Wealthier Americans Are Starting to Lose Faith

The U.S. economy shrank to start 2022... A precarious position... The mainstream is out to lunch... We're halfway there... Wealthier Americans are starting to lose faith... The EU moves on from the pandemic 'emergency'...

Uh oh, we've got shrinkage...

On Monday, we looked ahead to a big week for the markets, including earnings from the big tech companies... A report on first-quarter 2022 U.S. gross domestic product ("GDP") was published today... New "official" inflation data will come out tomorrow...

On the earnings front, Alphabet (GOOGL) had a rougher-than-usual first quarter, and its shares fell 4% yesterday... Meta Platforms (FB) showed some promise with user growth and shares jumped 18% today. Both moves are probably overreactions...

After today's closing bell, Amazon (AMZN) also reported earnings that missed growth expectations, and its shares dropped 6.5% in after-hours trading. Amazon CEO Andy Jassy noted "unusual" challenges from the pandemic, war in Ukraine, and inflation.

But today, I (Corey McLaughlin) am going to talk about the GDP report, which arrived this morning... because the results surprised some people. Mainstream economists were expecting a paltry 1% annualized gain in U.S. economic growth in the first three months of the year.

Instead, the numbers showed a 1.4% decline. In other words, a shrinking economy.

Considering that GDP grew by 7% annualized in the fourth quarter of 2021, this report is a big deal. This is the first decrease in U.S. quarterly GDP since the depths of the pandemic lockdowns in early 2020...

What it means...

There's always room to debate the details of numbers like these, but at the very least they show a "directional story" we've been expecting... Slowing economic growth has been happening the last several months.

And it comes at a time when the Federal Reserve, the biggest economic string-puller in the land, is intent on raising interest rates... which will slow growth even more in the months ahead.

As we've been saying, if you are a believer in the Fed's outsized influence on our lives, as we are, it has been important to note it has decided to sacrifice economic growth – by raising interest rates and pulling back on stimulus – for the sake of perhaps lowering inflation.

We say "perhaps" because all along the last two years, Fed Chair Jerome Powell has said supply-chain issues have been the main source of inflation in the U.S... and those haven't stopped yet.

If anything, they're escalating again due to what's going on in China and Eastern Europe.

Now, the economy and markets are in a precarious position...

And so is the Fed – which is supposed to promote "stable prices" and low unemployment. As our colleague and Ten Stock Trader editor Greg Diamond wrote this morning about the GDP news...

This really puts the Federal Reserve in a tough spot. They are raising rates into an economic contraction. Not good to say the least.

We'll have to wait and see how they play this new development next week, but they can't ignore it.

We can imagine Jerome Powell's face when reading the GDP numbers this morning, or last night if he got advance notice... and him cursing at his computer screen. Next week is the Fed's next policy meeting. Powell and other Fed governors have been talking up a 0.50% rate hike for weeks.

What's also telling and maybe foreboding is that the first-quarter GDP number only includes mostly a still rock-bottom interest-rate environment... The Fed only raised its benchmark rate by 0.25% on March 16, two weeks before the end of the quarter... So the Fed's efforts to slow the economy are not yet reflected in the numbers about the slowing economy.

In "normal" circumstances, you wouldn't want to be raising interest rates and making borrowing costs higher at all in an already shrinking economy, but that's probably what they're still going to do next month to say they're fighting inflation...

You won't hear this in the mainstream, though...

For the sake of comparison, I looked at popular news outlets "just to see"... and laughed out loud... The top story on CNBC.com this morning highlighted this quote, just below the headline, from Ian Shepherdson, an economist at Pantheon Macroeconomics. He said...

This is noise, not signal. The economy is not falling into recession.

The story also included some generous editorializing...

Some of the GDP decline came from factors likely to reverse later in the year, raising hopes that the U.S. can avoid a recession.

Sure, consumer and business spending, in general, still looked strong in the first quarter, though there are some interesting trends playing out on the consumer side that suggest possible lower growth ahead. I'll explain what I mean in a moment...

But, all in all, I felt bad for anyone who believed the above claims at face value...

Hope is not a good strategy... and neither is banking on someone telling us something is "likely" to happen in the economy when these same news outlets were telling us inflation was only going to be a problem for a few months.

What we'd rather do...

We could be right or wrong... it doesn't really matter. Ultimately, what Mr. Market thinks matters more. But the fact is, on balance, economic activity is slowing, and it's wise to prepare for it.

That's a big reason why our team put together our new Stansberry's Financial Survival Program, jam-packed with ideas and recommendations to protect and grow your portfolio in market downturn, be it now or down the road...

Click here for more details on what you'll receive in this seven-part series. For a very reasonable price, you'll get access to several different strategies from our editors to position your portfolio to survive a recession... bear market... or whatever happens next.

We're publishing the next and fourth module of the Financial Survival Program tomorrow after the market closes and you won't want to miss it... It's on how to profit from a crash, and it begins with a primer on the "anatomy of a bear market."

Shepherdson's thesis for "no recession coming" is that U.S. companies have been rebuilding inventories the last several months and the small GDP decline can mostly be attributed to significantly more imports than usual...

OK, fine, but there also wasn't enough economic activity going on otherwise to result in growth... It's funny how people can pick-and-choose labels or whatever works to fit a narrative. I try hard not to do it...

Today, for instance, I'm writing about the trouble for the economy on a day when the major U.S. indexes were each up, with the tech-heavy Nasdaq Composite Index gaining 3%.

But ignoring reality, or the facts, does no one any good in the long run…

The Nasdaq, the benchmark S&P 500 Index, and the Dow Jones Industrial Average are each still below their 200-day and 50-day moving averages ("DMAs"), which are good and simple technical measures of a long-term and short-term trends, respectively.

There is a good discussion to be had about if a recession, and the Fed's plans, have already been fully "priced in" to the market, but I lean toward "they haven't" because I don't think the central bank is even sure what it's going to do the rest of the year.

Particularly after today's GDP news... After one quarter of declining GDP growth, we're halfway to how the mainstream has typically defined a "recession," two consecutive quarters of negative growth...

Other people have different interpretations – the National Bureau of Economic Research has probably the most nuanced guidelines of what makes a recession – but they all add up to... "Most people have little confidence in the economy."

About that...

Some of the wealthier Americans are starting to lose confidence...

Our Stansberry NewsWire editor C. Scott Garliss sent us an interesting note the other day...

He noted Bank of America (BAC) research showing consumer sentiment among wealthier American households – those who make more than $125,000 per year – has recently dipped below that of those who make $50,000 or less...

Here are the interesting details...

Bank of America card data shows the lower-income group continues to lead spending growth across all major sectors. The bank's thesis is that higher wage growth among lower-income workers (6.1% year over year) than among higher earners (3.3%) is likely the reason.

On the one hand, you might say, "Great. Lower-wage workers are starting to make more, closing a gap between the haves and have-nots." On the other hand, those higher wages still aren't keeping pace with inflation...

And if you're wondering how this all might play out in your investment portfolio, as Scott noted...

From a stock market perspective, wealthier households are an important driver of demand for shares of publicly traded companies. If sentiment amongst those households deteriorates, it could weigh on their propensity to spend both disposable and discretionary income.

In other words, the folks with more money might spend less. And as we've said before but can't say enough, 70% of the American economy is tied to consumer spending in one way or another. Any significant dent will weigh on profits for companies in a higher cost world.

We also like to look at the University of Michigan's Surveys of Consumers data, which has been published since the mid-1940s. Last month, we reported that those surveyed said their financial situation was the worst it has been in nine years.

Surveys Chief Economist Richard Curtin reports that preliminary numbers in April have improved a little bit from March, but readings are still lower than the start of the year and in any other month of the past decade.

Curtin also wrote a paper earlier this month saying, "inflationary psychology has set in," and he warned it's going to be hard to reverse...

There is a high probability that a self-perpetuating wage-price spiral will develop in the next few years. Households have already become less resistant to paying higher prices and firms have become less resistant to offering higher wages. Prices and wages will continue to spiral upward until the cumulative erosion in inflation-adjusted incomes causes the economy to collapse in recession...

This situation has been termed "inflationary psychology." Consumers purposely advance their purchases in order to beat anticipated future price increases. Firms readily pass along higher costs to consumers, including the future cost increases that they anticipate. That's what happened in the last inflationary age, which started in 1965 and ended in 1982: Expected inflation became a self-fulfilling prophecy.

The survey will publish its official April report tomorrow morning. We'll see what it says.

Finally, I wasn't sure whether to begin or end with this today...

After what we've lived through the last two years, what I'm about to share feels like it should be a big deal, but it also seems that not too many people care anymore... All in all, that's probably a good thing.

The pandemic... It's time to move on.

We know many people have already, but now European Union leaders are on board with the idea too.

They didn't say it as plainly as I just wrote it, instead publishing a document predictably full of heavy language and no simple declarations. But what it all shows is that EU officials are moving out of the "emergency" phase of the COVID-19 pandemic...

... and into a life in which COVID-19 is still around, just without the lockdowns, tracking of everyone who tests positive, and all other related protocols we've come to know. The same can't be said in China right now, but the EU is moving forward.

Officials are expecting variants, but with three-quarters of all Europeans vaccinated and half having gotten a booster shot, European Commission President Ursula von der Leyen was at least comfortable enough to say...

We are entering a new phase of the pandemic, as we move from emergency mode to a more sustainable management of COVID-19. Yet we must remain vigilant.

There's plenty else for her to talk about. Also yesterday, von der Leyen accused Russia of blackmailing the EU after the state-run Gazprom (OGZPY) company stopped delivering gas to Poland and Bulgaria, as the war in Eastern Europe plods on with no end in sight.

Revisiting the 'Great Debate'

Gareth Soloway, president and CFO of InTheMoneyStocks.com, joins our editor-at-large Daniela Cambone ahead of the one-year anniversary of our great gold vs. bitcoin debate featuring Michael Saylor and Frank Giustra.

Soloway says despite how it might appear, gold – which should have a higher price – will still outperform bitcoin and the benchmark S&P 500 in 2022 because of the tailwinds the precious metal has, like high inflation and a potential recession ahead...

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 4/27/22): Black Stone Minerals (BSM) and Waste Management (WM).

In today's mailbag, feedback on Kim Iskyan's Wednesday Digest about how the war in Ukraine is killing the U.S. dollar... and a shoutout to some of our recent coverage... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Howdy, I agree with everything in this article, but more troubling still, is the Canadian Trucker Scandal, which is weaponizing the currency against your own, peacefully protesting citizens!

"It's one thing to weaponize a currency against an aggressive foe. It's much more terrifying and troubling when you are doing it to your own people.

"All of these fiat currencies need to go the way of the dodo bird. They are showing how unsound and freedom limiting they are. If they try to roll out CBDCs, we will have these issues on steroids!" – Paid-up subscriber Jorg S.

Corey McLaughlin comment: You had us at "dodo bird." +1 for the reference.

"Without reading the Stansberry Digest, I can say the U.S. dollar is like Tesla. Funerals have been ready early and often for both, but they just keep on truckin'." – Paid-up subscriber Lum L.

McLaughlin comment: You lost us at "without reading."

You're likely not reading this either, but we'll reply anyway... Even if you make a fair point – and one that Kim acknowledged at the start of yesterday's essay – it's still worth considering what a world where the U.S. dollar isn't the king of currencies looks like.

As Kim wrote, it's closer than you might think...

The global-reserve-currency holdings of the U.S. dollar, as a percentage of total stockpiles, at 59%, has fallen 12 percentage points over the last two decades and is at its lowest levels since the 1990s...

These are the facts of the present. Then there's relevant history that can tell us something about what might happen in the future...

Since the 1400s when Portugal once held the world's reserve currency, the most trusted currency in the world has just so happened to "change" on a regular cycle every 80 to 110 years... That's frequent enough for us to pay attention.

The last time it happened was around 1920, when the U.S. dollar overtook the British pound after World War I. In other words, we're about due again. We're not saying it happens tomorrow. This won't happen overnight...

But the hallmarks of a transition for the U.S. dollar's fall from the top are already present: overextended empire-building, war, debt greater than GDP, convoluted loan arrangements that conceal long-term problems, reckless government spending... and more to come.

"[A few weeks ago] you talked about [the trucking slowdown] and then addressed it again. I've since seen it parroted everywhere on the legacy media. Actually, this happens quite frequently.

"I don't invest in stocks – I'm more a physical real estate and owning an actual business guy, but I love your analysis of companies and the economy at large. And I love that your editors have differing opinions but present their cases so well.

"Keep up the great work!" – Paid-up subscriber Robert C.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 28, 2022