The 'Pivot' Isn't Coming, at Least Not Yet

The latest bear market rally is over... 'I always tell the truth. Even when I lie'... The 'pivot' isn't coming, at least not yet... Rising rates and a shrinking balance sheet... The most volatile time of the year... Marc Chaikin's critical market update...

Jerome Powell killed the bear market rally...

Or at least the Federal Reserve chair put out the order to end it...

He'd watched the major U.S. stock indexes rally 20% since mid-June and was apparently aware that enough people were betting on a "Fed pivot" – a move where the central bank would pull back on interest-rate hikes sooner rather than later because inflation is "cooling."

So on Friday, for the first time in a long time, Powell acted like the mob boss we once described him as. "I always tell the truth. Even when I lie," he yelled, quoting the fictional Tony Montana from the cult classic movie Scarface.

Powell then banged the lectern in the wood-paneled conference room at central bankers' annual confab in Jackson Hole, Wyoming, while everyone sipped their morning drinks and thought about whether to stay at the resort an extra full day to go fly-fishing...

OK, please don't take this description seriously. We're embellishing the scene a bit... but not by too much.

Powell didn't quote Scarface or scream, but he might as well have...

On Friday morning, in his latest round of highly anticipated public comments, Powell sent the major U.S. indexes plunging by more than 3%, down around 5% from where the benchmark S&P 500 opened just one Friday earlier...

The slide continued today, with all of the indexes down slightly... Energy was the only sector up significantly, with the Energy Select Sector SPDR Fund (XLE) up 1.5% today. Bond yields have been rising all month, with the U.S. 10-year Treasury yield near 3.1%.

As I (Corey McLaughlin) will share today, there's a chance this trend could keep going in the coming weeks given the renewed expectation for tighter monetary policy ahead. And at the very least, it would be wise to prepare for this possibility...

We're still in a bear market, after all. The Nasdaq is once again off 20% this year, and the S&P 500 is down 15%. And the Fed – the biggest string-puller in the economic game – doesn't seem to mind. The pivot to easier monetary policy isn't coming, at least not yet.

As our friend and Ten Stock Trader editor Greg Diamond shared with subscribers today...

In a so-called "free market," I always find it discouraging when the words of one person – like the Fed chair – can have such an impact on all capital markets around the globe. But like I say in trading, it doesn't matter what I think or want... what matters is reality and what's actually happening.

And right now, the Fed is dictating the fight against inflation... whether it remains aggressive or pulls back. And the markets are paying attention.

In any case, over the past few weeks, it became clearer that the bear market rally in stocks we've seen the past two months – the third this year – was close to finished. For better or worse, Powell ended it for good with his comments on Friday.

In the beginning...

He began his speech by noting he has typically used his speaking opportunity at the annual Jackson Hole meeting to deliver big-picture remarks, but that this speech would have a "narrow focus."

And it did... He talked for less than 10 minutes, and he was as clear and concise as we've heard him in a while. Powell said a lot of the same things he has been – 2% inflation is the goal, yada, yada – but without the conflicting statements that he's become known for delivering...

There was some typical "Fed speak," don't get me wrong... And we're not naïve enough to forget that we're talking about the same guy who was so wrong on "transitory" inflation and helped put the economy and stock market into the position they're in today.

We're not saying we believe every word he says, but Mr. Market clearly cares...

For instance, Powell couldn't quite bring himself to say the words "recession" and "job losses." But he got pretty close, saying the following while talking about the Fed's plans to keep raising interest rates...

Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.

These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Then he actually talked about history...

Powell said the Fed will raise rates by 50 or 75 basis points at its next policy meeting in September, putting its benchmark range closer to 3.25%. He also said at some point the Fed will slow the pace of rate hikes, but it isn't in a rush because...

The historical record cautions strongly against prematurely loosening policy.

Mr. Powell! Welcome to our chat.

He went on to say the Fed doesn't want to repeat the same mistakes of the 1970s. We've written about this history a good bit... In the '70s, the Arthur Burns-led central bank hiked rates in three cycles to fight inflation, but never by enough to kill higher prices for good.

Inflation ebbed and flowed in the '70s, and there were three recessions. But high prices mainly stuck around until the early '80s when Paul Volcker took over as Fed chair and hiked rates to 20% in 1981, simultaneously bringing inflation down and creating a devastating recession with unemployment over 10%...

Coincidentally, on Friday, the Fed's preferred inflation gauge (personal consumption expenditures, or "PCE") checked in at 6.3% for July (4.6% not counting food and energy). That shows you how far the bank is still behind the curve on its interest-rate hikes... Much like we wrote in the July 28 Digest, after Powell's last press conference...

[Powell] said they're at a "neutral" rate now... and the central bank will reevaluate things in September at its next meeting.

The market liked that message, for one day at least... but don't be fooled.

If the Fed's really going to handle inflation, rates need to go much higher – closer to the inflation rate of at least 4.7% by the central bank's preferred core PCE inflation measure.

Interest rates are still around 2% below even the most conservative "official" inflation measures.

This is basically the message that Powell sent on Friday without much conflicting information in response to reporters' questions... because there were no questions, just a prepared statement.

And he closed with a Tony Montana-style bang...

Powell noted three lessons we've learned about inflation in the past four decades. They were...

1. Central banks are responsible for delivering a low and stable inflation rate. This isn't up for debate now like it was in the '70s...

2. The public's expectations about higher prices are as dangerous as their reality, and "inflation has just about everyone's attention right now, which highlights a particular risk today."

3. The Fed isn't done addressing inflation. Again, he referenced the 1970s, when too little action just delayed the inevitability of a bad recession to the early '80s. He said...

Our aim is to avoid that outcome by acting with resolve now... We will keep at it until we're confident the job is done.

Make of that what you will. Mr. Market sure did. When the speech was over at 10:10 a.m. Eastern time, folks who had been betting on the Fed pivot looked like they were pivoting themselves.

One month ago, Wall Street was betting strongly on a 50-basis-point interest-rate hike at the Fed's meeting next month. Today, the odds are heavy on a 75-point raise. As we've written before, the Fed has done more than expected all year long...

Interest rates get the headlines, but the balance sheet matters, too...

What Powell didn't talk about was the Fed's balance sheet... which is still near $9 trillion... and how its shrinkage is about to accelerate. Since the Fed started trimming its balance sheet in the spring, it has only reduced its total assets by about $100 billion, or 1%...

It allowed $30 billion of Treasurys and $17.5 billion of mortgage-backed securities to mature last month. But starting in September, the central bank will trim as much as $95 billion per month from its holdings. Just like that... Poof!

This is financial engineering of the highest order, which many people are simply numb to. As Greg also wrote today...

This is known as quantitative tightening ("QT").

In simple terms, the Fed is shrinking its balance sheet. That will keep interest rates elevated regardless of the basis-point hikes the central bank announces in its next few meetings.

And to keep things really "simple" when the Fed does expand its balance sheet... With quantitative easing ("QE"), stocks generally rise, and with QT, stocks generally fall.

As Stansberry NewsWire editor C. Scott Garliss explained in an update in our Portfolio Solutions products in June, to return to "pre-pandemic levels," the Fed's balance sheet would need to shrink to $4 trillion, a nearly $5 trillion decrease...

Whether it gets there is doubtful, but the effort will count for something – or break something... So far, the Fed's mortgage-backed securities balance, which supports the real estate market, has plateaued since March near $2.7 trillion. But it hasn't shrunk... yet.

For Greg, if you combine this scenario with already-contracting gross domestic product, plus the downtrend in stocks we've seen since January, it tells him the current bear market will go on... despite the relief rally we just saw and any more that may come...

Prepare accordingly. As interest-rate and QT concerns (and potential unintended consequences) grow, don't be surprised if the major indexes retest their lows from June in the weeks ahead... or make new ones.

And if U.S. stocks dip below previous lows, look out below for longer... Could a Fed pivot to rescue the markets come down from on high at that point? Sure... especially if inflation is back to normal. But there could be a lot of time between now and then...

Along these same lines, our friend Marc Chaikin has a similar warning...

Regular readers should remember Marc, founder of our corporate affiliate Chaikin Analytics, from his prescient market calls this year...

Simply put, Marc is a Wall Street legend with more than 50 years of experience working with the world's largest institutions and high-profile investors. In the wake of the financial crisis, he decided to focus his time on helping individual investors...

Back in the February 1 Digest, he shared his prediction for 2022 with us. It included "lots of volatility"... big losses for tech stocks... new lows into May or June... and a "possible final bottom" in October. So far, the year has played out exactly as he envisioned...

Back in March, he warned that we were already in a "rolling crash" and that much more downside was ahead. Remember, this was back when many folks didn't want to admit we were even close to a bear market... much less in one.

In July, he shared that a recession could be closer than the government was willing to admit and what that could mean for your portfolio...

And in this same message, he warned that while a market shift could soon create more losses for investors. Importantly, it could also lead to dramatic profits for the few who understand what's really happening in the markets.

In the past few days, Marc doubled down on this prediction...

He just released a critical update to his stock market warning. In short, he says the worst is yet to come... and he wants to ensure no one is surprised by this major move as we approach what he says is historically the most volatile time of the year. As he says...

This is the moment I've dedicated my entire livelihood to since the crash of 2008. I'm ready, but I'm worried most people are not.

This may sound like a dire warning and, frankly, it is. But as Marc is also reiterating, if you take the time now to properly prepare for what's to come, you could also set yourself up for massive gains in your portfolio.

In a new recording from his home in Connecticut, Marc says...

We're in the early innings of an extraordinary market phenomenon we haven't seen in years. For some, it could erase any losses and heartache of this year so far.

In fact, three stocks I've recommended across my services this year just hit their 52-week highs this month.

Again, this is while the overall market has fallen 20%.

And as I'll explain in a moment, I predict this is only the beginning of a massive opportunity in a very special group of U.S. stocks... with the potential for multiple 300% to 500% winners before the dust settles.

But fair warning: What's coming could also have disastrous and long-lasting implications for your wealth if you ignore it.

Click here to watch Marc's update right now. It's worth the time. This message is coming from a guy who has survived the last nine bear markets. You'll hear his recommended steps to take right now, including where to move your money in the next 90 days, for free.

The Fall Forecast

Our editor-at-large Daniela Cambone's summer series is winding down... and her guests have touched on hot topics such as recession, bitcoin, precious metals, Treasury bonds, and more. Here's what they think about what's to come this fall...

Click here to watch or listen to this video right now. And to catch all of the videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 8/26/22): Texas Pacific Land (TPL).

In today's mailbag, feedback on our colleague Dan Ferris' latest Friday Digest... plus more thoughts on student-loan forgiveness and implanting chips in hands... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, I cracked up due to your August 26th Digest. You are getting a lot funnier!

"Nice analysis though. To me this does explicitly show that we have not reached any bottom. It is truly amazing how far these investors, whoever they are, are willing to get on the absurdity train. I wonder whether even a small percentage have ever considered what $130 trillion in debt for a $24 trillion economy really means?" – Paid-up subscriber Al M.

"I am livid over this [student-loan forgiveness] situation and others by our government that just keeps over spending on everything! I graduated high school in 1975. Jobs were hard to come by but I was able to get one starting at 16 for $1.65 an hour. I was all saved up to buy a VW Bug but when I graduated the price doubled and gas went from $0.35 a gal to over a dollar.

"I borrowed money to go to college as did my sister, the first two in our family to attend. My future hubby borrowed and we had to change the plates on his car every day because of the gas crunch in 1978-79. He drove from Brooklyn, New York, to New Jersey for school.

"Starting out with nothing, a 13% mortgage, and minimum pay in our fields we had to start paying the loans off. We paid back every cent! Why should these loans be forgiven? This is all a political ploy by Biden to win re-election as well as the midterms coming and it makes me SICK! You borrow, you pay it back, it's no different than using a credit card! I'm not interested in paying your bill, pay it yourself!" – Paid-up subscriber K.T.

"I didn't have the money to begin college, so I worked the midnight shift at a Western Kentucky underground coal mine as a UMW member BEFORE attending college and becoming a first-generation college graduate in my family. No college loans to pay off, and I started my professional career with a strong work ethic.

"So, we have record unemployment, and the government wants to help former students weather this poor economy with loan forgiveness? How about finding a better job that pays more?

"We live a city that has one university and two colleges; however, businesses are trying all sorts of incentives to get part time help. Many college students seem to want to enjoy a possible, forgivable student loan instead of working.

"The big elephant in the room is the cost of higher education. Tuition has grown much faster than the CPI and is not being debated enough. In our city, faculty and administrators never missed a paycheck during the financial crisis or the COVID pandemic, but tuition hikes continued." – Stansberry Alliance member Larry H.

"What could possibly go wrong [with a chip in the hand]? Personally I enjoy what freedoms we have left. The chip in the hand is simply a ploy to get you used to the next step, CBDC [central bank digital currencies]." – Paid-up subscriber Don F.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 29, 2022