Three Simple Views of a Complicated Time

A 'snapshot' of the markets... A powerful thought about interest rates... Fighting 'recency bias'... This isn't 'normal'... A leading 'crash' indicator is on again... Three simple views of a complicated time...

A 'snapshot' can really tell you something...

Many folks likely know that we – meaning Stansberry Research – e-mail a pre-market "snapshot" to readers of our free Stansberry NewsWire service every morning. It includes the key headlines, numbers, and other important notes for the upcoming day.

Written by NewsWire editor C. Scott Garliss, this rundown typically hits inboxes before 8 a.m. Eastern time. And given our job and interests here, it's one of the first e-mails I (Corey McLaughlin) read before thinking about what to share in the Digest each day.

The truth is, I could write about any number of angles that Scott covers in this snapshot. And sometimes I do cover many topics in a single Digest. But whether I include Scott's takes in the Digest or not, I always find another powerful use of these reports...

I'm talking about what they tell us about the mood and the risks in the broader market.

Take today, for example. What do these market notes say to you? These excerpts are pulled from this morning's NewsWire e-mail...

Federal Reserve Bank of Atlanta President Raphael Bostic said balancing the labor market's supply versus demand picture is the key to lowering inflation...

Economic indicators yesterday, including manufacturing activity for May and new home sales for April, pointed to slowing domestic activity, stoking global slowdown worries...

The European Central Bank's Financial Stability Review said regional asset risks have risen due to rising inflation and the increased potential for credit default.

I don't know about you, but these items don't sound good to me – particularly the last one out of Europe. The continent is facing a major, yet still underreported (in the U.S., at least) crisis related to the energy supply and the war in Eastern Europe.

After scrolling those notes, I read through the batch of mainstream financial headlines included in this morning's NewsWire report. Here are a few that caught my attention...

Inflation, rising rates curb global economic growth – Wall Street Journal. The latest business surveys underline the series of obstacles the global economy is facing this year, with some global companies beginning to plan for a significant slowdown or a recession.

Russia edges closer to default as U.S. lets key waiver expire – Bloomberg. Russia will get pushed closer to a potential default after the U.S. Department of the Treasury said it will let a key sanctions waiver benefiting American investors expire.

The next crisis to hit markets may be about liquidity – Bloomberg. Liquidity has been slowly draining from various markets to the point where the Federal Reserve this month warned that it threatens financial stability. Investors who ignore this warning do so at their own peril.

Taken on their own, these headlines just about spoiled my breakfast.

But more relevant to our work in the Digest, they painted a grim picture of the broader markets today. It's a "fearful" time, in case you haven't heard – and for real, tangible reasons.

These notes aren't about "talking heads" spouting useless opinions... We're talking about facts – inflation and slowing economic growth around the world (and a potential Russian default, too). In a world of "fake money," these are real risks to asset prices...

A simple thought can be very powerful as well...

Now, some of you may be thinking, "I'm not scared." Or perhaps, your first thought is, "If we're living in a fearful time, shouldn't we be greedy?" – and maybe buy a lot of stocks right now, like that sage Warren Buffett once said.

This idea jives, of course, with being a contrarian – which we like, and which, yes, can help you make money if and when the "herd is wrong."

But what if the herd is so wrong that it's right?

That's where we could be headed. Here's what I mean...

Simon Mikhailovich is the managing partner of The Bullion Reserve gold-investment firm. He has more than 35 years of market experience.

In short, Mikhailovich is an incredibly smart person with a world of perspective. (To see what I mean, you should watch this interview he did with our editor-at-large Daniela Cambone. It was recorded last year, but it's still timely.)

Last night, Mikhailovich shared a powerful, short message on Twitter about two common topics in these pages – the Federal Reserve and fighting inflation. From his post...

The Fed is raising rates to beat inflation but this time higher rates may not work [because] supply of many critical commodities is constrained whereas demand is inelastic. Higher rates can destroy discretionary demand but not demand for necessities that may keep getting more expensive.

Mikhailovich is basically saying that what the Fed is doing in an attempt to lower inflation likely isn't going to work. Notice he's not making a prediction... Instead, he's saying what "may" happen.

He's saying raising interest rates, which make borrowing costs higher, can lead to lower demand for discretionary items (stuff you don't really need). But importantly, it won't reduce the prices of the essentials people rely on in their daily lives – like energy, food, or water.

In other words, the prices of raw goods for the essentials – like gas or grains – are going to keep going up.

That gets us to the prevailing 'recency bias' of today...

We're bringing up this thought because it got us thinking about a critical idea that we've shared before – recency bias. It's about what most people expect to happen next...

Depending on how you want to think of it, recency bias is either a "feature" or a "bug" in human nature. As our colleague Dr. David "Doc" Eifrig wrote in a Digest last June...

Everybody struggles with "recency bias," in which we place too much importance on recent events and expect what has happened recently to continue happening. It's built into our psychology.

Thinking about the recent past can help us survive or not get hurt...

For example, should I walk into that electric fence that just zapped that guy in front of me? Not unless I want to meet the same fate.

But our brains can also make us think everything that has happened before will happen again.

That's why "surprises" is a word we use to describe unforeseen events. And it's why thinking about the prevailing recency bias leads us to go against the herd anyway.

Specifically, last year, Doc was talking about the idea that stock and bond prices have generally risen over the past 30 years – despite a few notable crises – in an era of "Great Moderation." By that, he means smaller inflationary booms and recessionary busts.

And as Doc wrote, one potential explanation for the Great Moderation was that policymakers like the Fed have gotten better at jiggering interest rates and bond buying. As a result, they're better at smoothing out the "business cycle."

Over the past several decades, since Alan Greenspan's tenure as the head of the Fed and the 1987 stock market crash, more people have relied on the so-called "Fed put." They've expected that the central bank would step in and "do something" to stop a bear market in stocks, for example, from getting substantially worse.

That's because it is what happened.

Bailouts... Rescue plans... Bond-buying operations... Emergency interest-rate cuts to soothe the markets... We've seen them all.

All in all, if stocks weren't going up, "safe" bonds usually did. A lot of people have come to expect the markets to always just get rescued.

So the conventional 60-40 stock-bond portfolio worked quite well over those decades.

But not today. Anyone following conventional wisdom has taken a beating this year...

In the first quarter of 2022, the benchmark S&P 500 Index and U.S. government bonds lost more than 5% and more than 2%, respectively, for just the fourth time in 49 years.

This isn't 'normal'...

Last year, Doc warned of this scenario when he said the Great Moderation was either nearing an end or had already ended with the onset of the COVID-19 pandemic and ensuing government responses. And in turn, he warned that it would likely drive inflation higher.

In a world where stocks were grossly overvalued and inflation was on the rise, he said folks shouldn't expect the type of returns from stocks they've gotten over the past 30 years.

Regarding bonds, he said with interest rates so low, they couldn't really go lower – which meant bond prices couldn't go up. (Remember, bond prices trade inversely to yields.)

As Doc said in that Digest last June, that could put...

A mathematical end to a 40-year bond bull market that started in 1981 when interest rates peaked.

What's more, the Fed's primary weapon to fight inflation is to raise interest rates, again meaning bond prices would go lower...

But typically, when central bankers have raised interest rates throughout modern economic-manipulation history, they've done it to cool a strong economy and prevent inflation from getting too high.

And that usually leads to some kind of economic slowdown or a recession. And all in all, that can be healthy over the longer term. But like many things in life, it's only healthy in moderation. At the extremes, things can get nutty...

Today, higher-interest-rate policies are being put into place when we already have high inflation and economic growth was already likely to slow compared to last year.

Basically, this is all to say that Mikhailovich makes a great point...

Don't expect the Fed's interest-rate hikes to "work" or for a "save the day" market bailout to come anytime soon. Or if it does, it will come later than you might expect.

In the meantime, we'll have higher prices throughout the economy – except for stocks perhaps.

Finally, today, a simple chart can be very powerful, too...

Related to the above point that a higher-interest-rate environment can primarily soften demand for discretionary items, look at the chart below and the ensuing commentary.

I sent this chart to our colleague, technical trader, and Ten Stock Trader editor Greg Diamond today. He simply replied, "Love it."

The chart comes from technical analyst Steven Strazza of All Star Charts. The investment website provides research to institutional clients and individuals. As Strazza wrote on Twitter...

This chart shows that the last two times consumer discretionary stocks – as measured by the Consumer Discretionary Select Sector SPDR Fund (XLY) – dropped 20% relative to the S&P 500... the last two major market crashes followed not long after.

And it just happened again... Consumer discretionary stocks are falling at a greater scale than the S&P 500 right now. They're down more than 30% since the start of the year.

Now, this example – which only goes back to when XLY launched in the late 1990s – doesn't mean another broad crash is definitely going to happen (though you could argue we're already in one). But today, it does get our attention as a leading indicator...

First, any type of correlation between market behavior from before the dot-com bubble and the financial crisis is worth noting when so many people today are fearful of another market crash.

Secondly, this fund's top five holdings are Amazon (AMZN), Tesla (TSLA), McDonald's (MCD), Home Depot (HD), and Nike (NKE). That's a good cross section of companies that sell things that people don't really need, but want.

Combine this information with the idea that policymakers' moves might dampen demand for discretionary spending but not lower inflation for other essential items, and it suggests legitimate reasons to be cautious with stocks today.

In the end...

Sometimes, it's best to keep the takeaway simple.

Today, we share three simple looks at what probably feels like a complicated world...

First, Mr. Market is fearful. You can pick up on that by reading a "snapshot" of the markets. To that point, my first recommendation would be – if you don't already – to sign up to our free NewsWire service.

You'll get Scott's morning market outlook and a whole lot more – like intraday updates on stocks that our Stansberry Research team has recommended across our investment universe and up-to-the-minute news and trends moving the markets each and every day.

Scott and his team cover a lot in the NewsWire. Sometimes I don't know how it's humanly possible. And this sort of service can typically cost $50,000 a year, or require a net worth of at least $1 million.

But we offer it 100% FREE to anyone with an Internet connection. You can sign up for our NewsWire service here.

Secondly, this is not a "normal" environment. Please note that I'm not saying, "This time is different." That phrase makes us cringe whenever we hear it.

On the contrary, I'm saying it's more of the same – the Fed using the same inflation-fighting playbook. But it's happening in an environment we haven't seen in 40 years, when inflation was last this high.

Finally, now probably isn't the time to get greedy just yet. There are times to "back up the truck" and buy stocks whole-hog. But based on what enough of our editors have been saying lately and what we're seeing... now is not one of those times.

We still don't know what the course of inflation will look like in the year ahead. We also don't know how companies will fare with higher costs, generally speaking. And as we've mentioned over the past two days, Wall Street institutional investors still haven't priced all of this in yet.

But if you feel like you must "buy something now," and see a good opportunity, remember that you don't have to go "all in" either. For instance, you could allocate half the money you normally would to a particular position. That way you'll always be "half right."

In general, position sizing is something most new investors don't think about. But your position sizes can – and should – vary based on how much volatility you're willing to stomach, as well as your goals and timeline for your investment.

In sum...

Always know which way the wind is blowing. And don't try to fight it. At the very least, we're far from a raging bull market.

It's All About Retail Earnings

With names like Target (TGT) and Walmart (WMT) reporting less-than-ideal earnings last week, the retail sector is a hot topic right now. In the latest episode of Making Money, Matt McCall answers questions about the sector and shares his views on several retailers...

Click here to listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 5/24/22): ProShares Ultra Oil & Gas Fund (DIG) and Energy Select Sector SPDR Fund (XLE).

In today's mailbag, feedback on yesterday's Digest about how the pandemic "bubble" still hasn't fully popped yet, as well as the Federal Reserve's plans. Do you have a comment, question, or observation? As always, send your notes to feedback@stansberryresearch.com.

"A Kudu bull was just sold on auction here in South Africa for a staggering 9.4 million Rands, a new record. Previous record R2.4 million. If this is not an indication we are still in bubbly territory, I don't know what is. Madness." – Paid-up subscriber Paul H.

Corey McLaughlin comment: It's funny you mention that, Paul. Just yesterday, not far from where we live, a two-year-old racehorse sold at auction for a state-record $3.55 million. That beat the previous record, set just three years ago, by $1.75 million.

Wild, indeed.

On a related note, if you happen to be interested in what a multimillion-dollar horse auction looks and sounds like, you can watch a recording of the one I'm talking about here.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 25, 2022