The Day After

Election Day results remain up in the air... It might be much ado about nothing... A major crypto blowup... Contagion fears in cryptos... Bitcoin hits a two-year low... Handicapping tomorrow's inflation data... Watch how the market reacts...

It's an Election Day (or Week, or Month) tradition now...

Death, taxes, and not knowing what the heck is going on the day after the polls closed.

As of this writing, no one knows which party will control the U.S. Senate or House of Representatives.

Several "too close to call" races – including three Senate seats – are still being figured out. Not that there's necessarily anything wrong with that... it's just taking time. For now, Democratic leaders are apparently pleased they haven't lost as badly as they thought they would.

But you can get this information anywhere... So why have I (Corey McLaughlin) brought up the midterms for the third straight day?

Well, because the expectations for what Congress will look like do influence stocks...

As we shared yesterday, the betting odds and recent stock market performance leading into Election Day suggested a "red-red" House and Senate. For example, as I wrote yesterday...

Institutional advisory firm Strategas identified stocks and other assets that would gain or lose the most from one of the two parties winning, forming them into hypothetical Democratic and Republican portfolios.

The Democratic basket included renewable-energy stocks, such as First Solar (FSLR), along with health insurers and hospital companies, given the likelihood of legislation to expand Medicare in a Democrat-controlled Congress. It also included some stocks linked to ongoing support for Ukraine, including American defense contractor AeroVironment (AVAV).

The Republican portfolio accounted for relatively lower spending and presumed lower inflation, in part by betting on lower short-term Treasury yields. The allocation also had significant exposure to oil and gas companies, like ConocoPhillips (COP) and Enterprise Products Partners (EPD), along with infrastructure names.

At last check, the Republican portfolio had outperformed the Democrat portfolio, which the firm says indicates a nearly 70% chance that Republicans win both chambers of Congress.

Today, it looks like Republicans will end up taking control of the House, but there's a chance Democrats could keep control of the Senate, with a 50-50 split swinging their way because the vice president can cast tiebreaking votes.

Senate control might not be decided until Georgia holds a runoff election in early December for the Senate seat up for grabs between Herschel Walker and Raphael Warnock. That race remains a toss-up with neither candidate receiving more than 50% of the vote.

This is all to say that some of the "red wave" expectations we talked about yesterday – resulting in a totally split Congress and White House – could be unwound before the year is through... But they could also be right, and this period of waiting for results could be much ado about nothing.

In any event, Republicans are on track to win the House...

Even with a Democratic Senate, that would still be enough gridlock to muddy up certain legislation and spending bills proposed by Democrats. But a slightly different makeup of Congress could make a difference on the margins of some markets, sectors, and individual stocks.

Moving on, we've got a major blowup in cryptos we must talk about...

When the tide goes out, you see who is swimming naked. Turns out that Sam Bankman-Fried, the CEO of major crypto exchange FTX, was definitely skinny dipping.

This story is still developing, but to cut to the chase... FTX is facing insolvency after a convoluted series of events caused its "native token," called FTT, to crater more than 80% since the start of the week.

That sparked a run on assets held in FTX accounts. New industry, old banking problem.

The tale includes personal grievances between Bankman-Fried and Binance CEO Changpeng Zhao – who heads the largest crypto exchange by volume in the world. Zhao ended up with a huge amount of FTT tokens when he sold his early investment in Bankman-Fried's FTX, which has grown to become Binance's fourth-largest rival.

The catalyst is that, recently, Zhao became upset with Bankman-Fried for alleged lobbying tactics with regulators, apparently suggesting Zhao had close connections to the Chinese government. As the Wall Street Journal reported...

Mr. Bankman-Fried frequently visited Washington, and pitched his exchange as one friendly to regulators – at times drawing a barbed contrast to Binance. A person close to Binance said Mr. Zhao had been rankled by some of Mr. Bankman-Fried's comments. But Binance still held hundreds of millions of dollars worth of FTX's own cryptocurrency, called FTT.

Until this past weekend. On Sunday, Mr. Zhao tweeted that Binance would sell its $580 million in FTT holdings over the next few months, saying he wouldn't "support people who lobby against other industry players behind their backs."

In simple terms, Zhao got mad and started selling the FTT tokens he owned, and others got nervous, cratering their price. In a 24-hour period earlier this week, $1.4 billion in withdrawals occurred on FTX against $523 million in inflows.

Given the scale involved, this caused a liquidity crunch in the FTX universe... and has caused Bankman-Fried to lose roughly $14 billion of net worth.

To top things off, yesterday Binance arranged to buy (er, bail out) FTX... only to back out today "as a result of corporate due diligence," it said.

All in all, this debacle has raised fears of a 'contagion' event in cryptos...

Nobody really knows the kind of leverage at play within FTX's crypto assets and how far the fallout might spread.

As our Crypto Capital editor Eric Wade told me today...

Ironically, as good of innovation decentralized ledger and blockchain technology are, not every business in our industry uses them fully even when they are exchanging cryptocurrencies built on blockchain.

Obviously the increased level of possible tracking and disclosure and sharing of information doesn't fix every problem... overleverage is still overleverage even if it's visible... but if an exchange trading cryptocurrencies elects to both use risky (questionable? we'll find out soon) practices and at the same time elects to used databases and business practices as opaque as the banks and brokers who have collapsed before them, that's when the low tide reveals all.

With one of the fastest-growing crypto exchanges on the verge of collapse, fear has reached the point that even the headline cryptos like bitcoin and Ethereum are under pressure.

Bitcoin is down about 14% in the past 24 hours to near $16,000, a new two-year low. Ethereum is also making new lows, off about 14% in the past day... We'll have more on this story as it develops, and Eric's subscribers can be assured he'll share any updates as needed.

And tomorrow is another day...

As I mentioned yesterday, another big inflation read – the October consumer price index ("CPI") – arrives tomorrow at 8:30 a.m. Eastern time.

This is another one of those pieces of data that Wall Street and many other folks with money in the markets are drooling over. It will show the annual year-over-year inflation rate... and, more importantly, the pace of inflation versus last month.

In other words, by "official" numbers at least, we'll get some insight on whether inflation – which will always be around in some form so long as the government printer is working – is rising faster or slower than the previous month or months.

This is key information when it comes to thinking about what the Federal Reserve might do with its interest-rate policy – and when. The sooner the Fed starts easing its rate hikes, the happier the markets will be.

It's all about expectations...

Inflation is what it is right now. We're not going from 8% to 2% year-over-year CPI growth overnight (or maybe ever). But if the month-by-month pace of inflation is showing signs of slowing enough, that could mean a Fed interest-rate "pause," at least, by early next year.

This is all relative... This time last year, inflation was increasing at a more significant rate than it is today. In October 2021, the month-over-month gain in CPI was nearly 1%. Tomorrow, it's expected to come in around 0.6 percentage points for October, which would make for an average near 0.3 points the past few months.

This is important...

Why? Let's say that every month, the CPI increased by 0.3 percentage points as measured month over month. (That would decrease the headline CPI number, since it would result in smaller year-over-year gains.)

And let's say the Fed kept raising interest rates by 0.75 percentage points in response. Sometime early next spring, "real" interest rates – accounting for inflation – would become positive. It's like Train A hypothetically meeting Train B in a math problem.

And why is this important? Because the Fed says that's its goal... It plans to keep hiking its benchmark lending rate until it tops inflation.

So if you can estimate when that might happen, this is important information. That's why we have investors fawning over decimal points of CPI data on a Thursday morning when most people are getting kids off to school, starting other work, or enjoying retirement.

I would refer you back to the great work our Stansberry NewsWire editor C. Scott Garliss and analyst Kevin Sanford did on this point back in September here and here.

Essentially, they broke down the possible timing of the Fed pausing interest rates based on three different scenarios of monthly CPI growth – and one deflation scenario – and what that would do to the path of headline, year-over-year CPI. Check out this chart Scott and Kevin shared...

As we said in September when we first shared this research with you, the takeaway is...

If inflation actually decreases month to month, even by a little, "real" rates could turn positive faster than many folks might think... But if monthly inflation grows even modestly, it could be the second quarter of 2023 at the earliest before the concept of a Fed "pivot" becomes a reality.

And if inflation keeps accelerating, the Fed would likely need to keep rates at least where it's projecting today – or maybe even hike them higher next year.

Scott checked in with us today with an update on expectations for tomorrow's numbers...

The Cleveland Fed's Inflation Nowcast model is predicting 8% year over year and 0.6% month-over-month CPI growth when the U.S. Bureau of Labor Statistics releases the numbers tomorrow.

Consensus expectations are for a 7.9% and 0.6% increase, respectively. It's also predicting a core CPI gain of 6.6% year over year compared to the consensus expectation for a 6.5% rise.

Their models were close in October, underestimating headline CPI by 0.1% and correctly predicting the core number.

If these results prove accurate, they lean toward inflation growth averaging around 0.2% to 0.3% growth over the last four months.

Based on those type of month-over-month projections and the current implied path of the fed-funds rate, we could see the real fed funds rate turn positive as soon as March.

So, if what Scott is saying indeed plays out tomorrow, institutional investors could like the latest CPI numbers... taking them to mean Fed policy in six months won't be more "restrictive" than is expected today. Of course, they could be disappointed too.

We saw the upside scenario play out in the markets on "inflation day" last month, on October 13, when stocks hit their most recent lows and staged a massive intraday reversal that afternoon.

All in all, we're reminded of a piece of investing advice our friend and Chaikin Analytics founder Marc Chaikin subscribes to... Watch the Fed and listen to the market.

And speaking of Marc...

We just received word he is going live with a brand-new online event next Tuesday, November 15...

Regular readers might remember we shared Marc's warning early this year in the Digest that the market was already in a "rolling crash"... and that he was not expecting a broader stock market bottom until at least October.

That game plan was certainly a good one to follow this year. Now, Marc – a Wall Street legend and the founder of one of our corporate affiliates – has another message to share about why we're about to see a shift in the U.S. financial system...

He says this could have a huge impact on your wealth in 2023. I suggest you check out his event next Tuesday – especially if you have a lot of cash in the bank right now. You can sign up for free right here and find out more.

Bull, Bear, or B.S.

At our Stansberry Conference in Boston last month, our Director of Research Matt Weinschenk gathered some of our "more outspoken and colorful personalities" for a lively game of "Bull, Bear, or B.S." Here's the video...

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 11/8/22): Booz Allen Hamilton (BAH), Biogen (BIIB), Black Stone Minerals (BSM), Covenant Logistics (CVLG), Gilead Sciences (GILD), W.W. Grainger (GWW), Lockheed Martin (LMT), McDonald's (MCD), Energy Select Sector SPDR Fund (XLE), and ExxonMobil (XOM).

In today's mailbag, two points of view on our pre-election analysis in the Digest this week (here and here)... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Corey, Thank you for handling the politics delicately... I don't want to know if you guys are R's or D's, and I especially don't want you to tell me how you think I should vote. I want good financial advice and commentary. You're doing a good job." – Stansberry Alliance member R.M.

As always, keep the politics and corresponding expectations out of your newsletters. As usual, wrong about the red wave. I don't want inaction in Congress because politicians are motivated by revenge impeachments, etc. I want bipartisan work on legislation that benefits all of the American people! I suspect a lot of voters feel the same way that I do." – Stansberry Alliance member Betsy C.

All the best,

Corey McLaughlin
Baltimore, Maryland
November 9, 2022