What's Really Hard for Humans to Understand
Inflation is (still) everywhere... Bad news can be good news... A PSA about T-bills... Podcast: Know when to walk away... Advice from former poker champion Annie Duke... Plan to quit... Dan Ferris on a rare 'market event'...
Inflation is sticky in Europe, too...
I (Corey McLaughlin) wrote yesterday about the sticky inflation numbers in the U.S. that have market prognosticators in a fit... and the possibility that the Federal Reserve could finally "pivot" – to higher interest rates.
Well, the same ideas are true in Europe...
This morning, we learned the latest consumer price index ("CPI") numbers in Spain and France, for instance. In Spain, CPI for February was up 6.1% year over year versus a 5.9% rise in January. In France, the same story played out... 6.2%, up from 6% a month earlier...
But before you start hitting the sell button on everything because of high inflation sticking around the world... let's explore some details beyond "inflation is sticky." You might think this is a death knell for stocks... But as I'll explain, I'm not so sure.
This could be a case where bad news is good news...
Good news for U.S. stocks, at least.
Think about it... If inflation in Europe, which is already higher than it is in the U.S., is on the same bumpy path as it is in the U.S., central banks in Europe are going to keep raising interest rates too.
So, even if the Fed keeps hiking rates in the U.S., – which, as we explored yesterday, is entirely possible – the relative value of the dollar may not change too much. That's a key difference from the second half of 2021 and much of 2022, when a strong dollar was a headwind for U.S. stocks.
Remember, the dollar and stocks have been noncorrelated assets for a while... When U.S. stock indexes have gone up in the past two years, the dollar has typically gone down, and vice versa – even in response to short-term moves.
This has involved expectations for the Fed's interest-rate hike plans, which began before their European counterparts. But now, Europe's central banks are keeping pace while facing even higher inflation rates.
The Bank of England's benchmark rate is 4% and inflation, as measured by the CPI, is 8.8%... the European Central Bank's lending rate is 3% and inflation is at 8.6%... The fed-funds rate is near 4.75% and CPI in the U.S. is at 6.4%.
If these trends hold, that avoids one risk to U.S. stocks.
Here's another scenario worth considering...
Let's say the Fed pauses its rate hikes or indicates that it plans to do so, yet European policymakers keep talking up more rate raises. That could lead to a relatively weaker dollar, which would be an even bigger boost for stocks and other dollar-denominated assets like U.S.-traded gold.
Now, the game of currency values is just one part of the market equation... I am pointing it out because it has been a big story for the past two years.
Another part of the story involves an economic contraction with falling gross domestic product ("GDP") and big job losses. That could still happen, offsetting anything we see from the currency story. But we're still waiting...
For now, investors appear to be behaving like growth is still ahead...
The major U.S. stock indexes were mixed today but remain above their long-term, 200-day moving averages. As our Ten Stock Trader editor Greg Diamond told his subscribers today about this story and the day's market action...
Inflation numbers out of Europe continue to tick higher, but stocks don't seem to care...
This reminds us: When the market tells you something, it can pay to listen.
A public service announcement...
The stock-pickers in our group probably won't enjoy this brief note, but if you have some cash to put to work over the short term (meaning a few months), your best bet may be out of the stock market...
Instead, there's an incredible opportunity for a safe return with U.S. Treasury bills.
A six-month bill is the sweet spot of the yield curve with a 5.15% annual payout... A three-month bill has a 4.86% annual yield... These are the highest yields for these T-bills since 2007, and you'd only collect 3.93% per year from a 30-year bond.
Stocks and other risk assets definitely have some big competition, which couldn't be said for the past decade-plus. While stocks' possible price appreciation can trounce a T-bill's returns, the S&P 500 Index is yielding only about 1.7% today.
In any case, if you can get past lending Uncle Sam some money and you have some cash that you'd like to grow over the next few months, consider letting the Treasury Department actually do something for you. Again, T-bills haven't offered such generous yields in more than 15 years.
You can skip the middleman and buy T-bills and other assets from the U.S. government at TreasuryDirect.gov.
Moving on, we heard some investing advice from a pro poker player...
We've said it before... Buying is easy. Selling can be hard.
Former World Series of Poker champion Annie Duke, who won more than $4 million in her playing career before retiring in 2012, takes these ideas many steps further... This includes the idea of, "Don't stick to a plan if it's not worthwhile anymore."
And this brings up an important question that many people never get around to asking: How do you know if something is worthwhile anymore?
As you may imagine, there's a lot of investing advice embedded in this idea and question...
Annie, who has a new book out, Quit: The Power of Knowing When to Walk Away, joined our Stansberry Investor Hour podcast this week to talk about it. She also shared the many lessons she has learned from poker and elsewhere that individual investors can use in their portfolios...
In an interview with our Dan Ferris, Annie covered a lot of ground. You can listen to the whole thing on our YouTube page, InvestorHour.com, StansberryResearch.com (if you're a subscriber, make sure you're logged in), or wherever you get your podcasts. Just search "Stansberry Investor Hour."
Pros and amateurs make the same mistakes, in different ways...
Among other things, Annie talked about research from economist Daniel Kahneman that showed the mistakes many inexperienced investors make...
(Kahneman is a Nobel Prize winner whose book Thinking, Fast and Slow sits on my desk as I write today.)
Specifically, Annie talked about how many people decide to cancel their stop-loss orders and also take profits too early instead of "letting their winners run." As she told Dan...
We really don't like the idea of turning a paper loss into a sure loss. And the only time that we will turn that into a sure loss is if we sell... If we've got this $10 loss on paper, as long as we continue to hold the stock, we may not have to take that loss.
We don't like that moment of turning it into a realized loss, but we do really seek out that moment of turning a gain on paper into a realized gain.
Many experienced institutional investors don't have those specific problems, she said. They've figured out that taking losses is necessary, but they tend to sell irrationally in a different way...
A group of pro investors that Kahneman studied – who often sought to put capital to work on a new idea or thesis – outperformed the market on buy decisions by 100 or more basis points. However, they trailed even random sell decisions in an experiment by 70 basis points...
As Annie explained to Dan...
[These institutional investors] were not making the "hold losers, sell winners" problem. Instead, they're only looking at the extremes. They're selecting what to sell from the extreme winners and the extreme losers in their portfolio instead of looking across the whole portfolio...
Something that's sitting in the middle may often be the correct thing to sell because it's kind of not doing anything... They don't look at the moderate winners or moderate losers... That's causing them to give back a tremendous amount of value.
Even once you're really good at it, you're still not good at it. You could overcome one problem, but other problems end up appearing.
The lesson: Annie said one of the things that are really hard for us humans to understand is that our intuitions are very often very wrong. People tend to sell – or quit – at the wrong time and, importantly, sell the wrong things at the wrong times, too.
How to know when to walk away...
You know the song "The Gambler" by Kenny Rogers... I've been humming it for the past week since we had Annie on the show. You've got to know when to hold 'em, know when to fold 'em, know when to walk away...
It's great advice, but how do you practically know when to walk away? According to Annie...
You have to start putting layers of strategy and tactics on top of the decisions that you make to start things in order to help you to actually be able to exit properly, because the worst thing that you can do for achieving your goals is stick with something that isn't worthwhile.
That's what the stickiness of sort of the human condition does for us... We end up holding a stock that we wouldn't otherwise buy that can't possibly be good for our goals of what we're trying to achieve with our portfolio, but we do it every single time.
In other words, you have to plan for the quit, then it becomes easier. She had stop losses when she played poker. Sometimes she blew through them, but the fact that she had them at all gave her a chance to succeed over the long run, she said.
You might think I'm talking about a complicated strategy...
But it doesn't have to mean weighing odds on the fly at the poker table against other pros...
Sure, that can be one example of knowing when to quit. But no matter the arena, first things first, Annie suggests you establish goals – and criteria to determine when it's worth continuing to pursue them or not.
These are worthwhile ideas to think about in any market environment. But it really resonates today when mixed signals are all over the place, with room for bears and bulls to both have a case.
I suggest you listen to the entire interview for all of Annie's great insights... I know I'm adding one word to my usual routine when writing down any goal based on what she told Dan: unless.
In other words, in "I'm sticking to this goal unless..." and determining when or why to quit something, be it a trade, or anything else.
Check out this entire episode of the Stansberry Investor Hour now. Again, you can listen on YouTube, InvestorHour.com, StansberryResearch.com for paid subscribers, or anywhere you get your podcasts.
Finally, more Dan!...
I mentioned this yesterday, but I want to be sure you don't miss this. If you want to hear some more from Dan directly and on camera, sign up for a new free event that goes live this Thursday, March 2...
In brief, Dan believes a "market event" 50 years in the making is happening right now... Without giving too much, it has to do with China, natural resources, and all of the upheaval we've seen in the world in the past few years.
It might seem unprecedented, but Dan says a predictable shift is playing out once again, and it could hand you huge profits if you know what's coming. A small number of folks have been preparing for this exact moment, but 99% of investors will miss out. He doesn't want you to be one of them.
Dan will explain all the details on Thursday, where he'll be joined by a few guests to help share the story. The event is totally free... We just ask that you sign up in advance so you don't miss a minute. You can do so right here.
New 52-week highs (as of 2/27/23): Copart (CPRT), Comfort Systems USA (FIX), Ingersoll Rand (IR), and Novo Nordisk (NVO).
In today's mailbag, feedback on yesterday's Digest, where we posited that the Federal Reserve could finally "pivot" its interest-rate plans, but higher... and another note on Dan's Friday essay... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Corey, Thank you for all of your fine commentary. Folks should listen to what you have to say. You mentioned a drunken squirrel might be less sporadic than the investment crowd right now... Well the Fed is feeding that frisky animal. I've mentioned before they'd go higher as I still think they will.
"But here is a thought that isn't originally mine. But it fits perfectly. From an old newspaper; just changed the name. 'Objection from a former Sailor; I object and take exception to everyone saying that Biden and Congress are spending money like a drunken sailor. As a former drunken sailor, I quit when I ran out of money.'" – Paid-up subscriber Jeff B.
"Absolutely correct!... 'Wall Street' keeps increasing what they think the Fed's target rate is going to. They are realizing they can no longer tell the Fed what they would like it to do and that the Fed is aimlessly firing darts at the economy, THAT THEY HELPED SCREW UP WITH ARTIFICIALLY LOW INTEREST RATES FOR 2 DECADES.
"To hell with the peasants, if they cannot afford eggs, 'let them eat cake'." – Paid-up subscriber Randy F.
"Dan Ferris, I thoroughly enjoyed your recent article, 'The Horror of Change.' It was spot on... had a few good laughs as well. Thanks for keeping us grounded out here in the wilderness!" – Paid-up subscriber Dan L.
All the best,
Corey McLaughlin
Baltimore, Maryland
February 28, 2023