It's a Long Road to Normal
The Fed chair hits Capitol Hill... It's a long road to normal... Expect inflation to stick... A difference of opinion. Or not?... Revisiting the 'Bull vs. Bear Summit'... Sign up for Greg Diamond's free event now...
We heard directly from the big guy today...
Federal Reserve Chair Jerome Powell testified today before the Senate Banking Committee in Washington, D.C.
It was technically a renomination hearing for another four-year term leading the U.S. central bank – he's a shoo-in, with bipartisan support – but the questions from the Senators were mostly about what the Fed will do this year, not whether he's the right guy to lead the Fed.
Most interesting for our purposes is what Powell said about the Fed's plans for monetary policy this year, which will influence the economy and markets one way or another...
I (Corey McLaughlin) have spent good chunks of two recent Digests writing about how some Wall Street investors have been spooked by the idea that the Fed will "tighten" its easy-money policies more aggressively than first imagined.
In his remarks on Capitol Hill today, Powell clarified what the Fed's thinking is... And the markets were OK with what he said. The tech-heavy Nasdaq was up more than 1%, and the benchmark S&P 500 Index and other market indicators rose slightly, too.
I promise I'll move on to non-Fed-related topics in the Digest shortly, but for now this is important because what the largest central bank in the world says is a big part of what makes up the backdrop of the global financial system and how money moves around it...
At the same time, what the Fed says can be wrong, too... which means it's wise to take the messages for what they are – essentially predictions. Unfortunately, whether right or wrong, these predictions matter to us more than most people would like to think...
Here are six big things we heard from Chair Powell today...
Let's set the scene...
Inflation is running at multidecade highs, the unemployment rate is near multidecade lows, and a $9 trillion balance sheet is still on the central bank's digital books... To top it off, the current Fed chair is being nominated for another term.
There was plenty to talk about...
And, by the grace of the senators involved, Powell was actually asked a lot of questions we've been thinking about lately...
Here are the big takeaways from his answers...
- In Powell's view, the pandemic has been the largest, most direct cause of inflation. The Fed assumed that once vaccines rolled out, supply-chain bottlenecks would ease, and supply and demand would rebalance relatively quickly... but we're still waiting for that to happen. "Getting past the pandemic is the single most important thing we can do," Powell said.
- Powell said this year is the time to end super "easy money" policies. "Right now, we're stimulating demand with highly accommodative policy," he said, like near zero lending rates and ongoing bond-buying operations. "The economy no longer needs or wants highly accommodative policies." Over the course of 2022 he said policy will return "closer to normal, but it's a long road to normal."
- The Fed's rollback of said highly accommodative policy looks like this for now: End its asset purchases ($60 billion in bonds and mortgage-backed securities a month) in March, raise its benchmark interest rates throughout the year, and then start to thin its huge balance sheet, possibly later this year, settling in at a to-be-determined rate.
- This a big one: In the meantime, inflation is going to continue. A couple small rate hikes aren't likely to tame it. "Real" rates – yields minus inflation – will still be negative. "We're going to learn a lot about the path of inflation through the first six months of the year," Powell said. Does he expect inflation to subside? "Over time, yes," he said. "The question is how fast."
- On a related point, Powell admitted that he and the other Fed members misjudged the scope of inflation that we saw coming over the last 12 months. "We and all other mainstream forecasters forecasted by now we'd be seeing much lower inflation." This is where we remind you that "price stability" is one of the Fed's two mandates. Surely, they could have envisioned this scenario... like so many others did. Remember this the next time a crisis hits.
- In the job market, some wages are increasing, the unemployment rate (of those in the workforce) is low, but labor participation is still lower than pre-pandemic, meaning the people who left work amid the pandemic haven't been replaced on balance. Powell said a long economic "expansion" will likely be needed for workforce participation to reach prior levels.
The long and the short of it is that the Fed is saying it wants to slowly take stimulus out of the economy... thus the "it's a long road to normal" line.
You could argue pre-pandemic "normal" is long gone and never coming back. But even if it does get somewhere close to normal, high inflation could stick around for at least a few more months, especially in the Fed's slow-moving, backward-looking economic data world... Prepare accordingly, people.
In any event, Mr. Market didn't hate the Fed's messaging – today anyway...
Whether this Fed messaging is accepted in the mainstream as all fine and dandy, we shall see... But it didn't hurt today. And, according our Stansberry NewsWire editor C. Scott Garliss, the recent tech sell-off is showing hallmarks of being finished.
All of this tells us that – for the next several months at least – you might want to expect more of the same "abnormal" macroeconomic themes playing out in the world... High inflation is included... To combat that, owning high-quality stocks is a good idea.
Moving on, this e-mail from an astute subscriber arrived in our inbox last night...
Paid-up subscriber Robert B. wrote in with an observation about yesterday's Digest...
So Steve [Sjuggerud] says, "press on with the bull," and Greg [Diamond] has a Jan. 13 "look-out below" presentation where he thinks Feb or March is gonna be the smack-down...
We won't argue at all with this statement... The facts are correct, but without any other context, we sense that Robert was getting at a question we get a lot here at Stansberry Research...
How can two of our editors be right when they are making seemingly conflicting statements? And beyond that, who should I listen to?
This idea most recently came up in advance of our 'Bull vs. Bear Summit' in September...
A Stansberry Alliance Partner, Mark G., wrote in back then asking about what to do when True Wealth editor Dr. Steve Sjuggerud was bullish and Retirement Millionaire editor Dr. David "Doc" Eifrig was bearish.
What we said then again applies today with the seemingly conflicting viewpoints between Steve and Greg. As I wrote in the September 27, 2021, Digest...
- Listening to both Steve and Doc is a wise move. And both can be "right," depending on what you are looking for...
- They probably agree on more than you think...
- There's a more important question to answer instead.
This requires a bit of an explanation, so if you want to see it all, go back and read that Digest. We won't rehash it here, but...
Spoiler alert: Steve was outwardly bullish, while the normally optimistic Doc was being a "realist" and sharing the warning signs he was seeing of a major stock market correction.
Our colleague Dan Ferris was also part of the "Bull vs. Bear Summit" and, as regular readers know, he has regularly warned about a "bubble"... And we said all of them could be right. We wrote in September...
If you listen closely to Steve, Doc, Dan, and many other analysts and editors at Stansberry Research, you'll see they're essentially all concerned about the bottom falling out from this juiced-up market at some point.
But they also say it would be a mistake not to own stocks right now... that things can run on longer than most people expect... and that, frankly, nobody really knows for sure when the next "crash" will happen.
That's why – bullish, bearish, or "realist" – Steve, Doc, and Dan have many open recommendations in their newsletters right now. They still can be "right" in many different ways, no matter what happens...
Each approaches the market from a different viewpoint, which we value here at Stansberry Research. It prevents "group think" and offers subscribers different opinions – which are expressed in different advisories and in the trades recommended within them.
As regular Digest readers know, Greg is a pure technical analyst, whose work is based on past trends and human behavior... Steve and his team tend to use a broader variety of analysis to spot great buying opportunities.
In other words, as our Alliance members and any subscribers to both Greg and Steve's work likely know, Greg is preparing to make different trades than the type that Steve recommends in his True Wealth franchise...
For those who don't subscribe, without giving too much away about what Greg will share on Thursday in his free webinar ‒ which you can sign up for here ‒ I can also tell you that his strategy is more short term in nature than Steve's approach to the markets...
But here's the other thing...
At this moment, Greg and Steve actually agree... As Dan wrote in his great Friday Digest, Greg said on the most recent episode of the Stansberry Investor Hour podcast that he believes the uptrend in stocks is still intact.
But because of the nature of his strategy, Greg is hyper-aware right now that the big trend could change sooner than most people realize. He sees several warning signs that he is concerned about...
At the very least, he expects a lot of stock market volatility in the months ahead – which can be great for his strategy. Greg says his subscribers can realistically double their money 10 different times if things play out as he thinks they could in 2022.
You can hear more about that from Greg on Thursday. Sign up for free here.
Now, sometimes our editors' strategies arrive at the same conclusion. We like when that happens... But sometimes they don't. That's OK, too.
At the same time, I know the latter scenario makes it hard to decide what to do when receiving what appears to be mixed messages.
That's why the key in this whole discussion is to know what you want...
In other words, what are you looking to do with your money? Why are you "putting it to work" in the first place?
Are you looking to make a lot of shorter-term trades? Or is your portfolio set up for the long term?
These are all critical questions to think about.
Because knowing the answers to them is the starting point to a wise diversification across the variety of assets that you can invest in – stocks, bonds, gold and silver, cryptocurrencies, real estate, or a Ken Griffey Jr. rookie card...
As we wrote in September...
Here are just two examples of ideas to consider... Are you relatively young and looking to build wealth? Or are you near or in retirement and looking to preserve wealth?
Depending on your viewpoint, you may want to own different assets... or have a different risk tolerance... or use a different exit strategy than your neighbor or some talking head on TV...
Having a plan in line with your goals for your money will not only help protect your wealth during the next major sell-off... But it could perhaps help you gain the confidence to stay in the markets when it feels like the rest of the world is telling you to get out.
Fortunately, our editors often recommend allocating a certain portion of your portfolio to their strategy or a particular stock or trade, based on the risks involved in it and the market environment in general... Don't ignore this advice.
It can make the crucial difference between losing or making money – no matter who is "right." After all, the best market call is worth nothing – in an investment sense – if you don't have enough conviction to take action on it.
The Fed's Credibility Is Destroyed
The Fed's credibility has already been dramatically weakened over the past year, and the central bank will have to make a pivotal choice in the coming months that could upend the markets, says Michael Gentile, founding partner of Bastion Asset Management.
As part of editor-at-large Daniela Cambone's Outlook 2022: The Tipping Point series, Gentile says that the Fed ceasing bond purchasing is "my biggest concern for 2022," and that you probably can't have enough cash or gold in your portfolio right now...
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 1/10/22): AbbVie (ABBV), Flowers Foods (FLO), Kimberly-Clark (KMB), and Sprouts Farmers Market (SFM).
We covered our most timely piece of feedback up above... If you have a comment or question, as always, e-mail us at feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
January 11, 2022