What You Must Know About Today's 'Inflection Point'
A familiar sell-off story... Inflation fears hit the market again... It might be premature... What you must know about today's 'inflection point'... What works at the end of the 'Melt Up'... Video: Pent-Up demand is real...
Raise your hand if you've heard this story before...
Stocks, but not all of them, are selling off today because of inflation fears.
If you've followed along with us this year for any length of time, this should sound like a familiar report.
For example, we wrote a similar story just two months ago, when the tech-heavy Nasdaq Composite Index ultimately corrected 10% from its February 2021 highs... while the benchmark S&P 500 Index and Dow Jones Industrial Average climbed in the same span.
We're saying it again today, with Big Tech selling off recently... Since its latest high above 14,100 on April 26, the Nasdaq is down roughly 5% – in other words, halfway through correction territory again.
In the meantime, the S&P 500 and Dow each just hit new all-time highs on Friday... And the two indexes are up 12% and 13%, respectively, in 2021. (The Nasdaq is up about 5% this year.)
Why is this happening now – and again? According to DailyWealth Trader editors Ben Morris and Drew McConnell, as they wrote in their issue yesterday...
All of a sudden, rising prices all around the economy have stoked fears of inflation. It's at the forefront of people's thoughts... The mainstream media is starting to talk about it... And folks are trying to figure out what to do to protect themselves.
On its own, this is not a bad thought to have... Protect your portfolio.
Regular Digest readers know we've been warning about inflation becoming a "thing" since March 2020, when the Federal Reserve most recently clicked into "do everything we want to do and don't worry about the consequences" mode to combat the COVID-19 crisis...
There are always consequences. And we're only now starting to see them...
Folks simply being spooked by inflation concerns is one of these consequences. Actual inflation on Main Street is another... like our "toilet paper indicator," for example.
We don't usually quote the mainstream media here, but we do so today to make a point about Wall Street sentiment at the moment...
Noted and oft-quoted investor Stanley Druckenmiller went off on the Fed in a CNBC interview earlier today. He was speaking about what could be the ultimate macroeconomic result of what feels like a massive financial experiment we're living in today.
Druckenmiller said the impact of the central bank's insistence on keeping interest rates low and $120 billion in monthly asset purchases going simply to underwrite Congress' spending binge in what is an already rebounding economy will linger well past the short term. He believes what's happening today will threaten the U.S. dollar's standing as the world's reserve currency...
If we're going to monetize our debt and we're going to enable more and more of this spending, that's why I'm worried now for the first time that within 15 years we lose reserve currency status and of course all the unbelievable benefits that have accrued with it.
In fact, Druckenmiller – who is also a bitcoin bull, by the way – suggested it might already be happening... Foreign holdings of U.S. Treasury bills, notes, and bonds have already decreased by $127 billion (or nearly 2%) over the past year, according to government data.
We won't get into a full-fledged discussion on the dollar today, but we'll briefly say what we have in the past... Nearly 600 years of history indicates the world's reserve currency changes about every 80 to 100 years, and we're at the next marker in the timeline.
As we wrote in our February 7, 2021 Masters Series...
Since the world stopped using ancient Roman currencies around 1450, every subsequent shake-up in the global economic order has been caused by excessive debt. And by any possible metric, U.S. national debt is unprecedented... It's at $27 trillion and counting.
To prepare for this – either the reality of the dollar losing its great power in the long term or the perception of it happening in the short term (which can lead to sell-offs anyway) – we've banged the drum for more than a year for allocating at least part of your portfolio to "hard assets."
These are things like precious metals, real estate, and bitcoin.
We've also made the case that when it comes to owning stocks in an inflationary environment, it's wise to own shares of capital-efficient companies with "pricing power" and addictive products – like Starbucks (SBUX) and Hershey (HSY), among others.
These companies, many based only in the so-called real economy, will increase in value in a world of a debased dollar, where people are also starting to spend more.
That's what's happening as we write...
In short, we don't expect to see the value of the things that people actually need and want (and that are in scarce supply) going away, as much as the government tries to make almost everything more expensive every day.
Here's the story we see today...
Prices of essential commodities (corn, lumber, paper, etc.) are skyrocketing all over the place, while Fed Chair Jerome Powell shrugs his shoulders and says inflation will be "transitory" – or not permanent – a dozen times during his media appearances.
As we said, this shift toward higher prices is getting more and more folks on Wall Street concerned today... just like they were a few months ago.
You see, if investors and traders haven't sold tech stocks or taken profits over the past few weeks directly because of inflation concerns, they're at least doing so for indirect reasons...
A reasonable person would conclude that in response to the higher inflation indicators out on Main Street that we've talked about (whether it's for pandemic-related, supply-chain reasons or not), the Fed would have reason to hike interest rates sooner than it has previously said it would.
Sure, that may be what eventually happens...
But this line of thinking that the Fed will raise rates is based off the idea that the string-pullers at the central bank actually care about real inflation today, which we don't think they do. In fact, we know they don't... at least when it comes to making decisions.
All they care about, which Congress allows, is the measure the Fed uses to justify its read on inflation – the personal consumption expenditures ("PCE") index. But as we've said before, it's a metric that doesn't take into account the largest expenses for many people...
It doesn't include things like home prices, the price of a college education, or financial assets for that matter. These are all things that have been inflating, by and large, for decades.
The PCE index, though, does include the prices of things like cars, furniture, sports equipment, groceries, clothes, and gasoline.
This is to say that at some point, rising prices over time will show up in this measurement... if companies like Kimberly-Clark (KMB) and Coca-Cola (KO), for instance, follow through on their promised price hikes in the months ahead to offset higher commodity prices.
If the Fed still ignores price increases when those changes show up in the data, then it's simply being negligent.
We may want the Fed to practice 'sound money,' but we're not holding our breath...
It ends up playing out in the markets in days like today, as Brian Tycangco – the lead analyst for our True Wealth Opportunities: China newsletter – shared on his Twitter account early today. You should follow Brian on Twitter if social media is your thing. As he wrote...
It's going to be another tumultuous day on Wall Street because of inflation fears... unless you own gold, gold mining stocks, and gold jewelry retailers. Oh, and silver and [Ethereum], too. Expect more talk on transitory inflation from the Fed to try to calm nerves in the market soon...
Seems like panic just set in. Nothing is going to be spared in today's market open. But considering the frenzied gap-down selling about to take place, this is all emotion, not much thinking. Wait until the dust settles...
We had the #tapertantrum in 2013. [In] 2021 we're having the #transitorytantrum. When before people were worried Fed was taking away support too fast, people now worry Fed is acting too slow to head off inflation.
Brian's suggestion that folks wait until the "dust settles" on this sell-off – and owning hard assets like gold, silver, and even crypto – is sound advice for a few reasons...
On first glance, you might think there's not a lot of room for error in the Fed's 'inflation game'...
As in, maybe the fact that one of America's biggest fuel pipeline systems was recently shut down because of a cyberattack while "real economy" demand is picking back up would be a major concern for a central bank allegedly concerned about inflation.
Again, that's what a reasonable person could conclude. Until you remember what the Fed has already done...
Back in August 2020, the central bank literally rewrote its long-term policy... and gave itself significant breathing room on inflation.
At its annual retreat – held virtually last year due to COVID-19 restrictions instead of in Jackson Hole, Wyoming, like normal – the central bank said it will let inflation (again, as the Fed measures it) run above 2% "over time"...
After the meeting, Powell also said the central bankers would let "easy money" flow for however long it takes to reach "full employment"... without ever actually describing how it will measure that. As we wrote in that August 27, 2020 Digest...
In the past, during the good times, the Fed has preemptively raised rates to head off higher inflation.
But it has evidently gotten too chilly for the Fed's liking. So the central bank is willing to turn up the heat on the stove, keep interest rates low to encourage borrowing, and let inflation run higher... even if or when employment gets back to full levels.
The point today is... you may see inflation and job openings all over town in the next few months, but we still don't expect the Fed to raise rates to cool the economy in the immediate term.
As Stansberry NewsWire editor C. Scott Garliss wrote in last Thursday's Digest, the earliest he thinks the Fed will pull back on some easy-money policy would be in the fall... and Scott expects the first "tightening" action to likely be reducing the billions of dollars in monthly asset purchases, rather than hiking interest rates.
In the meantime, folks on Wall Street are getting nervous, selling stocks of the high-flying tech companies (and others that could take hits from inflation), and looking to put money into something else...
Here's more evidence of inflation fears from DailyWealth Trader editors Ben and Drew...
In short, gold and silver appear to be on the verge of finally breaking out. As Ben and Drew wrote in yesterday's edition of their daily e-letter...
And as you've probably noticed, precious metals prices are starting to rise. Since the end of March, gold and silver have both outperformed stocks. And silver is ahead of the CRB [the commodity benchmark Refinitiv/CoreCommodity CRB Total Return Index], too...
We don't know for sure if gold and silver have finished digesting their gains... But we do know that a lot of folks are experiencing the effects of inflation in their day-to-day lives as they fill up at the gas station, build or renovate their homes, and pay higher prices for media-streaming services.
Ben and Drew went on to explain that gold and silver are responding to inflation fears exactly as anyone familiar with this subject would expect... by rising. As they concluded...
If you've been waiting for the right moment to buy precious metals, this is it.
In related news, our colleague Greg Diamond recently said May 10 would mark an 'inflection point' in the markets...
That was yesterday. And he was right...
Based on Greg's technical indicators, he expected a significant turning point – up or down – in the markets this week... And he wrote yesterday that what's happening today is the "worst-case scenario."
But before you panic and sell all of your stocks, you should know that Greg says even this worst case could be a longer-term buying opportunity in stocks – and, again, Fed policy is a primary reason. As Greg wrote to his Ten Stock Trader subscribers yesterday...
If we are on the verge of a 10% or even 20% correction it will be just that... A correction.
It will likely bring calls for the end of the bull market or just enough panic to get people bearish enough for a massive reversal.
Such a correction will also make the Federal Reserve do what they've always done... step in when the market isn't doing what they want. Whether its Operation Twist or some other intervention, I'd expect such a move to bring out the Fed. The less than expected jobs number last Friday gives them all the excuses they need to "do more."
I'm not saying I agree with what they are doing (I don't) but this is how Modern Monetary Theory has evolved and we've seen it play out over the last few years' time and time again – no reason to think they will change their stripes.
Will there be some pain if this is a top in terms of current positions and volatility?
Yes, Greg said... but it's nothing he hasn't seen or traded through before. As he told subscribers of his trading service, which is more focused on the short term...
If you are paying attention to the position sizes on each trade, a bigger correction will not be a game changer.
But unlike Ben and Drew – who suggest precious metals are worth buying today – Greg is waiting for more signals from stocks before he recommends any new trades this week.
This entire scenario fits with our colleague Dr. Steve Sjuggerud's 'Melt Up' thesis...
As we wrote in the April 29 Digest, in the late innings of a Melt Up – which Steve believes we are in now – the day's longtime market leaders, like Big Tech, aren't where the biggest gains are made...
In the late stages of a Melt Up – where the rich have already gotten richer and everyone is high on higher prices – it pays to look past the big names...
For example, dot-com-era darling Qualcomm (QCOM) – today known for making chips, ironically – was up more than 2,000% during the final 12 months of the Melt Up in the late 1990s.
However, most of those gains came early... The stock rose "only" about 230% in the final six months of the bull market.
In comparison, the biggest gains of five to 10 times were really made in some of the lesser-known names as investors hit peak euphoria. DISH Network (DISH), for example, went up more than 700% during the whole dot-com boom... and 500% of that gain came in the final eight months.
In the lead-up to the ultimate "Melt Down," smart investors start to get cautious and more selective... while new investors, and even the Fed, tend to get caught up in market euphoria.
Today, we see record numbers of people dabbling in options trading. Folks are buying things like Dogecoin for speculations... thinking stocks only go up... and ignoring reality. And of course, the federal government is essentially funding the game for millions to play.
That's not healthy thinking or behavior in the long term, of course... And that's why we always suggest taking control of your own finances. Don't leave your financial security to Uncle Sam.
Instead, everyone should have a well-prepared plan of their own...
It should be based on your goals and timeline... nobody else's.
Remember, for one, if you own a diversified portfolio – including at least some "hard assets" like precious metals, real estate, and bitcoin – you're likely in better shape than most.
Beyond that, if you understand the stock market environment we're in today – the late stages of a "Melt Up," with sky-high valuations, low rates, and other central bank policies that could fuel one final surge of higher stock prices before the party ends – you might be able to afford to take some chances.
The idea here is to create new wealth and then preserve it...
You might remember that Matt McCall from our corporate affiliate InvestorPlace joined Steve last week during his most recent presentation. As part of the discussion, Matt detailed a specific sector of tech stocks that will soar in an end-of-a-Melt-Up scenario...
They're companies that most folks haven't heard of before, but they're the type of businesses that frenzied investors will pile into as greed hits its ultimate peak. And the stage is nearly set for this to happen again, just like during the dot-com bubble...
If you're interested in learning more along these lines, you'll want to check out the brand-new presentation that Matt is releasing tomorrow. Specifically, in the coming weeks, Matt expects that news of one little-known biotech company's latest medical treatment could lead to the biggest investment gain he has found in 20 years in this business.
Over the years, Matt has established a reputation as a "tech prophet"...
He has recommended 120 different stocks that have at least doubled... and found 22 different stocks that could've made investors 10 times their money or more.
And this time, Matt is literally putting skin in the game...
You see, as part of his newest recommendation this month, Matt is planning to spend $15,000 to map all of his DNA (we're curious what that will show) just to make sure he gets his point across.
In the meantime, Matt is giving away a free special report for Digest readers that covers this rare opportunity for investors. You can claim your copy right here. Then, simply keep an eye on your inbox tomorrow morning for details on how to access the full presentation.
The Pent-Up Demand Impact Is Real
From travel to Rolex watches to cryptocurrency mining gear, pent-up demand is very real, according to Frank Holmes, the founder and CEO of U.S. Global Investors.
In a recent interview with our colleague Daniela Cambone, Holmes discussed Europe potentially opening up to vaccinated Americans – and addressed consumers' desire for luxury goods...
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 5/10/21): AbbVie (ABBV), Altius Minerals (ALS.TO), AutoZone (AZO), Berkshire Hathaway (BRK-B), CBOE Global Markets (CBOE), CVS Health (CVS), Quest Diagnostics (DGX), Eagle Materials (EXP), Expeditors International of Washington (EXPD), Freehold Royalties (FRU.TO), W.W. Grainger (GWW), Home Depot (HD), Huntington Ingalls Industries (HII), Hershey (HSY), Invitation Homes (INVH), iShares U.S. Home Construction Fund (ITB), KB Home (KBH), Coca-Cola (KO), McDonald's (MCD), 3M (MMM), Motorola Solutions (MSI), MasTec (MTZ), Northrop Grumman (NOC), Novo Nordisk (NVO), NVR (NVR), Invesco High Yield Equity Dividend Achievers Fund (PEY), Rayonier (RYN), Travelers (TRV), Trane Technologies (TT), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), Westlake Chemical Partners (WLKP), Waste Management (WM), Consumer Staples Select Sector SPDR Fund (XLP), and Health Care Select Sector SPDR Fund (XLV).
In today's mailbag, feedback on yesterday's Digest about the Colonial Pipeline cyberattack. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I experienced a takeover of my work computer as my week began one Monday morning, with the PC locked up by Spyware Protect 2009.
"After a hard shutdown, I called one of my coworkers and asked if anything out of the ordinary had occurred during the weekend. Armed with that information to narrow down the date and time, I powered up the computer, and before it had fully loaded the OS, looked through the System Logs, and found a likely *.exe file. After changing the filename to the same '*' with the substitution of '.txt' for '.exe', I opened the file in Microsoft NotePad. Interesting to see that the text file opened in Cyrillic. (Russian characters.)
"When the IT guys flew in from Anchorage, Alaska on their monthly visit, I asked them if the City of Whittier had experienced Spyware Protect 2009. Yes, they had, and the IT guys said it took them quite a while to clear the problem. I told them my solution, and they exclaimed, 'We never thought of that!'
"There was very little work for software engineers in Russia and Eastern Europe (Warsaw Pact) so they were easily encouraged to write ransomware and other remunerative programs.
"Perhaps ransomware has coevolved in complexity along with the operating systems, but then again, the old simple systems may have been given more nooks and crannies to hide in as Windows and other OSes have become more complex." – Paid-up subscriber Charlie B.
All the best,
Corey McLaughlin
Baltimore, Maryland
May 11, 2021