Yeah, That Should Do It
The Inflation Reduction Act inches closer to the finish line... Yeah, that should do it... 'Will it lower inflation? Not a chance'... We're only human... A bear market rally giveaway... This is when the bear market ends... Eric Wade's first warning...
And so it goes, so it goes...
The absurdly titled Inflation Reduction Act passed through the Senate along party lines by one vote on Sunday... and it's expected to move through the House soon, predictably without much debate.
We're not making any of this up... The 755-page bill includes $430 billion mainly to help clean-energy industries, extend health care coverage, and beef up the IRS... The law would also raise taxes on corporations and impose a new tax on share buybacks.
Yeah, that should do it... Take care of inflation once and for all by spending and taxing more.
We're not saying innovation should be discouraged in America or that we think health care should be more expensive. But disguising this bill as inflation legislation is comical on a good day and offensive on most others.
As the esteemed Bill Bonner wrote in his daily newsletter today (you might have heard him recently warning that "America's nightmare winter" is approaching)...
Will it reduce deficits? Almost certainly not. Will it lower inflation? Not a chance.
I (Corey McLaughlin) don't know what else to say...
The Congressional Budget Office, which runs the numbers for Congress on new legislation, estimates the proposal will change the inflation rate by less than one tenth of a percent over the next two years, and it can't say whether that's in a positive or negative direction.
And here's an independent, long-term take from the Tax Foundation, the nation's leading tax-policy nonprofit that has advised federal and state governments since 1937...
We estimate that the Inflation Reduction Act would reduce long-run economic output by about 0.1 percent and eliminate about 30,000 full-time equivalent jobs in the United States.
It would also reduce average after-tax incomes for taxpayers across every income quintile over the long run.
By reducing long-run economic growth, this bill may actually worsen inflation by constraining the productive capacity of the economy.
What we know is the U.S. is now printing money to allegedly trim an ever-growing budget deficit. Any "inflation reduction" that does happen will likely be marginal at best and relatively insignificant if the U.S. debt disaster continues to boom.
We'll just leave it at that... other than to say, unfortunately, expect more of the same impacts on the economy that we've been accustomed to from other government spending packages. Expect more inflation, not less.
Let's find some comfort in analyzing the stock market...
If you've been watching the U.S. stock indexes rally over the past month, you've surely wondered what exactly has been going on... specifically, whether this is the turnaround that ends the bear market.
We've warned plenty of times to not be fooled by "bear market rallies." Counterintuitively, the sharp rallies are a signature of extended downturns in past history. Some of the quickest and strongest market rallies happen in bear markets.
We can't share enough charts showing the evidence... Here's one from Stansberry Research senior analyst Brett Eversole in the July issue of True Wealth, showing the multiple rallies in the benchmark S&P 500 Index during the dot-com bust...
Despite these six rallies, the S&P 500 lost 50% over a year and a half (and the tech-heavy Nasdaq lost 80% from its high)...
The story was similar during the stock market sell-off associated with the financial crisis in 2008. There were five rallies – the last one being a 24% rise – before the ultimate bottom for U.S. stocks in March 2009, 50% below their 2007 high.
History doesn't need to repeat, but it does say something about what people have done in similar situations in the past. So far in this bear market, we've seen rallies of 11%, 7%, and – so far – roughly 12% (from a June 16 low) in the S&P 500...
The giveaway of a bear market rally is that stocks don't rally back above their previous high... In long bear markets, that doesn't happen until way down the road, years even...
Today, the S&P 500 is right near its previous highs from the end of May and early June, and still 14% below where it started the year. The Nasdaq is down 20%, even with a 17% rally since mid-June.
Of course, though, understanding history is one thing. Living in the present is another...
These rallies might be hard to watch today if you have cash on the sidelines. Even if you know logically to expect bear market rallies, fear of missing out is real. But patiently waiting for long-term trends to reverse, or being selective with buying opportunities in the interim, can pay off big time.
If you want a good take on this subject, read our colleague Dan Ferris' latest Friday Digest... or the latest issue of any of the newsletters you subscribe to from our group of editors and analysts.
Generally speaking, we're not betting on this bear market being finished. But we don't want to live with our head in the sand, either. Just because we don't think it should be over doesn't mean it can't be.
For the latest short-term market analysis...
... We turn to our Ten Stock Trader editor Greg Diamond. Yesterday, his regular Weekly Market Outlook was titled "This Is When the Bear Market Ends," which might have gotten your attention.
He wasn't calling the bear over, but he did say how to see when it is. I can't give away all the details that his subscribers pay for, but I do want to share Greg's general sentiment and one indicator he's using...
For the bear market to be over, we need to see a majority of stocks rallying above their 200-day moving averages ("200-DMAs"), making higher lows and higher highs and breaking downtrends from earlier this year.
As regular readers know, the 200-DMA is a simple technical indicator of a long-term trend. If a stock is trading above its rolling 200-day price average, it's in a sustained uptrend. If not, it's in a downtrend.
And the more stocks trade above their long-term price trends, the more strength it indicates about the markets in general. This is what market-types refer to as "market breadth," which we've also been covering this year as something to watch for as signs of a bottom.
As Greg said, after the rally the past month, some individual stocks today are close to breaking their downtrends, but others aren't at all... This behavior might be faking some people into thinking the bottom was in June.
Indeed, if stocks bust through their previous highs from the end of May and early June, it's a sign a new uptrend could be starting. But we're not there yet. As Greg wrote...
In other words, the strength in some stocks is helping the narrative centered on the bear market being over. But others that should be rallying with these strong stocks are not. This means we're starting to see divergence.
Divergence happens when some stocks make their bottom and rally, while others fall behind.
This divergence takes time to develop, but it's one of several indicators that will signal when the bear market truly ends. And if this divergence persists, it means the bear market will persist.
We're still seeing significant 'divergences' today...
Take shares of chipmaker Nvidia (NVDA) falling 10% in the past two days, dragging the semiconductor sector down with it... while other major tech stocks like Apple (AAPL) have traded sideways in the same two-day span.
As Greg updated subscribers today, this behavior is "very telling" and could indicate this latest bear market rally is nearing an end. This idea fits with a key market-breadth indicator and behavior we've been tracking the past several months, too...
I'm talking about the number of stocks listed on the New York Stock Exchange that are trading above their 200-DMAs. This breadth indicator has improved significantly over the past few weeks, from 15% to near 30% recently.
But looking closer at the trend, the number of NYSE stocks trading above their longer-term averages hasn't quite made a new high yet, nor a higher low...
At the height of the June rally, closer to 35% of stocks were trading above their long-term trend, but that didn't stop the market from taking another leg down...
In other words, we can't say there's an uptrend in market breadth just yet.
Plus, the more I see the "meme stock" revival of late, the more I think it's a new-ish type of bear market rally behavior. The same folks who'd bid up these garbage stocks early last year when the market topped are doing it again when they think the bottom is in.
In any case, the recent market action has resulted in enough of a move in a good chunk of stocks that we should watch closely for a big trend shift... But remember the bigger picture, too.
We could pick any number of catalysts for a new leg down...
Like more "surprise" inflation numbers starting tomorrow... and then Mr. Market reacting by thinking the Fed is going to hike rates by more than expected next month... That has certainly been the script so far this year.
To be fair, there's a market saying, "There's always a reason to sell." That's true because of the inherent risk in investing, and we have emotions.
But as Greg likes to say, the "why" doesn't necessarily matter to him in his brand of technical analysis. He looks at the "when," and the past history that he uses as context for the markets today. This strategy helps keep those pesky human emotions in check.
Existing Ten Stock Trader subscribers can find Greg's latest updates here, as can Stansberry Alliance members.
As I've said before, Greg's strategy is short-term in nature, but even long-term investors can find his analysis useful to identify key turning points in the broader markets or the specific sectors and stocks he covers.
Speaking of warnings, our colleague Eric Wade is making his first...
Many of you know Eric as editor of the excellent Crypto Capital and Crypto Cashflow newsletters. Eric is an unmatched resource for anyone interested in cryptocurrencies... and the source of so many successful recommendations we had to create a separate Hall of Fame for his biggest winners.
Today, Eric is warning of a monumental moment approaching in the crypto world, one that might arrive as early as the end of this month. He says if you own any bitcoin, Ethereum, or any of his other open recommendations, it's essential that you know what's coming...
And even if you've never bought a crypto before, this development could still have a major impact on your bottom line for years to come, he says. Never in his four years with our company has Eric made a warning like this.
We urge you to listen to him today to get all the details – before you likely hear them in the mainstream financial media in a few weeks. Click here to view Eric's new presentation on this story right now.
'I See the Future and It's Hell on Earth'
"This time, there will be no getaway plan [for investors]," warns Gerald Celente, the publisher of the popular Trends Journal. He believes the crisis that we are facing now is unprecedented and we are in a "new world disorder"...
Click here to watch this episode right now. And to catch all of the videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 8/8/22): Automatic Data Processing (ADP), Centene (CNC), CTS (CTS), and W.W. Grainger (GWW).
In today's mailbag, feedback on yesterday's Digest about the details of the latest jobs report... and more thoughts on Dan's latest Friday essay... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"One of my tenants has a dependable job as a school bus dispatcher who has always been able to pay her rent, but in August she told me she was happy she was able to find a part-time second job, because she has been struggling to keep her nose above water..." – Paid-up subscriber Tim S.
"The IRA (Inflation Reduction Act) is anything but. Can someone please tell me the math that proves that spending more funny money (in the $400 billions) will reduce inflation?? And this is after the same people injected $15 TRILLION of Monopoly money into the economy.
"The entire population of the Senate, the Congress and the President's Oval Office has gone off the rails. Not only do they not have a clue what they are doing, they refuse to admit and recognize that they engineered the mess that we are now in. And the answer to fix it is more of the same.
"When an hourly individual (now making $15.00 an hour) has to take another part time job on his weekends to make enough money to buy gas to get to his primary work we are at the beginning of some very serious problems." – Paid-up subscriber John M.
"I get it, gas is expensive, but I'm struggling with Albert playing the victim card that Amazon isn't paying him enough to fill his tank. If he's driving 120 miles round trip, the Soul gets over 30 mpg on the highway but let's use 30.
120 miles * 5 days = 600 miles / week
600 miles / 30 mpg = 20 gal gas (avg. in Raleigh is $3.66 / gal)
20 gal * $3.66 = $73.20
$73.20 * 4 weeks / month = $292.80 [for gas]$15.75 / hr * 40 hrs = $630 / week
$630 * 4 weeks / month = $2,520 / month
Housing assume about 35% = $850 / month
Food figure: $500 / month
Uncle Sam approx.: $295 / month
Remaining: $875 / month
"I am not sure what Amazon benefits costs on the healthcare front, but seems like after food and expensive shelter Albert should have nearly $600 left over before he takes the second job as a custodian. Sounds like Albert has a spending problem. I imagine Amazon has overtime pay too?
"I know the point you're making, but the Washington Post publishing this misses the bigger picture, how does someone who makes $2,500 / mo. struggle to pay for gas that is only $290/mo.?" – Paid-up subscriber Andy B.
"In [yesterday's] Digest you discussed the jobs report of employment rose by 528,000 in July.
"You further talked of 384,000 for part-time work and 92,000 people added a second job. Meanwhile the economy lost 71,000 full-time jobs. So that means only 52,000 net full time jobs were added.
"If that's the case, the original report should have been broken down accordingly and should be standard reporting from the U.S. Bureau of Labor Statistics in the future.
"Insist that it happens in the future!!! Good luck..." – Paid-up subscriber Max M.
"It was a BIG decision to invest as a partner in your business. I have made some good gains, preserved some wealth, and learned a lot along the way. The education has been invaluable. But I can also say Dan's Digests are a great joy to read. Thanks to all for the assistance in fine tuning my thinking and investment strategies. Doing my best to stay on the sidelines and be patient." – Stansberry Alliance member Jeffrey G.
"Thanks Dan for this article – straightforward, to the point, insightful, & witty. Keep doing this!" – Paid-up subscriber Peter K.
"The problem is NOT inflation. The problem is our government's destruction of the value of our money by ridiculous money printing, spending and more money printing. More money was printed in two years recently than in 200 years of U.S. history. In 1900, one dollar was worth $1.00. Today it's worth 3 cents. That's why gasoline is $5.00 a gallon recently. Adjusted for inflation/money destruction, it actually cost 15 cents in 1900 circa money.
"The median price of homes is now $416,000.00. And buyers are having bidding wars (all cash offers) trying to beat out the next guy to end up the winner. How many young people just starting out have 20 percent down ($83,200) to buy one, never mind can afford the monthly payments now at 5.6 percent interest? It's insanity of the third dimension.
"So, yes, I totally agree. The FED is NOT your friend. The government is NOT your friend. Politicians are NOT your friend... Their new mantra is inflate/destroy our fiat money or die because we are past the point where there is any hope of paying off our debt." – Paid-up subscriber John M.
All the best,
Corey McLaughlin
Baltimore, Maryland
August 9, 2022