The '70s Are Back, and More 'Havoc' Is Coming

Central-bank heads are united in higher-rate ideas... This really is like the 1970s... 2% inflation in 2025 – or later?... Former Fed official says to expect 'further havoc'... What BlackRock could do for (or to) bitcoin... Eric Wade's take...

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Picking up right where we left off yesterday...

Federal Reserve Chair Jerome Powell and his peers at other major global central banks delivered a unified "higher for longer" message about interest rates while speaking at a conference in Portugal.

As Stansberry NewsWire editor Kevin Sanford reported this morning, Powell, European Central Bank President Christine "Inflation Is But a Hump" Lagarde, and Bank of England Governor Andrew Bailey are now all aligned in continuing to "fight" inflation.

Here are a few quotes from Powell that Kevin picked out, along with his analysis...

We will be restrictive as long as we need to be.

Powell is hinting that while rates are in restrictive territory now, the downside risk of doing too little (not raising rates or keeping them high) is still greater than doing too much (raising rates to a level that is detrimental), even if that balance is inching toward equilibrium.

Core inflation will get back to 2% in 2025.

This is one of the more sobering comments of the day, as Powell says core inflation is a long way from returning to 2%... and likely won't until 2025.

This looks more like tightening cycles from the 1970s and 1980s.

Powell's comment here may get swept under the rug by many. But to me, this is a clear indication that investors should expect elevated rates for an extended time. Those two decades saw the highest average rates and more proactive policy than any other time since 1950.

Powell spoke before we published yesterday's Digest. Otherwise, I (Corey McLaughlin) could have suggested maybe he'd read what we were saying about reevaluating the "inverted yield curve" signal and thought to share the information, too.

This interest-rate environment is more like the 1970s and '80s...

And often back then, as we discussed yesterday, shorter-term rates were higher than longer-term rates for much longer than people these days have been typically used to.

That's why a lot of people have been expecting a big economic slowdown a year after an inverted yield curve.

The central bank's approach is no longer to cut rates at the first sign of economic weakness, like it did following the financial crisis. Instead, the stance is to raise rates until the economy slows enough to get "official" inflation back to 2%... And that has proven to be a challenge.

A baseline 'ballpark' projection...

When the Fed people talk about a 2% inflation goal, they're talking about their preferred inflation measure – the core personal consumption expenditures ("PCE") index. It has checked in at or near 4.7% annual gains the past six months ending in April, the latest data available. (May numbers come out tomorrow.)

So, the Fed's inflation measure is down from a peak of 5.4% back in February 2022. That's only a decline of 0.7% in 14 months. At that pace of disinflation – which admittedly could accelerate in the months ahead – core PCE would still be at 4% in mid-2024... not get below 3% until late 2025... and finally get below 2% only sometime in 2027.

Again, I realize simply plotting out the current pace of disinflation for the future won't necessarily play out, though it is a possibility. I share this example more to provide a ballpark of the scenarios we could be looking at absent a full-fledged recession with significant job losses.

Inflation may not return to 2% anytime soon (Powell evidently now thinks not until 2025 at the earliest). But if we are to believe the central banks, they are going to get us there by making money more expensive than it is today.

'Further havoc is all but guaranteed'...

Folks who have been in the "system" are starting to talk more and more like rates will keep going higher and higher (I was just talking about the inflation part)...

Today, former New York Fed President and Federal Open Market Committee Vice-Chairman Bill Dudley wrote an opinion piece for Bloomberg. He suggested that the 10-year Treasury note should yield 4.5% over the next decade, based on his conservative estimate... and that could mean more trouble for the economy. He said...

To some extent, this is what the Fed needs to happen, to slow the economy and get inflation under control. That said, it's been so long since long-term rates have reached such heights that further havoc is all but guaranteed.

Dudley argued that the longer "above 2% inflation" goes on, the higher rates will have to go. Among other impacts, he said even higher rates could eventually put more focus on the U.S. government's untenable long-term fiscal situation. That, remember, is $32 trillion in debt, not counting future Social Security or government-sponsored health care costs.

As Dudley wrote...

Given the dim prospects for any political agreement to get the U.S. government's unsustainable budget deficits under control, the Treasury will be issuing vast amounts of debt — at a time when the Fed will be reducing its Treasury holdings by $60 billion a month, and when international sanctions have led some central banks (notably China and Russia) to reduce their appetite for U.S. Treasury securities...

There's just one possible silver lining: With any luck, a reawakened bond market might force U.S. politicians to finally get the country's fiscal house in order. The sooner the better.

We won't bet on that yet.

Take note – again...

The "last 20 years of strategy" bet would be that if inflation is still at 3% in 2025 or if or whenever a recession hits earlier, central banks will cry uncle and "move the goalposts" of their inflation target higher to justify making policy "easier" again.

If it's a recession, they can say, "We can't keep losing jobs or seeing bankrupt businesses."

Then, on the game goes... And we may be dealing with high(er) inflation risks for a decade, if this really is the 1970s all over again.

Only then will folks maybe talk seriously about reining in government spending... or we'll be another few years closer to meeting the Roman Empire's fate.

We can't say for sure if or when that will happen, though. The more useful point for your investment portfolio is probably that the medium-term picture looks like this: A tougher road for businesses to make money is likely still ahead, and debt-ridden companies that will need to refinance loans at even higher rates are in real trouble.

But like we said yesterday, it also means that in the meantime, stock prices could keep going up until the global economy cools to a point where central banks would even think about cutting rates again. Plan accordingly.

On a related note, about cryptos...

Our colleague and Crypto Capital editor Eric Wade wrote to you on Tuesday to offer details on the Fed's imminent launch of a "digital dollar" system. "FedNow" will be used by the Treasury Department and government programs like Social Security. It will be available to tens of thousands of banks... and could put payment apps like PayPal or Venmo out of business.

Just to be clear, what Eric is talking about isn't the central bank digital currency you may have been hearing about. But what the Fed is making available starting July 1 marks a big step closer to a potential one... And also, as he explained, the launch of FedNow is a potential massive tailwind for certain cryptocurrencies and the blockchain technology that enables them to work.

On a related point, Eric told our editor-at-large Daniela Cambone in a recent interview that he thinks the Fed's rollout of this digital dollar system – along with the recent litigation from the U.S. Securities and Exchange Commission ("SEC") against big crypto exchanges Coinbase and Binance – could actually send crypto prices higher... like bitcoin (BTC) reaching $80,000 in the near future.

So if you've given up on cryptos after the beating the industry took in 2022 and earlier this year, think again... This may be just the time to get interested. The world's largest asset manager sure is...

What BlackRock could do for (or to) bitcoin...

You may have seen news recently that BlackRock earlier this month filed an application with the SEC to create a bitcoin exchange-traded fund ("ETF") called the iShares Bitcoin Trust, with Coinbase as its custodian. That's interesting considering the regulatory agency's current stance against parts of the crypto world, including Coinbase.

Fellow asset management giant Fidelity just today filed to launch a spot bitcoin ETF as well. And other firms like WisdomTree, VanEck, and Invesco have taken BlackRock's application as a sign the SEC could be changing its stance on a spot bitcoin ETF – since it has previously declined every application so far – and have begun taking steps toward creating their own funds.

If some of the world's largest asset managers want in – and get approval for public spot-bitcoin ETFs – it would give a huge stamp of regulatory approval to cryptos as an asset class. No such publicly traded ETF exists yet. Last year, BlackRock launched a private trust for institutional clients, but other existing bitcoin ETFs track bitcoin futures contracts or crypto-related companies rather than bitcoin itself.

Eric talked about this news in his recent interview with Daniela, and he shared a few additional points with me the other day when I brought it up for discussion...

Good news, bad news...

Eric says a successful launch of a BlackRock bitcoin ETF, if it is approved, could in and of itself be a factor in driving the price of bitcoin higher, based solely on the mechanics of how the world's largest cryptocurrency "works." But it would also come with some drawbacks for those wanting to use bitcoin as a means of exchange.

Eric told me in a note...

See, bitcoin (and most blockchain-powered cryptos) work differently than just about any other asset class on the planet. They're monetized differently. To conduct a transaction on the bitcoin network, you need to pay a fee... in bitcoin. That's more like how dollars work than any other investment we can think of. Imagine making a real estate transaction and when it's time to pay the agent their $60,000... having to pay in real estate? Or if you buy a case of fine wine and there's a fee... that you have to pay by uncorking a bottle and pouring a glass?

What I'm getting at is for the folks who are using bitcoin for transactions, be they speculative investors or day-to-day folks who use it like cash, every transaction on the bitcoin network collects a small fee... paid in bitcoin. And if BlackRock has a successful launch, attracting billions of dollars of investments into the bitcoin spot ETF like many of their specialty ETFs like the Medical Devices or Aerospace & Defense funds, that would be great for the price of bitcoin as BlackRock buys the scarce asset.

But once the coins are securely squared away, we won't be able to use them. They will literally be out of circulation, like millions of other bitcoin that investors just refuse to sell. That will cause a dramatic supply shock, affecting the people who do use bitcoin for transactions and pay fees on the network.

Hopefully they've squirreled some bitcoin away because we all know that increasing demand with a limited supply can really drive prices higher.

So, a BlackRock ETF would be kind of a "good news, bad news" development for bitcoin users or holders.

The price of bitcoin may go higher, but if BlackRock actually buys bitcoin as part of its plan, there would be less of the crypto available to be used for transactions by people who, say, aren't the largest asset manager in the world.

Moral of the story?...

It's probably worth owning some bitcoin.

Another takeaway: You can probably tell that Eric knows cryptocurrencies inside and out, especially if you also read his Tuesday Digest and definitely if you subscribe to either his Crypto Capital or Crypto Cashflow newsletters.

If you want to learn more from Eric, the best thing to do today is check out his latest free presentation. As we mentioned, he covers all the details about FedNow's imminent launch... what it means for cryptos... and how you could position your portfolio to take advantage of this massive change to the U.S. dollar.

In the video, Eric also gives away a free crypto recommendation, which is worth tuning in for alone. If you took his advice last time he did this, one year ago, you could have booked more than a 5,000% gain. So give his latest video a watch, for free, at this link.

New 52-week highs (as of 6/28/23): Apple (AAPL), Copart (CPRT), Covenant Logistics (CVLG), Dice Therapeutics (DICE), Floor & Decor (FND), W.W. Grainger (GWW), MSA Safety (MSA), Palo Alto Networks (PANW), Parker-Hannifin (PH), Roper Technologies (ROP), Spotify Technology (SPOT), and The Trade Desk (TTD).

In today's mailbag, a subscriber skips past discussion about our formatting in favor of feedback on yesterday's Digest about reevaluating the inverted yield curve... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Haven't we discussed [Digest length] already? I also wish to discuss this yield curve inversion. Could it be possible everyone is wrong? Housing numbers just came out and blew it out of the water. Construction and materials companies are making new highs every day as shown with your daily synopsis. I realize many of the projects happening now have been in the works for some time and most likely approved when rates were much lower. I have buddies who are so busy they are turning work away and even the crappy guys who never get work for one reason or another are busy. Mostly their prices are usually too high which is why their bids get tossed right away, not that their work is bad.

"I see this from many angles. I know there is a housing shortage but you need to see the small construction companies and how they operate. If people aren't moving, they will update the homes they currently have getting ready for the time they can move and enjoying the updates in the meantime. I'm also seeing gigantic projects still being planned and completed in towns you wouldn't think could or would have these housing projects allowed. Until I see guys with worried faces and day laborers packing the street and still there at 8:30 I believe this supposed 'recession' that many believe is either here or coming in the near future will be wrong...

"Things are still humming here in the northeast and I believe will be for another two years at a minimum. I know I am proving your case with the 24-month time frame but until the spending stops from the bottom up the country keeps humming along." – Subscriber James S.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 29, 2023