The Lone Dissenter

An alternative view from inside the Fed... The second-order consequences of lower rates... Prepare for more inflation... Risks abound... Gold hits another all-time high... The recipe for financial survival...

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A 19-year first...

When the Federal Reserve announced its 50-basis-point interest-rate cut last week, there was a small acknowledgment tucked away near the bottom of the statement...

Michelle Bowman, one of the 12 voting members of the Fed, disagreed strongly enough with her fellow members to "dissent" to the Fed's policy announcement. Bowman voted for a 25-point cut instead.

A 25-point difference in opinion on monetary "easing" might not sound like much. But the message matters. It was the first public dissent of a Fed's policy announcement since 2005.

Bowman, who occupies a seat on the Fed board representing community banks, elaborated on her disagreement today at a bankers' conference in Hot Springs, Virginia.

First, she said she was concerned about sending the wrong message to the market – that the Fed sees "fragility" in the economy (which she doesn't see).

Second, she feared the market would expect similar 50-basis-point cuts in the future when they might not happen.

Finally, she's concerned about "reigniting inflationary pressures." As Bowman said today...

I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment.

Although the labor market data have been showing signs of cooling in recent months, still-elevated wage growth, solid consumer spending, and resilient GDP growth are not consistent with a material economic weakening or fragility...

I am taking less signal from the recent labor market data until there are clear trends indicating that both spending growth and the labor market have materially weakened.

I suspect the recent immigration flows have and will continue to affect labor markets in ways that we do not yet fully understand and cannot yet accurately measure.

So Bowman has a more optimistic view of today's economy and less conviction about its future path than her colleagues, which may or may not be proven right.

On the one hand, you could criticize Bowman for "slow" Fed thinking if the economy worsens in the months ahead and into early 2025. On the other, Bowman is likely right to worry about reigniting inflation.

Now, given the rising unemployment rate and other pre-recession or recession signals we've seen lately, I (Corey McLaughlin) see the Fed's case (based on its "dual mandate" of stable prices and maximum employment) for the 50-basis-point cut. Either way, though, Bowman brings up a great point to consider.

There are always second-order consequences to a Fed move...

We like to consider these because they can "surprise" the market in the future and lead to volatility... like when 40-year-high inflation emerged after the central bank's consensus view of "transitory" inflation in 2021. Interest rates had to go higher afterward, which crushed the value of bonds (and stocks) in 2022. But the Fed never entirely told anyone this would probably happen.

Today, Bowman is a lone Fed voice reminding people about the possibility of high(er) inflation again due to Fed decisions. My gosh, is that some public self-awareness?! There's value in that.

Long story short: If the pace of inflation picks up again, it won't surprise us.

We're already seeing signs...

Yesterday's S&P Global "flash" report on U.S. manufacturing and services activity showed promising results for the current third quarter. But it also included this...

Prices charged rose at the fastest rate for six months, pushed higher by input cost growth accelerating to a one-year high. The acceleration of selling price inflation was common across goods and services, in both cases hitting six-month highs. Service sector input cost growth notably struck a 12-month high, linked to reports of wage growth.

Keep in mind, this was after the idea of rate cuts hit the economy over the past few months.

The Fed has now made the first of multiple rate-cut promises. But expectations for future growth are low...

Optimism about output in the year ahead deteriorated sharply, the survey's future output index falling to its lowest since October 2022 and the second lowest seen this side of the pandemic.

Put it together, and Chris Williamson, chief business economist at S&P Global Market Intelligence, said...

A reacceleration of inflation is meanwhile also signalled, suggesting the Fed cannot totally shift its focus away from its inflation target as it seeks to sustain the economic upturn.

The Conference Board's monthly measures of consumer confidence also just fell to their lowest levels in the past two years. A lot of people think "everything is bad" in the U.S. economy today.

Based on consumers' short-term views about income, business, and job prospects, the organization's expectations index declined to 81.7. This is close to but still above a reading of 80, which "usually signals a recession ahead," according to the Conference Board.

The results, according to Conference Board Chief Economist Dana Peterson...

Likely reflected consumers' concerns about the labor market and reactions to fewer hours, slower payroll increases, fewer job openings – even if the labor market remains quite healthy, with low unemployment, few layoffs and elevated wages.

The proportion of consumers anticipating a recession over the next 12 months remained low but there was a slight uptick in the percentage of consumers believing the economy was already in recession.

Ruh-roh. Just like last month, things appear complicated with this "landing." Proceed accordingly.

Still, the market absorbed these reports, along with everything else going on in the world today, and behaved slightly bullish. The S&P 500 Equal Weight Index was higher and so was the small-cap Russell 2000 Index and the tech-heavy Nasdaq Composite Index.

Inflation risk, coming to a port near us...

On October 1, a significant monkey wrench may be thrown into the entire U.S. economy.

The International Longshoremen's Association ("ILA"), North America's largest maritime workers' union, is preparing to go on strike if a new contract can't be reached with the U.S. Maritime Alliance, which represents container carriers and port associations on the East Coast and Gulf Coast of the U.S.

The sticking point is wage increases for about 25,000 workers, who the ILA says have received inconsistent raises of a dollar per hour over the past 30 years and are now seeking a $10-per-hour wage increase. The ILA said this in a statement a few days ago...

Our members are struggling to pay their mortgages and rent, car payments, groceries, utility bills, taxes, and in some cases, their children's education.

It's inflation, again.

According to the National Association of Manufacturers, the contract up for renewal covers all ports from New Jersey to Texas, which accounts for "more than 68% of all containerized exports and more than 56% of containerized imports" in the U.S. "representing an average daily trade value of more than $2.1 billion."

More specifically, 91% of containerized imports and almost 70% of containerized exports of pharmaceutical products move through these ports... as do 76% and 54% of containerized vehicle exports and imports, respectively.

If all of that is stalled at sea or never leaves its departure location, U.S. "supply-chain disruptions" will once again be front and center in the national conversation, and so will the effects.

I know we have shipping industry veterans in our audience. I'd be curious to hear your take on all this. E-mail us at feedback@stansberryresearch.com, and we'll share your views.

Then there's war, of course...

JPMorgan Chase CEO Jamie Dimon stated the obvious in an interview released by CNBC today: "Geopolitics is getting worse."

Middle East warring has hit new levels on the northern Israel border, and we can't imagine Iranian leaders are all too pleased. The Houthis are still attacking tankers in the Red Sea. Meanwhile, the war in Ukraine has been going on just over two and a half years without a resolution.

We haven't written the words "war is inherently inflationary" in a while, but they're still valid.

From government spending to fund war to the global supply-chain disruptions that come with ongoing fighting, everything leads to higher prices. Dimon also discussed the "chance for accidents in energy supply."

Not coincidentally, in Bowman's speech today, she noted these risks (and others)...

To hammer the point home, she said...

In my view, the upside risks to inflation remain prominent. Global supply chains continue to be susceptible to labor strikes and increased geopolitical tensions, which could result in inflationary effects on food, energy, and other commodity markets. Expansionary fiscal spending could also lead to inflationary risks, as could an increased demand for housing given the long-standing limited supply, especially of affordable housing.

Those were among the reasons she said she wouldn't "rule out the risk that progress on inflation could continue to stall."

Practically...

Higher inflation is terrible news for the long-term value of the U.S. dollar, Americans' budgets, and the country's overall health.

To curb the potential effects on you, you'll want to own U.S. stocks, bought at reasonable valuations, and tangible assets like gold.

Now, there are always "reasons to sell"... and it might sound like there are a few today, but we're not suggesting you go "all out" of your investments.

After all, the S&P 500 and Dow Jones Industrial Average are trading at all-time highs, and the Nasdaq and Russell 2000 Index aren't far behind. Gold also moved more than 1% higher today to another all-time high above $2,660.

That's good news if you're interested in growing your portfolio. As Stansberry's Investment Advisory lead editor Whitney Tilson wrote in his free daily newsletter today, history shows that "stocks are almost always higher a year after the Fed starts cutting rates." So we could see "Melt Up"-like behavior again before anything else.

But gold's action and stocks at or near all-time highs when rate cuts are beginning suggest that enough investors believe there will be second-order consequences down the road. So don't be caught off guard if inflation reaccelerates.

New 52-week highs (as of 9/23/24): Alamos Gold (AGI), Constellation Energy (CEG), Costco Wholesale (COST), Carlisle (CSL), Commvault Systems (CVLT), WisdomTree Japan SmallCap Dividend Fund (DFJ), iShares MSCI South Africa Fund (EZA), Fair Isaac (FICO), Comfort Systems USA (FIX), SPDR Gold Shares (GLD), W.W. Grainger (GWW), Houlihan Lokey (HLI), iShares Convertible Bond Fund (ICVT), iShares U.S. Aerospace & Defense Fund (ITA), Nuveen Preferred & Income Opportunities Fund (JPC), Kinder Morgan (KMI), Lockheed Martin (LMT), NYLI CBRE Global Infrastructure Megatrends Term Fund (MEGI), Meta Platforms (META), Motorola Solutions (MSI), Newmont (NEM), Northrop Grumman (NOC), National Storage Affiliates Trust (NSA), NVR (NVR), Sprott Physical Gold Trust (PHYS), PayPal (PYPL), RadNet (RDNT), Royal Gold (RGLD), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), Spotify Technology (SPOT), ProShares Ultra S&P 500 (SSO), TransDigm (TDG), Texas Pacific Land (TPL), Trane Technologies (TT), ProShares Ultra Gold (UGL), Vanguard S&P 500 Fund (VOO), Vistra (VST), and Utilities Select Sector SPDR Fund (XLU).

In today's mailbag, thoughts on "distorted" data, which we discussed in yesterday's edition... and a few readers also pointed out an errant link to this week's Diamond's Edge. The correct link to this week's video is here.

"Hi Corey: Distorted employment reports, distorted inflation reports, the Fed lowering interest rates when they know real inflation has not ebbed, fake news, etc.! We are just getting into the window dressing period that many of us knew was coming as the November election nears...

"Regardless of the outcome of the election, it's all going up in flames starting in the first quarter of 2025 because of all the damage that's been done since January 2021." – Subscriber Michael U.

All the best,

Corey McLaughlin
Baltimore, Maryland
September 24, 2024