A Trip Around Inflation Nation

A shortage of samples... A trip around inflation nation... Life in our 'reopening' economy... What's really going on with supply chains... The stocks you want to own today...

Which will go away first – inflation or the cicadas?

Regular Digest readers know what inflation is... We've been tracking it for months, if not the past year. And based on your comments, in many cases, you've been living through it.

But for those of you not living on the U.S. East Coast, you might not know about cicadas (pronounced "suh-kei-duhz")... Be happy that you don't.

They're ugly, red-eyed, annoyingly loud bugs that have once again emerged from beneath the Earth's surface in recent weeks. It's something that only happens every 17 years... They come out in droves – up to 1.4 million per acre – to mate, lay eggs, and then die.

Thankfully, experts say the adults in "Brood X" – the name for this specific group of cicadas – will mostly be dead by the beginning of July. As that happens, the babies will hatch and go back underground until the life cycle repeats again in the year 2038.

That brings us back to our initial question... Given any odds, our bet is the cicadas.

Based on what we've observed over the past several days, the inflation story in the U.S. will probably still be going 17 years from now, when the cicadas make their next appearance... and certainly at the start of next month.

Here's why inflation – or at the very least, the fears of it – will stick around for a while...

On Friday, we learned that members-only retailer Costco Wholesale (COST) – a bellwether of so many things throughout this pandemic – is seeing inflation in items ranging from meat (up 20% over the past month) to aluminum foil.

As Richard Galanti, Costco's chief financial officer, put it bluntly on the company's earnings call last week...

Inflationary factors abound.

Now, add pent-up demand for goods to the story... which has the potential to drive up prices.

On Saturday, in suburban Pennsylvania, we saw a line of at least 50 people waiting to get into a Nike (NKE) store... "But that's the store I want to go into!" we heard one man complain from a distance. He soon walked away with his wife without ever meeting his goal.

And then, consider companies – like the airlines, which were already bailed out by the federal government – not wanting to lose more money if they can help it...

You see, while driving in the car back from Pennsylvania on Saturday, we heard on the radio that even the airlines are now devaluing their currency... Southwest Airlines (LUV) owes folks so much free air travel that it reduced the value of its Rapid Rewards points in April.

Next, add supply-chain disruptions into the mix... which can impact supply.

Here's just one small example...

On Sunday, my wife went to a local paint store to get a few samples to test on a wall. Instead, she came home with only those little cards with the color samples printed on them.

The store – a brick-and-mortar location for Sherwin-Williams (SHW), a big national chain – didn't have the little metal cans to put sample paint in. This seems like it could be a line from hit sitcoms Seinfeld or Curb Your Enthusiasm...

There's a shortage of samples!

Either Sherwin-Williams can't get the tin-plated steel needed to make the cans... decided its time and money is better spent elsewhere... or both. In any case, "It's been like this for two months," a store employee said.

And of course, let's not forget central bank policy... Record-low interest rates are fueling a housing boom, which is driving up the prices of the asset – real estate – that makes up most of the average American's net worth.

As we honored our fallen heroes on Memorial Day yesterday, we came across a bunch of anecdotes about how wacky the real estate market is today from someone who knows it well – Glenn Kelman, the CEO of online-based real-estate broker Redfin (RDFN).

Kelman shared a Twitter thread that is worth reading in its entirety. As he began...

That's disturbing. We wouldn't sell to that desperate buyer, either.

Anyway...

The point is, this is what life looks like in our 'reopening' and stimulated economy...

Everywhere we look – or everywhere we go to buy something – we notice another shortage. It started with microchips, one of the most in-demand goods in the world. Now, we're talking about paint cans.

Would the environment look the same without more than $850 billion of direct payments to Americans over the past 14 months... record-low mortgage rates in the housing market... and unemployment benefits that, in many cases, pay people more money not to work than to work?

It's hard to imagine it would... With more than half of the U.S. population having received at least one dose of the COVID-19 vaccine, a lot of what we see in today's environment now lays squarely at the feet of the Federal Reserve and those who make up fiscal policy, too.

We're clearly in overkill stimulus territory now – where it looks like the only result of more short-term stimulus is the failure to solve long-running, deep-seated economic problems rather than jump-starting an efficient economy.

We can talk about supply-chain disruptions – and they're definitely present – but what is the source of these disruptions? Here in the U.S., it looks like government policy.

Go figure...

This is what folks like our colleague Dr. David "Doc" Eifrig have been concerned about. As Doc wrote in his January issue of Income Intelligence...

If you wanted to point to three sources of inflation, you'd look to accommodative monetary policy, expansionary fiscal policy, and a strong economy. There's no question that we have the first two ingredients – and we think the third is about to kick in as well.

Today, simply coming up with enough labor to fulfill demand is the biggest driver of inflation in the U.S...

In the past, we've talked about how one survey in particular helps us gather insights into what's really happening in the economy – the Institute for Supply Management's ("ISM") Prices Index.

The survey tracks price trends across 18 different U.S. manufacturing industries. And as part of the survey, the ISM asks American business owners for direct feedback on the reasons for price movements, along with the data on prices.

It's "real world" stuff.

As Stansberry NewsWire analyst Nick Koziol reported today, the latest ISM survey – released this morning – showed continued economic growth in the month of May. But it also painted a picture of continued shortages of raw materials and labor in U.S. manufacturing.

Tim Fiore, who serves as chairman on the committee that runs the survey, said in today's report...

[Businesses] reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.

Beyond that, a few individual respondents had a lot to say about the topic this month. You'll likely notice a few trends.

From someone in the computer and electronics industry...

Supplier performance – deliveries, quality, it's all suffering. Demand is high, and we are struggling to find employees to help us keep up.

From a business leader in the fabricated metal products space...

[A] lack of qualified candidates to fill both open office and shop positions is having a negative impact on production throughput. Challenges mounting for meeting delivery dates to customers due to material and services shortages and protracted lead times. This situation does not look to improve until possibly the fourth quarter of 2021 or beyond.

And from a nonmetallic mineral product supplier (sand, gravel, stone, clay, etc.)...

The continued global supply chain tightness and raw material shortages from the Gulf (winter storms) make it less likely that any business can recover this year. Demand is strong, but what good is that if you cannot get the materials needed to produce your finished goods?

Manufacturers can't find people to work for them... supply chains are tight... and the ISM survey shows that raw materials keep rising in price and dropping in supply. We're talking about basically everything – cardboard, aluminum, plastic, and stainless steel.

And that's just the story here in America...

Overseas, particularly in emerging markets, a recovery is much further behind...

We'll admit to suffering from "hometown bias" as much as anyone else... It's easier to think about what's going on in your own backyard (like the cicadas) rather than what's happening around the world.

So we were stunned when we saw a collection of statistics from the Robinhood Snacks daily newsletter this morning. The data showed a huge divide in a global economic recovery from the COVID-19 pandemic.

It sounds like the concept of a "K-shaped" recovery – meaning the rich getting richer and the poor getting poorer – now applies worldwide. From the newsletter...

While rich countries rebound... poor nations are falling further behind. Covid is surging, economies and health systems are crumbling, and poverty is increasing. The pandemic caused the first rise in extreme poverty since the '90s.

Emerging markets are on track to vaccinate less than one-third of their citizens this year, versus 72% for developed nations. In Africa, just 0.4% of the 1.5 [billion] population has been fully vaxed.

• 1.5 [million]: The number of Covid deaths that have already been reported this year will soon surpass the 2020 tally of 1.8 [million]. Latin America, Asia, and Africa account for 72% of deaths.

• 34 [million] people are on the brink of famine because of the pandemic, a record 35% annual increase, compounded by soaring food prices and weak tourism.

• 100 [million]: More than half of children in Latin America are out of school, and many are unlikely to return. Globally, [more than 800 million] students don't have access to computers.

We could get into a lot of things about this data, but let's stick to the inflation point...

We sense that all of this data points to worldwide supply-chain disruptions... And we sense that it will last longer than most folks imagine. Today, as NewsWire analyst Daniel Smoot reported, Intel (INTC) CEO Patrick Gelsinger said the "chip shortage" could last years.

And it will put pressure on prices... It will likely go on longer than the decision-makers at the Fed think. They've repeatedly said this whole thing is "transient" after all.

Thinking that way doesn't do very much for those of us living in the present. We see a recipe for more inflation... And of course, the million-dollar question is... How much?

As we've said before, many of our editors don't foresee runaway inflation happening – like the type we experienced in the 1970s... They expect the Fed to hike interest rates or take other steps to cool the economy if things get too out of control.

And to be fair, today, we're seeing more signs that the central bank is considering "tightening" policy sooner rather than later in comments from various policymakers.

But in the meantime, with U.S. gross domestic product ("GDP") already expected to grow by at least 6.5% this year, we're nearing a tipping point where costly damage to the economy will be done if prices rocket higher because companies need them to turn profits.

And you know who pays the bill... Me and you, dear taxpayer.

It's not all bad news, though. Savvy investors can use this information to their advantage...

When it comes to building your portfolio, it's important to note that in an inflationary environment, the companies with pricing power benefit the most... And in turn, they could see their share prices go higher.

These companies sell products that people will likely buy no matter how much their prices inch higher... or in the case of today's pent-up demand environment, companies selling stuff that has been missed or rediscovered during the pandemic – like boating or camping supplies.

By now, you've heard of Marc Chaikin, the founder of our newest corporate affiliate Chaikin Analytics... I couldn't fit this part of our discussion in our Masters Series Q&A a couple of weekends ago, but we spoke precisely about this topic and how it plays out in the real world.

For one example, Marc talked about a friend's homebuilding project... It has more than doubled in cost over the past few months due to rising materials prices. From there, Marc went on about what this entire episode told him about the markets, as he has seen it over a 50-year career...

I just heard this the other night at dinner, and a lot of people are saying it. 'It's expensive, but what are we waiting for?' It's probably not going to get cheaper anytime soon. Whether it's a house, or a boat or a car or camping equipment, things aren't getting cheaper.

And if you think inflation is coming, which it clearly is, because of supply-chain issues of the price of raw materials going up, then there's sort of a buy sooner rather than defer type of mentality... Because your money is not earning anything in cash or money-market funds. Consumers have an incentive to spend rather than save, and now they're spending with prices going up.

It just may be the "perfect storm" where the consumer drives the economy and the stock market forward from here.

Marc, whose one-of-a-kind "Power Gauge" system covers a universe of 4,000 U.S.-traded stocks and exchange-traded funds ("ETFs"), pointed to stocks like retailer Camping World (CWH) and golf-equipment maker Callaway Golf (ELY) as examples of companies that he has seen ride the reopening and inflationary wave higher.

We don't think we're giving away too much here... Today, Callaway still has a "bullish" rating in Marc's system, while Camping World is "very bullish."

This is one of the beautiful aspects of Marc's work...

You can follow virtually any storyline or trend that you might see playing out and find a company that is positioned to profit from it... and do it confidently.

As we've explained over the past few weeks, Marc's Power Gauge gives everyday investors insight into the stocks that Wall Street is buying today... It's the type of informational edge that simply hasn't been available to most Main Street investors before.

In today's world, this is one way to beat inflation... Stay ahead of the trends in stocks.

Learn more about how Marc's system allows investors to do that right here. It's a free presentation, and you won't be disappointed by giving it some of your time...

Marc – who is truly a Wall Street pioneer – will run through his proprietary stock-grading system... share his biggest predictions for the year ahead... and much more.

We Can't Ignore This Situation Any Longer

Willem Middelkoop, author of The Big Reset, emphasizes the gravity of today's inflation and currency debasement in this provocative interview with our editor-at-large Daniela Cambone...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 5/28/21): Analog Devices (ADI), American Financial (AFG), American Express (AXP), Crown Castle (CCI), Richemont (CFRUY), iShares MSCI Emerging Markets ex China Fund (EMXC), Expeditors International of Washington (EXPD), SPDR Euro STOXX 50 Fund (FEZ), GreenTree Hospitality (GHG), Invitation Homes (INVH), Cheniere Energy (LNG), Motorola Solutions (MSI), VanEck Vectors Russia Fund (RSX), and TFI International (TFII).

Our inbox is overflowing with thoughts on Dan Ferris' Friday Digest about the risks and rewards of owning bitcoin and cryptocurrencies. We'll begin sharing your responses today and will publish more throughout the week. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, ... knowing the right questions is 10 times more valuable – and likely less risky – than believing you have the right answers. Questions keep you thinking... Answers can make you complacent. And even if you find them, they're rarely what they seem to be.

"This probably is the best quote I've ever heard. It should be on the wall in every classroom in the world and on the desk of every political, religious and business leader. There is nothing more dangerous (and more commonplace) than people who have absolute certainty that they have the right answers and know what's best for everyone else.

"To put it another way 'The only thing I know for certain is that I know nothing.'" – Paid-up subscriber Martin P.

"Excellent article, probably the best I've ever seen from Stansberry, for a number of reasons.

"First, a great reminder that all markets fluctuate.

"Second, great insights into 'What didn't happen' and would have happened in the bond market or stock market with a crypto-like decline.

"Third, why cryptos (not just BTC, but all the other DeFi coins) are here to stay, as a store of value." – Paid-up subscriber J.V.

"In Dan's Digest of May 28th, he asks if any of us were worried by bitcoin's recent pullback.

"I am typically the type of investor whose level of pain with losses far exceeds the pleasure I derive from gains. Given this hard wiring of my brain, one would think that I'm not the sort to be a cryptocurrency investor, or to easily tolerate large drawdowns as has just occurred. However, I tolerated this drawdown with no emotional discomfort whatsoever.

"How is that possible? Well, to put my actions within my personal historical narrative, I invested relatively early in cryptos, beginning in mid-2018, and had a wild ride to the top in January 2019. Really out of pure luck, I completely unwound my positions one week before the bottom fell out of the crypto market, making overall a return of about 8,000%. Unfortunately, Opportunity Zone investments were not yet commonly available as they are now, and so I ended up paying Uncle Sam at the short term gains rate, along with the 10% state tax in California.

"In any case, when the crypto market did collapse, I was pretty smug, and remained out of the crypto market. Though I did reinvest a small amount as the market began to rise by mid-2020, I had no appetite for anything heroic, as I knew that my 8,000% gain was a once in a lifetime score, and to attempt to reproduce it would undoubtedly prove to be costly. However, as the crypto market continued to rise, I realized that had I remained in crypto through the crypto winter, that considering my tax burden, I would actually now be much further ahead. In fact, even with the current correction, I'd still have about a 50% greater gain than I realized in 2019, and including the taxes, about 100% greater gains.

"Thus, with my current relatively small allocation to bitcoin and a few other coins, I now intend to Hodl ('Hold on for dear life' for the uninitiated). Given my past experience, I was completely emotionally prepared for at least a 50% correction if not more, having now reasonable confidence that, as Dan said, 'it's going to be a long, winding road to the top.'

"With this intellectual and emotional preparation, I am proud to say that I sailed through the correction without any emotional scars whatsoever!" – Paid-up subscriber Ted G.

"I own mostly Ethereum, remember reading that the banks favored it years ago. I bought 6 of them in March 2020, when there was blood in the streets. My total outlay was ~$5,000. It and a few other coins recommended by [Crypto Capital editor Eric] Wade were recently worth $41,000 and now about $28,000.

"I am not worried as I see these as another gold, with all the money printing. I am playing with the house's money so will hold for the long run, comforted that these assets and, my gold and silver, will protect me in the future." – Paid-up subscriber Edward M.

"I own some Bitcoin. I'm in for the long haul. I spent the time to learn about blockchain, mining and decentralization before I bought. The pullback is part of the process, just like stocks. I see it as a buying opportunity. It's hard to 'hold' when you see a 54% pullback, but like Eric Wade and Matt McCall say, you have to remember why you bought in the first place." – Paid-up subscriber Jim W.

"I own bitcoin and Ethereum and am not concerned on their pullback as I have invested only what I can afford to lose. I also entered that area about one year ago so the recent pullback still has me in positive areas.

"Based on what I have been reading for the last year, the technology of cryptocurrencies as it ties in with the blockchain makes sense from a directional perspective. So long term this investment, although volatile, seems like a good one to me based on the perceived upside.

"My main concern is future regulations that governments may impose." – Paid-up subscriber M.F.

"I look at the cold hard math of where Bitcoin mining companies are at. They paid for their operations with selling new bitcoin in the past and if you look at the recent activity of these companies, they're hoarding it now. They have backing from institutions that they never had before. We're entering a period of supply disruption which should drive Bitcoin higher. Bitcoin halving was a scarcity factor every 4 years but now we have Bitcoin miners taking out the new supply of Bitcoin on the Crypto market." – Paid-up subscriber Hugh S.

"I am 73 years old and spent my career as a municipal bond trader and investment banker. I didn't understand digital wallets and had no inclination to learn. I did however see a place for Bitcoin in my investment domain. So I bought 2,000 units of GBTC at $10.69. I did set trailing stop and when it dropped 25% from its high, I sold at $42, quadrupled my money in 10 months.

"Now after the recent down draft, I am just deciding where to get back in. Thanks to the brilliant minds at Stansberry; keep up the great work." – Paid-up subscriber Scott M.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 1, 2021