What the 'Two Economies' Are Telling Us Now

We haven't seen this since March... An indicator of market 'health'... Hallmarks of the 'Melt Up'... More reason to own 'hard assets'... Is it worth it?... What the 'two economies' are telling us now... Don't miss Steve's 'Melt Down' message...

'For the first time since March'...

It might feel like a different lifetime today, but it was only 10 months ago...

We sat in our office in Baltimore, looking through pictures and videos of Chinese medical officials building temporary spaces outside of their hospitals to hold all of the patients... hoping it didn't happen here. It did, of course... and then so did the panic and everything else.

You know the rest of the story...

The New York Stock Exchange "circuit breakers" were tripped. We experienced a 30% drop in the major U.S. indexes in a few weeks... followed by a rally back to new all-time highs, which is where we are today.

So when we see something in the economy and markets today described as "happening for the first time since March," as we did just recently, you can believe it catches our eye...

It means something is shifting, and it's a signal all investors should pay attention to...

Admittedly, this isn't sexy material or fodder for your next cocktail party (whenever that might be)...

Many folks aren't talking – or even thinking – about it today. But it's an important indicator about whether the economy is getting healthier or sicker in the near term...

We touched on this indicator briefly in last Thursday's Digest, in the wake of the chaos unfolding in Washington, D.C. As Stansberry NewsWire editor Nick Koziol wrote on January 6...

The yield on the 10-year Treasury rose above 1% today for the first time since March. And this is a good thing for bank margins...

Banks make their money by borrowing money at short-term interest rates, and then lending it out at long-term interest rates. The spread between the two is called net interest margin ("NIM").

So with the Federal Reserve keeping short-term interest rates near zero, banks don't have to pay much to borrow money. And now, with long-term interest rates rising, banks can see their NIM expand. This will likely boost their earnings.

Not only is this a good thing for the beaten-down banking sector – which rallied more than 7% that day, as measured by the SPDR S&P Bank Fund (KBE) – but it signals that economic growth is happening in the economy, in general.

After all, if the "hated" banks are rallying, what isn't?

Don't get me wrong... We're still talking in the context of historically low interest rates and the continued devaluation of the U.S. dollar, as well as the investing world playing with the Fed's own created money (which doesn't sit right).

But here's what we haven't seen in a while... The yield on the 10-year Treasury note has risen for six straight trading days, up to 1.15%, as of yesterday.

Why is this important?

Longtime Digest readers know our editors track the "yield curve" as a gauge of economic health and an early warning signal for stocks. As we wrote in the October 13, 2020 Digest...

In the plainest English we can use, the "yield curve" is the difference between long- and short-term interest rates.

You can measure this curve in a variety of ways, but the most common is the difference between the 10-year U.S. Treasury notes and the two-year U.S. Treasury notes.

Most times, long-term rates are higher to compensate for the trouble of tying up your money for a longer period of time. This is healthy... and logically, it makes sense.

But when that relationship flip-flops, the yield curve is said to have "inverted." It doesn't happen often... But when it does, it warns that trouble is ahead for the U.S. economy.

We saw an "inverted" yield curve briefly near the end of August 2019, six months before we entered the pandemic-induced recession... That continued a streak of this indicator remarkably preceding the previous eight recessions.

That's important because this is NOT what we're seeing today...

We'll have to keep tracking this trend for longer than a week, but there's no doubt that the longer-term, market-controlled 10-year Treasury rate has been rising lately. Meanwhile, the two-year U.S. Treasury yield, which typically moves in sync with interest-rate expectations, is a minuscule 0.14% and has barely budged since May.

In fact, the "spread" – the difference between the long-term and short-term rates – has widened to roughly 1%... That is its largest gap since the middle of 2017, though it's still negative in "real" terms when accounting for inflation.

And bond prices, which move inversely to yields, are going down. They're about the only thing trending down for more than a few days in a row... The iShares 20-Plus Year Treasury Bond Fund (TLT) is down to about $150 per share for the first time since February 2020.

In the meantime, of course, the Federal Reserve – which regulates the banking system – is maintaining an artificially low, near zero, benchmark overnight rate "for the foreseeable future." That official mandate puts more liquidity into the system.

And in recent days, a pair of Fed officials have said a rise in yields shouldn't make the central bank react with any new higher interest rate policy...

This was "new" back in the Ben Bernanke days at the Fed during the financial crisis... but it's old hat to current Fed Chair Jerome Powell. What's new, though, is the size and scope of the monetary and fiscal stimulus we saw in 2020 and what appears still on the horizon.

We're expecting to hear the details of the new presidential administration's multitrillion-dollar fiscal stimulus proposal later this week... Market pundits are pointing to this news, as well as entrenched Fed low-rate policies and an increased supply of U.S. Treasurys this week as the reason for higher yields...

But it's not really material if all of that is true or not. The point is this...

This indicator of market "health" is getting incrementally stronger today... and it's happening before more stimulus hits most Americans' pockets... and well before the Fed has telegraphed its plan to raise its benchmark rates a year or so from now at the earliest.

It's like throwing more fuel on the fire...

These are all hallmarks of the 'Melt Up' at work...

It's more government stimulus – both monetary and fiscal – than most folks could previously imagine. We're talking about a new stimulus package possibly in the neighborhood of $3 trillion to $4 trillion.

If you're a believer in Steve's Melt Up thesis – with Fed interest rates so low – this ultimately means higher stock prices and an asset bubble continuing to grow to a size that we haven't seen before...

(It's also a bubble that you want to protect yourself and your portfolio from when it pops, as we've mentioned lately. You can hear more from Steve about this "Melt Down" right here.)

It might take some folks longer to come around to it than longtime Digest readers, but this could all mean more demand for the shares of the type of capital-efficient, high-quality companies we love... They'll help you make the most of the weaker dollars floating around.

It also means a place for "hard" assets as part of a truly diversified portfolio – things like commodities, gold, silver, and as several of our editors consider it, bitcoin. These stores of value can work on a longer time frame...

NewsWire editor C. Scott Garliss shared some interesting stats with us yesterday to this point. He was highlighting asset performance in a similar environment in 2009...

West Texas Intermediate crude oil gained 191% from inauguration day in 2009 through the end of April 2011. Bitcoin, then mostly just a little-known idea, went from $0.08 to $2.21 – a 2,663% gain in the same span. As Scott told us...

Bitcoin and oil, along with silver and gold, are seen as stores of value relative to the dollar. So, if we're talking about a similar setup to when Barack Obama took office – overcoming domestic financial calamity, administration willing to spend, and a central bank willing to do the same – all of these items seen as a store of value could see similar moves.

According to Silver Stock Analyst editor Garrett Goggin, silver rose 333% in roughly the first two years of the Democrat-controlled Congress and White House. And as for gold, Gold Stock Analyst editor John Doody covered this idea in his most recent must-read issue sent to subscribers just last night. From the issue...

Gold price fears only higher interest rates. That means the Federal Reserve and its loose-money policies are the real drivers pushing the metal higher – just as they did in the gold bull markets of 2001 to 2004 (when gold rose 56%) and 2008 to 2011 (when it soared 129%).

John is still forecasting $3,000 gold, which would be a roughly 60% gain from here.

At the same time, we simply can't get away from the longer-term consequences of all this money printing... the gradual erosion of the value of the U.S. dollar.

How low can it go? In theory (namely "Modern Monetary Theory"), it can – and will – go lower as soon as the Fed hits the "print" button on more digital dollars that the new Democrat-controlled Congress approves.

In practicality, though, as we wrote last week, is it all worth it?

Much has been made of consumers, in aggregate, having more savings on hand than ever before. But let's take a closer look...

We'll start with a recent take from a macro investor named Lyn Alden.

She mentioned a lot of themes that Porter and our editors have discussed over the years, including the rise of populism... why the U.S. left the gold standard and what happened after... and our continued growing debt as a percentage of gross domestic product ("GDP").

Alden also discussed how many millions of everyday Americans continue to get more and more frustrated with the whole financial system that is failing them...

But in her January newsletter, she also had a take that we haven't seen too many places before. Alden argues that we may have already seen an era on par with the Great Depression. She calls it the "Hindsight Depression." From her newsletter...

This is a chart of total debt as a percentage of the GDP over the past 100 years for the United States, along with short-term interest rates:

And here's a chart that shows federal debt held by the public as a percentage of GDP and nonfederal debt as a percentage of GDP as separate items, showing the one-two punch of a private debt bubble and a public debt bubble about a decade apart that characterizes the peak of a long-term debt cycle:

A comparison I've made a number of times over the past year is that in many ways the 2010s were a lot like the 1930s, and the 2020s are shaping up to be a lot like the 1940s, in terms of monetary and fiscal policy.

Alden went on to show the disproportionate impact on the poor since the financial crisis...

She noted that the number of homeless people spending each night in New York City shelters, for instance, has grown by more than 10,000 since 2008... that life-expectancy in the U.S. has plateaued over the past several years... and our median net worth (the middle 50th percentile) is lower than most other developed nations.

What the 'two economies' say...

In a similar idea orbit, our friend and Empire Financial Research founder Whitney Tilson highlighted an insightful article on this point in his free daily newsletter earlier today.

It's from Morgan Housel, the great financial writer who we've mentioned here in the Digest before. Housel writes in "Two Worlds: So Much Prosperity, So Much Skepticism"...

Consumers – in aggregate – are in the best shape they've ever been in.

But the distribution of that prosperity has never been more extreme.

Take two recent CNBC headlines:

U.S. savings rate hits record 33% as coronavirus causes Americans to stockpile cash

61% of Americans will run out of emergency savings by the end of the year

Or these two:

Household wealth surged to a record high during the pandemic

More Americans are shoplifting food as aid runs out during the pandemic

That's the story.

There are 9 million fewer jobs today than a year ago, a decline of around 6%. But for those earning more than $28 per hour, the job market has fully recovered, like the recession never happened. For those earning less than $16 per hour, one-quarter of the jobs are still gone, which is on par with the 1930s.

Our economy and the markets are complex...

In our view, we still have "two economies running at the same time," as we wrote way back in March...

There's the one that can function without physical "in person" interaction – like our business here at Stansberry Research... And there's the one with jobs and sectors that suffer tremendously in the same socially-distant environment and take longer to "bounce back."

Others might think of it another way... One economy pegged to a currency – the dollar – that the major central banks around the world use, and another that some people want to be pegged to a currency that will run itself (i.e., bitcoin).

Yet today, we see something "we haven't seen since March." It's small, but it's a good indicator of the underlying health of the market, albeit with a bloated and growing Fed-backed balance sheet that isn't showing any signs of shrinking... just the opposite.

All of this is a way of saying, it's not a popular position today to say things will get better, but we're seeing flashes in that regard as several COVID-19 vaccines slowly hit the public...

At the same time, we strongly hesitate to say, it can't get worse because it always can... And just today, we learned of virus-related lockdowns in China, just like we did this time one year ago.

The good thing, though, as our colleague and Extreme Value editor Dan Ferris likes to say...

We don't need to predict. We just need to prepare.

If you're invested in the markets and own a truly diversified portfolio of stocks of high-quality businesses, along with "hard" assets like gold, silver, and bitcoin, you're likely in good shape today.

And if you've listened to Steve's recent message about what to do to protect yourself from the inevitable Melt Down, you're in an even better position than most folks to weather whatever storm arrives... and whenever it does.

If you haven't already, be sure to check out Steve's message before it goes offline later this week. You can do that right here.

Until tomorrow...

What Could Trigger a Sell-Off

Our editor-at-large Daniela Cambone speaks with Frank Holmes, CEO of U.S. Global Investors, who shares his thoughts about the market amid this winter's "Melt Up"... starting with the Group of 20 ("G20") countries proclivity for Modern Monetary Theory...

"The G20's quick solution is to print money, and that's why I feel gold and bitcoin will do well," Holmes says in the interview, part of Daniela's Outlook 2021 series. "The other question is, will the Biden administration raise taxes? If that happens, then the market will go through a big correction."

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 1/11/21): AbbVie (ABBV), Analog Devices (ADI), Asana (ASAN), Autohome (ATHM), AutoZone (AZO), Cresco Labs (CRLBF), Corteva (CTVA), CVS Health (CVS), Dow (DOW), Eagle Materials (EXP), GrowGeneration (GRWG), Green Thumb Industries (GTBIF), SPDR S&P Regional Banking Fund (KRE), OptimizeRx (OPRX), Oshkosh (OSK), PowerFleet (PWFL), Radius Health (RDUS), Construction Partners (ROAD), Trulieve Cannabis (TCNNF), U.S. Concrete (USCR), ProShares Ultra Semiconductors Fund (USD), Zebra Technologies (ZBRA), and Zendesk (ZEN).

In today's mailbag, feedback on Kim Iskyan's Digest yesterday about the "tyranny of the minority" in the market. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Good morning Kim, very interesting essay on 'The Tyranny of the Minority in Market Democracy.' To your credit, you made a very valid point that many times the majority are fooled. This is especially true when their news sources are limited, narrowly focused or outright censored... [Our Second Amendment's] sole purpose is to allow the people to protect themselves from a real or perceived majority, in particular from the government entities they may elect, who would reign tyranny on its citizens. Unfortunately, most people do not [know] why the Second Amendment is in existence. Many politicians do, and those who oppose it are the ones it was specifically designed to protect us against. Please keep up the good work and I pray that your voice is never silenced." – Paid-up subscriber Mark H.

"Gonna be 'that guy' today... Gun control is a horrible example, as is any example of fundamental human rights. You can't vote away someone's rights. Fundamental human rights exist whether or not governments recognize them. They are dictated by natural law. Voting has no bearing on them. The only 'tyranny' is when such rights are made illegal by the majority mob." – Paid-up subscriber Josh T.

All the best,

Corey McLaughlin
Naples, Florida
January 12, 2021