What Higher Rates Mean for Stocks and Gold

The market is certain the Fed will raise rates tomorrow… What higher interest rates mean for stocks and gold... Will Trump kill the gold bull market?... The latest on 'The Big Trade'...

The last Federal Reserve policy meeting of the year kicked off today...

The Fed will announce its latest interest-rate decision tomorrow afternoon at 2 p.m. Eastern time.

As regular Digest readers know, the Fed is widely expected to increase its benchmark interest rate by another quarter percentage point to a range of 0.50% to 0.75%.

In fact, according to the latest data, it's now a near-certainty... The CME Group FedWatch tool puts the probability of the move at 95.4%, while World Interest Rate Probability data compiled by Bloomberg puts it at 100%.

Yet, while the Fed's interest-rate decision has been anticipated for months, analysts are now less certain about what they'll say about the economy – and the likelihood of additional rate hikes – going forward. As the Wall Street Journal reported last night...

A rallying stock market, rising bond yields and the return of inflationary pressures are creating new challenges for the Federal Reserve as it starts its two-day policy meeting...

Leading up to the Fed's announcement Wednesday, officials have largely maintained a cautionary tone even as joblessness sits at a nine-year low and economic growth is accelerating. But many Fed watchers see the prospect of tax cuts and fiscal spending under Donald Trump, as well as rising oil prices and inflation expectations, pointing to a pickup in the pace of rate increases.

The outlook has shifted since the last time Fed officials issued economic forecasts in September. That time, they cut their outlook for growth and inflation this year, and predicted slightly higher unemployment by the end of 2016.

We'll take a closer look at the Fed's announcement later this week.

In the meantime, our advice remains the same...

Stay long, but stay "hedged."

Remember, higher short-term rates aren't a reason to sell stocks. As we noted in the November 28 Digest, our colleague Steve Sjuggerud's research shows Fed interest-rate hikes can be a good thing for stocks.

They're also not a reason to sell gold...

Prior to last year's December interest-rate hike, the financial media trumpeted fears that gold would fall even further. Of course, that was completely wrong...

The long bear market in gold bottomed that same month, and precious metals absolutely soared through the spring and summer.

Today, we note a similar situation...

Gold and silver have fallen for several months... Investor sentiment has turned negative again... and several indicators show precious metals are as "oversold" as they were last December when the bull market began.

We wouldn't be surprised if this month's Fed meeting marks another important bottom for gold and silver.

Speaking of which, we've also heard concerns that Donald Trump's victory could bring about an end to the bull market in precious metals...

But that's unlikely. In fact, it's far more likely to strengthen it in the long run. As Porter and his team explained to Stansberry Gold & Silver Investor subscribers following last month's election...

The stock market has surged since Donald Trump's upset victory in last week's presidential election... Meanwhile, precious metals and the stocks of gold and silver miners sold off. The markets may be optimistic that Trump will enact policy changes that would rev up the economy.

Sure, he's preaching deregulation, lower taxes, and infrastructure spending. That can create jobs and profits in the short term... But a Trump presidency will not magically solve our economic problems. Over the long term, his ideas simply amount to more of the same deficit spending that created our problems...

In other words, the election hasn't changed any of the underlying fundamental problems that made us bullish to begin with...

If people are selling gold because they think we're entering a period of growth... they're making a mistake. Gold isn't about "sell on growth, buy on recession." Gold is about deficits and debt. It's insurance against a fiscally irresponsible government. And that story hasn't changed.

Likewise, we've heard from several readers who are worried Trump could prevent the credit-default cycle Porter has warned about...

Again, this simply isn't the case. In fact, Porter and his research team addressed these worries in the December issue of Stansberry's Big Trade, published yesterday after market close. Because we know many folks are likely concerned, they agreed to share a portion of the issue with Digest readers today. From the issue...

Don't lose your nerve... The stock market is poised to end the year on a big rally. Since Donald Trump's surprise election in November, the S&P 500 Index is up 6%. But it's not just the so-called "Trump Rally." This has been a great year in the market. It's up 24% since its February lows.

As Porter and his team noted, for many readers, this may seem like a terrible time to bet against stocks, even troubled ones like those among "The Dirty Thirty" – their nickname for the 30 most indebted (and most likely to default) companies. But the reality is far different...

Conditions right now are ideal for our strategy. Remember, this is exactly why we told you Prem Watsa's story last month... Watsa is the CEO of financial-holding firm Fairfax Financial, headquartered in Toronto, Canada. He's famous in the markets for his well-timed calls on market moves... and for making billions by betting on the crash of 2008.

He started buying credit default swaps (CDSs) in 2005 as a bet against America's housing boom. At one point in 2006, his investments were down $87 million – or 74%. But he knew the storm was coming.

He bought more over the next two years when investor confidence was sky-high. Then he waited. His final payout came in 2009 – four years after he first started speculating. His gain was nearly 500% – billions of dollars.

Today, Porter and his team see the same opportunity. A "storm" is coming. It's simply a matter of being patient and taking advantage of cheap "insurance" when it's available...

The underlying problems we see in the market and our economy haven't gone away. And the equity values on the companies that we target here at Stansberry's Big Trade and on our "Dirty Thirty" list remain bloated. These companies are going to fail. So the rising market is simply giving us a chance to pick up cheap options that will pay off big when the downfall arrives...

Since launching Stansberry's Big Trade, we've discussed the importance of patience... diversification... and building out a portfolio. We know that's not exciting advice, but we cannot emphasize this enough with our Big Trade strategy.

You see... our Dirty Thirty list is full of names that are facing the biggest problems as the credit cycle turns... including broken business models, the worst corporate credits, and heavily-indebted firms... Over the coming months, quarters, and years... we believe you will do well by owning puts on all of them...

It's really quite simple. Identify the opportunity... buy when the odds are stacked in your favor... and wait.

New 52-week highs (as of 12/12/16): American Financial (AFG), Altius Minerals (ALS.TO), Axis Capital (AXS), Boeing (BA), Bank of Montreal (BMO), Berkshire Hathaway (BRK-B), ProShares Ultra Oil & Gas Fund (DIG), BlackRock Floating Rate Income Strategies Fund (FRA), short position in Hertz Global (HTZ), Microsoft (MSFT), VanEck Vectors Russia Fund (RSX), Travelers (TRV), and W.R. Berkley (WRB).

In today's mailbag, at least one Stansberry's Big Trade subscriber has been listening... and another reader has a question for bestselling author and Digest contributor P.J. O'Rourke. What's on your mind? Let us know at feedback@stansberryresearch.com.

"'PATIENCE, GRASSHOPPER, PATIENCE'... That message resonated quite clearly the night of your [Big Trade] Webinar. I placed an order the next day (11-17-16) to Buy to Open 10 contracts of [one of the recommended put options]. After reviewing trading volume and price ranges, I placed a limit GTC order at $1.03. The Big Trade recommendation was to buy about the $1.10 range. That first trading day, the bid was $1.23/ ask $1.24. I didn't chase it. My order was filled today for 10 contracts at $1.03. MY PATIENCE WAS REWARDED." – Paid-up "getting smarter all the time" Stansberry Alliance member Frank S.

"Hi PJ, I thoroughly enjoyed your piece on your ten holiday book suggestions. I sent it to our daughter who is a freshman at Marquette (she's starved for conservative thinking), and have it ready to take with me next time I hit Barnes & Nobles. I have precious little time to read these days with big time tuition bills for our daughters, but look forward to a time when I will have the opportunity to read.

"I have a quick question... A Christian friend of mine has a son who is a freshman like our daughter, and he is surrounded by liberals who are already making inroads. He recently indicated he is starting to think that there is a great deal of merit in the United States moving toward socialism. I want to buy him a book for Christmas, but if I chose the wrong book, it may be 'one and done.' I need to pick the right book.

"I'm considering The Fountainhead, Captain Courageous, and A Connecticut Yankee... but have yet to read any of the three, as most of my reading these days is Christian based. Do you have a recommendation for a young 18 year old boy who is drifting toward socialism and is in need of a great book to keep him from leaving orbit? Thanks in advance. Keep up the great work." – Paid-up subscriber SEP

P.J. O'Rourke comment: Thank you for asking that question! I've spent a lot of time talking to my kids about how private property is fundamental to religious faith – starting with that ultimate piece of private property that God gave to each of us – a soul.

A wonderful resource for an 18-year-old with an inquiring mind is the Acton Institute for the Study of Religion and Liberty. They're great people and their work is easily accessed, for free, on the Internet. I think the best tactic is to point the young man in this direction and let him discover for himself the brilliant arguments that the Acton Institute makes. A good starting point is an article, "How Christianity Created Capitalism," by the noted scholar and philosopher Michael Novak. It's in Volume 10, Number 3, of the Acton Institute's online publication Religion & Liberty.

P.S. While Ayn Rand makes a lot of powerful arguments for individualism, she was, however, an atheist, so I don't think she'd be the best choice in this case.

Merry Christmas!

Regards,

Justin Brill
Baltimore, Maryland
December 13, 2016