Fat Turkeys, Superstar Central Bankers, and Caffeinated Donuts

One of the things we're proudest of... Only you can decide what's best for your money... An unprecedented prediction (well, if I made predictions)... Three reasons why I'm bearish on stocks right now... Fat turkeys, superstar central bankers, and caffeinated donuts... What to do when our analysts disagree...

You can't hire good analysts and expect them to agree all the time...

In fact, this idea comes up more often than you might think... Whenever some of us disagree on the market's direction, the e-mails and phone calls usually come flooding in.

We addressed this source of "confusion" for subscribers in the May 5, 2016 Digest...

Our analysts often have different opinions on macroeconomic issues, and sometimes even on individual stocks. It's actually one of the things about Stansberry Research we're proudest of.

We don't tell our analysts what to say. Unlike many other investment-research firms, we have no obligations to advertisers or the companies we're analyzing. We work
only for you, our subscribers.

As you'll see in today's Digest, I (Dan Ferris) don't see eye to eye with one of my colleagues about where stocks are headed from here. But as I hope you'll come to realize in the end...

That's OK.

It's OK for me to show you why I believe one thing will happen (and I'll keep doing it over and over)... It's OK for my colleague to show you why he believes the opposite... And when it comes down to it, only you can decide what's best for your money.

In yesterday's Digest, my colleague Chris Igou tackled three concerns 'driving the worry in the stock market'...

Chris noted that "things simply aren't as frothy as earlier this year." And he explained that we're not seeing the "all-out greed" that normally accompanies the end of a bull market.

In the end, Chris concluded that...

Worry is starting to set in... yet the S&P 500 remains in a strong uptrend. You want to take advantage of the good times as long as they continue. So my advice today is simple... Stay long.

If you've been here for long, you know I'm on the opposite end of the spectrum...

While you can find undervalued stocks in any market environment, I believe this is a scary time for investors. I've often explained that market tops are processes, not one-day events.

So with that said, it's my turn to make an unprecedented prediction...

Well, sort of.

Regular Digest readers know that I don't really make predictions... I don't call tops and bottoms or share any other type of market prophecies. It's just too silly to pretend that I can do something that nobody has ever done consistently enough to call it a strategy.

It's much more helpful for me to pound the table with my mantra, "Prepare, don't predict."

That hasn't changed. But I will say this... The closest I can come to making a prediction today is to share a prediction that I would make if I did make predictions.

If I were in the predictions business, I would probably predict a top within the next few months...

And if I did make predictions about the direction of stock prices, I would predict that the benchmark S&P 500 Index would be lower a year from now, not higher.

The problem is, one year in the grand scheme of things is a relatively short period of time... And it's nearly impossible to predict securities prices over short periods of time. Long periods of time are hard enough to predict. (Although, as any knowledgeable investor knows, "up" is the right answer often enough to make you wealthy over the long term.)

All I can really say with any confidence right now is that when stocks previously have been as expensive as today, returns for the next several years generally have been poor. So with that in mind, you should prepare for the likelihood of poor returns for several years on most stocks starting from today's prices.

That's nowhere near as flashy as saying, "The market is going to crash 30% or more in the next 60 days! Sell it all, hold cash, buy put options... And you'll make a fortune!"

It's more honest, though. But again, I'm not really predicting anything... I don't do that.

As far as I'm concerned, this is just a fun way to do what I've done many times before. It's a way to highlight some of the sights and sounds as a raging bull market tops out.

If you can get past all that, maybe now you want to know... Why are you so bearish, Dan? And why right now?

I'm bearish on stocks right now for three reasons...

The first reason is something I've mentioned before in the Digest, but given the timing, it's worth repeating today...

It's the story of a turkey.

The turkey is living in luxury on a farm. Of course, he's a turkey and doesn't have a very big brain... So the fact that he's living on a turkey farm is lost on him. He eats all he wants and always has a warm place to sleep... And there are plenty of lady turkeys around, too.

It's the most idyllic life that a turkey could ever have...

Life gets better every day. The turkey loves life a little more every day... And he gets fatter every day. He just eats, relaxes, and has a good time with all his fellow turkeys.

Then, Thanksgiving comes.

The turkey's head gets chopped off... And he's served on a plate alongside Grandma's homemade stuffing, mashed potatoes, cranberry sauce, and plenty of delicious gravy.

Markets work like that sometimes, too...

Even though the "beheading" can take months – or even years – to play out, it feels much more abrupt when you're in the thick of it... After more than a decade of gains, a two- or three-year bear market can hit you with the shock of a quick beheading like the turkey.

The S&P 500 is putting in new highs almost daily... And it's much more expensive than it was at the top of the dot-com bubble, as measured by the price-to-sales (P/S) ratio. The S&P 500 peaked with a P/S ratio of 2.3 times back then. It's at 3.1 times sales now.

By the way, I use the P/S ratio for the S&P 500's valuation because when it has been high, subsequent returns have been low, and vice versa, roughly 90% of the time over the past century. It's the best and simplest way to think about the valuation of the overall market.

Except for a brief period in the spring of 2020 amid the COVID-19 panic, the market has been on a relentless rip higher for more than a dozen years. And that's all most folks see...

They see stock prices going up, up, and up. Getting rich in the stock market looks easy, attracting lots of new turkeys... um, I mean, investors. They get fatter and happier, and they tell everyone who will listen how easy it is.

Then, one day, stock prices start falling...

"No worries. This is normal. It's just a small correction," the turkeys cluck.

Then, one day, the entire market is down 30%...

"No worries. I have diamond hands and the market will turn around and make new highs, just like it did after it fell 34% in March 2020." Cluck, cluck. Gobble, gobble. Carry on.

Then, what seems like 10 minutes later, the market is down 60%, 70%, maybe even 80%...

The turkeys can't take it anymore. They've been beheaded. They sell out in a panic, locking in massive losses for the sole purpose of ending the emotional torture of watching more of the easy money in their accounts disappear every day.

For a turkey, a beheading after believing everything was perfect is truly a matter of life and death... But I promise you that losing 60%, 70%, or 80% of your money after you believed stock prices would never crash again can feel like that, too.

Don't be a turkey...

Make sure you have a plan to avoid catastrophic losses – no matter how sure you are that the market is headed higher. Use trailing stops, position sizing, and other techniques to ensure that your wealth won't be wiped out if the unexpected happens in the weeks ahead.

You must have a plan. It won't just happen on its own.

With that said, the markets are full of turkeys today. There's an awful lot of clucking and gobbling going on. They're just getting fatter and happier.

This is exactly the sort of atmosphere that prevails during the market-topping process.

Now, the second reason why I would predict a top in the next few months if I were the kind of guy who predicted tops...

Jerome Powell.

You probably heard yesterday that President Joe Biden has nominated Jerome Powell for a second four-year term as the chair of the Federal Reserve. He nominated Fed Governor Lael Brainard for vice chair. And Biden said of the nominations, in public, without sarcasm...

I'm confident that Chair Powell and Dr. Brainard's focus on keeping inflation low, prices stable, and delivering full employment will make our economy stronger than ever before. Together, they also share my deep belief that urgent action is needed to address the economic risks posed by climate change, and stay ahead of emerging risks in our financial system.

Um... what?!

Did he say "keeping inflation low" or am I mishearing?

The "real" yield on the 10-year U.S. Treasury note – which takes inflation into consideration – is around -4.7%... That's lower than any time since 1974, when it bottomed at -4.9%.

In other words, if you buy 10-year Treasurys today, you feel like you're making 1.6% on your money (which also stinks, by the way)... But due solely to inflation, you're really falling behind by 4.7%.

I'm not an economist, but I'm pretty sure "keeping inflation low" doesn't involve the real yield on the 10-year Treasury being more negative than any point in nearly half a century (during one of the worst decades of inflation in our history). It's almost like Biden is making fun of Powell for being so bad at his job and wanting to see if he can do even worse.

Don't overlook Biden's mention of "urgent action... to address the economic risks posed by climate change," either. That sounds like secret code to me. Maybe he really meant to say...

"They also share my deep belief that we need to print enough money so taxpayers won't notice how badly they're being violated by electric-vehicle and other climate-related subsidies, or how stupid they must be to believe the Fed can predict how the weather will affect our unfathomably complex $20 trillion-plus economy at some time in the future."

At the top of my lungs and from the highest peak, I must call hogwash on all of that.

In reality, only one thing really happened yesterday with Biden's nominations...

An uppity civil servant who often can't remember what his keepers told him to say next just nominated another couple of uppity civil servants for a pair of the cushiest jobs on Earth.

Why would anyone think more than that of Biden's nominations?

But it's arguably weirder still...

The Federal Reserve serves as the top U.S. banking regulator. You won't find a much more boring job. And yet, the ability of these nominations to make headlines is remarkable...

It's as if all the world's football experts worshipped the NFL's head referee. But when confronted with the name of a superstar, like future Hall of Fame quarterback Tom Brady, they simply said, "Tom who? Never heard of him. Is he a college ref or something?"

It's completely backward to treat central bankers like rock stars or superstar athletes... And it's absurd to credit them with saving a $20 trillion-plus economy that – in reality – would work much better if all those doddering uppity civil servants just stopped coming to work.

In fact, the most likely way such an economy will be ruined is through an egregious amount of interference from governments and central banks. If they just left it alone to work its magic, it would probably go on growing and lifting people out of poverty for millennia.

As it is now, I suspect we're headed the way of every previous deeply flawed empire that was run into the ground by too much war (courtesy of way too much government)... too much currency debasement... and never, not once, too much commerce and freedom.

Anyway, I don't want to get too far off the rails before the holidays. My point is... obsessing over the top banking cop as if he's Superman is absurd. It must be a sign of the top.

That brings us to my final reason for why I would predict a top in the next few months if I did things like that...

Caffeinated donuts.

I'm not kidding... Snack maker Hostess Brands (TWNK) recently started selling "Boost Jumbo Donettes." They come in chocolate mocha and caramel macchiato flavors. And according to the packaging, the caffeine content in each donut equals one cup of coffee.

I've written about crazy artworks – including "invisible" pieces and bananas taped to walls – selling for exorbitant prices, but that stuff can only kill your money... If you eat enough caffeinated donuts, your doctor likely will tell you to get your affairs in order because you won't live much longer.

I guess someone in a recent meeting at Hostess headquarters must've said something like, "Hey guys, our product is so poisonous that our only hope of not losing customers is to make it a lot more addictive. Opiates are illegal, so let's try caffeine. They'll love it."

From what I understand, caffeine isn't so bad in moderation. But using it like this to further addict folks to processed sugary garbage is just downright sinister.

As you might expect, though, nobody thinks it's processed sugary garbage except health nuts and curmudgeons. (I'll let you decide which of those two descriptions fits me.)

You see, Hostess is not losing customers. It's actually taking them away from the competition... The company grew its market share by 1.8% last quarter. It has grown sales 9% or more every quarter since the pandemic started – including 10% last quarter.

And as a result, the stock is on a roll lately (along with most other stocks)... It's up about 11% since mid-September, beating the S&P 500's roughly 4% return over the same period.

Who can blame Hostess' customers for loading up on tasty toxic waste?

After all, the government told a lot of these folks that they were "nonessential" and prohibited them from making a living last year. Wouldn't you eat more Twinkies if you were told that you and your family are nonessential? Maybe I'm doing things wrong.

When it comes to this final reason, my point is simple... If this doesn't speak for itself as an iron-clad sign that there's way too much money chasing way too many truly insane ideas today, I can't help you.

We've covered a lot in today's Digest, so let's recap everything before we sign off...

As you've learned this week, our analysts sometimes have different opinions on where the overall market is headed. But it's OK to have a different opinion from someone else...

My colleague Chris Igou disagrees with me right now. He believes the bull market will keep marching on in the coming months. And he doesn't want you to miss out on further gains.

Meanwhile, I've shown you today why I would predict a top within the next few months if I were the kind of guy who predicted tops. Let's go over all three reasons one more time...

1. Turkeys are fat and happy until they get beheaded... And today's stock market turkeys are fatter and happier than ever.
2. Jerome Powell is way too famous for an uppity civil servant who does such a lousy job... He's not Superman, so we shouldn't obsess over him like he's saving us all.
3. Caffeinated donuts are a clear signal that folks are going crazy... When you start spending money on ideas like that, you know you have too much of it on your hands.

I won't predict anything. But with those three reasons, I can only come to one conclusion...

It's over. This is the top. (It might even be the end of civilization itself.)

However, since I can't truly predict the future, I can't be 100% certain... No one can.

That's why you must prepare for both scenarios that Chris and I have shared in the Digest this week...

Differing opinions about where stocks are headed is precisely why I always recommend preparing for a wide range of outcomes. The truth is... neither I, nor Chris, nor anyone else can know exactly what will happen with stocks going forward.

No one can predict the future.

That's why it's critical to own a truly diversified portfolio with four basic elements – stocks and bonds, plenty of cash, gold and silver, and a little bitcoin. You must be ready for the unexpected to happen... It's impossible to get caught off guard if you're ready for anything.

So the next time you find yourself asking why some of our analysts disagree... remember that it's OK to think differently. And as long as you're prepared for whatever the market could possibly throw at you, you'll sleep much easier at night regardless of what happens.

And finally, no matter what, we all agree on another important takeaway for subscribers...

Recognizing and controlling risk is one thing every investor must do to grow their wealth in the financial markets. If you take on too much risk, you'll get burned at some point.

So whatever happens from here, remember the most important thing an investor can do at any time... Assess the risk you're taking on. Don't let it get out of control in your portfolio.

New 52-week highs (as of 11/22/21): Apple (AAPL), Atkore (ATKR), Best Buy (BBY), Costco Wholesale (COST), W.W. Grainger (GWW), Home Depot (HD), iShares U.S. Home Construction Fund (ITB), Lynas Rare Earths (LYSDY), MYR Group (MYRG), Palo Alto Networks (PANW), Procter & Gamble (PG), and W.R. Berkley (WRB).

The mailbag is quiet today. But with Thanksgiving in just two days, we want to hear which Stansberry Research publication you're most thankful for – and why? As always, you can tell us what's on your mind at feedback@stansberryresearch.com.

Happy holidays,

Dan Ferris
Eagle Point, Oregon
November 23, 2021