Inflation Really Is the Worst

U.S. GDP just got a little worse... Lower profits and less extra cash... Inflation really is the worst... 'The way democracies die'... Nvidia's revenue declines... More about Taiwan Semiconductors... A note for new Ten Stock Trader subscribers...

Upon further review...

A few weeks after we reported "shrinkage" in the form of a 1.4% contraction in first-quarter U.S. gross domestic product ("GDP"), the numbers got a smidge worse today. In short, the U.S. Bureau of Economic Analysis ("BEA") "revised" the number down to a 1.5% decline.

Now, that might sound like a meaningless, record-keeping change. But first, 0.1% of annual U.S. economic production is roughly $23 billion, using last year's total GDP of $23 trillion as a marker.

I (Corey McLaughlin) had to look up how many zeros are in a trillion to do the calculation. The answer is 12, if you're counting at home.

Secondly, the trend is headed in the wrong direction... The BEA isn't done reviewing its GDP data for last quarter. Typically, the agency does an initial report, a second take (which we got today), and then a third version. So this number could keep going lower.

Third, and probably most importantly, more-telling information was buried deep in the weeds of the revised GDP data release. But you needed to take the time to look for it.

Our Stansberry NewsWire editor C. Scott Garliss did just that. And he found two noteworthy themes...

For starters, Scott found lower profits for businesses and less 'disposable' income for people...

As Scott noted in the NewsWire earlier today, the revision reflected updated analysis of private-business inventories and residential investment (lower than thought). And that was mostly offset by higher consumer spending than previously recorded.

However, the increased spending numbers actually made the BEA's quarterly inflation reading go higher, too – given higher costs for products. It now reports the GDP Price Index for the first quarter rose to 8.1% versus 7.1% in the fourth quarter of 2021.

From there, the numbers get more interesting. As Scott wrote today...

Buried in the release is a segment on corporate profitability. The BEA said they dropped by $66.4 billion during the first quarter. If we break the numbers down, it showed domestic profits for financial corporations tumbled $28.6 billion while those for nonfinancial corporations slid $21.2 billion.

At the same time, current-dollar disposable income was revised lower. The BEA cut the number by $224.1 billion for the first quarter due to an upward revision to personal taxes. That cost increased by about $204.4 billion. The change equated to a 6.7% contraction in disposable income compared with the prior quarter and a 0.2% drop relative to the same quarter last year.

So while consumer-spending data is encouraging (in nominal terms, at least), the data on corporate profitability and disposable income isn't. And those metrics are probably more relevant to gauging growth or declines. More from Scott's report...

Based on the BEA's data, corporate profitability peaked in the second quarter of last year and has been steadily sliding ever since. The current quarter marks the lowest level since the fourth quarter of 2020.

The slide in disposable personal income is even worse. According to the Federal Reserve Bank of St. Louis economic database, you have to go back to the second quarter of 2009 to find a decline that's comparable. That quarter was right around the depths of the financial crisis.

All in all, these numbers point to a slowing economy that's possibly headed toward an official "recession." And frankly, we would argue that we're likely already in one today.

In short, because of our inflation problem (or "fox with rabies" or "crocodile" problem, as we've described it)... because the costs of staples like gas and food are so high... because, in part, wages aren't keeping up... people have less extra cash to spend than they've had lately.

And businesses are already making less money, generally speaking. That means they aren't going to raise wages further. Instead, they'll look to cut costs – like we talked about in Tuesday's Digest in terms of the Big Tech companies. They'll cut jobs, if anything.

Inflation really is the worst.

Not to get too far afield, but...

Unfortunately, we're reminded of this "end of days" interview that Charlie Munger, the 98-year-old partner of Warren Buffett, did a few months ago. It was after the Consumer Price Index showed a 7.5% year-over-year increase in January. And it has since gone higher, of course. As Munger said...

Inflation is a very serious subject. You could argue it is the way democracies die... It's a huge danger once you have a populous that learns it can vote itself money. If you overdo it too much, you ruin your civilization.

If you look at the Roman republic, even after they went to an empire with an absolute ruler, they inflated the currency steadily for hundreds of years. Eventually, the whole damn Roman empire collapsed. It's the biggest long-range danger we have, apart from nuclear war.

In the same conversation, Munger referenced inflation in Germany... followed by the Great Depression... as the reason Hitler came to power after skyrocketing costs destroyed the country's middle class.

In short, as Munger said of high inflation, "The history is not pleasant."

Switching gears, let's update a story we talked about last week...

Following up on last Thursday's Digest featuring our colleague Dave Lashmet's sell recommendation on graphics-card company Nvidia (NVDA)... and the reasons why... we want to note what the company reported in its latest earnings announcement last night.

In short, it was what Dave expected... And it's why he recommended that his Stansberry Venture Technology subscribers close their remaining position in Nvidia for a 1,400%-plus gain. And as we noted, that was good enough to take over the top spot in our Stansberry Research Hall of Fame.

Dave suggested selling for three main reasons. As we wrote last week, the most interesting reason could be a strong link between Nvidia's share price and that of the world's second-most popular cryptocurrency, Ethereum.

Dave told us – and his Venture Technology subscribers earlier this month – that a lot of Ethereum "miners" use Nvidia's powerful graphics cards, which are designed primarily for gaming.

This fact shows up in the company's "variable revenue," as Dave explained, instead of as more fixed revenue the company has from selling products to companies like Alphabet (GOOGL) or Amazon (AMZN) for their cloud businesses, for example.

Dave discovered that this number – Nvidia's variable revenue – has lately fluctuated based on crypto prices, which can increase or decrease demand for the company's technology by crypto miners.

Well, as it turns out, Nvidia reported a slowdown in sales in its "gaming segment" in its earnings report published late yesterday. And it projected a 10%-plus decrease in gaming revenue for the current quarter compared to the last quarter.

The news surprised some Wall Street analysts. Not Dave, though. As he told us in a private note today...

Gaming segment? Do you mean variable-cost chips sold to individuals? That is down 17%.

To the same point, Nvidia Chief Financial Officer Colette Kress said in a statement yesterday that the company suffered a 52% year-over-year decline in its "OEM [Original Equipment Manufacturer] and other revenue" category due to a drop in revenue from processors for crypto mining as well.

This is all to say that Nvidia's fortunes are more linked to crypto sentiment than most people may think, not just the gaming technology for which it originally became popular.

Shares of Nvidia are down roughly 40% in 2022, even after a more than 5% gain today.

On a related point, let's address a reader question...

In our Digest last week about Nvidia, we also noted Dave's concern about the company deciding to source their chips only from Taiwan Semiconductor Manufacturing (TSM) beginning next month.

We mentioned that TSM was also building a new manufacturing facility in Arizona, but the project had run into some delays. Stansberry Alliance member Bill D., who lives near where this facility is being built, wondered about that project. As he wrote...

In your article about NVIDIA sole sourcing their chips from TSM, you mentioned TSM was building a plant in Arizona, but construction was delayed and not anticipated being ready for production until 2024.

I live several miles from the new TSM property in Arizona and can attest that buildings have been going up for over a year and span several miles. Started in late 2020 and projected 5-year production ready in 2025, so it appears to be ahead of schedule.

Do you have new information or bad information?

Curious.

First off, to everyone, we love notes like this...

It always pleasantly surprises us (though it shouldn't by now) how far and wide our subscriber base is. Someone is often always "close" to something that we're writing about, with a much more grounded-in-reality view than most politicians, for example.

As I shared with Bill directly earlier today, of those choices, I would say "new information" – or at least important-enough information I wanted to share as it relates to Nvidia's decision to source only TSM chips beginning this year.

In TSM's last public announcement about the timeline for the $12 billion Arizona plant, the company said it expected to open in early 2024 – which was its original target as well (not 2025, as far as we've seen).

But reports from a few months ago said the project – TSM's first attempt at building a facility outside of Taiwan – had fallen three to six months behind schedule. Financial-news outlet Nikkei Asia, a leading source of financial information in that region, reported in February...

Construction of Taiwan Semiconductor Manufacturing Co.'s first advanced chip plant in the U.S. is three to six months behind schedule, sources told Nikkei Asia, a sign that the world's biggest contract chipmaker is finding it more challenging to expand overseas than at home.

TSMC initially planned to start moving in chip production equipment by around September this year, but the company has told suppliers that this will be pushed back to around February or March of 2023, several people with knowledge of the matter told Nikkei Asia.

The deferral was mainly due to labor shortage and the on-and-off surge of COVID-19 infections in the U.S., the people said. Complicated processes for obtaining the different types of licenses needed for construction was another factor, they said.

Another reason for the reported delay is a factor Dave mentioned in his sell recommendation to Venture Technology subscribers as well...

We're talking about TSM's major U.S. competitor, Intel (INTC).

At the same time TSM is building its new facility, Intel is expanding its nearby plant in Chandler, Arizona, as well. And as you might expect, both companies are pulling from the same resources and labor pool in the area. (As we were writing today's Digest, Bill replied to say that "homebuilder delays" in the area are typical, which is what this sounds like to him.)

All in all, in Taiwan, it has generally taken TSM only 12 to 15 months to move from groundbreaking to equipment "move in." But it's going a little slower in Arizona than the company is used to, for a few reasons.

Industry website AppleInsider is also covering the story because Apple (AAPL) sources its chips from TSM as well. And for now, according to its latest report, TSM hasn't said anything publicly about a delay in its official opening...

Despite the delays in construction, TSM expects it will still reach its production start in early 2024. The timeline for installing and testing equipment will be shorter, but the production should begin on time.

But of course, we all know how construction projects can go.

We just wanted to point out that it might be possible that TSM's first foray into the U.S. is a little behind schedule. No matter what, it won't happen until 2024 at the earliest, which complicates business for major clients like Nvidia, Apple, and Advanced Micro Devices (AMD).

And it'll be that much more complicated if conflicts escalate in Taiwan sometime in the next two years. As always, we'll be watching the other side of the world for any developments.

We'll close today with a housekeeping note for new Ten Stock Trader subscribers...

Our colleague Greg Diamond has welcomed a bunch of new subscribers to his Ten Stock Trader advisory over the past week – and for good reason...

As you might know, Greg has been calling for a big move in the markets this week or next week. And we've been sharing links for folks to hear more details and get access to his trade recommendations.

We've also seen some questions coming in from new subscribers. So we wanted to pass on Greg's answers for new subscribers here in case anyone missed them.

Specifically, we want to make sure you're aware of the Ten Stock Trader app...

It's part of the Ten Stock Trader subscription – and Stansberry Alliance members have access to it, too.

Greg recommends short-term trades with "buy up to" prices. And since we're in a volatile market, prices can change quickly throughout the day.

If you download the Ten Stock Trader app on your iPhone or Android device and approve receiving messages from the app, you'll get instant notifications whenever Greg recommends a new trade – or publishes any intraday updates, for that matter.

It's the fastest way to get trade alerts and other information for Ten Stock Trader. After subscribers sign up, they'll also receive e-mail notifications. And of course, the recommendations and updates are also posted to our website under the publication's devoted page.

So if you're interested in the app, just search for "Ten Stock Trader" wherever you get your apps and start using it today. We know you'll enjoy it.

'It's a Doom Loop'

"Inflation is just roasting people, and sadly it's going to get worse," Lawrence Lepard, founder of Equity Management Associates, recently told our editor-at-large Daniela Cambone. "The Fed can't print goods and services like they can print dollars."

Lepard said the U.S. will remain stuck in a "doom loop" until it resets with a "sound, neutral reserve currency." And he suggested that in order to protect your money today, investors need to be in "sound money assets," including gold, silver, and bitcoin.

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 5/25/22): ProShares Ultra Oil & Gas Fund (DIG), Enterprise Products Partners (EPD), Shell (SHEL), Energy Select Sector SPDR Fund (XLE), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

In today's mailbag, some thoughts on the Federal Reserve, which we talked about again in yesterday's Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"It looks to me like by the time the Fed really gets serious about inflation, we will already be deep in recession and the Fed will deepen the hole. By the time 'recession' is acknowledged, we are already well into it." – Paid-up subscriber Kevin S.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 26, 2022