They're Speeding Up Into a Red Light

Down on the farm... Red light, green light, 1-2-3... Mr. Market's conditioned for the 'Fed put'... Be skeptical... They're speeding up into a red light… A scary and interesting time... A great offer to watch our Stansberry Conference... Mailbag: Your feedback on financial literacy...

On the way to the farm...

Part of the reason we shared our "late-summer series" with you the past few days is because I (Corey McLaughlin) was taking some time off to be with my family... We traveled from Baltimore to stay on a farm on the Eastern Shore of Virginia.

It's a beautiful part of the country with a fascinating history that we won't get into here... But today, you can enjoy a dose of isolation, fresh oysters and crabs from the Chesapeake Bay, salt-water beaches (with the ocean nearby), and the typical land fare.

In short, it's a great place to get away... and it seemed like a nice place to live year-round. We stayed with good company, including a friendly Great Pyrenees dog named Lumpo who stood night watch to protect the cows, goats, and chickens.

OK, enough with the travel recommendation. I bring this up because on the drive there, work was still on my mind...

The traffic lights got me thinking...

Please allow me a brief explanation...

As we drove the Delmarva Peninsula from Maryland into Virginia, there were just a few traffic lights along a rural two-lane, tree-lined route. You could see the lights hanging far in the distance, and there weren't a lot of other cars on the road.

In these situations, with red lights ahead, if there are no cars behind me, I like to take my foot off the gas and let the car coast to see how far I can get before needing to tap the brake... or accelerate again if the light turns green.

"Nailing it" in this silly (or neurotic?) exercise means never needing to hit the brake, maybe saving some gas, and not letting your dear passenger notice you're not driving as fast as you possibly can. It's a fine line.

As I went through this maneuver a few times, I started thinking about the wild year in the markets still waiting back at work in Baltimore...

Coasting, braking, or accelerating into red lights...

It was all a perfect analogy for today's economy and markets – particularly the influence of the Federal Reserve and other central banks. They're playing a similar game, but with much higher stakes...

Tiptoeing in and around a recession...

Stick with me...

Right now, with inflation still near 40-year highs, the Fed and other central banks are doing what they can to slow the pace of accelerating prices in the U.S. and around the world. They say they care about regular people now and that inflation is public enemy No. 1.

The primary tool they have to fight inflation is raising interest rates – making borrowing costs more expensive – and reducing its balance sheet to take "juice" out of the economy and slow demand in certain sectors.

Given the Fed's outsized influence on mortgage rates, this impacts real estate most directly. Other sectors, like energy, are not as directly influenced, though softening demand broadly filters through the entire economy eventually.

If they slow things enough, it could drive the economy into a recession... if you don't think we're there already.

We'll pick up the "driving toward traffic lights" analogy here...

The light is a signal about the economy. The economy is the car. Interest rates can be the gas or the brake...

Normally, central banks "hit the brakes" and raise borrowing rates when economies are strong. This can be a strange concept to hear at first...

But like many things in the markets, the opposite of what makes sense to us regular folk is often what occurs... When the light is green, the Fed usually slows the economy for one big reason... to prevent inflation. But, today, inflation is already here...

And based on a lot of indicators, the light – the economy – is flashing "red." So the Fed, the European Central Bank ("ECB"), and others are actually accelerating (by hitting the gas on interest-rate hikes and economic slowdown). They're speeding up into a red light.

Driver's ed teachers say not to do this, but they don't really have a choice if they want to cut into inflation. As Alfonso Peccatiello, publisher of the Macro Compass newsletter, told our editor-at-large Daniela Cambone in this video...

The Federal Reserve and ECB are willing to choke the economy right now.

We don't necessarily have an immediate cure-all alternative from the Fed or ECB for this particular action. It's all they can do, given the mistakes of the monetary and fiscal policy of the past two years (and long before) and the circumstances of today's world...

But what we're seeing today from monetary policy in the U.S. and around the world certainly is not typical of the past 40 years... which should be concerning. But the good news is it's something that you can navigate with the correct preparation.

Mr. Market has been conditioned to expect the 'Fed put'...

Our colleague Dan Ferris covered this recently in the August 5 Digest.

In short, if stuff hits the fan and some crisis emerges, people have come to expect the Fed to step in and "rescue" the markets. If the light turns red, it pours stimulus into the economy... That's what it has done – long-term consequences be damned...

But as we've laid out, now it's slowing the economy to fight a new problem – high inflation. And the light is already flashing red. So why have the major U.S. stock indexes been going up for the past two months?

Well, from what we see, there's a lot of speculation in financial circles today about whether the Fed will pivot and step in with a rescue or cut rates again if the economy slows too much.

The Fed says lowering inflation to 2% (from its current 4.8% level, based on the central bank's preferred "core" Personal Consumption Expenditures gauge) is the top priority, which implies it won't stop raising interest rates until the inflation rate is more than cut in half...

For this reason, economist Nouriel "Dr. Doom" Roubini, a past speaker at our Stansberry Conference who predicted the 2008 financial crisis, said recently that investors expecting a Fed pivot are "delusional."

We want to say the same thing, though we can't say for sure what the central bank will do.

Here's the crux of the matter...

There are enough people moving money around who don't believe the Fed. Enough folks think that the U.S. might end up acting like Turkey, which today cut rates with its inflation sitting near 80%... bucking central-bank trends.

This thought has been the backdrop for the rally in stocks for the past two months after "official" inflation numbers in the U.S. ticked down slightly from their highs last month... As Dan wrote in the August 5 Digest...

Tech speculators think they can predict what the Federal Reserve will do and believe that the world's most influential central bank has their backs. At least that's what the Wall Street Journal reported last week, and it sounds right to me...

Tech stocks have been on the rebound of late, partly on investor hopes for a slower path of interest-rate increases in the months ahead.

Take a look at the phrase "Fed pivot" on Google Trends. The hope that the Fed will save the stock market is palpable...

Hope is not a strategy. It's more like a guaranteed way to lose money.

But I understand where people get the idea that the Fed will soon stop raising rates and start cutting them again.

As Dan strongly suggested, you should be skeptical of this line of thinking. Or, at the very least, be aware that this is a different game of the childhood favorite "red light, green light, 1-2-3" than we've seen in the past 40 years.

Of course, if the Fed does throw more stimulus into the economy, it could be a tailwind in the short term for stocks, long-term consequences be damned once again. But that would also be a risk for higher inflation. The 1970s proved that, as our colleague Mike DiBiase wrote in June.

It took three cracks at raising rates – and two recessions – in the '70s before stubborn inflation eased. It took the Fed hiking rates to 20% in 1981 and a deep recession to finally end the high-inflation era... and usher in a 40-year trend of declining rates.

The '70s were a tough decade for stocks. In 1973 and 1974, for instance, the S&P 500 lost 47% of its value, the worst two-year stretch in the past 90s years outside of the Great Depression. (The dot-com bust had three straight down years, totaling the same 47% loss.)

A good bet...

What I'm most confident in is if the Fed turns its policies around sometime later this year or in 2023, inflation could continue to be higher than many people have ever experienced...

So even if you believe that central banks will actually cut rates before inflation retreats to pre-pandemic levels, it's wise to prepare for even more inflation in the period that would follow.

Alternatively, if the Fed actually does what it says it will – and it actually has this year – interest rates will be higher than they are today, meaning life will be harder for businesses and everyday people...

Borrowing costs will be higher... Corporate margins will be tighter... More layoffs are likely to happen... all while the world adjusts to a higher-inflation era where more debt continues to add to the current problem, without providing the Band-Aid-style fix it used to.

In sum, this means safeguarding your wealth and strengthening your investment portfolio today is all the more important. First of all, make sure your financial house is in order. Now's probably not the time to be "out over your skis" with your portfolio.

Be diversified. If you have cash on hand and want to grow it with low risk, consider investments like T-bills or I-bonds, both of which move with inflation... While others make knee-jerk moves, we suggest you focus on making the best long-term decisions for you.

With stocks, if there was one idea that emerged from this past earnings season, it's that consumers – who make up 70% of the U.S. economy – were buying more of what they consider essentials.

Companies that make and sell these products and services have "pricing power" and can raise their prices to weather whatever is happening in the economy to keep making profits. Hello, Hershey (HSY), a longtime favorite around our office...

Certain sectors – like health care – have tended to beat inflation better than most others over the years, too...

There are also certain businesses that actually benefit from higher interest rates, like insurance companies. On the other hand, some don't, like startups that finance most of their operations... or "zombie companies" that can't even afford to pay the interest on their loans.

This can be both a scary and interesting time...

It's scary because of what the world is staring down today. An era of higher inflation that we haven't seen in decades... recession fears... a bloody war in Ukraine that is still going on... and another conflict in the South China Sea that might just be nearing a tipping point.

But all the changes that are happening are also making it an interesting time in many ways for long-term investors... Our colleague Matt McCall shared this message in yesterday's Digest with his pitch on the opportunities in rare earth minerals.

This has been a tough year for the stock market. We're not saying all the pain is over, but what else can we do other than look ahead to the future?

Maybe it was the time I just spent on the serene farm on the water (after getting through a few lights), but there will be winners when the dust settles on the volatility of 2022 (and/or 2023). We just might have to search in overlooked places to find them.

To this point, there's no more perfect way to do this than at our Stansberry Conference...

As we mentioned on Tuesday, our conference is an annual gathering of our editors and analysts and some of the brightest guests from finance that we can think of. It's a chance to hear a ton of fresh ideas and meet like-minded folks from all over the world.

For instance, in 2019, Roubini – whom I quoted earlier – warned of exactly what happened to the global economy and stock markets in 2020.

Specifically, he told 2019 Stansberry Conference attendees in Las Vegas that in the next recession there will be even more "unconventional policy" from institutions. In fact, he said we may see "helicopter money" – where central banks will print money and hand it to citizens...

Wow...

If you listened to Roubini's presentation that day, nothing that happened in the markets and economy in 2020 – which will go down in history as an unprecedented year for so many reasons – would have surprised you. That's saying something.

If you don't believe me, here is a free link to the speech to watch or listen yourself.

You can expect to hear unconventional ideas like these each year at our annual conference. This year is the 20th anniversary, and it's taking place October 24 to 26 at the Encore Boston Resort. Click here for all the details, including our speaker lineup.

And if you can't swing a trip to Boston in two months, we've got you covered.

You can reserve a livestream ticket with full access to all the presentations – from the comfort of your own living room. And right now, we're offering a limited-time discount...

As we wrote on Tuesday, the next 100 people who secure a livestream ticket will pay just $999. You can be "in the room" with all our speakers and hear their recommendations. The package includes access to our 2022 Online Conference Video Archive, too.

But this offer won't last forever. It's only open to 100 people, and spots are going fast. Grab your ticket to watch the livestream – or attend in person – today. You can do that and find much more information on the conference here.

New 52-week highs (as of 8/17/22): Automatic Data Processing (ADP), CTS (CTS), Huntington Ingalls Industries (HII), Cheniere Energy (LNG), Northrop Grumman (NOC), and Waste Management (WM).

In today's mailbag, more of your feedback on financial literacy, the topic of Tuesday's Digest. Keep your stories and advice coming – or any other questions or comments – to feedback@stansberryresearch.com.

"Although rarely available these days, a paper route started me on my journey of running a small business...

"Deliver daily. Collect on Fridays. Meet the paper collection agent and pay him on Saturday mornings. Manage the bad debts (people that didn't pay for weeks had many excuses). Cut delivery to those that didn't pay. Find new customers on the same route footprint...

"It was a great learning experience for a 12-16 year old in the early 1970s!

"When I ended up owning several multi-family properties in my 50s, it had a vaguely familiar process. And I found the same 'excuse' pattern on the late or missing rent. 'Lost my wallet, lost my job, dog needed medicine, I was sick and missed work, my payroll check bounced, my car broke down... ' I could go on!

"Teaching finance and even small business process/ideas is clearly a huge miss for our middle and HS education system." – Paid-up subscriber Jim M.

"Good article today about financial education. Mine came in my late 20s. I was a 'hotshot' national sales manager of a small manufacturing company. Travelling the country, staying in nice hotels, eating in great restaurants – and living paycheck to paycheck with three kids and a mortgage.

"Returning from a business trip I was picked up at the airport by the company maintenance man whom I had never really gotten to know. After all, I was 'management' and he was a lowly floor sweeper.

"On the one-hour ride home from the airport he mentioned putting his five kids through college! I asked how he managed that. His answer has always stayed with me: 'It's not how much money you make, it's how much you save that counts.'

"That one line turned my financial life around. We started saving just a few bucks every week, paid off our debt and never looked back.

"I now live in a nice home, have enough investments to comfortably retire, collected five cars, own and pilot my own airplane – all paid for in cash.

"All because of the wisdom shared by a 'mere' floor sweeper." – Paid-up subscriber Gary S.

"My story that educated me at an early age of nine when I began to sell lemonade on the corner of my home... I was earning approximately $50+ on a weekend working Saturday and Sunday. I had been doing this for about two years during the warmer spring and summer months. One day my dad asked my mom, 'Where is Philip getting the frozen lemonade from?' My mom responded, 'From the freezer.' My dad then said, 'Oh...'

"He then came out to me and asked me where I was getting my supply of lemonade from. I said from our freezer! 'Whose lemonade is that?' Ours, of course! 'No, that is mommy and daddy's lemonade that is in the freezer too!' Then he abruptly said, give me money to pay for it. He calculated an approximate amount that I had used and asked me for $50, since I was pretty much profitable with hardly any expense except for my time.

"We negotiated and we settled on $35. I ended up putting in more hours over the next several weeks to make up what I had given him. The lesson learned from my situation was that there is always an expense and cost to earning a profit." – Paid-up subscriber Philip R.

"My two millennial kids are typical of their generation in many ways, but not when it comes to money. One summer we crafted mailboxes from cardboard. Each morning the kids discovered mail to be dealt with: checks, bills, statements, notes about money they withdrew from an ATM, etc.

"I got my local bank to give me a couple of blank check registers, the rest of the documents, including fake checks (that were obviously fake and said so on them) I printed on my computer. At the end of each week they received a statement from the 'bank' – and we reconciled their accounts – to the penny. It was a lot of work for me to put this teaching unit together, but I knew their school was not going to do it, and I had just read that the number one reason for divorce was financial issues.

"More than a decade later, both of my kiddos graduated college debt free. They are good with money. Now married, they are homeowners. I made plenty of mistakes with my kids, but this is one area I feel good about." – Paid-up subscriber Jacqueline G.

Corey McLaughlin comment: Congrats, Jacqueline. Thanks for sharing what I find to be an inspiring story. The hard work paid off.

"In eighth grade, my math teacher required us to choose a company to invest in. We had to choose the stock in September and report the results the following April along with an explanation of why it went up or down, how much we made or lost both in absolute dollars and percentage. I chose Alaskan Airlines back in 1961 before it diversified and when it was cyclical because of the weather in Alaska.

"After I turned 21, I started buying Alaskan Airlines in September and selling in April every year for about 5 years (when it diversified). Alaskan Airlines hit its low for the year in September and its high in April. I made money every year all because of the eighth-grade teacher that got me interested. There should be more teachers like that." – Paid-up subscriber J.P.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 18, 2022