Our 'Fox With Rabies' Problem

The early returns from earnings season... Higher prices or slower growth?... A 'tricky space' and 'rocky waters' ahead... More and more CEOs are getting worried... Our 'fox with rabies' problem... What are your thoughts on inflation?

Well, we're not off to a good start...

As I (Corey McLaughlin) mentioned on Monday, we're keeping a really close eye on the start of earnings season this week.

By earnings season, we're referring to the multiweek stretch every three months when all the companies in corporate America report their quarterly earnings numbers to the U.S. Securities and Exchange Commission... Wall Street analysts... and anyone else who might be interested, like us.

This earnings season might be the most compelling one since last spring. Back then, you might recall that we were looking for signs of real inflation in the economy as the Federal Reserve tried to tell us, "Don't worry, it's just transitory."

We're glad we did our own work on that point and didn't believe the Fed at their word from the start. One lesson, for example... listen closely when the CEO of a maker of essentials like toilet paper or diapers tells you prices are going to go up in the next six months.

In the current round of earnings reports, we're keen on balance-sheet numbers as always. But the comments from CEOs could be more telling... They'll provide color to all the data and bear market warnings we've been talking about lately.

This is a chance to get a sense of broad market sentiment, companies' expectations, and thoughts about inflation for the first time since the war in Ukraine began in February and poured fuel on the global inflationary fire.

So you better believe we're listening.

It's still very early... This earnings season won't end for S&P 500 companies until mid-May, when Disney (DIS) reports. And only about two dozen of those companies have shared their first-quarter numbers so far.

But the early returns are giving us some answers...

In short, business isn't as rosy as it has been...

The past year or so has been a "really easy money" era. By that, we mean short-term lending rates near zero and trillions more of economic stimulus from the Federal Reserve.

That environment is set up perfectly for businesses... And in turn, the biggest story about earnings reports was probably that Wall Street analysts, in general, were consistently underestimating them.

We wrote about this idea back in October. We noted that expert analysts were off by roughly 19% in their U.S. corporate growth expectations over the previous five quarters.

It seems like easy work if you can get it.

The point is, though, that this earnings season is setting up to be a bit more notable than any other in recent memory...

The Fed is raising interest rates to slow demand in the economy, with supply pressures firmly in place. And it's doing that while prices continue to rise on all kinds of goods and services in various industries at a rate not seen in four decades.

What could possibly go wrong?

Two weeks ago, Gary Friedman, the CEO of upscale home-furnishings retailer RH (RH), put it very plainly...

Either businesses are going to make a lot less money or they're going to raise their prices. I don't think anybody really understands how high prices are going to go everywhere...

I think it's going to outrun the consumer, and I think we're going to be in some tricky space.

Tricky space... That's one way of putting it.

It reminds us of a line that the White House's top economic adviser delivered this week. National Economic Council Director Brian Deese said the economy is "facing rocky waters."

Without using analogies, more and more CEOs are getting worried right now...

Earlier today, banking giant JPMorgan Chase (JPM) reported a quarterly profit 42% lower than this time last year.

Its earnings per share came in below Wall Street expectations in part because the firm decided to raise its credit reserves by $902 million in the first quarter to protect itself from possible loan losses (at least partly tied to the bank's exposure to Russia).

Another big reason for coming in low was a slowdown in investment-banking deals and lower fees (down 31%) due to lower equity and debt underwriting activity. That's a signal of less money moving about the "plumbing" of the economy.

JPMorgan Chase CEO Jamie Dimon (who, on a somewhat related note, once called bitcoin "worthless" and then recently praised its underlying blockchain technology in an annual shareholder letter) said in a press release today...

We remain optimistic on the economy, at least for the short term – consumer and business balance sheets as well as consumer spending remain at healthy levels – but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.

Dimon also warned of "higher probabilities of downside risk" for the bank's business.

In other words, the juice of potential rewards is not worth the squeeze of taking on the risk to achieve them – as it was just a few months ago.

That brings us to our 'fox with rabies' problem...

As we've written recently, the Fed – which you might want to fight, but never should – has a decision to make...

The central bank can sacrifice economic growth – and importantly, stock prices – in an effort to fight inflation (by raising interest rates and pulling back on economic stimulus)...

Or it can let inflation run wilder than that fox with rabies that bit a member of Congress and at least eight other people in Washington, D.C. last week (and was "humanely euthanized" after being caught by U.S. Capitol Police).

Now, that's a good inflation analogy – a rabid fox.

It can sometimes be hard to identify. It could look tame, for instance. It could also look drunk... or perhaps overly aggressive, which might make it more obvious to stay away.

In any case, the most dangerous and painful scenario is if the rabid fox attacks and bites you... infecting you with a disease that's almost always fatal if left untreated.

The member of Congress from California who was bitten last week quickly received several rounds of rabies shots. Similarly, the Federal Reserve has a go-to treatment for inflation – higher interest rates.

But that doesn't come without consequences...

Today, the Fed – and by association, "We the People" – is in a "lose-lose" situation, as Ten Stock Trader editor Greg Diamond has put it. Depending on the speed and scale of the Fed's planned rate hikes, the central bank could slow economic growth more than anyone wants.

Greg discussed this topic with his subscribers yesterday. As he wrote...

The way I see it – and I mentioned this at the latest Stansberry Town Hall earlier this year – is that the Fed has two choices...

Neither choice is good.

It can fight inflation, or it can support growth and asset prices.

It can't do both.

Judging from the price action and from comments from the Fed governors themselves, they're saying one thing (without actually saying it)...

The Fed is going to fight inflation to sacrifice growth and stock prices.

Greg says the Fed is terrified of a 1970s-style inflation environment. And based on what Fed governors have been saying in public lately – inflation is the No. 1 priority, Lael Brainard keeps saying – that appears true. So at least there's that.

Like the fate the fox with rabies met, the Fed says it's trying to euthanize inflation... It might be successful, it might not. But in the meantime...

For one, what it's doing isn't necessarily good news for stock prices. And second, the Fed is acting far too late to avoid the consequences of possibly slowing economic growth in a big way – maybe into recession territory – at the same time.

Practically, CEOs are concerned today because of high inflation... continued supply-chain breakdowns because of the COVID-19 pandemic, and now the war in Eastern Europe... and also rising costs – like higher wages, which employees want, even though they still aren't keeping up with inflation anyway.

Here's a good example from Europe, where it's also earnings season...

Stansberry NewsWire editor C. Scott Garliss wrote an interesting piece on the United Kingdom's largest grocer, Tesco (TSCDY), earlier today...

The company reported better-than-expected revenue and adjusted operating profit for the fiscal year 2022. However, during its conference call, the management team said rising costs will hurt profits for the fiscal year 2023.

The company said it's focused on trying to keep costs down for consumers harmed by inflation. CEO Ken Murphy said he didn't want prices to be an excuse for customers to leave for discount competitors.

At the same time, management noted its costs are going up as well. It employs over 360,000 people. Pay has risen by 6% on average to help offset inflation. The company is also spending more on merchandise to sell to customers. As a result, it cited uncertainty around inflation and expenses as the drivers of cautious guidance.

JPMorgan Chase and Tesco are just a couple examples based on the companies that reported today. We won't go as far as proclaiming any trends with certainty, but these real-world stories could give us a head start on what the rest of earnings season might look like.

We'll share more notes and stories on earnings season in the Digest in the days ahead. But frankly, our NewsWire team is the group to follow for a constant stream of immediate, round-the-clock updates on earnings season and any other market-moving news.

Be sure to follow Scott and his hardworking team at the NewsWire. It's 100% free. And when you sign up, you'll get morning market previews, access to intraday stock updates, daily recaps of the U.S. markets, and more. It's where we went for our information today.

Oh, and one more thing... I might not need to tell you this. But as always, please watch out for rabid foxes.

Crisis in Confidence and Fear of Recession

Rick Rule, the founder and CEO of Rule Investment Media, rejoins our editor-at-large Daniela Cambone for another must-watch conversation on the global economy. He explains why his portfolio reflects a crisis in confidence and a fear of recession...

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.

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The mailbag is quiet today. So instead, we want to ask a question. It's the same one that was on our mind two years ago when we started talking about the potential for high inflation stemming from the pandemic and ensuing government responses to it...

We took some time today to go back and find a few mailbag notes from back then, in the spring and summer of 2020. For example, here's what subscriber Dennis C., who owned a pizzeria in the Chicago area, told us in the June 29, 2020 Digest...

Before Covid-19 we paid $1.80 to $2.30 a pound for our pizza cheese and yesterday the price was $3.05 a pound. We raised our prices on any item with meat. If cheese continues to cost more we will be forced to increase our pizza prices.

Obviously, Dennis was not alone in his experience. Everyone (even the folks at the Fed) knows that today.

The point I want to make, though, is that hearing your stories about inflation two years ago encouraged us to keep watching this "economy killer" closely. And it has led us to share ideas about how to protect and grow your investment portfolio in a high-inflation era.

So I'm curious... what are your thoughts on inflation today? How do you see it in your everyday life or at the store? For example, if you run a business – which we know many subscribers do – what's your experience? Is it still as bad as we think?

Or, on the other hand, what are we missing? And what do you want to know more about from us?

We're going to keep talking about inflation one way or another – unfortunately – in the months ahead. And I would like to be as relevant and as helpful as possible when writing about it...

I'm not looking to sell anything, either. I just want to provide the forum to talk honestly about inflation. Maybe you're prepared and don't care about it anymore... But remember, this is historic... We haven't seen this kind of inflation spike in four decades.

So if you get a moment, let me know your thoughts about today's inflation in an e-mail to feedback@stansberryresearch.com. Your note can be as short or long as you want to make it. We'll share responses in the mailbag in the coming days... and go from there.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 13, 2022