We Can't Escape the Next Recession... But We Can Do This

Follow the money supply... Not a pretty picture... The Fed gets an 'F'... There is no escaping the next recession... Too much for too long... A vicious circle... There is no avoiding the 'R' word...

Editor's note: Today we bring you an urgent warning from our colleague Mike DiBiase, editor of Stansberry's Credit Opportunities newsletter...

Mike follows inflation data closely – it matters tremendously for the corporate bond-buying opportunities he and our colleague Bill McGilton recommend in Credit Opportunities... and as Mike will explain, several of the indicators he tracks are warning of a coming recession...

In short, as Mike sees it, there's no way out of the next recession – and it will hit the U.S. economy later this year. This might sound startling, but we're sharing this message not to scare you, but so you can consider preparing now... if you haven't already.

Please take note of Mike's message and advice today...

At the end of today's Digest, he shares one way to protect your wealth and portfolio in a recession – and the "credit crisis" – that will come with it... and I (Corey McLaughlin) will follow up with more ideas this week and in the weeks to come...

It's the dreaded 'I' word...

Inflation, that is.

The general rise in prices across the economy – everyone is talking about it... It's the Federal Reserve's biggest concern today.

And it should be. The latest inflation reading in January was 7.5%, the highest in 40 years... The last time inflation was this high was 1982 – when On Golden Pond was the hottest movie and the world had just learned the term "computer virus."

As editor of the corporate bond newsletter Stansberry's Credit Opportunities, I (Mike DiBiase) pay attention to inflation. That's because inflation influences another "I" word... interest...

Changes in interest rates move bond prices. They are a big part of how much you can expect to earn from a bond.

In today's Digest, I want to share with you why I think high inflation isn't going away anytime soon... And I'll share my predictions for 2022 and beyond.

To cut to the chase, it's not a pretty picture...

Before I get started, let me say that not all Stansberry Research editors and analysts will agree with these predictions... But it's my duty to give you my honest views. The more viewpoints you are exposed to, the better an investor you'll be...

I've been worried about inflation much longer than most folks.

Last April, I wrote a Digest essay that was all about inflation... I called it the biggest threat to the markets. Back then, inflation was just 1.7%, as measured by the Consumer Price Index ("CPI").

Because of the unprecedented post-pandemic monetary stimulus by the Fed, I knew inflation was headed much higher... And despite what Fed Chair Jerome Powell was saying at the time, I knew it wasn't "transitory"... And now he does, too.

Since then, inflation has skyrocketed...

As you can see, today's 7.5% inflation rate is still nowhere close to the inflation of the 1970s... But it's higher than it has been in decades and continues to rise. You can see why the Fed threw in the towel and finally admitted inflation isn't going away anytime soon.

This is a big deal...

It means that the Fed has failed on one of its two mandates... creating stable prices.

Admittedly, it has done a good job on its other mandate... enabling maximum employment. The unemployment rate is now below 4%, nearing its pre-pandemic 3.5% rate.

But on inflation, the Fed gets an "F"... Remember, the Fed's target inflation rate is 2%.

As I've written before, I don't agree that a constant 2% rise in prices even meets the definition of "stable prices"... or that it's a good thing. I don't know about you, but I prefer to pay less for things than I did the year before, not more.

Have you ever asked yourself why the Fed wants prices to keep rising? Especially considering that technology is a powerful deflationary force... Over time, technology should be bringing down the cost of most things.

Most economists agree that inflation has always been ‒ and will always be ‒ a tax on savers. I suppose you can't expect any government to not support a tax.

But I'll put that aside for now and agree ‒ for the sake of argument only ‒ that the Fed's 2% inflation goal is a good goal.

Here's my first prediction...

Inflation isn't going back to 2% for many years...

High inflation is here to stay... Get used to it.

I'm not saying the rate of price increases won't start to come down at some point this year... I expect it will. What I am saying is it won't get close to the Fed's 2% target rate for many years.

Why do I believe that? All you have to do is follow the money supply...

Despite what you read in the mainstream financial media or what Chairman Powell says, the money supply is the primary driver of inflation...

In economics, it's called the quantity theory of money... This isn't some complicated new theory that Powell has never heard of.

It was first developed by astronomer and mathematician Nicolaus Copernicus more than 500 years ago... He's the guy who figured out that the Earth revolved around the sun... and not the other way around.

Sometimes a chart tells the story best.

The chart below shows the U.S. "M2" money supply (black line) ‒ which is the cash, checking, savings, and money-market mutual fund accounts held by households and businesses ‒ over the past 60 years. The gray line is the annual change in the money supply over this same time period.

In the latest reading published in late February, the money supply soared to a record $22 trillion...

As you can see, most of this increase has come since the start of the pandemic. Since then, the money supply has exploded 41%... or $6.4 trillion higher. Never before in history has our money supply grown so much, so fast.

You can't increase the money supply by more than 40% in the span of two years and not expect to get persistent inflation... It's simple mathematics and the law of supply and demand.

With more dollars chasing essentially the same amount of goods and services, prices are going to go much higher...

Keep in mind, this newly created money takes time to make its way into the economy. Economists estimate it takes between six months to two years for money-supply increases to show up in inflation numbers...

In fact, it took more than a year for the post-pandemic increases in the money supply to begin to show up in inflation numbers for the first time last year...

In the latest data from January, the U.S. money supply grew another 13% from a year ago. That's nearly double the 7% average rate it has grown over the last 60 years. Inflation isn't going to subside anytime soon when the money supply is still growing by double-digit rates.

In short, we all need to learn to live with much higher inflation.

Most of this new money came from the Fed's printing press...

Not literally, of course. Most new money is created with a few computer keystrokes. The Fed magically creates dollars out of thin air with an accounting entry on its balance sheet.

The Fed has used this new money to purchase $3.3 trillion worth of U.S. Treasurys and $1.3 trillion of mortgage-backed securities since the start of the pandemic... These securities sit on the Fed's balance sheet until they are paid back.

Take a look at what has happened to the Fed's balance sheet since the pandemic. It has more than doubled.

The Fed did all of this to rescue us from a recession that happened right after the pandemic started. It worked. You may not even remember the recession... It was the shortest ever.

We needed the Fed back then. The problem is that the Fed continued to "support" the economy long after the recession ended. It deluged the market with liquidity throughout 2020 and 2021, buying tens of billions of dollars' worth of Treasurys every month. Those actions artificially suppressed long-term interest rates while the Fed kept the short-term interest rate it controls near zero.

It should be clear to everyone now that the Fed did too much for too long...

Sure, it put out the "fire" and pulled us out of a post-pandemic recession. But the Fed left its economic fire hose on for far too long and flooded our economic "house"... As a result, we are now all knee-deep in inflation.

By not removing its support quickly enough, it has made things far worse...

So now we have the next epic battle ‒ the Fed versus inflation...

Who will win? My money is on inflation... That's because the Fed can't win the battle against inflation without losing the war.

To fight inflation, the Fed only has two arrows in its quiver... raising interest rates or decreasing the money supply. And it can't do either by a little.

The Fed needs big, bold actions to make a dent in inflation. The rate hikes it has planned for this year ‒ the first coming next week ‒ won't be nearly enough...

The expected rate hikes through the end of 2023 will only increase rates by 2.5 percentage points. That will just get rates back to what they were in 2019 when inflation was around 1.5%...

If the Fed is serious, rates need to go up much faster...

But doing that creates big problems... If rates suddenly went up by four or five percentage points, the additional interest cost would cause a massive wave of bankruptcies and write-offs for big banks... Credit would tighten, and it would send shockwaves across the global economy, plunging the world into a recession.

There is simply too much debt today to support the kind of interest rates needed to get inflation under control. Households, businesses, and the government have all gotten much fatter with debt since the last financial crisis.

The only reason these bloated debt balances can be serviced is because of today's historically low interest rates... We've all grown completely dependent on low interest rates.

The Fed's only other option for fighting inflation is to decrease the money supply...

That won't work either.

To decrease the money supply, the Fed can either sell its Treasurys or require banks to tighten credit...

Both options would result in the same thing... a popping of the credit bubble and the start of another recession.

Remember, over the past two years, the Fed has been the primary buyer of long-term Treasurys to keep rates low. Selling its Treasurys will cause prices to fall. Treasury prices and interest rates move in opposite directions. When Treasury prices fall, their interest rates rise.

Just look at what has happened since the Fed began talking about tapering its purchases of Treasurys in late 2021. Interest rates have been steadily rising since.

Imagine how fast rates would rise if the Fed started selling its Treasurys. Rates would soar.

The problem with raising interest rates or decreasing the money supply is that doing either by more than a little will kill the economy. It will plunge us into the even more feared "R" word... a recession.

The Fed knows the "I" word is better than the "R" word.

Inflation is something people can learn to live with... A recession is not. It puts people out of work and politicians out of office.

The Fed is going to do everything in its power to avoid another recession.

That's why I predict the Fed will reverse its tightening policies later this year...

When inflation settles to the 4% to 7% range, the Fed will declare victory... It will back off raising interest rates and return to quantitative easing... buying Treasurys to keep a lid on long-term interest rates.

And to do that, it will have to print more dollars... which, of course, leads to more inflation. The Fed can't escape the inflation problem it created. It's a vicious circle.

That's why I think we'll soon see the Fed begin to embrace higher inflation... I predict it will revise its 2% inflation target to something in the 4% to 5% range.

But even hitting that target will be tough.

I predict we're going to see more government intervention to combat inflation over the next couple of years.

I wouldn't be surprised to see the government change the way inflation is calculated to make the numbers look better... It has been done before, and I expect it will happen again.

Governments will also resort to artificially suppressing prices and lining the pockets of voters to make inflation more palatable.

Look for more price controls... things like rent control in certain high-demand cities... caps on price increases for certain commodities and critical goods... and increases in the minimum wage in many states.

And expect universal basic income to continue to make significant political inroads...

The problem with all of this intervention is that it doesn't work. It creates what economists call "unintended consequences" ‒ inefficiencies and unplanned effects in the markets that politicians can't foresee.

The Fed created the inflation problem by interfering with the free markets and trying to control things that shouldn't be controlled... interest rates and the money supply. Trying to exert more control over free markets isn't going to work.

All of these policies will fail miserably.

As famous Austrian economist Ludwig von Mises wrote...

Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.

The only thing that will work is the Fed reversing its past mistakes with the same vigor... raising interest rates or decreasing the money supply.

Which leads me to my last prediction...

Despite the Fed's best efforts, a recession is coming this year... There is no avoiding the "R" word.

Inflation will continue to erode corporate profit margins. It will eat up more and more of every American's budget. Debt will become more burdensome. Growth will slow...

One way to know a recession is coming is from the yield curve.

Every time in the past 50 years the yield curve has inverted ‒ when long-term interest rates fall below short-term rates ‒ a recession has followed.

The chart below shows a favorite measure of a yield-curve inversion... the "10-2" Treasury spread. This is simply the yield on 10-year Treasurys minus the yield on 2-year Treasurys.

When the number falls below zero (red arrows), a recession always follows...

Today, the 10-2 spread is just 24 basis points (a basis point is one-hundredth of 1%)... You can see that the spread has been falling since the middle of 2021.

As I said, the Fed's first short-term rate hike will begin next week. I expect the yield curve will invert by its next meeting in May.

So buckle up... A recession is coming.

But that doesn't mean you should suffer. You should be preparing now to profit.

There are lots of ways to protect your portfolio from inflation, including allocating a portion of your portfolio to gold and gold stocks and buying only the highest-quality companies that stand to benefit from rising prices.

And there's another strategy you've probably never considered... investing in distressed corporate bonds. It's a strategy that the world's best investors use in times of crisis to make a fortune.

When the next credit crisis unfolds ‒ and I predict it will begin this year ‒ bond prices are going to plummet. That Fed is out of ammunition to stop it from happening like it did after the pandemic... Even bonds that are safe are going to trade for pennies on the dollar.

That's when you can earn massive, stock-like returns with investments that are much safer than stocks... Corporate bonds have legal protections that stocks don't have. Companies must pay you or they go bankrupt.

These are the types of investments my colleague Bill McGilton and I recommend in Stansberry's Credit Opportunities. Bill and I do all of the work for you. We find bonds that are safe no matter their price. I'd love for you to join us.

Do you agree with my predictions? If not, what did I get wrong? I'd love to hear from you at feedback@stansberryresearch.com.

These Stocks Are Breaking Out Despite the Volatility

This latest "down and dirty" episode of Making Money With Matt McCall is quicker than his usual Tuesday and Thursday video podcast, but still loaded with important information... The market has already priced in the worst-case scenario for stocks, which has many investors running for the hills. But in this episode, Matt points out that this is one of those times when crisis creates opportunity.

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 3/4/22): Alcoa (AA), AbbVie (ABBV), Altius Minerals (ALS.TO), Bristol-Myers Squibb (BMY), Continental Resources (CLR), Centene (CNC), DB Gold Double Long Exchange-Traded Notes (DGP), Freeport-McMoRan (FCX), Freehold Royalties (FRU.TO), SPDR Gold Shares (GLD), Hershey (HSY), Lockheed Martin (LMT), Cheniere Energy (LNG), McCormick (MKC), Altria (MO), Mosaic (MOS), Northrop Grumman (NOC), Nucor (NUE), VanEck Vectors Oil Services Fund (OIH), Sprott Physical Gold Trust (PHYS), Royal Gold (RGLD), Sprouts Farmers Market (SFM), Suncor Energy (SU), United States Commodity Index Fund (USCI), Viper Energy Partners (VNOM), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

In today's mailbag, feedback from a longtime subscriber and kudos for Dan Ferris' Saturday Masters Series essay... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I have been a Stansberry subscriber for the better part of 10 + years and have not always made money with or followed the recommended investments proposed. One that I am so glad that I took to heart and followed to the letter was Porter's survival formula.

1. "Have at least 50K in cash (me 100k)
2. MS64 St. Gaudins (now 65 slabs purchased three to four years ago at under the suggested buy price).
3. Lots of Silver Eagles and Morgans
4. Farmland that one could sustain oneself and family members with. Just purchased a 14-acre cir.1787 farmette on the Mason and Dixon Line.

"Still working on the dual passport so maybe an update on the easiest, safest, and cheapest country to assimilate would be appreciated. Fine advice from financial journeymen, Keep up the good fight Stansberry Research!" – Paid-up subscriber Steve S.

"It was a great read of Dan Ferris' Saturday Stansberry Digest. The quote of Christopher Cole's writing on volatility is particularly intriguing.

"His word 'Volatility is no different in markets than it is to life...' reveals deep wisdom. It applies to investing, personal life, and to the large extent, to the world. The headline news for last 20 years of the world filled with wars in areas of Syria, Libya, Irag, Afghanistan, now Ukraine, and Russia.

"The root of the conflict points to some untruthful foreign policy adopted by some country or countries with a hidden agenda. The world of all nations should live in peace if every nation chooses truth. I hope that the leaders of all nations come to face 'the difference between the world as they imagine it to be and the world that actually exists... '

"Then every nation 'will find a way to prosper if we relentlessly search for nothing but the truth, otherwise the truth will find us through volatility,' as the world today!!" – Paid-up subscriber J.A.

"Dan, I very rarely write comments or respond to the things you write. It's just not something I do. However, I do want you to know that I listen to your podcasts and read almost everything you publish. I love your sense of humor and your thought-provoking, beautifully written messages. 'The Truth Will Find Us Through Volatility' is just another example of your impressive skills... simply brilliant.

"Yes, 'this is a bubble'! Keep up the excellent work." – Paid-up subscriber John H.

Regards,

Mike DiBiase
Atlanta, Georgia
March 7, 2022