Exploring Today's Investment Options ‒ Sambal Stingray or a Quarter Pounder

Exploring today's investment options ‒ sambal stingray or a Quarter Pounder... A trifecta of uncertainty... Omicron is spreading fast and spooking markets... Inflation is finally at the top of the agenda... The Fed has learned to telegraph its prescriptions... What if the Fed gets it wrong?

There are long lines at Burger King in Singapore...

Singapore is a food-lover's paradise... It's overflowing with inexpensive and delicious cuisine from all over Asia.

But people are queueing up to wait for boring burgers... It's among the world's bigger mysteries.

In the midst of the vast array of delectable culinary options, many people – and no, they aren't American tourists – instead opt for the least-exciting and most-predictable choice in the entire country: a fast-food burger and fries.

As investor, philosopher, and writer Nassim Taleb explained, upon witnessing a packed McDonald's restaurant in Milan, Italy (also a foodie destination)...

Shockingly, Italians are seeking refuge [at McDonald's] from a risky meal. They may hate McDonald's, but they hate uncertainty even more.

Of course, maybe Singapore has too many good options. And perhaps those folks outside Burger King are just wary... and don't like what they're not sure of.

In today's Digest, I (Kim Iskyan) will look at why people are heading for the safe Quarter Pounder of investment options... because they are scared, there are too many options, or something entirely different altogether...

Investors' appetite for the 'burger' options of the investment universe is rising...

For years, overall rising markets have boosted almost all assets... And the more exotic and speculative assets – the stock equivalent of sambal stingray or stir-fried beef lungs – like cryptocurrencies and non-fungible tokens (NFTs) have delivered incredible returns to savvy speculators.

But in recent weeks, markets have been reflecting more of a "Burger King mentality"... That is, investors have been lining up for the predictable while ditching the speculative.

As the Financial Times explained on Friday...

U.S. stock markets are once again sailing to record peaks, yet under the surface, a strong tide is pulling down the share prices of hundreds of companies to their lowest levels of the past 12 months... [On the Nasdaq], more than 1,300 stocks [that's about 40% of all traded companies on the exchange] are down 50 per cent or more from their highest level of the past year.

That means that a small number of large stocks account for a big percentage of total market returns... while smaller stocks have taken a pummeling. Similarly, the total market capitalization of cryptocurrencies has fallen by a quarter since all-time highs more than a month ago.

Citing data compiled by investment bank Goldman Sachs, the FT continues...

Just five stocks — Apple, Microsoft, Nvidia, Tesla, and Google parent Alphabet — have accounted for more than half of the S&P 500's returns since April.

Now, those stocks aren't exactly bland and boring. But they're certainly not the stock equivalent, of (say) lamb's brain soup on the Singapore culinary scene... The strong return of relatively safe large caps reflects investors' preference for stocks that are perceived as lower risk.

A trifecta of uncertainty might lead to a different dish altogether...

Not knowing what comes next is a fact of life – and of markets... We never know what's going to happen tomorrow. Or as baseball legend Yogi Berra said...

It's tough to make predictions, especially about the future.

Just now, though, markets are facing an unprecedented trifecta of issues of code-red uncertainty... the trajectory of the Omicron variant, the future of interest rates, and non-transitory inflation... And there's no good news on any of those fronts.

And what might that push investors to do? I'll get to that shortly...

The Omicron variant is spreading fast and spooking markets...

On Saturday, the Netherlands became the first European country to re-enter lockdown... Ireland introduced an 8 p.m. curfew for pubs. Several countries in the EU introduced travel restrictions on each other.

In the United Kingdom, the number of Omicron coronavirus cases increased by two-thirds, to 25,000, within one day... And the World Economic Forum announced that it would postpone its scheduled January meeting in Davos because of Omicron.

Here in the U.S., Washington, D.C. and New York State reported all-time-high numbers of new cases over the weekend. The Atlantic reported on Friday...

Everyone in New York has COVID, and everyone agrees, even though they know that is not literally true. And this seemed to happen in just one weekend.

Chief U.S. presidential medical advisory Anthony Fauci warned of mounting stress on the American medical infrastructure... Worse, he said that in coming weeks the Omicron variant will bring about a record number of COVID-19 cases, hospitalizations, and deaths.

Whatever your view of the coronavirus... its scope to be a driver of the economy is clear. Even short of lockdowns, people who are concerned about getting sick go out less... don't travel as much... and spend less money.

The good news, though, is that this time around we (more or less) know what we're dealing with – unlike early on in the pandemic... And now there's a solution in the form of vaccinations, boosters, and treatments.

But markets aren't immune... And Omicron isn't the only big question mark today.

Inflation is (finally) at the top of the agenda for global central banks...

All around the world, central bankers are increasingly concerned about inflation.

The U.S. Federal Reserve and the European Central Bank ("ECB") both announced plans to scale back bond-repurchasing programs that have provided economic stimulus... The Fed moved forward with its plan to raise interest rates. Central banks of the U.K. and Norway both raised interest rates, as have central banks in nine emerging markets, including Russia.

Inflation has been driven – in the U.S. and everywhere – by strong demand coupled with weak supply, caused mainly by breaks in the global supply chain... And the Fed, along with almost every other central bank, has – belatedly – abandoned any characterization of inflation as transitory.

But they're less concerned about the next chapter of the coronavirus...

Notably missing from the calculations of the world's central banks – in sharp contrast to the case in March 2020, when central banks treated the coronavirus like a five-alarm fire – are concerns about how much of a role the Omicron variant will play in the economy.

Fed Chair Jerome Powell, for example, said recently that the latest COVID-19 variant "doesn't really have much to do with" the American central bank's plans to withdraw coronavirus economic support.

As the Financial Times explained...

As well as putting inflation at the centre of their thinking, officials in charge of monetary policy downgraded the importance they attached to coronavirus and its effects on economic activity. Statements from the Fed, ECB, and BoE [Bank of England] all highlighted the uncertainty surrounding the Omicron variant. But none thought it would be pivotal to policy in coming months.

One thing the Fed has done well is telegraph its intentions in advance...

In the spring of 2013, then-Fed Chair Ben Bernanke announced that the Fed would begin reducing its monthly purchases of Treasurys and mortgage-backed bonds, which was a form of stimulus put in place after the 2008 to 2009 global economic crisis... Markets were caught unaware, and the statement triggered a modest – but not insignificant – market panic that was dubbed the "taper tantrum."

Current Fed Chair Jerome Powell was on the Federal Reserve's board then. He subsequently described how the episode left "scars on anybody who was working at the Fed at the time"... His key takeaway from the "taper tantrum" was that the Fed needs to be as clear and predictable as possible – as if markets are a rabid, cornered dog, with the Fed as an animal-control officer.

So it's not surprising that Powell's Fed has been lauded for its very intentional messaging... The recent announcement that the Fed will accelerate its bond-buying program prompted little market reaction – because most market watchers had fully expected this to happen.

And it's in sharp contrast to the Bank of England, which surprised markets last week with a rate hike to head off rising inflation... Ironically, the expectation for the early-November meeting was a rate hike – which didn't happen.

But what if the Fed gets it wrong?

Like the rest of us... central bankers make mistakes. Except when they do, it's a lot more serious than regular-person errors... like confusing the salt for the sugar, or forgetting to put a stamp on the envelope with your credit-card payment.

History is littered with examples of the Fed's mistakes – like not doing enough to prevent the Great Depression... or being caught off guard by the 2008 to 2009 global economic crisis. Monday morning quarterbacking makes it easy to recognize mistakes – but not necessarily easy to avoid them in the future...

This time around, the Fed has been excruciatingly slow to recognize inflation as a threat. But many, including us here at the Digest, having been talking about inflation for most of the year... In fact, here is what Corey McLaughlin wrote on February 23...

Indeed, although Powell said again today that the Fed's broad measures of inflation remain below their target (now 2% and above), we are seeing "real world" inflation...

And meanwhile, the Fed's bond-buying program and maintenance of low interest rates – while the U.S. economy was also being flooded with the largest peacetime stimulus in history – were like a sugar high for the American economy...

Now, the key risk is that inflation has gotten its claws embedded into the American economy. The fear is that the Fed (after failing to act earlier) now will overcorrect... and strangle the economy into recession by hiking interest rates and rolling back stimulus. And, possibly, it will underplay the role of the next chapter of the coronavirus on the economy.

Will investors choose the most boring – but safest – dish of all?

It's the plain white rice of investment options...

Cash.

Even though it provides no return, it's the best hedge against uncertainty.

A survey of global fund managers by Bank of America Securities in early December found a sharp increase in cash holdings by institutional investors... It forecast that a hawkish Fed meeting in December – which is what happened – would result in the higher cash level being maintained.

And if markets continue to roil... cash is also a good way to sooth an upset stomach, whether it's from curried goat brains or a plain Quarter Pounder.

New 52-week highs (as of 12/17/21): Cerner (CERN) and PLDT (PHI).

Today's mailbag features a handful of comments from subscribers about the latest Friday Digest from our colleague Dan Ferris. What's on your mind? Send your thoughts, comments, and observations to feedback@stansberryresearch.com.

"Thank you for a great column... We often think of Ronald Reagan's famous 'The nine most dangerous words in the English language' ('I'm from the government, and I'm here to help'). But I feel the four most dangerous words in the English language – 'This time it's different' – is equal to the Reagan axiom when it comes to investing...

"Whether it's tulip bulbs, Florida real estate, the roaring '20s, the Nifty Fifty, the tech bubble of the 1990s, etc., it always ends the same way, doesn't it? Then it's back to fundamentals once again. And the tried and true." – Paid-up subscriber Paul Y.

"Hi Dan, congratulations to you and your team. Your reports and insights are the best. I agree totally with all of your investment points of view.

"I am in my 70s, and I wonder if younger generations just don't get gold and its history – and therefore, gold is not where it should be.

"I wish you all a very healthy, happy, and Blessed Christmas. And as always, thank you and your team for the fine work." – Stansberry Alliance member Bill R.

"A very interesting article. As always, it helps to keep things in perspective.

"Two comments...

"1. Gold has been heavily manipulated by the banks, with all of the regulatory agencies giving tacit consent right up to the present day, or it would be a lot higher in value.

"2. Bitcoin is outside the reach of the control of government manipulation, and when the people stop listening to the press, the volatility will diminish. It's the hardest currency ever created, and I am definitely one to HODL." – Paid-up subscriber Bob S.

"Dan, a great summary of the present conditions. You are a tease, and I can't wait till [this coming Friday's] fan-dance reveal. How are you going to top these Digests next year? I'm expecting all your various cautionary tales to make you look even better and be equally entertaining. Best of luck in the New Year." – Paid-up subscriber Robert H.

"Dan, this is one of the best articles I have read in a long time.

"I have often wondered how passive investing in 401(k)s has changed the investment horizon. Thanks for a concise analysis of the present.

"I look forward to your Friday article. Thanks." – Paid-up subscriber Charles B.

Here's to good investing,

Kim Iskyan
Ashton, Maryland
December 20, 2021