Hello, Stagflation
Dear subscriber,
Everyone is trying to talk the markets higher.
But talk is cheap... especially with a possible recession on the horizon.
President Donald Trump bought a Tesla on the White House lawn last week to try and polish up Tesla's (TSLA) stock price.
This week, U.S. Secretary of Commerce Howard Lutnick went on Fox News and pitched Tesla's stock directly, saying...
I think, if you want to learn something on this show tonight, buy Tesla... It's unbelievable that this guy's stock is this cheap. It'll never be this cheap again.
Of course, Tesla's stock has continued to fall. It's down more than 40% from the start of the year. And the broader market isn't much better... having entered correction territory.
Treasury Secretary Scott Bessent went on CNBC last Thursday and said he wasn't concerned about the volatility. He offered the viewpoint that the economy was going through a "transition" but that it "doesn't have to be" a recession.
On the week, Tesla is still down. The market has rebounded a bit... But it's nothing to get excited about.
Markets and economies are recursive. They feed on each other and are both driven by "vibes" and "animal spirits."
So when folks have fears about recessions and bear markets, injecting some optimism into the markets can be a self-fulfilling prophecy.
As I wrote last week...
It's not new for government officials to try to move markets. The Federal Reserve and other central banks will often make verbal commitments to stimulus or to "do whatever it takes" to support the economy.
Those statements, when credible, can create confidence and turn markets around, without any action even being taken.
But that's hard to do when everyone is worried about a recession today. I hear it from subscribers and friends, and I see it in the financial media as well.
Just look at Google searches for "recession"...
Consumer sentiment has turned abysmal. Folks are worried about business conditions and losing their jobs at a level we haven't seen in decades. (Check out this roundup on consumer pessimism from the Apollo Academy's chief economist, Torsten Sløk.)
It's unclear yet whether we'll actually tip into a recession. But the next couple steps along the economy's current path are very easy to see...
First, Trump's tariffs will cause a slowdown in growth. We see that in bond yields, and we know that from basic economic reasoning.
What we don't know is how big the decline will be.
We also don't know if the Fed will be able to step in and lower interest rates to rescue the economy (and stock market).
The Fed's capacity to do so depends on inflation being low enough that it can cut rates... And the outlook for that doesn't look particularly good.
This week, the Fed held a meeting to announce its latest decision on interest rates. It left them unchanged.
But what did change was the Fed's outlook for the economy...
During the press conference, Fed Chair Jerome Powell said the things he needs to say to try and breathe some life into the economy... though his words carried an air of uncertainty.
For instance, he wrapped his prepared statements with...
I'm confident that we're well-positioned, in the sense that we're well-positioned to move in the direction we'll need to move...
[Forecasting] is always very, very hard. And in the current situation... uncertainty is remarkably high.
Most news outlets walked away from the conference thinking it was a fairly routine affair with little news. But there was more behind the headlines.
The Fed published its latest Summary of Economic Projections at its March meeting. This is where all the members of the Federal Open Market Committee ("FOMC") share their projections for interest rates, economic growth, and unemployment. It's the best look into what the Fed thinks is next for the economy.
Well, in the latest report... everything moved in the wrong direction.
The median GDP growth estimate for 2025 fell from 2.1% to 1.7%. Meanwhile, expectations for inflation – as measured by the Fed's preferred inflation gauge, personal consumption expenditures ("PCE") – rose from 2.5% to 2.7%. PCE typically runs about half a percent below the more widely used consumer price index ("CPI"), which would reflect a CPI of up to 3.2%.
The Fed also shared the FOMC's range of expectations. Some worry economic growth will fall as low as 1% and that inflation could be as high as 3.5%...
There's a name for lower growth and higher inflation. It's called stagflation.
And this is precisely the problem with Trump's tariff plan...
Even if you believe that tariffs will revive American manufacturing, create jobs, and lead to more growth in our economy... it likely won't happen for at least a couple years. It takes time to reorganize supply chains and build factories.
Until then, tariffs will slow growth – as they immediately make trade between countries more difficult – and also raise inflation.
And if prices are ticking up, then the Fed will be reluctant to lower interest rates. That's because lower rates fuel inflation further.
The Trump administration is set to make another big tariff announcement on April 2 – what the president is now calling "Liberation Day." Trump and his team will explain which countries will see tariffs on which goods and at what rates.
Their exact plan is anyone's guess at this point.
Of course, Trump has already put the Fed's objectivity at risk. After the Fed's press conference, he posted on his Truth Social account...
The Fed would be MUCH better off CUTTING RATES as [U.S. tariffs] start to transition (ease!) their way into the economy. Do the right thing. April 2nd is Liberation Day in America!!!
But that's not the problem. The problem is if those Liberation Day tariffs come in broader and higher than the market expects, the fallout will be substantial.
And the Fed – and the American economy – will be stuck with a thorny stagflation puzzle for years.
What Our Experts Are Reading and Sharing...
The Bank of Japan has been hiking its own interest rates since March 2024. But in its latest meeting, it announced it would keep rates unchanged, citing tariff uncertainty as the main reason. With inflation in Japan hitting a two-year high of 4% in January, the country and its economy are dealing with a balancing act of their own.
Stansberry Research analyst Alan Gula has a theory that the initial public offering ("IPO") of AI cloud-computing company CoreWeave will mark the top of the AI bubble – or at least be a sign that the end is near. An IPO frenzy has been the one thing missing from this bull market. And CoreWeave just filed for a $2.7 billion IPO... scaled down from its initial target of about $4 billion. We're eager to see if there's a big first-day IPO "pop" in CoreWeave's shares.
Zeynep Tufekci, a Princeton University professor of sociology and public affairs, is livid with the behavior of public-health officials during the COVID-19 pandemic. They squelched evidence that the COVID-19 virus could have leaked from a Chinese lab. It's still uncertain where the virus originated, but making science about anything other than an open search for truth can be highly destructive. In a New York Times opinion piece, she also points out that the same risky research is still being conducted.
New Research in The Stansberry Investor Suite...
At Stansberry Research, we love boring, simple businesses.
We've even recently highlighted the stocks of companies that make basic everyday products, like toothpaste and chocolate.
But sometimes, the big reward is in helping companies do difficult, complex things...
Today, the Stansberry Innovations Report team is highlighting a company that helps other companies do what seems impossible... powering the entire digital world with tiny little chips.
If you've ever wondered how a company goes about designing semiconductor chips, the answer is that they probably use this company's software.
The science involved in this business is as cutting-edge as it gets. As the team puts it...
Modern semiconductor development is an immensely complex process involving multiple stages – from defining the chip's architecture to testing its functionality before it goes into production.
Importantly, though, this company doesn't undertake the difficult work of semiconductor design or manufacturing. Rather, it provides the tools that the big chip companies use to get the work done.
As you can imagine, there isn't a lot of competition in this space – and that leads to good returns for investors.
Moreover, this software company has huge gross margins of 77% and a free-cash-flow margin of 22%. Those are stellar numbers.
And the business is at an inflection point. The team notes that the company is reaching a point of "operating leverage," where its earnings are rising much faster than its revenues.
The term "tech stocks" may make you think of companies that sell frivolous tech services like social media. But this is the kind of hard tech that truly delivers innovations to the world.
Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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