It's Going to Take Some Time

The Fed is still 'fighting' inflation... A pause – with a bet on more rate hikes to come... A dent in higher prices, but not a smash... It's going to take some time... A higher-inflation era... Burn low rates from your memory...

The message is clear – if you're listening to it...

The Federal Reserve says the inflation "fight" is more a yearslong ordeal than simply a few more months – or even another year. But, still, it seems enough folks don't want to or just simply can't believe Fed Chair Jerome Powell.

In a 45-minute press conference that followed yesterday's policy meeting, Powell said a lot. But when I (Corey McLaughlin) heard him talk toward the end about when the Fed might possibly cut rates, it really got my attention.

He was talking about "maintaining real rates," meaning a lending rate to banks that is above inflation. In monetary-policy land, that acts as a headwind for the economy (and inflation). Powell said, with emphasis added...

We're having real rates that are going to have to be meaningfully positive and significantly so for us to get inflation down... That certainly means that it will be appropriate to cut rates at such time as inflation is coming down really significantly. And again, we're talking about a couple of years out.

I think as anyone can see, not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate if you think about it. Inflation has not really moved down. It has not reacted much to our existing rate hikes. We're going to have to keep at it.

After hearing that, if anyone is still betting on the Fed cutting rates this year, we don't know what else to say... The central bank yesterday decided to pause its rate-hiking spree that brought the federal-funds rate from near zero to more than 5%, so it can evaluate the effects on the economy before making more moves.

But along with its policy announcement, the Fed also published its quarterly economic projections. These showed a doubling of their previous 2023 outlook for gross domestic product ("GDP"), a lower projected unemployment rate, and higher-than-expected inflation.

As our Stansberry NewsWire's Kevin Sanford wrote in an analysis today...

• The Fed no longer expects the U.S. to enter a recession in 2023.
• The Fed predicts the unemployment rate will be 4.1% at year-end, down from the previously estimated 4.5%.
• The Fed sees annual gross domestic product rising 1.0% instead of the prior forecast of 0.4%.

In other words, the central bank sees a stronger U.S. economy for the rest of this year than they were expecting three months ago... and six months ago... and nine months ago (based on its past quarterly projections).

Here's the important part in all of this... What's next?

When the Federal Open Market Committee members wrote down their projections for the rest of 2023, they showed the likelihood of two more rate hikes this year, which would bring the fed-funds rate range to around 5.5% to 5.75%. And they certainly didn't expect rate cuts, at least in Powell's estimation, though he and the Fed have been wrong many, many times before.

How it could happen...

The Fed has four more policy meetings this year, and it's thinking about two more rate hikes.

When I heard Powell talk and answer questions yesterday, it sounded like the Fed's plan of the moment – should the banking sector not go into crisis again – would be as follows... It would raise rates at its next meeting in July, "skip" a hike again after that at its September meeting, raise rates again in November, then take the holidays off... and pick up the discussion in early 2024.

This expectation could be wrong, or the plan could change even if the read is correct. But it seems our friends the bond traders are coming around to the general idea. According to the CME Group's FedWatch Tool, fed-funds futures traders aren't heavily betting on rate cuts anymore like they were a few weeks and months ago.

That said, the market can still work with this framework.

It doesn't mean stock prices can't or won't keep going up. It just means that higher inflation for longer – and higher interest rates for longer – should be seriously considered... along with the consequences of that reality.

It's still about the path of inflation...

Three years on from the economic-stimulus dump in response to the pandemic that started this whole inflation run, the big central bank narrative is still about higher prices, which should teach everyone a lesson about our recent "unprecedented times."

The Fed has been expecting a spike in unemployment in response to higher rates that would typically make an "official" recession obvious to anyone and everyone. That just hasn't happened. Maybe it will soon... as pandemic-era stimulus programs have only recently ended, and U.S. jobless claims have been trending up since the start of the year and recently hit an 18-month high.

And Powell said yesterday that he felt supply constraints were becoming less of an issue, and that in housing, new rents and new leases are showing signs of disinflation. Still, in nonhousing "services" – making up more than half of the inflation measure the central bank weighs the most – the Fed is seeing "only the earliest signs of disinflation." As Powell said...

I would almost say that the conditions that we need to see in place to get inflation down are coming into place. And that would be growth meaningfully below trend. It would be a labor market that's loosening. It would be good [supply] pipelines getting healthier and healthier and that kind of thing. The things are in place that we need to see, but the process of that actually working on inflation is going to take some time.

How long is 'some time'?...

I can't give you an exact date, but the answer is probably longer than most people think.

As Powell said it, the Fed's preferred indicator – the core personal consumption expenditures ("PCE") – hasn't eased much at all this year. That's a familiar story.

After running below 2% for almost the entire previous decade before 2021, core PCE peaked at 5.3% in early 2022. And after five percentage points of Fed rate hikes since then – it has still been around 4.7% for the past six months. That's a dent, not a smash. As Powell said...

Remember, we're two-and-a-half or two-and-a-quarter years into this, and forecasters, including Fed forecasters, have consistently thought inflation was about to turn down and typically forecasted that it would – and been wrong.

Over the last six months, you're just not seeing a lot of progress. It's running at a level over 4.5%, far above our target, and not really moving down. We want to see it moving down decisively...

We are going to get inflation down to 2% over time... We want to do that with the minimum damage we can to the economy, of course. But we have to get inflation down to 2%, and we will. And we just don't see that yet.

He's trying to tell you it's going to take a really long time...

Year-over-year inflation may have "peaked" last spring or summer, depending on what measure you want to use. But remember, these numbers are talking about the pace of inflation. We're not talking about inflation going away forever, and this distinction should always be part of your investing calculus.

We're still going to have inflation no matter what, so long as we have a fiat currency. The critical detail to think about is whether the pace of inflation is still slowing.

Take it month by month...

If the monthly pace of inflation is slowing, then that's reality. Inflation is slowing. If not, then it's not.

The headline numbers for both PCE and the widely followed consumer price index ("CPI") are year-over-year comparisons. That's not exactly helpful when you're figuring out the pace of inflation in the recent past and thinking about the near future.

For example, core PCE month-over-month growth hit an alarming 20-year high of 0.7 percentage points in April 2021. That was 10 months before the Fed started raising interest rates, which was about 10 months too late.

A look at the month-over-month gains in inflation today shows that, if anything, the economy is in a new higher-inflation era...

Some simple math: You get 2% annual inflation with monthly increases of 0.167 percentage points on average (2% divided by 12 months). This was roughly what the economy averaged from the mid-1990s until 2021. Not anymore...

For the past year, core PCE has averaged 0.36-point month-over-month growth – about double the average of the previous decades. It checked in at 0.4 points in May, the latest data available...

That's actually higher than the month-over-month gain was a year earlier in May 2022, in the early stage of the higher-interest-rate run. And that's why the headline number has stayed higher than expected.

About those inflation figures...

In our Stansberry NewsWire, Kevin also published an analysis of the latest inflation data yesterday ahead of the Fed meeting. As he noted, inflation numbers can be in the eye of the beholder.

Some investors believe the resilient core prices demonstrate sustained robust economic growth, while yet others have declared victory in the war on inflation. In general, though, Wall Street investors are expecting headline inflation to keep coming down...

Yet as Powell suggested yesterday, housing inflation continues to move at a snail's pace (as we'd expect) and is preventing core prices from falling at a faster rate. That's going to take "some time."

And remember, the Fed is looking most closely at core PCE, not CPI.

Keep this in mind whenever you hear a conversation about the Fed, inflation, and interest rates. So long as core PCE isn't trending downward – and it hasn't in six months – and unemployment hasn't spiked, the central bank will be inclined to keep raising rates.

What does this mean for stocks?...

Well, we've seen over the past several months that stock prices can go up even as interest rates have remained "higher for longer"... The question – again – is how much higher rates will go... and for how much longer.

So far, in the past two years, the answer has always been higher and higher, and longer and longer than most people think. It still seems that this is the case today. I can't tell you for sure what's going to happen in the future.

Will the Fed be late to the game again, this time with easing policy, and cause collateral damage to the economy? That's a bet I'm willing to make, too. But for now, all I can tell you is what the environment is and share a quote I haven't been able to forget for the past 24 hours.

It's from the famed investor Warren Buffett in 2013. That's back when the world was trying to figure out what the heck "quantitative easing" paired with rock-bottom interest rates would do to the economy. Buffett said then...

Interest rates are to asset prices what gravity is to the apple. They power everything in the economic universe... When there are low interest rates, there is a very low gravitational pull on asset prices.

I first shared these words from Buffett in an April 2022 Digest, in the early part of what became a nearly yearlong decline for the major U.S. stock indexes and bonds. Today, the economy has five percentage points of rate hikes behind it that it didn't have then.

The apples fell hard in a bear market that took too many people by surprise... And a strong gravitational pull is still at work today, one that could get stronger before it gets weaker. That's not to say stock prices can't go higher, but the path is not as straightforward as it was in the near-zero-interest days of the past 15 years.

Burn those from your memory.

One more thing before we go...

Our friend Marc Chaikin, founder of our corporate affiliate Chaikin Analytics – who predicted a run on banks back at the end of 2022, just four months before it happened – is stepping forward again now with a new prediction that he says could double your money this year.

Marc is calling this "backdooring Wall Street," in part by using the Power Gauge tool he has developed during his five decades in the markets to predict where big Wall Street firms are moving their money... and how to capitalize on this knowledge.

If you've never considered Marc's system before, now is a great time. As he tells it, his Power Gauge pointed to the top 10 stocks of 2022, enough to turn a $10,000 stake in each of those names into a $163,000 profit. And that was in a bear market...

If you're interested, click here for more information. You will hear from Marc directly, along with a special guest who he considers the "secret weapon" in Chaikin Analytics, which Marc founded to help individual investors even the playing field with Wall Street.

Taking the 'Mosaic' Approach

Empire Financial Research analyst Enrique Abeyta joined the Stansberry Investor Hour this week. He shared a wealth of wisdom, including the importance of staying optimistic and how he uses a "mosaic" approach to form a comprehensive view of a stock or the market...

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 6/14/23): Apple (AAPL), ABB (ABBNY), Adobe (ADBE), Aehr Test Systems (AEHR), Ansys (ANSS), ASML (ASML), Cintas (CTAS), iShares MSCI Emerging Markets ex China Fund (EMXC), iShares MSCI Japan Fund (EWJ), iShares MSCI Mexico Fund (EWW), Comfort Systems USA (FIX), Innodata (INOD), Ingersoll Rand (IR), Iron Mountain (IRM), Eli Lilly (LLY), Meta Platforms (META), MSA Safety (MSA), Microsoft (MSFT), OMRON (OMRNY), Palo Alto Networks (PANW), Pure Storage (PSTG), ProShares Ultra QQQ (QLD), Construction Partners (ROAD), ProShares Ultra Technology (ROM), SoFi Technologies (SOFI), Vanguard S&P 500 Fund (VOO), and Walmart (WMT).

In today's mailbag, feedback on Wednesday's Digest by Stansberry Venture Technology editor Dave Lashmet about the next "black-swan event"... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I totally agree with your assessment that China is an increasing risk to Taiwan and the rest of the world. Just look at what they have been doing over the last several months. Their aggression has increased exponentially as the U.S. sanctions have also dialed up. They took over Hong Kong without repercussions either from the U.S. or anyone else. That was our first mistake. Now they have further confidence that they can do the same with Taiwan.

"China has serious problems that the leadership isn't able to fix any time soon. One being the ratio of older people to younger people under their control. Because of their one-child policy for the last several decades, they now have a huge crisis. There is not enough younger population to support the aging and retiring population. And secondly, their economy is so stretched out that it HAS to maintain a solid growth rate of at least 6 percent annually. And that is a high water mark for any economy.

"So to distract the people of China from those looming issues, [President Xi Jinping] is now aggressively issuing confrontations with the U.S. and Taiwan. Any mistake from either side (the U.S. or China gets too close to a warship or aircraft and one fires a weapon at the other) and the war is on." – Paid-up subscriber John M.

All the best,

Corey McLaughlin
Kent Island, Maryland
June 15, 2023