Mr. Market Just Lost His Mind Again

The Fed raises rates a little... 'Real' interest rates will still be negative... Let's talk China... Chinese stocks may have just hit bottom... Mr. Market just lost his mind again... More about the Intelligent Retirement portfolio...

Finally, everything's going to be alright...

The Federal Reserve is raising its benchmark lending rate by 0.25%. All is well... High inflation is a goner!

Well, not exactly. We might get there eventually, but I (Corey McLaughlin) hope my sarcasm comes through about today's headline financial news...

As expected, Fed Chair Jerome Powell officially announced today the central bank is hiking its benchmark interest rate from near zero to a range of 0.25% to 0.5%... "raising rates" for the first time since 2018.

With inflation high and unemployment low, the Fed also indicated it wants to raise rates at each of its six remaining meetings this year, getting near 2% by the end of the year in order to "cool" the economy... and that trimming the balance sheet could count as another rate hike.

Then, in 2023, Powell and company see three more hikes... and that's it.

Be sure to check out our Stansberry NewsWire team's coverage of the Fed's announcement for more detail and what this all means. For starters, higher lending rates make borrowing costs higher and that will filter through the economy...

It also shows the central bank is trying to tackle inflation by making dollars "more expensive"... Perception alone can soothe a market, and it may have helped today, with the major U.S. indexes all finishing positive.

The tech-heavy Nasdaq Composite Index rose nearly 4% and the benchmark S&P 500 Index was up more than 2%.

But excuse me if we just say 'bah humbug'...

As we wrote yesterday, the Fed – and by extension, we the people – are in a "lose-lose" situation now...

That's because the central bank essentially ignored or was oblivious to the signs of widespread inflation, which we reported on way back in 2020 and became clear to many more people halfway through 2021...

The folks like Powell, who handle monetary policy for the largest economy in the world apparently thought inflation would just stop when COVID-19 went away... as if trillions of dollars of Fed-created money hadn't been thrown into the economy over the past two years.

Maybe I'm grumpy today, but I don't believe that was the Fed's position behind closed doors. More likely, it wanted to keep its own interest payments on the government's massive debt (roughly $88 trillion) at rock-bottom rates for as long as possible.

Powell's words and the Fed's (relatively small) actions today might soothe a volatile market for a little bit, but eventually, the U.S. economy is either going to see slower growth with perhaps lower inflation... or higher inflation with a bit more growth.

Either way, even Powell in his post-rate-hike press conference today acknowledged higher inflation could begin to come down in the second half of the year... but he "still expects inflation to be high."

This is not exactly an ideal scenario. This is why we've been stressing lately to prepare accordingly, mostly about your portfolio, but the same could be said for everyday personal or business costs in the months and years ahead.

Here is another reason why...

Raising interest rates just a little won't make a meaningful difference in the short term...

The context of the current economic environment is not fundamentally changing because the Fed is raising its overnight lending rate from near zero to a range near 0.25%...

Our editors look at "real" interest rates – the yield you can get from short-term bonds minus inflation – as a better gauge of what's really happening in the economy and where to put money to work.

As our colleague Dr. Steve Sjuggerud wrote in his latest edition of True Wealth Systems, real rates have fallen to 1970s levels... and they've been negative since early 2020.

Take a look at this chart, which shows the three-month Treasury yield minus inflation since the mid-1970s, the last time "official" inflation data was as high as it is currently...

Steve and his team showed subscribers this chart then followed up with a very important point... This dynamic is not going to change anytime soon. As Steve wrote...

Yes, the Fed is about to raise interest rates, which will increase the yield on Treasury bonds. And yes, it will likely do that several more times this year. But with real rates at negative 7.5% today, think about this...

Inflation could fall by half and the Fed could hike rates five times... and real rates would still be negative.

The thing is, it doesn't seem many folks have realized this.

When more people do realize this and see that higher-than-recently-seen inflation is going to stick around much longer than they think, you can bet people are going to scramble to adjust their portfolios...

One place that could benefit handsomely is the gold market, Steve says... In the late 1970s, when real rates were negative and inflation was higher than the yield you could earn in bonds, folks plunked money into other assets, like gold.

The precious metal soared more than 500% from the end of 1975 to its peak in January 1980. History isn't guaranteed to repeat, but it's worth considering what "real" rates being negative for at least another year means for your investments.

Moving on, let's talk about China...

I'll say right away that we're going to put aside detailed discussion about China's disturbing "no forbidden areas of cooperation" pact with Russia and possible reconfiguring of a new world disorder, as we put it in the March 3 Digest... For now anyway.

Though what we're about to talk about – the behavior of the Chinese stock market lately – is directly related.

Lost in the headlines about war and the U.S. stock market volatility is the fact that Chinese stocks have been in a free fall the last few weeks.

The Hang Seng Tech Index, which tracks the performance of China's 30 largest technology stocks listed in Hong Kong, fell about 37% in a month as of yesterday.

The KraneShares CSI China Internet Fund (KWEB), a benchmark for Hong Kong-traded Internet stocks, has performed even worse – down 43% over the same period.

The sell-offs have been attributed to a variety of factors...

Most recently there has been another wave of COVID-19 infections and lockdowns in China...

Plus, there have been growing concerns that the U.S. would de-list many of the largest Chinese companies over the next few years... And there have been worries of Russia-like economic sanctions on Chinese businesses, given China's cozier-than-is-comfortable relationship with its neighbor.

That has caused shares of huge Chinese companies traded on U.S. exchanges via American depositary receipts ("ADRs") to fall. Alibaba (BABA), the "Amazon of China," and JD.com (JD), the country's largest online retailer, fell 60% and 30%, respectively, from one year ago.

In short, there has been a ton of negative sentiment around Chinese stocks lately, measuring even worse than the 2008 financial crisis. As True Wealth Opportunities: China analyst Brian Tycangco wrote in a special update for subscribers yesterday...

To get an idea how bearish people have become, take a look at this chart. It shows us the relative strength index ("RSI") of Chinese stocks. This is a way to gauge when assets are moving too far, too fast in a given direction... which means a snapback is likely.

Right now, the RSI for Hong Kong-traded stocks is at its lowest level in at least a decade. Check it out...

In other words, this measure of Chinese stocks – which already includes major Chinese tech names like Alibaba, Tencent, and JD.com – is extremely oversold...

In fact, the index is more oversold today than it was during any other bear market in the last 20 years, including the 2008 financial crisis. Investors have been running for the exits.

But today, Mr. Market in China reversed direction...

In fact, Chinese tech stocks saw their largest one-day rally ever... The Hang Seng Index was up 9%, and the Hang Seng Tech Index soared roughly 20%.

Why? Simply put, it looks like the Chinese government just had a "bailout" moment of sorts in response to the intense amount of negative sentiment for the country today...

A high-ranking government official, Vice Premier Liu He, gave a speech before a key financial-stability committee and basically assured folks that stimulus measures are coming... and maybe more important, he addressed other concerns – related to U.S. listings – that have been overhanding the market for about a year.

You might remember that Chinese stocks sold off across the board last year as the government there started cracking down with new regulations on all kinds of industries... from doing away with the multibillion-dollar private tutoring industry, to limiting kids to one hour of video games on weekends and holidays.

Investors with money in China didn't know when it would end... Eventually, the wave of new regulations touched the country's real estate industry, via what was essentially a government-sponsored debt deleveraging of China Evergrande, the country's largest real estate developer.

And it continued more recently with fears – renewed in the context of the war in Ukraine – of the "delisting threat," as Brian put it... He told Stansberry NewsWire analyst Nick Koziol in an e-mail today...

[Liu He] said the government would actively release policies favorable to markets and make sure any regulation that could have a significant impact on capital markets is coordinated with financial management departments in advance.

Reading between the lines here, it's clear Beijing has become concerned with the steep fall in the markets both domestic and abroad (Hong Kong). It likely means lower interest rates to boost the economy.

But most importantly, it can be taken as a sign they are going to ease up on regulation of the tech sector and show willingness to work with the Public Company Accounting Oversight Board ("PCAOB") to remove the cloud of delisting that has contributed to the collapse in Chinese ADRs.

The "good news" was reflected in today's sharp rebound in Chinese stocks. If investors get even more clarity on regulatory issues, shares of companies like Alibaba, JD.com, and other leaders could pop back higher because of diminished uncertainties.

This might be 'the bottom'...

High-quality Chinese businesses have seen their prices crater over much of the last year... and many are now trading at incredible discounts. If you're interested at all in scooping up shares, now might be a good time.

As Brian said today...

There's a good chance the events of the past few days have marked the bottom for Chinese stocks. And we continue to believe that this is going to be a corner of the market that will deliver outsized gains for investors in 2022.

I know what at least a few of you are thinking... No way.

Well, even if you hate Chinese stocks so much that you won't touch them with a single dollar of your money no matter how cheap they get, there's a lesson here. And it's counterintuitive to many folks...

Some of the greatest risk-reward opportunities in any market can appear in the moments right when sentiment hits a severe low and uncertainty is at an extreme high, just like in China today... or in U.S. stocks during the onset of the pandemic in March 2020.

The famed investor Benjamin Graham, Warren Buffett's mentor, wrote about this in his landmark book, The Intelligent Investor, published in 1949...

In the book, Graham suggested thinking of the stock market as if you owned a $1,000 stake in a private business. Every day, your business partner, Mr. Market, provides you with a price valuation of your slice of the business. Graham wrote...

Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly...

You may be happy to sell out to him when he quotes you a ridiculously high price and equally happy to buy from him when his price is low. The rest of the time you can sit on your hands, waiting for Mr. Market to lose his mind once more and offer you another deal that you can't refuse.

In other words, at the extremes – fear or greed – it often pays to do the exact opposite thing it seems most other people are doing. That goes for selling what's popular when "everything seems great"... and buying what might be hated when "nothing is going right."

The Party Is Over for Tech

The trend in favor of tech stocks "is finally breaking, and I think that is going to continue in 2022 and 2023, where that momentum may move into gold," says mining industry veteran Ross Beaty, founder and chair of Equinox Gold (EQX) and Pan American Silver (PAAS).

Listen why, and hear more about how cryptos fit into this story as well, in Beaty's exclusive interview with our editor-at-large Daniela Cambone at last month's 2022 Gold Stock Analyst Investor Day Conference in Florida...

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 3/15/22): AbbVie (ABBV), Bristol-Myers Squibb (BMY), Berkshire Hathaway (BRK-B), Telekomunikasi Indonesia (TLK), Travelers (TRV), and W.R. Berkley (WRB).

In today's mailbag, an observation on yesterday's report about self-driving cars yesterday... and question about where to find Dr. David "Doc" Eifrig's Intelligent Retirement portfolio... Do you have a question or comment? Please e-mail us at feedback@stansberryresearch.com.

"In the Stansberry Digest, there was a photo of a mock-up of an AV interior without steering wheel. I found it amusing that a rear-view mirror was shown on the left door. Why? For what purpose is it to be used? The occupants certainly won't use it. And if they did, what could they do about what they saw, with no wheel or brakes? Not a very well thought out concept." – Paid-up subscriber Barry W.

"In the Monday, March 14 issue of Stansberry Digest, Corey McLaughlin discussed the "Intelligent Retirement" portfolio. I can't find this portfolio listed on the Stansberry website. Is it the Income Intelligence portfolio? If not, please let me know where I can find it." – Paid-up subscriber Stuart N.

Corey McLaughlin comment: Stuart (and anyone else who might have the same question), the short answer is Doc's Intelligent Retirement portfolio is part of his Income Intelligence newsletter.

You can find everything you're looking for on the Income Intelligence section on StansberryResearch.com.

Here is a direct link to Doc's most recent quarterly allocation recommendation... and here's a link to the Intelligent Retirement Handbook, which details the portfolio's approach and why Doc feels it's such an important tool to use right now.

After you asked, I read over the handbook again last night... and I found this example from Doc's back-testing particularly timely, given that many folks today are concerned about 1970s-like inflation eating away at their nest-eggs again...

In the 1970s, you can see the Intelligent Retirement portfolio vastly outperformed the "60/40 portfolio" and the benchmark S&P 500 Index during this high-inflation era, represented by the red line showing Consumer Price Index ("CPI") data from back then.

Just last week, the U.S. Bureau of Labor Statistics released the most recent CPI data available, for February 2022, and it measured 8% growth year over year, so we're in the same ballpark today as we were in the 1970s. The question is... where does it go next?

Even if you don't want to put Doc's portfolio into action for your retirement funds, his handbook is worth a read for the information alone. I think all investors can find something useful from this research. As Doc wrote...

We designed the Intelligent Retirement model to be a complete solution. You can check the quarterly updates and set up your allocation to match.

This will work for anyone looking to maximize long-term returns while taking reasonable risks. And we'll cover some possible practical questions in the next section.

But we also designed the guide to be able to help those who don't want to follow it precisely, for whatever reason.

If you're not ready to go full-bore on this model, it can also just help you work with a financial adviser or set your own plan...

Maybe you don't feel you need as much of an allocation as we describe, but it's valuable information for what questions you should be asking and what assets you can consider.

Again, existing subscribers and Stansberry Alliance members can find all the information on the portfolio here and the latest Intelligent Retirement allocation here. I suggest you at least check out what Doc has to say, especially if you are nearing retirement.

For anyone else who is interested in getting access, click here to hear more from Doc.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 16, 2022