The Clouds Are Thick
Another 'Fed Day' is on deck... The answer is more inflation... Have you seen bitcoin lately?... The story behind the crypto's jump above $30,000... Reasons for optimism... Why sound money can save us...
Tomorrow is another 'Fed Day'...
As I (Corey McLaughlin) wrote yesterday, this week is a busy one for economic data... And for now, the latest Federal Reserve meeting is the headline event, taking place today and tomorrow.
The string-pullers at the central bank met today and will announce their latest policy decisions at 2 p.m. Eastern time tomorrow, followed by a press conference from the noted sail-by-the-stars explorer and Fed Chair Jerome Powell.
To use Powell's analogy from back in August about how the Fed is "navigating by the stars under cloudy skies," the economic outlook is obscured by thick clouds right now, and so are most stocks lately. The major U.S. indexes are trading below their long-term trend lines... as are roughly three-quarters of all the names on the New York Stock Exchange.
And the previous Fed meeting in mid-September appeared to be a catalyst for the second half of the three-month-long sell-off we've seen in stocks... What's to come? Let's start with a brief look back.
The last time...
A month ago, Fed members published their quarterly economic outlooks and indicated they were near the end of the road of interest-rate hikes to fight inflation... but that they would keep the central bank's benchmark lending rate around 5% well into next year.
They also said that they would likely cut rates in 2024 (presumably to juice the economy because it'll be dragging), but not by as much as they had projected before. As I wrote on September 21, the day after the last Fed meeting, we saw investors adjusting to the idea...
If you look at the futures markets and bond yields, this week's market action may reflect growing expectations of a slightly higher-interest-rate environment for longer than previously thought.
Compared with the expectations one month ago, fed-funds futures traders are now betting on the Fed's benchmark lending rate being about 50 basis points higher throughout next year. This same group of bond traders now thinks the earliest the Fed would cut rates is June.
This trading activity also implies that these folks don't expect a reason to cut rates – like a recession, for example – until later next year.
Since then, those knee-jerk reactions have turned into patterns. Longer-term bond yields have risen dramatically (and stocks have been down)... The 30-year bond is yielding more than 5%, and the 10-year Treasury yields around 4.8% as of today.
Meanwhile, short-term yields – which track Fed policy more closely – have remained mostly steady. The 2-year note is yielding a little more than 5%, and a 3-month T-bill will give you roughly 5.5% annualized.
In other words, the market is behaving like the Fed is near the end of its rate hikes... But it also thinks inflation will be staying higher, indicated by the lack of demand for longer-term bonds at recent rates.
What to expect this time...
Many folks on Wall Street expect the Fed to hit the "pause" button again on rate hikes. That would leave its federal-funds rate range between 5.25% and 5.5%, and leave open the possibility for another 25-basis-point hike at its next meeting in December.
Then the idea is they'll call the inflation fight "over."
That's my bet, too (even if the fight being over is not true). It's what the central bank has been telegraphing for months. So, as is often the case with these Fed dog-and-pony shows, the important comments to listen to are Powell's endless thoughts of the future...
There's a key point that's often forgotten or rarely mentioned in the mainstream financial media: that the Fed will only cut rates if the economy has gotten really bad. As of August, the central bank was expecting to do that in 2024, while not predicting inflation to "get back" to a 2% annual rate until 2026.
In my view, that's a teeny-tiny tightrope to walk. It leaves a lot of room for uncertainty with monetary policy for the next few years, if the central bank ends up cutting interest rates when its preferred inflation gauges are still above levels of the past decades.
If Powell makes it clearer tomorrow that the Fed is prepared to cut rates should the economy slow, stocks could very well bounce from this monthslong sell-off. Yet as we've said many times before...
The end result is likely higher inflation for longer...
The market appears to be reflecting this idea. Bonds, as measured by the 10-year Treasury, are on track to decline in three consecutive years for the first time since 1787.
After the past few months of selling, the Dow Jones Industrial Average is now flat for the past year. The small-cap Russell 2000 Index is actually down slightly since last October 31. And the benchmark S&P 500 Index and tech-heavy Nasdaq Composite Index, while still above their lows of last October, are down roughly 10% since late July.
Among other things, this messy picture and mixed signals are another reminder of one of our key investment principles... If you're interested in owning stocks, you want to own shares of high-quality businesses, particularly ones that don't depend on the path of inflation and can sell their products or services and reward shareholders even in a recession.
This is part of the message our founder Porter Stansberry has been sharing lately in a brand-new video presentation. In short, Porter thinks trouble is ahead for the economy in 2024, and that the government will resort to all it knows how to do in times of crisis: print money, which ultimately leads to more inflation.
So what can you do to protect and grow your wealth?
As Porter suggests, the only thing he knows for certain is to own shares of high-quality businesses that can generate tons of cash no matter the economic environment. Holding shares of these companies that don't depend on new capital to grow is "the real solution for this kind of long-term inflationary outlook," Porter says in his latest video.
Be sure to check out Porter's new presentation, if you haven't already. It's totally free and is a must-watch. He and our Director of Research Matt Weinschenk cover a lot of ground, including the outlook for the next year, the state of the U.S. consumer, the banking system, the recent bond-market rout, and much more.
And, in tomorrow's edition, I'll have a report on the latest from the Fed meeting. Stay tuned.
In the meantime, let's switch gears...
This is a story we've been keeping an eye on for the past few weeks...
Have you seen what has been going on with cryptocurrencies lately?
And I'm not talking about the trial of Sam Bankman-Fried, founder of the collapsed crypto exchange FTX. (The proceedings are close to wrapping up and featured him taking the stand for the third and final time in his defense today.)
No, the news that matters is that cryptos are rallying once again. Since October 15, bitcoin (BTC) and Ether (ETH) have risen roughly 28% and 16%, respectively. And the total crypto market cap is up roughly 17% in the same time frame.
To hear it from Stephen Wooldridge II, an analyst on our Crypto Capital team, these recent moves are making waves in the crypto communities. And there's more promise behind this rally than meets the eye...
Stephen takes things over from here with the details...
On the surface, I (Stephen) see this rally as directly tied to the imminent approval of a bitcoin ETF by the U.S. Securities and Exchange Commission ("SEC"). In fact, some analysts think that an accidental tweet on X, previously known as Twitter, sparked this run.
It was from Cointelegraph, a relatively trusted source in the crypto community, claiming that the SEC had approved BlackRock's request for launching a bitcoin ETF. You can see on the chart below how the famously volatile BTC market price broke out of four days of remarkable stability on October 16 when this report made the rounds...
That same day, the media outlet publicly apologized for what it said was a "false" post derived from misinformation. But the market's rally held up through the backtrack, even climbing in the following days. And that's a tell about crypto sentiment today...
A rally over this news, real or not, makes a lot of sense...
A regulated bitcoin ETF would help bring more crypto exposure to a wider range of investors who don't want to trade in BTC directly. Against the backdrop of 12 months filled with regulatory uncertainty surrounding cryptocurrencies in the U.S., and popular centralized exchanges like FTX and BlockFi going bankrupt, that covers a lot of people.
But to end the discussion there would be an oversimplification of what's really going on with the crypto markets.
In truth, this rally is a small part of a slow climb that has been building all year. The crypto market at large is recovering from a deep bear market that lasted throughout 2022.
We've been in an accumulation phase since January and have just broken past a key technical resistance level for BTC at $30,000 that had lasted since last year's drawdown... so the future is as bright as it has been in quite a while.
This may sound like a bold claim, but it's not a stretch to say that we may very well be on the cusp of a historic bull market in cryptos unlike anything we've ever seen.
A number of factors support this optimistic prediction...
SEC Chair Gary Gensler indirectly made a bullish case for crypto's future value after his speech at the Securities Enforcement Forum event in Washington, D.C. last Wednesday.
The speech itself presented a grim view of crypto investing, which is "rife with noncompliance," according to Gensler. But when fielding questions afterward, he said that the U.S. capital market is valued at upward of $110 trillion on its own, whereas the total crypto market cap is valued at just above $1 trillion. Thus, cryptos make up less than 1% of U.S. capital markets.
Gensler used this to indicate that people are talking about cryptos too much when they are still such a small sector of the overall market. But we look at it a different way: Considering the value of blockchain – the ledger that tracks a crypto's transactions – this ultimately means that the prices we've seen thus far are wildly undervalued, and we're still very early in the development of cryptocurrencies.
If that idea doesn't excite you, maybe this will...
Bitcoin may have jumped from $27,000 to $29,000 on October 16, but since then, it has rallied as high as $35,000... up nearly 26% in the month of October alone. Anyone expecting a pullback has been on the wrong side of the trade, as BTC has offered little indication that the price could be dropping anytime soon.
One of the biggest reasons to expect a surge of value over the next 12 months comes from a technology built into bitcoin's code since its origin. You see, bitcoin is due for another "halving," estimated to occur sometime in April 2024.
Every four years, bitcoin miners start receiving half of their previous rewards for processing bitcoin transactions. Halvings significantly slow down bitcoin's inflation rates. And historically speaking, these halvings are always followed by a substantial rally.
The most recent halving took place in May 2020, when BTC was priced around $8,600. It was followed by a significant bull run that left BTC priced at $56,900 in May 2021. That's an increase of 561% in one year. And the previous halving, in July 2016, saw gains of 287% in the same time frame.
Because of bitcoin's dominance in the crypto markets, currently making up 51.3% of the total crypto market cap, BTC's halvings are a good predictor of an incoming bull run. But alternative cryptocurrencies, coined "altcoins," often see the biggest gains.
For example, our publication Crypto Capital closed out five separate 1,000%-plus gains in 2021, near the peak of the last BTC halving bull run.
But even without the "halving indicator," there are other unseen factors influencing the markets that are setting it up for a successful run over the next year...
An inflation hedge? – Finally?...
Arthur Hayes, co-founder of the centralized exchange BitMEX, recently offered a view from left field concerning the recent rally that makes a lot of sense. He claims this rally isn't from the looming bitcoin ETF approval, but instead is an unexpected consequence of the ongoing wars in Ukraine and Israel.
As the U.S. beefs up its military spending, which could rapidly increase if war breaks out in more corners of the globe, U.S. inflation will be gearing up to hit an all-time high. And scarce commodities, like precious metals and cryptos, can act as a hedge against that.
It is notable that bitcoin's recent rally has coincided with a rally in gold, too.
Yet beyond crypto's monetary value, which we value against U.S. dollars that are affected by inflation, utility is what really sets cryptos apart as an asset class.
Cryptocurrencies and the blockchain technology they're built on have opened up a new world of decentralized, community-run financial opportunities, coined decentralized finance ("DeFi").
This category includes self-repaying loans, loans that don't require a middleman, real-world assets ("RWAs"), like real estate and precious metals that can exist in a digital and borderless form, yield-bearing vaults on a variety of assets, and new innovations that folks haven't even conceived yet.
Cryptos (still) will change the way we do things...
They'll touch things like buying concert tickets to financing homes, without us even realizing that we're using them.
It will streamline complicated processes, put the power back in the hands of people, cut out unnecessary middlemen, and define the way we interact with the financial landscape of a globally connected world.
That's the real value cryptocurrencies bring, and we believe crypto's inherent usefulness will be valued much higher than it is today by individual investors and institutions. The users of DeFi protocols both benefit from its value and ultimately control its development.
But there's another, perhaps controversial, recommendation for where bitcoin, the biggest, most popular, and best-known cryptocurrency could start to make a world-changing difference: as backing for the U.S. dollar.
I'm talking about a fascinating proposal in an upcoming book my colleague, Eric Wade, the editor of Crypto Capital and Crypto Cashflow, is publishing next February.
You see, Eric believes America could defeat inflation, runaway fiscal spending, and ineffective government policies if we return to an asset-backed U.S. dollar... which we haven't had since 1971 when the dollar left the gold standard for good.
As Eric wrote in a July Digest...
Our economy, our consumption, our politics all rely on the myth that our currency is "sound." And yet, the practice of endlessly devaluing it continues.
The government creates umpteen trillion dollars seemingly out of thin air. But it doesn't want anyone to stop believing those magic dollars are a strong, sound currency.
It's a paradox. And we ought to try to break it, by backing the U.S. dollar with assets.
Eric's solution is to strengthen the greenback with a combination of real-world assets such as gold, American real estate, diamonds, and – perhaps unsurprisingly – bitcoin.
Eric touched on this idea here a few months ago, and he's been putting together an entire book on the idea: America vs. Americans: How Capitalism Has Failed a Capitalist Nation and What We Can Do About It.
The book isn't about politics, but the importance of sound money...
And Eric makes the case that bitcoin belongs at the same "real asset" table with classes like real estate and gold.
America vs. Americans considers the possibility that a sound dollar and American technical innovation could be used by our government to balance the budget, save Social Security from being insolvent, reduce our taxes, eliminate involuntary poverty, and give education to everyone who wants it.
If you're interested in these ideas and are curious about why Eric thinks bitcoin can benefit America, you can preorder his book online now for just $26. Here is an Amazon link. In the meantime, keep an eye on cryptos and the next halving that's approaching.
New 52-week highs (as of 10/30/23): iShares 0-3 Month Treasury Bond Fund (SGOV).
In today's mailbag, a question about our founder Porter Stansberry's latest presentation and recommendations, and an answer from our Director of Research Matt Weinschenk, who sat alongside Porter during his free broadcast that debuted last week... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"If the market is going to be as bad as Porter says it will be over the next 12-18 months, why would I buy the recommendations now, wait for them to take a hit and come back up, as opposed to buying them during the market downturn when they are cheap or after when they have rebounded?" – Subscriber B.B.
Matt Weinschenk comment: We address this in subscribers' newest Forever Portfolio issue. In short, the key is that you should build a portfolio that works in all markets. As we write...
Porter has always had a unique aptitude for seeing what others don't. He identifies the cracks in the system. And he worries about when they will spread, widen, and break apart. But he also understands that regardless of what else is happening in the market, stocks are the greatest wealth-creation tool in history.
Despite his often bearish views, the newsletter that bears his name, Stansberry's Investment Advisory, has invested in stocks since 1999. Even though Porter properly called multiple bear markets and crashes in that time, sticking with stocks over the long term has made his readers money.
Since 1999, the average return of the Investment Advisory model portfolio is 16.1%, compared with just 12.3% for the benchmark over that time. The trick is this: Cash earns no return. Gold is just a metal. Bonds are someone else's debt.
But true high-quality businesses create actual value from capital.
Given Porter's new outlook, we've made some changes to the portfolio intended to put it on firmer footing for a recession or bear market. We also had to adjust positions because some had grown so much that they had become an outsized portion of our portfolio.
Existing Forever Portfolio subscribers and Stansberry Alliance members can check out our latest allocation here. And if you are interested in gaining access, click here to get Porter's full thoughts, including details on how and why to get started with his recommendations.
All the best,
Corey McLaughlin and Stephen Wooldridge II
Baltimore, Maryland, and Los Angeles, California
October 31, 2023