Why Sjug Is Super-Bullish Today
Steve Sjuggerud's readers saw this coming... The best recession indicator we have... How bonds are supposed to work... This could be the Federal Reserve's fault... Why Sjug is super-bullish today... Don't be a victim of the news cycle...
In the August 14 Digest, my colleague Justin Brill noted that the so-called 'yield curve' inverted...
That day, the 10-year U.S. bond yield dipped below the two-year bond yield. (Technically, the official rate for the day was 0.01%, though it fell to -0.02% at one point. Still, it was close enough to send the media into a frenzy.)
Even President Donald Trump took to Twitter to note the "CRAZY INVERTED YIELD CURVE!" (and used the opportunity to vent his frustration with Federal Reserve Chairman Jerome Powell).
These days, everyone is talking about the story.
But as longtime readers know, Steve isn't worried...
It's simply part of Steve's Melt Up script. He's been planning for this for years.
You see, Steve has been talking about the Melt Up since 2015. And for most of that time, the yield curve's inversion was a long way off.
But inversion is a big part of the Melt Up.
As I (Vic Lederman) will explain in today's Digest, it's how we know when to start the clock for the next recession. And with the yield curve closing in on inversion, it's time for a refresher course on Steve's Melt Up thesis.
A recession is on the horizon now – here's how we know...
The one thing that the media gets right is that yield-curve inversion is our best indicator of a looming recession. Take a look...
You've probably seen this chart before. We've shared it countless times, and for good reason... It represents an incredibly powerful idea. And until recently, it's one that the mainstream media had ignored entirely.
As you can see, the economic recessions of the 1980s, 1990s, and 2000s all followed a pattern. When yields inverted, a recession followed.
Think about it... An inverted yield curve means that the rate paid on short-term bonds is greater than that of long-term bonds. That's a sign that something is going seriously haywire with the U.S. economy.
Normally, bond yields follow a simple rule...
Short-term bonds yield less than long-term bonds.
It makes sense... When you buy a U.S. government bond, you're loaning your money to Uncle Sam. Loaning the government money for two years is a lot less risky than loaning it for 10 years. As such, the rate paid on the shorter-term loan is low.
Naturally, longer-term loans command a higher rate. The risk is still low, but it is a little higher than the two-year. And it's more inconvenient to tie your money up for 10 years, too.
Of course, this is how the world works when things are going well. But what if things aren't going well? What if investors think things will be going poorly in the next year or two?
When investors are more worried about today than tomorrow, rates can invert.
But the market doesn't entirely set rates on its own...
The Fed uses interest rates like a brake pedal for the economy. And it has a track record of "overdoing" it.
The prior recessions on the previous chart share a few things in common. One of those is that the Fed put the brakes on right before they happened.
That's exactly why Trump is so frustrated with the Fed. Things have been going well... But the Fed spent the last year hitting the brakes. It did that by raising interest rates, which raises the cost of doing business.
In theory, it's supposed to do that to keep inflation in check. But as many economists have pointed out, there isn't a lot of inflation in today's economy.
Regardless, the Fed thought it had more wiggle room in rates than it did. And it's becoming clear that the bigwigs overdid it.
This shouldn't come as a surprise based on the Fed's previous actions. Now, the Fed is cutting rates again... But it's too little, too late.
Investors are more worried about today than they are about tomorrow. Specifically, that means the 10-year bond yield has fallen below the two-year bond yield.
This means one thing: We're seeing the first sign of the most powerful recession indicator we have.
But now is not the time for fear.
In fact, Steve is more bullish than ever...
And you should be, too... No kidding.
Don't let the headlines scare you. The media may have parts of this story right, but it has the timing all wrong.
Here's how Steve explained it in the most recent issue of True Wealth, out last week...
Now that the yield curve has inverted, history says we should expect big gains over the next six to 18 months.
The financial media has completely missed this part of the picture. Instead, they play on our fears and start wailing that the end is here. That couldn't be further from the truth. Consider this...
The last time the yield curve saw a new inversion was in January 2006. That kicked off a wave of recession worries and stock market concerns. These fears eventually proved to be true – but not before folks who acted had a chance to make serious gains. Take a look...
Stocks weren't anywhere near a top in early 2006. They went on to soar 26% over the next 21 months before the eventual October 2007 peak.
But that 26% gain wasn't a one-time deal. We've seen this scenario play out several times throughout history. More from Steve...
Over the last seven economic cycles, the first yield curve inversion occurred an average of 19 months before the next recession began. And stocks jumped 21% on average through the next market peak.
The top in 2000 was a particularly extreme example. The yield curve inverted in September 1998. That was two years before stocks eventually peaked. Take a look at what happened during that time...
Stocks soared 55% after the yield curve inverted. And that doesn't show the massive 210% gain in the tech-heavy Nasdaq Composite over the same period.
If history is any indication, the inverted yield curve isn't a reason to get scared. It's a reason to get bullish. As Steve concluded...
History says it should be a year or more until stocks eventually peak. And we'll likely see big gains between now and then.
Most folks don't want to hear this. They don't believe the market can move higher from here, as we've already discussed. Everyone is scared. And this week's inverted yield curve is the current fear hot button.
The end of the Melt Up is going to climb a wall of worry, and we'll see more warning signs along the way...
Inversion might just be the most "real" of them all. But that doesn't mean it's time to panic just yet. We're in the midst of the longest bull market in U.S. history.
History says we'll see the market shoot higher before it runs out of steam. And you don't want to be on the sidelines during a Melt Up.
There's no question we're going to experience some turbulence in the market in the coming months. But Steve's readers are ready. We have a script that will guide us through the end of the Melt Up.
So don't let the headlines scare you out of the market. Wait for Steve's signal. Until then, stay long and follow the script. I know I will...
New 52-week highs (as of 8/21/19): Booz Allen Hamilton (BAH), New Oriental Education & Technology (EDU), Franco-Nevada (FNV), Home Depot (HD), Hershey (HSY), Invesco Value Municipal Income Trust (IIM), iShares U.S. Home Construction Fund (ITB), Lockheed Martin (LMT), Medtronic (MDT), MarketAxess (MKTX), Motorola Solutions (MSI), NovaGold Resources (NG), Nuveen Municipal Value Fund (NUV), NVR (NVR), PNC – Series P (PNC-PP), Polymetal (LSE: POLY), and ResMed (RMD).
In today's mailbag, one reader praises Dan Ferris for his work in Tuesday's must-read Digest. As always, send your questions, comments, and complaints to feedback@stansberryresearch.com. We can't respond to everything, but we read them all.
"By golly Dan you've done it again! As I was reading through your toxic waste Tuesday Digest I found myself angry at the nitwit bankers and chuckling at your wit at the same time, but when I got to the part where you said, 'So the banks lent money to anybody who could fog a mirror, sprinkling toxic waste around like poisonous fairy dust.' I lost it!
"At the moment I'm reading that passage the image of a guy lying on a gurney close to death with one of those little mirrors by his nostrils barely fogging up with a new mortgage laying on his chest popped into my brain and like I said before, I lost it! I was laughing so hard tears were rolling down my face. Good job Dan. Thank you for combining humor with information everyone in the world should read and learn from." – Paid-up subscriber K.S.
Regards,
Vic Lederman
Jacksonville, Florida
August 22, 2019