The Dumbest Narrative in the Market

People are lazy... The dumbest narrative in the market... If inflation were a stock... The longest and most relentless bull market you'll ever see... You'll always pay more... Yes, this is the same Dan Ferris...

I (Dan Ferris) am afraid too many folks have become really lazy as investors...

They think they'll get out of the biggest mega bubble in history with a run-of-the-mill, one-year bear market. I've told you more than once I think that's unrealistic.

And now, these same people seem to think they'll escape 40-year-high inflation easily, which I also think is unlikely.

Before we talk about why anyone who feels like this shouldn't be so complacent, let's see how they got this way...

Investor attitudes of today have been deeply engrained by trends that started in the early 1980s. Back then, interest rates were sky high, with the 10-year Treasury yield peaking at 15.8%.

From then until 2022, interest rates fell. Rates didn't fall in a straight line... But every time they went up, we'd have a recession or some other big economic calamity...

Then the Federal Reserve would step in and start cutting rates again... and rates would fall to new lows.

The market came to rely on bailouts and lower rates...

Folks started calling it the "Greenspan put," named for former Fed Chair Alan Greenspan.

The Fed conditioned investors to trust it to keep them and the market propped up.

After Greenspan retired, the idea became known as the "Fed put," as his successors all adopted the bias toward lower rates and bailouts...

Falling rates made it harder for savers to find a safe, lower-risk return on savings accounts and government bonds...

So folks turned more and more to the stock market. It became normal for individual investors to bypass safer alternatives in favor of stocks...

That turned out OK. The bear markets of 2000 to 2002, 2007 to 2009, and the March 2020 COVID-19 crash taught investors that they were right... They could count on the Fed to deliver lower rates and big bailouts.

You'd expect bear markets and crashes to scare investors away...

But the Fed's larger and larger responses – its bailouts during the great financial crisis, the trillions of pandemic-stimulus dollars – taught investors to be lazy about risk. They forgot how to be scared.

Despite the drawdowns of the current bear market, investors haven't given up on the strategies and attitudes that worked like gangbusters in the Fed put days.

They still try to get rich quickly by speculating on dying, and even bankrupt, businesses. They still think it's easy to make money in stocks. And they still think they're smart.

It all demonstrates what I said at the outset, that investors have become lazy. They still believe the biggest mega bubble in history can end with a typical, rather mild, bear market.

I see so many people still asking, "When's the Fed going to cut?" as if we're still in the bull market of the past decade... and 40-year-high inflation never happened...

Enough people think the Fed put is still in place. It's not... The Fed keeps talking about raising rates, not cutting them.

But this isn't even the only way investors have been lulled into laziness by decades of falling interest rates...

Folks aren't scared enough of inflation, either...

After making fun of the Fed's "transitory" gaffe last year, investors seem to have embraced it. They think 40-year-high inflation will gently float back to Earth with the same impact as Tinker Bell sprinkling fairy dust on a marshmallow.

(Google "inflation has peaked," and you'll see what I mean.)

Absolutely nobody alive today seems to understand that interest rates falling relentlessly for 40 years is a weird, once-an-eon anomaly highly unlikely to be repeated during our lifetime. Or it brainwashed investors, leaving them vulnerable to the ravages of inflation – perhaps the single most pernicious economic force of all.

The idea that any level of inflation is desirable is bad enough...

The idea that central banks can pinpoint inflation targets and hit them with great certainty and accuracy is downright dangerous and just plain wrong. If they could do that, we wouldn't be talking about this, and the consumer price index ("CPI") would never rise above 2%.

I promise you, the combination of a pandemic, zero interest rates, the biggest mega bubble in all recorded history, and 40-year-high inflation has warped many investors' expectations.

It makes investing a lot harder...

It's like I said in our January 20 Digest...

It's as though you're looking at the market in a funhouse mirror. You can try to adjust for the distortions all you want. But the image you see won't look right in the end. You'll be misrepresenting reality, not accurately reflecting it.

It's harder to get an accurate picture of economic and financial reality now than it was a few years ago. Forty years of falling rates followed by the roller coaster of the past three years is just too much for most folks to process.

On Monday, I called meme-stock buyers 'the world's dumbest investors'...

Well, "inflation has peaked" is the dumbest narrative I've ever heard in my life.

It depends on how you measure it, but if you use the CPI, it's obvious that inflation hasn't peaked – at least not any time in the past 76 years.

The popular inflation number that's reported every month is the annual percentage change in the monthly CPI. You've heard folks say, "Inflation has peaked because it has fallen seven months in a row."

But if you look at a chart of the CPI itself, you will not find a peak. You won't see anything even close to a peak.

Since early 1947, the CPI chart is up and to the right forever. You can see a few tiny drops here and there, but they barely register over the long run. The biggest "dip" is a 3.5% drop in 2008.

Otherwise, the chart of this widely followed inflation measure is the longest and most relentless bull market you'll ever see.

If the CPI were a stock...

You'd buy it immediately and forget you owned it for the rest of your life...

And you wouldn't be selling it because it's not going up as fast as before. You'd instead be telling yourself how smart you are for holding onto it because it's still going up. You might even buy more because every tick up would make you more confident that it would keep heading higher.

"But Dan, the CPI isn't a stock," you might say.

You're missing the big point! It never stops going up. It never stops rising. Inflation is permanently, upwardly mobile... It riseth toward the heavens on the wings of an eagle.

Get it?

(This is becoming a Monty Python skit.)

It's a bit confusing to see the CPI reported at 6.4% higher than last year and hear so many folks claiming inflation has been conquered. A Wall Street Journal reporter started a recent article with this sentence...

The end of distressingly high inflation is slowly coming into view. Consumer prices gained 6.4% in January, down from June's 9.1% annual rate, the highest since 1981.

Maybe it's just me, but it seems like that really says, "Inflation is distressingly high, higher than it has been in 40 years, but it'll all be over soon because prices are rising less rapidly than last June?" I guess the reporter did say it was falling slowly. But still...

It has a similar feel of the officials who told folks in East Palestine, Ohio to return to their homes and just ignore all the dying animals and toxic-chemical smells making them vomit and break out in rashes.

Maybe you think I’m just trifling around with definitions and data sets...

Well... Maybe looking at year-over-year CPI changes from June to January and declaring, "All clear!" means you're on drugs.

Like I said before, it depends on how you measure it...

For example, there's nothing magical about one-year increments. Why not report the change in the latest monthly CPI reading compared with the same month five years ago?

I think the answer is, "Because that might scare the bejesus out of everyone." Here's what the CPI looks like for the past year if it was calculated on a five-year timeline...

At the rates that have prevailed for the past eight months, your money loses more than one-fifth of its value every five years. And it looks less like it's peaking and more like it's leveling off around 20%.

Would you have predicted that, starting in June 2017 and every month through January 2018, your $1 bills would be worth $0.80 in five years? I bet not. Nobody was thinking about inflation five years ago.

This isn't academic, either. It's hurting millions of real people right now...

They're spending their hard-earned money to make ends meet, and they keep paying more and more and more for the same stuff. They're on a treadmill, running faster and faster just to stay in place.

As I pointed out on Monday, Americans are saving just 3.4% of their disposable income – much less than just before the pandemic. And more of them are living paycheck to paycheck than ever before, including 8 million people with six-figure incomes.

Even if inflation settles back to a level most folks consider low, the purchasing power that has been lost over the past year and a half is gone forever. It's not coming back.

In other words, your dollars have been permanently impaired – like a company whose assets fall in value until its liabilities overwhelm assets and it goes bankrupt.

Bottom line: From now on, you'll always pay more than you paid in the past. It would take a deep, sustained depression to return your lost purchasing power. Even then, I promise it would be inflated away again soon enough.

OK, now I'm the one in danger of being lazy...

I'm not making a prediction, as much as it might sound like one...

Even when I do make a prediction, I'm really just vividly entertaining a scenario that I believe is more likely than most people think. And I'm doing it with inflation right now because the narrative feels to me like it has gone too far in the other direction.

That Wall Street Journal article I quoted earlier has a long title, but the first three words are, "Inflation Is Falling..." They're too certain. They don't know inflation is falling at this moment, only that the CPI rose last month at a slower 40-year-high rate than the previous month.

Truth is, I don't know that inflation hasn't peaked. I just think it's less likely to have peaked than most folks seem to think right now.

I also believe inflation is a stickier phenomenon than the current narrative in the financial press seems to indicate. It hangs around longer and is harder to get rid of than the current narrative allows.

When it comes to inflation, learn to expect it to pop up at odd times in surprising assets and industries, and don't be too quick to declare it gone for good.

Don't expect inflation to move one way or another in a straight line, either...

Don't dismiss the possibility of a volatile, epic battle between the U.S. dollar and other asset prices to play out over the next few years. As interest rates have risen dramatically over the past year, the dollar strengthened, relatively speaking...

Here's a chart of the U.S. Dollar Index, which measures the dollar's value relative to other major currencies...

With a quick glance, one might say the dollar had an epic run-up into this past fall, and now it's over... Right now, it seems like the value of the dollar will keep falling... This would likely lead to higher CPI readings for longer than you might expect, because, by definition, anything priced in dollars will go up in price as the dollar falls.

Maybe... And maybe something will scare investors out of risky assets and into cash, strengthening the dollar. And maybe the Fed won't come to the rescue anytime soon, continue raising rates, strengthening the dollar some more...

Maybe. I don't know. The point is, you must look ahead and think about what might happen. Just don't bet with real money based on the idea that you can predict the future.

Instead, use your views about the future to...

'Prepare, don't predict,' as I've said many times...

When I say mega-bubble bear markets don't end this easily, or inflation doesn't go away this easily, it's not a prediction. I'm just trying to put ideas back into your mind that 40 years of falling interest rates and Fed bailouts have maybe made you forget.

That's why I keep repeating them and trying to find different ways of making those same warnings. Because I know that humans form habits easily... and habits of thought that are out of touch with market realities are portfolio killers.

For months and months now, Fed Chair Jerome Powell has been talking about how the central bank is going to keep raising rates, not cut them... and, at the very least, pause the Fed's benchmark lending rate at a level somewhere around 5%, as of now.

But enough investors don't seem to believe him... right when they actually should, or should at least consider believing him.

At this point, maybe you're wondering if this is the same Dan Ferris. I should probably say again what I wrote in an August 2022 Digest...

You know, the one who is always telling you not to believe what the Fed or the government tells you...

I'm the guy you go to when you want to fade the headlines, read between the B.S., and plan on all the authority figures' predictions turning out exactly the opposite of what they promised.

But, right now, it might be dangerous not to listen to what the Fed is saying. They will try to kill inflation, even if they can't. This is an important distinction. As I put it in August, the Fed is like a dentist with a chainsaw...

More accurate, the Fed is like a dentist who says he can fix your teeth with a chainsaw. He spends all his time oiling the thing... sharpening the blades... and talking about the type of steel on it, the high-tech chains, how finely tuned the engine is, and how it has special textured grips so he can hold it steady...

But it's a freaking chainsaw, and if he tries to fix your teeth with it, he'll just end up cutting your head off.

And now the Fed thinks it can use its chainsaw to lop 7% off inflation as though it were a surgeon removing a brain tumor.

But it will keep trying.

It'll raise interest rates as the CPI continues to print higher-than-expected numbers. And the stock and bond markets will react with "surprise," as inflation keeps prices of real things high and the rising cost of borrowing pushes the prices of homes and financial assets lower...

I said the advice from all of this was...

Don't fade the Fed's intent to push inflation to 2%...

Though I think the dollar could easily strengthen again... ultimately, I know it's as doomed as every other fiat currency. The dollar will eventually lose, and assets like gold, silver, oil and gas, copper, and high-quality, cash-gushing businesses with competitive advantages will win.

That's the endgame that has played out over and over throughout history. Eventually, the currency is always sacrificed to pay off excess debts. So long as there is fiat currency, there will be inflation. And as long as there is a Fed, it will act like a dentist with a chainsaw trying to "fix" the economy.

It's not possible, but the Fed will fight inflation to the death (even if it can't kill it). On top of that, too many folks are underestimating how long the current bout of high inflation could last...

In the end, if you're left feeling a little unsatisfied with what I've talked about today, then maybe I'm making progress. Maybe I'm helping you unseat some of the habits we all developed these past few decades.

It was OK to be confident about buying every dip and counting on the Fed to bail everybody out for a long time. It's not OK anymore. This time is not different, and "Goldilocks" periods never last forever.

New 52-week highs (as of 2/16/23): BorgWarner (BWA), inTEST (INTT), and Madison Square Garden Sports (MSGS).

In today's mailbag, some of your feedback on yesterday's Digest about more trouble with American railroads... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Corey, My husband and I live along the Mississippi in Fountain City, WI with Winona, MN on the other side. Been here 32 years, and have a few issues with [Warren] Buffett's train [company]. The length of trains is now two miles long for both states.

"Issue #1: River towns have two-story brick houses dating back to 1890s. The mortar was not developed to withstand the ground shaking that these heavy trains produce. They're cracking our houses, literally.

"Issue #2: Winona, MN doesn't have one bridge that goes over the tracks!!! All main roads have 'gated' crossings. If someone was having a medical emergency, they would be stuck waiting for the two-mile train to pass by. This is partly the fault of small town politics... but, it also exemplifies the power of the train industry and its lack of concern of the citizens living around major train routes.

"Issue #3: Dust from open coal cars. Regulations should require covers for these cars to protect air quality. Good luck getting that passed. So Corey... I suggest you start writing the book. Meanwhile, maybe call Anderson Cooper or a crew from 60 Minutes to interview Buffett and do an in-depth program on Americas Train Titans. Thanks for showing concern." – Paid-up subscriber Teri H.

"Regarding the Norfolk Southern accident in Ohio, why in the world is everyone sitting around waiting for them to decide there's enough incentive for them to clean up their act. Kind of ridiculous. More and more regulation is not always the right answer, but this industry obviously needs to be forced into action..." – Paid-up subscriber Pat D.

"Here's my take on the railroad disasters taking place now. The decline and decay of American railroads was predicted in the 1950s by Ayn Rand, and described in detail in her 1957 novel Atlas Shrugged. I read that book in the mid-70s. Then I heard what my father, a Southern Pacific passenger agent, was saying about how the railroads were being taxed out of existence. Then, the country's once-great passenger lines (which I enjoyed traveling on many times with my mother) got replaced by government-run Amtrak (a markedly less enjoyable ride).

"Our crumbling rail lines are following the trajectory prophesied by Ayn Rand. My wife says it's disgraceful what these companies are doing. I concur. So, why did the feds prevent current rail workers from striking for safer working conditions? You can bet the OSHA [Occupational Safety and Health Administration] stayed silent on that one." – Paid-up subscriber Franklin D.

"Funny how all of the current difficulties are strangely reminiscent of things portrayed by Ayn Rand in Atlas Shrugged. We're beginning to see what government overreach can cause. Just sayin'. Who is John Galt?" – Paid-up subscriber Dave P.

"Many people ridiculed the Atlas Shrugged movies for being true to Ayn Rand's focus on railroad problems contributing mightily to America's collapse. Recent events suggest the mockery might not in fact be warranted.

"We will see what happens. Prognosis, however, and, of course, remains poor." – Paid-up subscriber Lee N.

"The length of trains will be settled once they determine how many cars with solar panels on the roof will support the demand for the electrical motor in the 'engine'." – Stansberry Alliance member Gary H.

Good investing,

Dan Ferris
Seattle, Washington
February 17, 2023