'Soft-ish Landing' Is the New 'Transitory'

A night with the Fed chair... Jerome Powell killed the mood... Stocks' worst day of the year... Call it another case of 'social rot'... 'Soft-ish landing' is the new 'transitory'... Examining the jobs market... What we think about the Fed...

Jerome Powell left me (and many others) disappointed...

Because it's my job and interest, after the children were asleep and the sun set in the western sky last night, I (Corey McLaughlin) spent part of the evening in front of the computer... listening carefully to Federal Reserve Chair Jerome Powell's press conference from earlier in the day...

Maybe it was the drink I'd just had with dinner, but the roughly 40 minutes did not disappoint... It was entertaining (to me, at least)... full of contradictions... empty promises about lowering inflation... side-stepping of recession questions... and the use of a phrase – "soft-ish landing" – that just might be the new "transitory."

That's good news for us... Even if the content disappointed us, it gives us plenty to write about, as I will today. But, unfortunately, what I heard from the Fed chair last night is also bad news for the world in general... and an indicator that tougher times for the economy and markets could be ahead.

Today, Mr. Market agreed.

U.S. stocks had their worst collective day of the year – so far... The tech-heavy Nasdaq Composite Index dropped 5%... the small-cap Russell 2000 Index fell roughly 4%... and the benchmark S&P 500 Index and Dow Jones Industrial Average lost more than 3%...

We're not going to send the tab for all the losses to the Federal Reserve "c/o Jerome Powell," but he sure deserves picking up a big chunk of the check. Because the Fed giveth and the Fed taketh away...

Regular Digest readers may know what I'm talking about...

Since near the start of the pandemic and until December of last year, Powell – the guy in charge of the Fed's now $8-trillion-plus balance sheet and the going rate for borrowing money in this country – insisted that high inflation was "transitory."

We could only take that to mean "temporary," as the definition of the word transitory implies. Skepticism, frankly, was always warranted... and even more so now that Powell is trying to suggest "this is fine," with a fire raging in the markets around him.

He said yesterday...

I would say I think we have a good chance to have a soft or softish landing or outcome, if you will... but I'll say I do expect that this will be very challenging. It's not going to be easy.

A good reporter, Michael McKee from Bloomberg, asked Powell yesterday if the Fed has a "credibility problem," given how far behind the central bank was on realizing inflation was no longer "transitory." Powell answered...

No, I don't.

And we didn't believe him.

In 2020, he said, inflation would be toast as soon as we had vaccines! After that failed to be true, Powell started talking up the supply chains as the main source of inflation. That was true, in part...

Seemingly unreliable labor, production, and movement of goods is still a big part of the inflation story, but so too is the trillions of dollars of stimulus – both fiscal (like stimmy checks from Congress) and from monetary policy... via Powell and the Fed string-pullers.

Long past the "emergency" phase of the pandemic, and while signs and realities of inflation were spreading far and wide and Congress kept approving more inflationary government spending, the Fed kept the "easy money" flowing...

We wrote this more times than we could count as it was happening. Here's one from the May 11, 2021 Digest...

Prices of essential commodities (corn, lumber, paper, etc.) are skyrocketing all over the place, while Fed Chair Jerome Powell shrugs his shoulders and says inflation will be "transitory" – or not permanent – a dozen times during his media appearances.

The Fed kept its benchmark lending rates near 0%... even as people either kept spending a lot of money on a lot of different things, like homes, while COVID-19 cases and deaths ebbed and flowed.

In the last three months, the Fed continued to buy at least $120 billion of bonds and securities, backstopping the economy in a very active way with inflation at multi-decade highs... and helping prices across many sectors rise more, like real estate.

Here's just one example of the problem with that...

With inflation already happening well above its 2% goal, most people in their 20s, just beginning their working lives, are basically priced out of even considering owning a house now, with prices and mortgage rates sharply rising...

In the meantime, rents have skyrocketed too. So they want to be paid more... Same with experienced employees. So companies costs go up to pay them, and so do prices to keep profits on pace.

And the cycle of debt-fueled social rot goes on... It sounds a lot like when I began my working life during a recession, which didn't have inflation, but did have jobs hard to come by.

Not once has anyone from the central bank acknowledged this huge part of the story... and explained why, post-pandemic, markets zoomed higher by 100% without slowing... stimmy checks were bet on garbage stocks like GameStop (GME)... and prices of lumber, toilet paper, and food kept rising higher, faster, and longer than seemed possible...

To what end was it all for?

Could it kill anyone at the Fed to admit any one of its mistakes? Then we could at least try to move on and believe them again... But I guess it's not in the calculus, as they say. This is the closest Powell got to any sort of admission about the past yesterday...

Inflation has obviously surprised to the upside over the past year.

Obviously surprised?

Even with birds chirping in the distance outside and a rainstorm just having passed, the oxymoronic statement just about ruined my evening. It would have been easy to turn in right then.

But, for you – dear readers – I kept watching...

Because, for better and worse, what the Fed says and does matters a lot to the markets.

Here's what you might want to know...

First, as we mentioned, the phrase "soft-ish landing" has become the new "transitory."

If you're new to this racket, "soft landing" is a central-banker term to describe the goal of "gliding" the economy into a higher-rate, slower-growth environment without causing too much turbulence, like, say, a recession...

It says something on its own that Powell is using the young-ish phrase "soft-ish" instead of "soft," to acknowledge that it's going to be difficult...

But despite several warning signals that suggest a recession is ahead in the next year or so – which the team behind our Portfolio Solutions products described to subscribers on Tuesday – Powell tried to tell the world yesterday that a recession might not happen...

I guess I would say it this way... There's a path.

The path has to do with jobs in the U.S, where unemployment is near all-time lows (3.6%) and openings are at all-time highs (roughly 5 million unfilled openings in March). It's a narrative that you are likely to hear from the central bank over the rest of the year – but it's a strong economy... – and one that's actually worth discussing for a few reasons.

We'll get into the details momentarily, but first, doesn't Powell's statement seem to imply there are several other paths where a recession is in the cards?

It does to me.

So do the growing realities of the world today...

Like in England, whose own central bank said today it's worried about runaway inflation, stemming from slower global growth and the war in Ukraine. Stansberry NewsWire editor C. Scott Garliss has more on the story here.

Perhaps that's why, after the major U.S. indexes immediately rallied yesterday afternoon on the "good news," Powell said a couple 0.50% were likely this year, and not a 0.75% rate hike – which would slow growth even more – markets tanked today...

As Scott, who worked for 20 years on Wall Street before joining Stansberry Research, told us today about institutional investor thinking...

People were so caught up in the lack of a 75-basis point hike in June that they missed the bigger picture of two 50-basis point hikes in the next two meetings with more to come.

If this is the start of a 'soft-ish landing,' what's next?

A reporter asked Powell if "another leg down in equity values" would mean anything to him when thinking about Fed policy the rest of the year... and he basically said "not really," mentioning credit spreads and general financial conditions as more important... and that fighting inflation is issue No. 1. As Powell said...

As we raise interest rates, demand moderates. It moves down. Businesses will invest a little bit less. Consumers will spend a little bit less. That's how it works... There may be some pain… but the big pain is in not dealing with inflation and allowing it to become entrenched...

We need to do everything we can to restore stable prices... [and] we think we have a good chance to do it without a significant increase in unemployment or a really sharp slowdown...

He brought up unemployment because it's one of two parts of the Fed's dual mandate from Congress... 1) Help the country have low unemployment and 2) ensure stable prices. We've got one without the other right now...

The big question is whether we'll have both – a truly healthy economy and reason to expect a raging bull market again – anytime soon... and if inflation will ease enough... and the economy won't slip into a recession.

Because as you can see, a sharp rise in the unemployment rate is part and parcel of a recession, as shown by the gray shaded areas here... A recession always followed a bottom in unemployment, because historically that's when the Fed starts raising interest rates...

It was the same story even the last time inflation was this high in the 1970s. Are we to believe this time is different?

The odds are long, considering we're halfway to a recession already, with a 1.4% gross-domestic product ("GDP") decline in the first quarter of the year and inflation still not at a peak yet.

I wish I had better news, but it's what we'd want to hear if we were on the listening end of this story...

A big part of me wants to say this is all just part of the nature of the pandemic...

If you look at the Labor Force Participation Rate – which measures the percentage of the U.S. population working, and is different than "unemployment" (those seeking a job but unable to find one) – it shows 1%, or 2.6 million, fewer people are working in America today than at the start of the pandemic...

It's hard to imagine that the sharp drop – and roughly one-third rebound in 2020 – would have happened if COVID-19 didn't become part of our lives... but the government and institutional response to the new virus also played a big role too.

A lot of people retired rather than trying to work at home and deal with COVID-19 policies... Some parents adjusted to work-at-home and school-at-home life by quitting a job out of necessity to simply get through the day.

And, most unfortunate, a lot of people of working age died during the pandemic too, a sad truth that goes largely undiscussed... The CEO of one Indiana-based insurance company, for example, said in December that deaths among working-age Americans were up more than 40% over pre-pandemic levels in the second half of 2021, according to his data.

That's one local report, of course. And we're not here to make blanket statements based off it. Also, the labor participation rate has increased by about 1%, or 2.6 million, since this time last year, indicating workforce balance may be healing on its own.

My point is... There are factors outside of the Fed's control that have led to a few million people leaving the workforce, on balance, over the past two years... Also, some amount of inflation was going to happen with all the supply-chain issues.

One other crucial point…

The Fed hiking interest rates can directly influence the demand side of the economics 101 equation... but the central bank does not have direct control over supply, like whether wheat or oil makes it out of the fields of Eastern Europe…

But there are also a few other big influences in the Fed's control...

Interest rates is one. The balance sheet is another. Messaging to the market – like Powell's press conferences – is one more. And when it comes to jobs, the central bank can giveth and taketh...

In regard to employment, Powell was talking about a "tight" labor market in the middle of 2021...

That's when the term "Great Resignation" made for click-bait headlines... and anyone who had a job in demand was at least thinking about switching roles for better pay, working conditions, or both.

It's also when inflation became obviously rather ingrained than "transitory."

We noted it at the time, with CEOs in various industries talking about how they would raise prices in quarters ahead and general contractors were struggling to find wood to build houses because of such a large supply-and-demand imbalance.

This – in the middle of 2021 – would have been the best time to start pulling back on economic stimulus – at least some of the bond and mortgage-backed securities buying... and talk about raising interest rates from near zero.

But for whatever reasons – like the Modern Monetary Theory perhaps running the show – the Fed didn't do it. (To this point, I'd be curious to hear your thoughts on why the Fed didn't act sooner. Let us know with an e-mail to feedback@stansberryresearch.com.)

Instead, the central bank kept making policy decisions under the assumption that high inflation would simply stop one day, just like that... that all the reports readers like you have sent us... about lumber costs, materials costs, food costs, any costs... would just revert to normal.

It's not that simple. Once higher prices happen, businesses don't just "roll them back" like a one-week promotion on a piece of furniture at Walmart (WMT)...

Percentage gains of inflation might eventually slow, but in real terms, inflation means costs of everything go up and not back down...

It goes for materials, wages, energy, whatever. And if an unexpected event pops up – which happens all the time, even if you don't know what they're going to be – like a war in Eastern Europe, the rising prices of critical commodities like oil and wheat can accelerate even more.

This economic cycle just happened to show how it works in two years rather than a decade...

In any case, this is the problem with trying to artificially manipulate an economy...

Now, anyone with money in the markets is seeing the consequences, as economic growth slows and high prices remain in place, and stock prices fall dramatically... All of these outcomes were avoidable.

The important question to pay attention to now is about "unemployment"...

As money becomes more expensive and economic growth slows, will the unemployment rate rise? Or are there so many unfilled jobs out there today that those open positions will simply "go away"? Will companies not seek to hire for them without folks losing the jobs they already have?

That's a good-case scenario. We hope it happens and unemployment stays low while inflation eases. Then we regroup and get ready for better times ahead... If only it were that simple.

A recession likely won't discriminate only against companies that have open positions...

It's possible that the unfilled positions go away, and people will lose their jobs. Then we basically have a bad recession with higher than normal inflation... or stagflation.

In any case, the Fed is willing to take the chance of bringing on a recession to ease inflation... So, in the end, the great monetary experiment we wondered about two years ago when it began, ends just like all other economic cycles... except with record-high inflation.

As Powell said...

There aren't enough people to fill these job openings. And companies can't hire and wages are moving up at levels that would not over time be consistent with 2% inflation.

And while earlier he said he wasn't seeing evidence of a devasting "wage-price spiral" in the economy today, he added a notable contradictory statement that it might already be happening…

These wages to some extent are being eaten up by inflation.

So what to do?

What does this rant-ish Digest essay mean for you and your portfolio?

Instead, I would say you can add the Fed's messaging into your toolbox for how you're preparing for this market. To be fair, a big part of Powell's job is to project a "this is fine" attitude... even if it's not. Which it's not.

I've never met Powell... He seems like a fairly normal guy for a former investment banker and lawyer... and I don't envy that he is asked to talk a lot in public – he's basically the Fed press secretary and Fed chair wrapped into one.

And Powell has been self-deprecating before, which we like... If he'd ever read this letter, I'd like to think he'd laugh at some of it... and take a look at our past work and realize we're just out to help our readers the most we can.

During his most recent nomination hearing before Congress, Powell mentioned that his family probably wasn't watching... Yesterday, when a reporter asked Powell if he thought the Fed has been supported enough from policies at the White House and Congress to combat inflation, he demurred...

It's really the Fed that has responsibility for price stability... We need to stay in our lane and do our job. When we get inflation back under control, then maybe I can give other people advice.

Reporters in the crowd laughed... and so did Powell. As always, there is truth in humor.

Bitcoin vs. Gold: One Year Later

It's been one year since gold financier Frank Giustra debated MicroStrategy CEO Michael Saylor in the ultimate gold vs. bitcoin showdown hosted by our editor-at-large Daniela Cambone.

To reflect back on the unsettled debate, Daniela brought on best-selling author Jim Rickards and crypto bull Max Keiser from the Keiser Report and Orange Pill Podcast, to discuss whether gold or bitcoin has a stronger case one year later...

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 5/4/22): New Residential Investment (NRZ), Suncor Energy (SU), and Telekomunikasi Indonesia (TLK).

In today's mailbag, feedback for Ten Stock Trader editor Greg Diamond, who continues to nail calls about the market volatility this year... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Hi Greg. I want to thank you for all your hard work. And making this blue -collar dude a phenomenal trader by following your recommendations, I've made more money in the markets in the past couple months than I ever have. Your trades always pull through...

"I'm not bragging but I think you should know how good your work is. I made roughly 28K this week alone. And that's no bull****. I always keep my bets small. Around 10 and not larger than 20 contracts. I only put up what I'm willing to lose.

"If you ever decide to start a subscription for more aggressive trading let me know I am in. I'm a believer. Thank you for everything and if you ever need anything please do not hesitate. I'm indebted." – Paid-up subscriber Joe F.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 5, 2022