Another Warning Signal for the 'Real' Economy

China can't shake Omicron... Double-digit inflation is in play... Another warning signal for the 'real' economy... A sign of things to come?... Some good news... Announcing Stansberry's Financial Survival Program...

Many people still haven't heard this story...

Overshadowed by the war in Ukraine and skyrocketing inflation here in the U.S. is one big reason that the persistently high inflation itself could continue in the months ahead – and potentially even for years.

Regular Digest readers will recall that the COVID-19 Omicron variant was "just getting started in China" back in mid-January. At the time, we discussed why that concerned us about the potential for slowing economic growth amid rising inflation.

Simply put, given China's position as the world's second-largest economy and a major exporter of everything that says "Made in China" on it, this scenario meant "stagflation" could occur anywhere inflation was still rising...

Stagflation is when prices are going higher but growth is slowing at the same time. It's not good for anyone – including the stock market. So we warned you about the possibility – even before the war in Eastern Europe added to both sides of the story.

Now, roughly three months later, China still can't shake Omicron...

A reported subvariant of Omicron is acting just like Omicron has.

While it causes "mild" symptoms for most, it easily spreads. And that has caused Chinese officials to institute massive lockdowns across the country – including in many of its biggest cities – for weeks.

For example...

Shanghai is the country's biggest city and its financial hub. (In fact, by population, it's the third-largest city on the entire planet... Roughly 26 million people live there.) It's home to the world's largest container port, too.

And yet, Shanghai has been locked down with strict COVID-19 restrictions...

Just two people per apartment building – yes, the entire building – have been allowed to shop outside each day for a maximum of two hours. And as part of the Chinese government's "zero COVID" policy, everyone testing positive for COVID-19 must quarantine whether they have symptoms or not.

Even worse, the lockdowns aren't working. As Stansberry NewsWire editor C. Scott Garliss wrote earlier today (while noting this story's influence on oil demand fears)...

Yesterday, the city of Shanghai reported more than 26,000 new cases. The number is a record and has pushed the country's total to the highest since the start of the Wuhan outbreak in 2019.

The government in Beijing has a zero-tolerance COVID policy. In other words, it doesn't want the virus to spread and will clamp down on activity in any areas where cases pop up.

The problems aren't isolated to Shanghai, either...

Today, the Chinese manufacturing hub of Guangzhou tightened restrictions as well.

The city closed in-person classes at its elementary and middle schools for at least the next week. In addition, local residents were advised not to leave the city unless necessary... And they need to show a negative COVID-19 test from within the past 48 hours to do so.

The aggressive stance against COVID-19 from the Chinese government is apparently wearing on citizens' mental health. But beyond that, the lockdowns are making business hard for one of the world's largest producers of cellphones, electronics, car parts, and more.

Of course, if you're a loyal reader, these developments aren't surprising...

As I wrote in the January 18 Digest...

If we've learned anything from this pandemic, it's that the virus is likely to spread around China, like it has seemingly everywhere else...

Back then, we also discussed the country's "zero COVID" response. And importantly, we addressed how potential full-scale lockdowns in China could keep clogging up global supply chains... which could lead to higher inflation around the world.

More from January...

We're not going to ignore the signs of history repeating itself again...

When it comes to the economy and markets, aside from again seeing how massive stimulus can distort the value of money... probably the biggest lesson that might be taught about all this is how supply chains were disrupted.

Different countries, cities, and parts of the world have dealt with COVID-19 peaks and valleys, and supply and labor problems, at different times.

For most of the pandemic, COVID-19 waves have originated in Asia, Europe, or Africa before hitting the U.S.

The "original" COVID-19 came from China (yes, I'll say it)... The Delta variant took hold in India... And the Omicron strain evidently sprouted from South Africa...

The mismatched timing had altered global supply-chain efficiency.

Keep in mind, again, that this Digest was published before the war in Ukraine raised a bunch of questions about the global supply of basics like oil and wheat... plus a number of other commodities that are essential to producing goods, ranging from fertilizer to cars.

Also remember that economic data is backward-looking... That means any big slowdown in gross domestic product in the months ahead – or worse, a recession – will only become obvious to most people after it has already started to hurt them.

Just like inflation.

More recently, our colleague Dr. David 'Doc' Eifrig updated this scenario...

In the latest issue of his Income Intelligence newsletter, published March 17, Doc wrote...

China just locked down Shenzhen, a major city of 17 million people, in an effort to contain a COVID-19 outbreak. And it initiated smaller lockdowns in Shanghai.

China has stuck to a COVID-zero policy that imposes major lockdowns to try preventing the virus's spread. That includes stopping manufacturing and any other businesses considered nonessential.

The market does not yet appreciate what is happening...

China is in for trouble. As we know from our own U.S. experiences with Omicron, it's much more contagious than previous variants. China has ineffective vaccines and a population that has been largely unexposed.

If China continues to fight COVID-19 with lockdowns, the problems with the supply chain have just begun...

Then, Doc shared why this matters to the stock market. As he explained, Wall Street has been banking on a quick return to normalcy, but the supply chain still isn't healthy. More from last month's issue of Income Intelligence...

Take a look at the Global Supply Chain Pressure Index, a clever tool created by the New York Fed...

We're learning the supply chain is not a simple thing that will quickly return to equilibrium. The longer the trouble lasts, the more it seems like the trouble will last longer.

Now, add Russia's war and China's lockdowns and the already-dated talk of "transitory inflation" sounds like a punchline.

This is what we're talking about...

Continued major disruptions of global supply chains... in an environment of already historically high inflation... and one in which the Federal Reserve is now taking economic stimulus out of the economy at a rate that we've never seen before...

No wonder warning signals for trouble ahead have flashed all over the place in recent months. Despite that, Mr. Market just now seems to finally be pricing all of this information in... That means there's still time for you to prepare before things get even worse.

On a related point, the Bureau of Labor Statistics will publish a key report tomorrow...

I'm talking about the Consumer Price Index ("CPI") update for March.

The CPI is the Fed's preferred gauge of inflation.

In February, it came in at 7.9% over the prior 12 months. And remember, that update only reflected the start of the Russian military's invasion of Ukraine. As Doc wrote last month...

Just a week ago, we considered it likely that the 7.5% CPI reading from January would be pretty close to the top and inflation would start working its way down to around 4%.

Even 4% inflation concerned us. But with the China news, we're much more worried, and we're blowing out our inflation outlook...

Doc wrote in Income Intelligence that he's expecting to see a double-digit CPI reading within the next three months. That's alarming... Even with all the warnings out there today, we still don't think many people are prepared to see 10%-plus inflation.

Not to pile on, but here's another 'warning signal'...

We haven't cited the Dow Jones Transportation Average in the Digest lately. However, we must update you on what's happening with this index today...

The Dow Jones Transportation Average was close to an all-time high just a few weeks ago. But as you can see in the following chart, it fell off a cliff as the calendar turned to April...

In short, it has fallen roughly 13% from its most recent high in late March. It hasn't experienced that type of drop in a short span since the early days of the COVID-19 pandemic back in February 2020.

The Dow Jones Transportation Average consists of 20 U.S. transportation stocks. The index's components include railroad companies CSX (CSX) and Union Pacific (UNP), delivery brands FedEx (FDX) and United Parcel Service (UPS), and many leading U.S. airlines and trucking firms.

In other words, we're talking about the "real" economy.

So when this index endures a drop not seen since the start of the COVID-19 crash, we need to pay attention. This sort of behavior can be a valuable leading bear market indicator...

After all, the "transports" are critical to U.S. infrastructure. They move goods and services from producers to consumers... and they move people all over the country. Beyond that, the profits of these "boring" companies are tied to routine business.

Unfortunately, the recent sell-off in these transportation stocks is a bearish indicator for the 'real' economy...

According to Scott, the fact that these stocks are selling off dramatically reflects the idea of slower economic growth expectations that might be far-reaching in the months ahead.

He told us on Friday about a recent piece from Craig Fuller, the CEO of leading global logistics website FreightWaves. Fuller believes a "freight recession is imminent." (Fuller also called for a trucking boom in April 2020, which turned out to be correct.)

Scott then wrote this analysis piece for NewsWire readers, explaining that freight "capacity" has been growing lately. That's a sign of weakening demand... And it stems from the evaporation of pandemic tailwinds like fiscal stimulus, the end of exclusive work-at-home life, and folks buying less goods.

Add in the ongoing supply-chain threats in China and all over the world, and "all of this signals growth is slowing." As Scott explained, this dynamic often portends a recession...

FreightWaves noted that in transportation sector downturns, the supply of available shipping options tends to peak well after the market has entered a recession. And it recently said it's starting to see a bad trend in the shipping industry... The number of shipments rejected by trucking companies is falling.

FreightWaves said that trucking companies typically turn down shipments when they have plenty of work to choose from. In other words, if two companies want something shipped across the country, the one willing to pay more is accepted and the one willing to pay less gets turned down... which makes sense.

At the start of March, the number [of rejected shipments] was 18.7% and by the end of the month, it was below 14%. FreightWaves said the last week of March is typically one of the best weeks of the year, but this year it's one of the worst. It stated companies are already seeing shipping rates drop by as much as 20%.

That means, according to this data, the shipping market may have entered a recession in March.

Now, one month doesn't make a trend. But as Fuller noted in his article, trucking booms are followed by busts. And they typically occur in three-year cycles.

So in other words, this turning point is worth noting.

And it leads us to a new reality...

I wrote last week that a new reality was starting to set in on Wall Street. It's all about rising interest rates, reduced stimulus, and slowing economic growth (which we've been writing about and expecting for months).

And the same thing goes for business leaders in shipping industries.

In the article, Fuller noted feedback he has gotten after some of his recent warnings. For example, here's one note from a large industry supplier...

In an internal memo that I sent to the team last week about weakening demand and what that means for the industry, my closing line was '[The] steroid-induced demand juicer is over.'

And as Scott wrote Friday...

When there's too much capacity in the transportation sector, prices need to drop. Companies want to keep money coming in the door. They'll accept lower rates to keep the lights on...

It doesn't mean a recession is imminent, but it does mean the hypergrowth we experienced during 2021 is an exception...

This story is a big deal for transportation companies. But beyond that, it could have potentially massive implications for the broader stock market as well.

We'll be watching the results of the upcoming earnings season – which starts later this week – to see if any businesses report lower demand. And if so, we'll want to see how many do.

If demand is dropping for transportation companies, it's possible that it's happening for companies in other industries as well. That means less revenue and profits coming in the door, which weighs on corporate outlooks... and stock prices.

OK, enough of the dismal dialogue. Let's end with some good news...

You've heard plenty of warnings in these pages in 2022...

We've talked ad nauseam about how to expect stock market volatility this year... the indicators that are signaling a possible recession over the next year or so... and the data showing stock market sell-offs associated with slower economic growth.

So if you're wondering what to do with your portfolio... you're not alone.

That's why Stansberry Research publisher Brett Aitken asked our world-class team of analysts to create a specific, detailed, top-to-bottom plan for the kind of uncertain and volatile market we're in today. As Brett recently explained...

That starts, of course, with protecting your downside. But that's only the beginning. Moments like this provide rare opportunities to profit from other folks' fear and uncertainty.

If you missed the announcement about what our team has come up with in Friday's Digest, we'll share it again here...

Announcing Stansberry's Financial Survival Program...

In short, you can now access the plan that Brett asked our editors and analysts to create.

It's a brand-new, seven-module course that was specially designed for this moment. And it's called Stansberry's Financial Survival Program.

As we explained on Friday, the first module of research and recommendations – from Doc – went live that evening. It focuses on ideas you can use to "get defensive," like raising cash.

Over the next six weeks, we'll publish six more lessons...

Each module will focus on a different opportunity. They'll all feature fresh, actionable recommendations that could protect your savings and deliver up to hundreds-of-percent upside... And they'll do so not just in spite of, but because of the turmoil today.

By the end of this course, we believe you'll have at least a few new ideas for your portfolio. And hopefully, you'll feel much more confident navigating today's turbulent market.

If this idea sounds interesting to you, click here to get all the details.

You'll find out why we put this product together... more information about what's in Stansberry's Financial Survival Program... and how you can put the ideas into action today.

A note for Alliance members before we sign off...

As part of your lifetime partnership with us, you can already read the first module at no extra charge right here. And you'll be able to immediately access each of the next six modules as soon as they're published after the markets close each Friday until May 20.

Ignore the Headlines and 'Turbocharge' Your Portfolio

Our colleague Dan Ferris welcomed back powerhouse guest Marc Chaikin, the founder and CEO of Chaikin Analytics, in a recent episode of the Stansberry Investor Hour podcast...

As Marc explained, and as we shared over the weekend in our Masters Series, more than a decade ago, he developed a revolutionary investing tool called the "Power Gauge"... It's an objective, quantitative system that simplifies the stock-picking process and levels the playing field between institutional and individual investors.

In this wide-ranging conversation with Dan, Marc shared a few interesting tidbits about his Power Gauge system. He also showed how the tool allows folks to ignore the headlines and "turbocharge" their portfolio with double-digit outperformance of the indexes...

Marc also provided his outlook on investing in technology stocks, as well as a tip on the one quantitative measure that he uses to pick out the "cash-flow cows" from all the beaten-down tech stocks that litter the market.

Click here to listen to this episode right now. And to catch all of the videos and podcasts from the Stansberry Research team, be sure to visit the "Media" page of the new StansberryResearch.com anytime.

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In today's mailbag, feedback on the new Stansberry's Financial Survival Program... and thoughts on our Friday Digest, which began with a story about Warren Buffett negotiating a potential multimillion-dollar deal while on vacation in Alaska. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

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"I am a BETTER person because of my Alliance Membership, and I continue to be thankful for your commitment to 'EXCELLENCE'! Keep up the good work!" – Stansberry Alliance member Gene N.

"This is fabulous! Thanks for the new offering. Another reason to stay tuned on Fridays. You guys do great work. Congratulations, and thanks for everything." – Stansberry Alliance member Dave D.

"You wrote [in Friday's Digest]:

Buffett kept on rolling, none the worse for the experience other than to say, 'It was an interesting period.'

Yes, it was. And as I will explain in today's Digest, it's an experience anyone interested in building serious wealth can learn from.

"The lesson that Buffett failed to learn, is there are many more important things than money and communications with [Wall] Street, such as the awesome beauty of nature. Wake up and smell the roses." – Paid-up subscriber Kendrick M.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 11, 2022