We've Been 'Caught' Red-Handed
The 'boo birds' are back… We've been 'caught' red-handed… Clearing up some confusion about interest rates… What to make of our 'contradictory' opinions… What are you really paying for?...
Today, we'd like to come clean...
You see, we've been caught red-handed.
Yesterday, we noted that the Federal Reserve's favorite inflation gauge had finally hit its official 2% target in March. And we made what appeared to be a simple and uncontroversial observation. As we wrote...
New Fed chair Jerome Powell has already been more "hawkish" – or in favor of tighter monetary policy – than previous chair Janet Yellen. He believes inflation is headed significantly higher, and these data are likely to strengthen his case.
Barring a sudden reversal, expect the Fed to stick to its plan to raise rates at least three more times this year.
Again, our reasoning was simple...
The Federal Reserve has been gradually raising its short-term interest rate – known as the federal-funds rate – for a little more than two years now. At its latest policy meeting in March, the Fed raised this rate for the sixth time since December
But it's important to remember that these rate hikes were largely preemptive... They were made on the expectation that price inflation would rise above the Fed's target in the future, rather than in response to actual data.
Meanwhile, the new chair of the Fed has already told us on several occasions that he believes inflation is likely to rise faster than is currently being forecast. And yesterday, official government data appeared to confirm his stance.
Certainly, given these facts – and again, barring a dramatic change in the data in coming months – it was not unreasonable to suggest that the Fed will likely stick to this plan.
But one reader was not so easily 'fooled'...
We received the following e-mail from paid-up subscriber Robin V. last night...
Again, the Stansberry data/e-mails contradict themselves... talking out both sides of its proverbial mouth.
[Here's a] quote from [Steve Sjuggerud in] DailyWealth Premium ("A Stansberry Publication") this morning:
"Lately, fund managers see inflation and higher interest rates as the biggest tail risks. Nobody believes lower rates are possible. As a contrarian, I love to see this kind of situation... when the entire investing world agrees on a conclusion. It rarely works out. The exact opposite of that consensus tends to happen instead. Interest rates have been on the rise. Ten-year government bonds broke 3% for the first time in years last week. But history tells us the run-up could be ending soon. Rising rates are keeping investors up at night... But we shouldn't worry about their biggest fear."
[And here is a] quote from the Stansberry Digest this afternoon: "Don't expect the Fed to stop hiking rates any time soon... Barring a sudden reversal, expect the Fed to stick to its plan to raise rates at least three more times this year."
Really, I pay you to provide expertise and advice. Not to contradict yourself and then defend your poor service as difference of opinion between different authors. It's not a difference of opinion; it's complete contradiction which provides no advice at all.
Now, I'm sure you will reply with some snide or egotistical comment, as normal, when you feel offended by your paying customers...
Of course, we're just having a little fun here.
And we're certainly not offended. We're often accused of "playing both sides," and Robin's e-mail is among the more civil we've received.
But it does raise a couple of important issues we'd like to address.
First, like most of the accusations we receive, this one is due to a simple misunderstanding...
As we noted earlier, we were referring to the short-term federal-funds rate. Steve, on the other hand, was referring to intermediate- and long-term interest rates. This is an important distinction.
Short-term interest rates are controlled by the Federal Reserve. Longer-term rates are set by the market for U.S. Treasury bonds. And these rates don't always move together.
It's possible for long-term rates to rise as the Fed cuts short-term rates. Likewise, it's possible for long-term rates to fall as the Fed raises rates.
In fact, as regular Digest readers know, it's this latter scenario – rising short-term rates and falling long-term rates – that has predictably caused the yield curve to "invert" and eventually trigger a recession several times in the past.
And to be clear, this isn't just our opinion...
Steve Sjuggerud agrees. As he explained in the March issue of True Wealth, where he recommended this big bet on lower long-term rates for the first time...
The conventional wisdom is that short-term and long-term interest rates move in the same direction. Most people don't even distinguish a difference when they say "interest rates." But that's not the right way to think about it.
The important thing for you to understand is this: Just because the Fed raises short-term interest rates, it doesn't mean that long-term interest rates have to go up.
History confirms this...
As Steve noted, the Fed has entered three rate-hiking cycles over the past 25 years. You might assume that 10-year Treasury rates would've moved higher during those periods. But you would be wrong. More from the issue...
Take a look...
10-year Treasury rates rose 0.1% during the mid-1990s rate-hike cycle... And they actually fell during the last two rate-hike cycles. Here's what short-term and long-term rates looked like the last time around...
Today, we're betting on long-term rates falling from here. Yes, the Fed will continue hiking short-term rates. But that doesn't mean we can't make money on this trade.
In short, history shows that long-term interest rates don't have to rise just because the Fed is hiking short-term rates. The quicker you can be OK with this, the more money you will be able to make as an investor, I promise.
So we hope it's clear there was no real contradiction here at all...
We believe the Fed is likely to continue to raise short-term rates this year. Steve believes longer-term interest rates are likely to move lower over the next several months. This combination is not only possible... it's happened before.
Oh... and for the record, we agree with Steve. As we've discussed, we expect long-term interest rates to move much higher over the next several years. But this trade is incredibly "crowded" and due
However, Robin's letter was right about one thing...
Sometimes our editors and analysts do disagree. Occasionally, our views are contradictory.
Again, this is not by design... and nothing subversive is going on here. Despite accusations to the contrary, we could likely sell far more subscriptions if we published a single, unified view on every topic.
But the markets – like life in general – are not "black and white." They aren't absolute. They're messy, uncertain, and constantly changing... which means even the brightest, most experienced analysts will sometimes reach dramatically different conclusions.
As Porter often says, our goal at Stansberry Research is to give you the information we would want if our roles were reversed. Occasionally, that might mean giving you well-reasoned, yet conflicting, opinions on the same stock, trend, or macro view.
We simply wouldn't be doing our jobs if we didn't.
But the reality is you don't pay us for our opinions and predictions...
You pay us for our advice and recommendations. This isn't just semantics. While our opinions often differ, our advice tends to be remarkably similar most of the time.
There may be no greater example of this than the "conflict" between Steve and Porter today.
Steve believes the bull market could continue for another year or two... and thinks we'll see an explosive "
Porter, as you read in the Friday Digest last week, is far more cautious. He believes a serious crisis could begin as early as this year.
On the surface, these views couldn't be farther apart...
But when you look at what they actually recommend, the differences are a lot less dramatic.
For example, given Steve's super-bullish outlook, you might expect his True Wealth portfolio to be overflowing with speculative growth and momentum stocks to benefit from a potential
Sure, the model portfolio holds a few of these speculative positions. But it also holds plenty of the low-risk, high-upside contrarian opportunities Steve has always recommended – including a sizeable position in physical gold. And of course, he continues to recommend proper risk-management strategies, like reasonable position sizing and strict trailing stop losses, just in case he's wrong.
On the other hand, given Porter's bearish view, you might expect his Stansberry's Investment Advisory portfolio to hold hardly any long positions in stocks. But again, that isn't the case.
Yes, he and his team have recommended several "hedges" – in the form of precious metals companies and select short sales – to protect against a bear market decline. But they certainly haven't recommended that readers sell everything and move to cash.
Instead, Porter's team has continued to recommend new long positions in stocks. Many of these have been low-risk, capital-efficient businesses that you'd expect them to favor.
But they've also added a handful of speculative opportunities… stocks that should outperform if the bull market continues.
In other words, despite accusations to the contrary, there is no great contradiction in their advice...
Steve and Porter are leaning in different directions, but neither has "bet the farm" on those views. Instead, they both continue to recommend relatively balanced portfolios that will do well if they're right… but can still do well if they're wrong.
New 52-week highs (as of 5/1/18): NovaGold Resources (NG) and Okta (OKTA).
In today's mailbag: More feedback on our advertising and our new Stansberry Concierge initiative... and Stansberry's Credit Opportunities editor Mike DiBiase responds to a subscriber's worries about bonds. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com. We can't provide individual investment advice, but we read every e-mail.
"I find it amazing that there are people out there who can't tell the difference between a real article (like the Digest) and an e-mail that is instead an advertisement?! I assume we're talking about fully grown adults here, not children? I assume we're talking about people who are allowed to control a motor vehicle on our roads, but at the same time can't filter their own inboxes to read what's of interest, and ignore what isn't?!
"Geez, what a state – I pity you sometimes thinking of some of the crap and complaints you must have to read... I personally receive over 100 emails a day with my work and am VERY busy all day long, but I couldn't care less if you send me advertising. I read most of it anyway, but if something doesn't interest me I just move on – what's the big deal?! Some people will complain about anything I guess, and just totally miss the MASSIVE amount of incredibly valuable FREE stuff that you guys output – I for one am very grateful." – Paid-up subscriber Julia R.
"Porter, wanted you to know when you wrote about ads in your free e-letters I thought... I wouldn't want to be without them. You make me think and give me ideas. Those ads in many ways are of great benefit. You never know when you might run across one that will really work for you individually. Your materials and your podcasts are the best. I always gain when doing as you say not as I am thinking. So thank you for being such a great mentor and teacher." – Paid-up subscriber Jeff B.
"If the bond market is going to collapse does this also apply to the [recommendations in Stansberry's Credit Opportunities]? I'm worried or maybe not understanding. Thank you." – Paid-up subscriber Gil T.
Mike DiBiase comment: This is probably the most common question we get from new subscribers. You're right... If the bond market collapses, it's true that the market prices of the bonds in Stansberry's Credit Opportunities' portfolio will likely also fall... maybe even fall a lot.
But we're not worried. And you shouldn't be either.
Remember, unlike stocks, bonds are binary. You either get paid all of the interest and principal on your investment, or you don't (and the company defaults). We only recommend bonds that we believe are safe – in other words, bonds issued by companies that we believe will be able to repay us all of our interest and principal.
As long as we still believe we'll collect all of our interest and principal, the current market prices of our bonds don't matter at all. The only thing that you should worry about is the price you pay for a bond. When you buy a bond, you lock in the return you're going to earn on that investment through its maturity. That return doesn't change as long as you hold it through maturity. Current market prices don't affect it.
It's true that your portfolio might look a bit ugly if market prices collapse, but as long as the bonds pay in full, it doesn't matter. You'll earn the return you locked in when you purchased it. Just continue holding and collecting your interest payments. (The interest payments alone
We look forward to the bond market rolling over. It will expose all of the companies that took on far too much debt they can't afford. The prices of the bonds issued by those companies will be decimated. Many of the companies won't survive. But a massive bond market sell-off will also give us many more opportunities to make money.
That's because investors will also indiscriminately sell off bonds of high-quality companies that can afford their debt. That's where we'll make a killing. By buying bonds issued by good companies at large discounts from par, we'll earn huge capital gains on top of our interest coupon payments. That's how you earn equity-like returns while taking on far less risk than investing in stocks.
Regards,
Justin Brill
Baltimore, Maryland
May 2, 2018