What Powell Left Unsaid

What else to make of the Fed's message... High(er) inflation is here to stay... The Bank of Japan intervenes again... Cannabis stocks get a bump... Weight-loss-drug company earnings... Mailbag: 'Everyone is not a winner'...

If you're still left scratching your head after yesterday's Fed meeting...

You're not alone. We shared our first impression on the fly as we went to press yesterday... and did our best to summarize what we heard. Still, it felt to me (Corey McLaughlin) like a difficult exercise given the mixed messages we heard...

The Federal Reserve kept its suggested bank-lending-rate range right where it has been since last July... and its policy-setting committee acknowledged "lack of further progress" on the pace of inflation easing over the previous three months.

Then, at a post-meeting press conference, Fed Chair Jerome Powell notably didn't acknowledge that he felt the central bank had reached "peak rates" as he has in previous months. This seemed to leave room open for a major "hawkish" policy shift from the Fed.

But then, in response to financial reporters' (good) questions, Powell said that despite inflation numbers well above the central bank's supposed 2% annual goal, another rate hike was "unlikely." He even outlined hypothetical scenarios for rate cuts still happening.

Reasonable people could have come to different conclusions about the message Powell was trying to send. Wall Street firms have, too. Here's CNBC.com today...

Wall Street reacted Thursday to this week's Fed meeting, with forecasts scattered across a range of outcomes for where monetary policy heads next.

Most economists for the biggest forecasting firms expect the central bank to lower benchmark interest rates sometime later this year. But the outlooks ranged from one cut to four, with most saying that only time will really tell how much the rate-setting Federal Open Market Committee can take its foot off the brake.

Appropriately, the major U.S. indexes took a full round trip late yesterday afternoon, from "mixed" to "everything up by at least 1%" to mixed again... They were up today, with the benchmark S&P 500 higher by nearly 1%.

As we wrote yesterday, it seems the Fed wants to cut rates, but the central bank doesn't have an argument right now. The reality found in the Fed's beloved data remains the same... hot recent inflation numbers, a still-growing economy, and a sub-4% unemployment rate.

Which brings up a good question: Why might the Fed want to cut rates?...

Nobody at the Fed has really said anything about that in a while. It was long thought that cutting rates would just be necessary because the Fed always has after rate-hike cycles. Each time, the economy ultimately slowed down to a point where inflation eased... or a recession occurred.

Not long ago, the Fed also publicly stated that it didn't want to damage the economy with any higher rates. But by its own definitions, growth has been going along just fine since the central bank made borrowing costs significant again.

Even after a recent first-quarter GDP report that in fact showed slower growth than previous quarters and higher inflation, Powell yesterday disputed the idea of "stagflation" that represents this scenario. He joked...

I don't see the stag or the 'flation.

While funny, it was a revealing line, too. In short, Powell says the economy is fine, but bank-lending rates will likely go lower before they go higher. Something doesn't add up.

Maybe there's a reason for this... Maybe the Fed feels like it has done all it can to "fight" inflation without causing more crises in the banking system or a deflationary recession, which would take care of inflation but cause other financial heartaches and job losses...

Maybe that's a legitimate fear and a well-intentioned concern.

Or maybe, as Powell and other Fed officials have alluded to in recent months, the fiscal side of the equation – government spending and all the pandemic stimulus – is and was too strong to think that the central bank is the be-all and end-all when it comes to prices.

Perhaps once inflation took hold and the government started mailing checks to people and handing out loans like Halloween candy, it's hard to make things simply go back to the way they used to be.

We read this message between the lines of Powell's remarks yesterday. He maintained that interest rates were "restrictive," and he specifically mentioned that while "interest rate sensitive" parts of the economy had been influenced by Fed policy, other factors were influencing prices as well.

The big takeaway...

If any of this is true, or even close, then it is reasonable to consider that the central bank doesn't care as much about decimal points in inflation data as it used to... including the long-held 2% goal.

Often, what's most important can be what's left unsaid...

And if that's the case, here's how we end the head-scratching... with what matters most when thinking about what any of this could mean for your investments. It's simple.

Essentially, it's the same thing longtime readers know we've said since 2020, way back when we warned of higher inflation ahead... and in 2021, when we were doing the same despite the Fed claiming higher prices were "transitory"... and again earlier this year when we told you inflation was running "hot" well before the Fed acknowledged it.

The Fed's claim of a 2% inflation rate rings hollow today. High(er) inflation will be sticky... and while the story isn't just beginning anymore, it's far from over.

But we'll take a break from beating this horse...

Switching gears to 'breaking the yen' watch...

Lost in the bustle of yesterday's late-afternoon market frenzy around the Fed meeting was what looked like yet another intervention from the Bank of Japan to prop up the yen.

Right after yesterday's close of U.S. trading, the yen fell sharply again versus the dollar – with each dollar worth five fewer yen than the day before. It follows a nearly identical move we saw earlier this week as the currency traded near 160 to the dollar.

Analysts estimate this latest round of intervention amounted to as much as 3.5 trillion yen, or around $23 billion. The precise mechanism is unconfirmed, but it's thought that Japan's Ministry of Finance sold dollar deposits it holds in reserve on the foreign-exchange market and bought back its own currency with the proceeds – boosting demand, and thus prices, for the yen.

The Bank of Japan's balance-sheet projections for next week show a 4.36 trillion yen net receipt of funds, compared with a 700 billion to 1.1 trillion estimate before this second suspected intervention. That follows the bank's similarly suspected and estimated purchase of 5.5 trillion yen on Monday.

Speaking of stimulus...

Cannabis stocks are back in the headlines...

News this week that the U.S. government is getting closer to potentially reclassifying marijuana from a Schedule I drug (like heroin and LSD) to a Schedule III drug (such as Tylenol with codeine or steroids) sent cannabis stocks soaring...

Today, DailyWealth Trader editor Chris Igou updated his subscribers on the story... and a cannabis trade in his portfolio... and noted that the cannabis sector is likely to remain in the news through November's election, much like in the 2016 and 2020 election years.

An update on the weight-loss-drug winners...

They just keep winning. Novo Nordisk (NVO) and Eli Lilly (LLY), the two major makers of the popular weight-loss drugs (and diabetes treatments), have reported terrific quarterly earnings this week.

Novo reported today that its net quarterly profit rose 28% year over year (to $3.6 billion), sales of its popular weight-loss drug Wegovy more than doubled, and overall sales in North America rose 35%.

On Tuesday, Eli Lilly said its first-quarter revenue rose 26% (to almost $9 billion) from the same period a year ago, a result primarily driven by its own weight-loss drugs, Mounjaro and Zepbound. It also raised its full-year revenue projections by $2 billion.

Stansberry Venture Technology editor Dave Lashmet – who gave away both of these tickers in a free presentation earlier this year and here in the Digest in years past – shared his take with me today...

Looking at Lilly and Novo for weight-loss drugs, the first thing to know is their Type 2 diabetes drugs and their weight-loss drugs are the same chemicals, branded separately.

So, Lilly's Mounjaro and Zepbound both have a drug called tirzepatide inside Lilly's self-injector. And Novo Nordisk's Ozempic and Wegovy both have a drug called semaglutide inside Novo's self-injector.

Secondly, no matter which drug you are on, you scale into it, from lower doses to higher doses, if necessary. For savvy investors, then, splitting revenue streams within companies is not the full story.

Instead, what matters is profound revenue growth for these two drugs – plus their added production capacity.

For Lilly, it's added $1.8 billion in quarterly revenue growth (year over year) for its tirzepatide product line. It's also spending $10 billion building new factories to make this drug. So this is a gangbusters business...

For Novo Nordisk, it's added $1.7 billion in quarterly revenue growth (year over year) for semaglutide. It's also gaining 27,000 new prescriptions for Wegovy per week – which means 1.4 million new scripts per year.

Given that there's at least 250 million medically obese people in the U.S., Canada, Europe, Australia, and Japan, it would take more than 100 years to reach market saturation. Clearly, Novo Nordisk is trying to beat that.

Dave added that Novo just spent $11 billion buying an existing protein-manufacturing site (a concept he wrote about in the March 15 Digest), and Novo is also building $6 billion worth of new factories, all for these weight-loss and Type 2 diabetes drugs.

Dave says this will continue to be a high-growth market as more supply comes online for these two companies. Both are growing at around 25% per year overall, and "we see this trend continuing," he says.

What to watch tomorrow...

On the economic-data front, investors' eyes will be on tomorrow morning's "nonfarm payrolls" report from Uncle Sam. This will include an updated unemployment rate...

Any notable weakness in the labor market tomorrow or anytime in the near future could cause enough investors to lean toward the "Fed cut" idea rather than whatever they might be thinking now.

New 52-week highs (as of 5/1/24): Alpha Architect 1-3 Month Box Fund (BOXX), Commvault Systems (CVLT), Procter & Gamble (PG), and RadNet (RDNT).

In today's mailbag, feedback on what the Fed said yesterday... and a take on higher interest rates being a good thing for savers... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Corey, the Fed Said, 'Who the Flick Knows, NO CHANGE FOR THE FORSEEABLE FUTURE'.

"Of course, Powell also admitted that the future is no longer than the next meeting AND it would take a massive change in employment to scare them into not going higher for longer than the wider market really expects.

"Net bottom line? The fear of a potential Volker2 scenario due to Fiscal Sloppiness is not off the table. Me? I love it. These are the times that fortunes are made (or lost)!" – Stansberry Alliance member Bill B.

"You cannot turn in to any broadcast, podcast, or financial blurb without the topic of Fed rate cuts coming up. It's been that way for two years. Why don't the commentators raise the obvious corollary – maybe rates are about where they belong in the long term; at rates that force lenders to allocate capital to viable projects; rates where savers can actually be compensated for saving without having to become stock market investors.

"For 15 years, the Fed has robbed seniors of the chance to earn a real rate of return on savings without incurring a degree of risk that a great many are simply unprepared to accept. I know many low-income seniors who have kept their savings invested in CDs at 1% or thereabouts for more than 10 years. In the meantime, massive misallocation of trillions of dollars of capital has occurred due to the ridiculous maintenance of sub-real market borrowing rates. Ridiculously low mortgage interest rates have contributed to real estate prices ballooning to the point that today's young adults, for the most part, have no dream, much less the reasonable expectation of becoming homeowners short of using an inheritance or major parental gift, or perhaps finding a bag of money in the road that dropped off the Brinks truck.

"Now, for the first time since the Great Recession, ordinary conservative savers can collect 5% on their money risk-free... Lenders actually underwrite commercial loans now, so that borrowers must be reasonably able to repay their debt – or not get the loan... Yes, the rate increases generate a lot of fallout among weaker businesses that cannot survive refinancing low-interest debt for market-rate debt. To that I say no one promised them interest rates would be 1% forever...

"Free market capitalism requires that there be losers. Everyone is not a winner. Businesses that borrow money that they cannot expect to repay when the bill becomes due are those losers. There may be a couple more years of 'hell to pay' as the lending 'crisis' plays out. There are a lot more losers set to close up shop in the next year or two. And gee, maybe, just maybe, as market forces drive T-bill rates up and up, the Fed will resist the pressure to ease the rates back down to zero so Congress can continue to spend like, well Congress, without making real spending cuts. But I doubt it." – Subscriber Kelly F.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 2, 2024