-old Warren Buffett, one of his students at Columbia University, in the 1950s to work at his investment firm.

You can bet that one of Graham's lessons was why understanding Mr. Market's personality was important. As Graham wrote in a single paragraph in The Intelligent Investor...

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

When I (Dan Ferris) read that paragraph, I'm led to believe that, according to Graham, two traits define Mr. Market...

First, he's "very obliging indeed," meaning that he's a very active trader, always wanting to buy or sell. Second, he's manic-depressive, frequently letting his emotional highs and lows get the better of him.

An overactive, manic-depressive trader seems destined to spend his life transferring all his wealth into other people's accounts...

Unfortunately, lots of folks behave that way... And thus, so does Mr. Market because...

Mr. Market is "lots of folks"...

He's the personification of the herd, which buys at the top, afraid of missing out on gains that have already been enjoyed by early investors... And the herd also sells at the bottom, when its members can't bear the thought of further losses.

At the same time, other folks like Buffett, Stanley Druckenmiller, and Paul Tudor Jones amass fortunes by exploiting Mr. Market's mistakes...

They win when he loses.

Perhaps that's why immediately after introducing Mr. Market to the world in his landmark book, Graham points out in the next paragraph that it's better not to worry about him most of the time...

You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

The Buffetts, Druckenmillers, and Tudor Joneses of the world do that. They beat Mr. Market by forming their own ideas based on their own research. You are free to do the same and decide for yourself whether Mr. Market's view is "plausible and justified" or "a little short of silly," based on your own research (or that of someone you trust, like Stansberry Research), then act accordingly.

Wise words from Dan, huh?

All the best,

Corey McLaughlin
Baltimore, Maryland
April 30, 2024