The Real Temperature of Inflation

In the eye of the beholder... The latest on inflation... What Fed traders are expecting... What the surprise or the outcome could be... New all-time highs again... Hello, Dr. Copper... Early returns on Doc's new AI pick...

The headlines today said inflation is 'cooling'...

Really?

That would depend on your timeline... or your inclination for optimism.

This morning's consumer price index ("CPI") report for April showed a pace of inflation of 0.3% month over month and 3.4% year over year.

The monthly price growth was slightly, and we do mean slightly, below Wall Street expectations of 0.4%. It's also just below the 0.4% reported growth in February and March. So in the very short term, sure, the pace of inflation didn't speed up, according to these "official" numbers.

Investors, on balance, cheered. The major U.S. indexes were up...

But the monthly growth rate in inflation is still on pace for annualized numbers closer to 4% than the Federal Reserve's publicly stated 2% goal. And if you consider the data over just a slightly longer time frame, one might reach an entirely different analysis about the temperature of inflation...

Consider this take from Bob Elliott, formerly of Bridgewater Associates and now the chief investment officer at alternative investments firm Unlimited Funds – and a former guest on our Stansberry Investor Hour podcast. He posted on social media platform X about the CPI numbers from April and the last three, six, and 12 months...

As Bob alludes to, the Fed either keeps ignoring or doesn't want to admit that we're still in a high(er) inflation period that doesn't match up with its supposed 2% inflation goal...

We noted this just yesterday after hearing Fed Chair Jerome Powell (the "JP" in Bob's tweet) comment on the April producer price index data release. "I wouldn't call it hot," Powell said... even though you could.

The backdrop of the market...

Rate cuts straight ahead! Eventually! At least that's what the Fed says for now and many investors believe.

That stance may change, or cuts might even happen. After all, there are signs that the economy is slowing compared with the past year or so, which may give the Fed an actual reason to lower rates.

Today, for example, U.S. retail sales data was reported to be flat in April. It showed indications of consumers pulling back on goods and services because of higher costs like gas prices. This could portend more weakness that might eventually hit the labor market... or it could not.

We can't say what will happen in the future with certainty, but it's clear that enough investors with enough money at stake today in the markets expect "looser" financial conditions moving ahead. That would take the form of lower rates and a Fed that has already "eased" its balance sheet policy.

The majority of federal-funds-futures traders are betting on one 25-basis-point rate cut and perhaps two by the end of the year, according to the CME Group's FedWatch Tool. This group of traders is putting only a 7% chance that today's current fed-funds rate (5.25% to 5.5%) will be in place at the Fed's last meeting of 2024 in December.

What this means for the value of dollars down the road and in the present is another matter.

You don't hear a lot about the consequences of higher inflation that rate cuts could bring. But what we just described continues to be the backdrop for today's bullish market action. It's what we've seen since late last year... and October 2022, when investors started to believe that 40-year-high inflation had "peaked" and the Fed wouldn't raise rates much higher.

As Stansberry's Investment Advisory lead editor Whitney Tilson wrote today in his free daily e-letter...

I continue to believe that the new normal for inflation is between 3% and 4% – which the Federal Reserve, businesses, consumers, and investors will become accustomed to.

And it's a decent environment for investors... They can earn more than 5% holding cash or investing in the market, which I think will deliver satisfactory returns thanks to a continued strong economy.

Eventually, of course, the economy will weaken. But at that point, the Fed has plenty of room to cut rates – which is usually good for stocks – and would provide relief to low- and middle-income households, which have been hit hard by the steep rise in interest rates.

As we said, stocks were up today. The S&P 500 Index rose about 1.1% and closed at a new all-time high, following the tech-heavy Nasdaq Composite Index's lead yesterday...

In the meantime, Treasury yields were down, and so was the U.S. Dollar Index ("DXY"). Gold continued its run higher, up 1.4% to around $2,390 per ounce, close to a new all-time high again... And bitcoin is more than 7% higher in the past 24 hours to around $65,000.

Here is another signal...

Dr. Copper is talking to us... As Stansberry Research senior analyst Brett Eversole wrote in True Wealth Systems "Review of Market Extremes" last week...

This commodity isn't one that most investors keep up with every day. But it's hard to ignore copper right now...

The metal is up 30% since bottoming last October. That's more than stocks, which have been on an impressive run of their own.

And we highlight this fact here because copper is referred to by many market analysts as "Dr. Copper," given that its price can tend to be a signal about the health of the economy. As Brett explained...

Copper is a crucial part of modern society. We need it to build homes, cars, appliances, electronics, and more.

Like all commodity prices, copper prices move based on supply and demand. Assuming supply is somewhat constant, a rising price means demand is high. And since copper goes into just about everything we need for economic growth, higher copper prices mean the economy is going strong.

By now, it's clear that we never got the "obvious" recession everyone expected in 2022. The job market is still strong, with no sign of letting up. And as we wrote in our latest monthly issue, global economies have been doing darn well.

So it's no surprise that copper prices have been soaring. Take a look...

The metal fell when a recession seemed imminent. But conditions have improved. So copper prices are off to the races again.

Today, copper traded around $4.90 per pound. That's good for an 8% move higher in just the past five days, plus a continued signal of more expectations for a growing economy ahead, or at the very least, demand for copper. (And maybe more inflation.)

The commodity has also been in the news lately...

More and more people are realizing that copper is a key component in things ranging from artificial-intelligence data centers to electric cars. As the Wall Street Journal reported yesterday...

After one of the world's top copper producers recently hit a financial crunch, the Biden administration started huddling with potential investors about taking a stake in the company's Zambian mines worth as much as $3 billion.

The search isn't restricted to American companies, with entities from the United Arab Emirates, Japan and Saudi Arabia – all viewed as friendly to U.S. interests – expressing interest in the stake in First Quantum Minerals' assets, according to people familiar with the matter.

The goal is simple: to keep it out of Chinese control and prevent the Asian superpower from tightening its grip over the global supply of crucial metals and minerals.

The bidding, expected to be concluded later this year, is part of a global rush to acquire more copper, a key component in everything from electric cars to transmission lines and the data centers powering the AI revolution.

This reminds me that folks around Stansberry Research have been writing and talking about the unrealized demand story in commodities like copper... and oil... for years. For example, as Dan Ferris wrote in The Ferris Report newsletter in July of last year...

Copper is the commodity of the future.

It has excellent properties that keep it in high demand. It's highly malleable, meaning it can be pounded into almost any shape. It's highly ductile, meaning it can be pulled and stretched into wires.

And most importantly for our electrified modern world, copper is an excellent, cost-effective conductor of electricity. Only silver is more conductive, but silver is not a viable substitute because it's hundreds of times more expensive than copper.

Dan called copper the "next oil."

But be wary of piling into this trend just now...

Again, consider your timeline... The long-term bullish case for copper and other "real" commodities is strong. High(er) inflation could stick around longer than many people might want to think... And all the stuff that deals with AI needs a lot of electricity to work...

But, right now, as Brett showed in his Review of Market Extremes, futures traders have gotten "overly optimistic," with copper's price hitting a multiyear high. And this typically means that prices are due to reverse.

This happened in 2018 and again in late 2020. The situation today is similar. As Brett said...

We don't know if we're near the peak yet... or how long it could be before prices begin to fall. But we do know that traders love copper today. And that usually means the metal is likely to fall.

In other words, it makes sense to use Dr. Copper as a signal about expectations for the economy... But its recent bullish run higher doesn't mean it's worth putting together a trade on it in the short term, given the risk-reward balance.

That said, we do have a related winner to report...

I wrote to you last month about a brainstorming meeting that was attended by many Stansberry Research editors and analysts – and probably the biggest topic discussed was AI and its potential impacts.

We talked about everything from how the technology may or may not be practically used in the future... to whether AI was in a "bubble"... to the ancillary investment opportunities tied to it, stemming from facts like the energy needed to run AI-related infrastructure.

Soon after that meeting, in last month's issue of Income Intelligence, our Dr. David "Doc" Eifrig made an income-based recommendation on a business that – bubble or not – was positioned to benefit from the drive for a huge energy build-out related to AI.

An 'AI investment that will survive the bubble'...

As Doc wrote to subscribers, the valuation of certain "AI stocks," like chipmaker Nvidia (NVDA), made him wary. The S&P 500 as a whole trades at about 3 times revenue. At 30 times revenue, investors expect Nvidia to grow sales to about $630 billion per year... nearly double what Apple (AAPL) takes in.

So, as Doc wrote...

Sure, there's hype [about AI]. And many companies are spending more time on their AI branding than on their AI implementation.

But this technology isn't like the little "boomlets" we've seen over the past few years. This is much closer to a railroad or Internet story. That means we could still be in the early days despite the already lofty valuations.

Our mandate, however, is income-paying investments for folks who want to preserve and live off their wealth.

We're not searching for the next hot AI stock that'll make us moonshot gains overnight.

But we can't ignore the hundreds of billions of dollars that will be spent in the pursuit of AI.

Specifically, Doc explained that AI technology needs a lot more power than our nation's utility companies can currently provide. (That also means more copper for all the necessary electrical wiring, but Doc didn't focus on that point.) They're trying to boost capacity, but they're "likely to fall short." That's where his recommendation came in...

And it didn't take long for Doc to be proven right. Earlier this month, on May 1, AI power player Microsoft (MSFT) reached a $10 billion partnership with the company Doc recommended. The stock rose 10% that day, and Income Intelligence subscribers are sitting on a gain of 31% in just a few weeks.

Congrats to Doc and his research team on another great call.

This stock is trading above Doc's buy-up-to price today, but as he said recently in an update for Income Intelligence subscribers, "Big surges like this often fade a bit after the news calms down. If you haven't bought in, keep an eye on prices."

Existing Income Intelligence subscribers and Stansberry Alliance members can find the full recommendation on this company in the most recent issue. In the issue, Doc also shared a fascinating take about how he's thinking about AI's place in the economy in general... drawing a parallel to an exciting new industry that boomed during the 19th century.

New 52-week highs (as of 5/14/24): ABB (ABBNY), Agnico Eagle Mines (AEM), Alamos Gold (AGI), Arhaus (ARHS), Brown & Brown (BRO), Constellation Energy (CEG), Dell Technologies (DELL), Dimensional International Small Cap Value Fund (DISV), Enstar (ESGR), iShares MSCI Spain Fund (EWP), Cambria Emerging Shareholder Yield Fund (EYLD), Freeport-McMoRan (FCX), SPDR EURO STOXX 50 Fund (FEZ), VanEck Gold Miners Fund (GDX), JPMorgan Chase (JPM), Kinross Gold (KGC), Kinder Morgan (KMI), Liberty Energy (LBRT), RadNet (RDNT), Rithm Capital (RITM), Sprouts Farmers Market (SFM), Sprott (SII), Teck Resources (TECK), Teradyne (TER), Toast (TOST), Texas Instruments (TXN), Tyler Technologies (TYL), United States Lime & Minerals (USLM), Vertiv (VRT), Advanced Drainage Systems (WMS), Utilities Select Sector SPDR Fund (XLU), and Zebra Technologies (ZBRA).

In today's mailbag, feedback on yesterday's Digest, which highlighted the newest episode of our Stansberry Investor Hour podcast with guest and macroeconomic analyst Lyn Alden... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Corey, I think interest rate hikes are always inflationary... What happens is that interest rate hikes are effective at fighting inflation when they finally drive millions of consumers into bankruptcy and the economy into a recession, or as might happen in the U.S. today, a deep depression. Demand for goods & services falls; thus, prices fall, and everybody cheers about what a great job the Fed is doing in the fight to lower inflation. Sad! As usual, thanks for an excellent article." – Subscriber Michael U.

Corey McLaughlin comment: Michael, thanks for the note. I think what you're getting at is that inflation is ever-present, it's just the scale that changes. Inflation is almost always "there" and always will be, so long as fiat currency exists. On this point, you may appreciate this related new video that Lyn put together about the history of money... how the modern financial system developed... and why it's "broken today." It's really educational.

"Heaven forbid Congress should ever have to live by a FICO score like normal people. Thank you, you do good work..." – Subscriber Jeff B.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 15, 2024