Why the Next Round of Fed 'Juice' Could Fuel the 'Melt Up'
'Chicks dig the long ball'... The Fed is on its 'Goldilocks' kick again… Why the next round of Fed 'juice' could fuel the 'Melt Up'... What about the yield curve?... A couple notes about our Las Vegas conference...
Two months ago, Dan Ferris wrote a Digest about the Federal Reserve and 'juiced balls'...
If you didn't read Dan's essay when it was first published on July 24, we recommend you take a couple minutes to do so now. His points ring as true today as they did back then.
In short, Dan compared the Fed's economic policies to Major League Baseball "juicing" its baseballs to make it easier for players to hit home runs.
Seeing balls engineered to fly farther and more frequently out of ballparks makes fans happy... As the old TV ad from sportswear giant Nike (NIKE) said, "Chicks dig the long ball." (In hindsight, "long Greg Maddux and short Mark McGwire" would've been a smart play.)
Investors, too, swoon over the "long ball." The Federal Reserve is more than happy to turn investors' heads by sending stocks on an inflation-fueled run higher.
When losses start piling up in the financial markets, central banks take out their hypodermic needle in the form of rock-bottom – or even negative – interest rates to juice stocks. As Dan wrote in that Digest...
They say, "Since low rates and easy credit looked great until they killed you, we've decided even lower rates and easier credit are just what the doctor ordered."
They say this while knowing full well the "extreme brevity of financial memory" will prevent fans – investors – from remembering how juiced rates eventually killed them last time.
"Last time" meaning the financial crisis.
Well, the Fed is now talking about shooting up the market with its needle again...
Last week, in Stansberry NewsWire, our colleague C. Scott Garliss pointed out an important-yet-overlooked statement Fed Chairman Jerome Powell recently made about "market juicing."
Specifically, Powell said, at their next policy meeting at the end of this month, the Fed governors will consider expanding the central bank's balance sheet sooner than expected.
That means – after less than a year of letting the market do its thing – the Fed is looking to buy up assets once again. Scott described this move as "tantamount to cutting rates."
The last time the Fed began "balance sheet expansion" was during the financial crisis in 2009. Take a look at the market's response after that...
We can't know what assets the Fed will buy... But the governors have discussed loading the Fed's balance sheet up with short-term debt – not the long-term debt that makes up most of what is now on its books.As Scott points out, an asset-buying Fed will force bond prices up and rates down... That will push investors looking for yield into stocks. In turn, that will lead to improved sentiment, "juiced" prices, and consumers spending more of their hard-earned money.
That action would drive changes in the "yield curve" – the difference between the rate on long-term bonds (10-year Treasury notes) and short-term bonds (two-year Treasury notes). In August, the curve "inverted"... a bond market move meaning short-term rates eclipsed long-term rates. As we've said many times in the Digest, such a move is traditionally a predictor of recession.
A Fed that buys back short-term debt would widen the curve by forcing down short-term rates. It's quantitative easing ("QE") all over again... which got us into this market of excess in the first place.
After the Fed's QE policies of the past decade, nobody knew what unwinding of the central bank's balance sheet would do to stocks... As it turns out, nothing good.
Regular Digest readers may remember that Powell sparked a correction near the end of 2018 when he said the Fed's balance sheet reduction was on "autopilot."
The Fed's recent turn in policy appears to acknowledge its role in market performance. As Scott noted in the NewsWire about Powell's speech after the Fed's last policy meeting...
[It] was tantamount to saying that in light of the global slowdown brought on by the China-U.S. trade war, the central bank raised rates too far last year and unwound its balance sheet too much.
Powell will again speak publicly at a Fed event on Friday afternoon in Washington, D.C. Stay tuned.
More proof of a 'Melt Up' or a 'Melt Down'?
The thing is, as our colleague Steve Sjuggerud has written several times over the last few weeks, we're not in a crisis right now, though investors think we are. From one of Steve's recent missives in his free DailyWealth e-letter, published on September 12...
According to the AAII Sentiment Survey, investors are more scared today than they were during the most recent stock market correction... the U.S. credit downgrade in 2011... and even the depths of the financial crisis.
That's nuts for a simple reason. We're not in a major crisis today... It's quite the opposite.
After 10 years of higher stock prices, the S&P 500 remains near all-time highs. The economy continues to show signs of strength. And interest rates are incredibly low, which tends to be rocket fuel for stock prices.
But instead of going "all in," individual investors are scared... And that tells Steve and his research team that we're not yet near the end of the "Melt Up." We still have time to take advantage of that last euphoric run higher before the bull market ends.
Here's what Brett Eversole, Steve's lead analyst, told us in a private note yesterday...
The Fed is trying to do what it always tries to do, get a "Goldilocks" economy... not too hot, not too cold. The Fed believes it went too far, too fast with rate hikes. So now further stimulus is happening, with more on the table.
That tells us two things... 1) We don't have euphoria in the markets, and 2) The stimulus that's happening now could result in the euphoria that's currently missing.
But you may be wondering...
"What about the inverted yield curve? Doesn't that signal closing time on the bull market?"
It's true, going back 60 years, this inversion has predicted every recession... and the stock market peaks in 1980, 1989, 2000, and 2007.
And Steve agrees, this is as good of a recession – or "Melt Down" – indicator as there is. But just because it means a recession is coming doesn't mean one is imminent...
As he wrote in the September 11 DailyWealth, an inverted yield curve is a leading indicator...
Now that the yield curve has inverted, history says we should expect big gains over the next six to 18 months...
The last three times the yield curve inverted, the market didn't peak until 18 months later... each time. And stocks gained 21% on average.
In 1998, the inversion happened almost two years before stocks eventually peaked. Stocks soared 40% over that time.
According to Steve and his team, now isn't the time to be fearful and sell. It's the time to know your history and stay long. Here's a final thought from Brett...
Most folks are just expecting the bust at this point. But that's where they've got it all wrong. The final boom hasn't even happened yet. You want to prepare yourself for that first.
Be invested now, before things really get ugly. Then you can move to higher ground.
One more thing before we go...
We're getting close to our annual Stansberry Conference in Las Vegas.
In fact, it's next week... The event officially kicks off Monday, October 7.
This year, we're headed back to the fabulous Aria Resort & Casino... And we're excited for all the great speakers and extraordinary opportunities we have planned.
One of the unique opportunities that conference attendees will have is the chance to take a "peek behind the curtain" of The Atlas 400... As regular Digest readers know, The Atlas 400 is an exclusive travel and wealth club that includes some of the world's most accomplished and interesting people. (If you aren't familiar, you can click here to learn more information.)
Just know that The Atlas 400 is not for everyone... The initiation fee to join is substantial ($30,000). And the club's excursions around the world – trips to Antarctica, private wine tastings in Bordeaux, or racing Ferraris through the Italian countryside – aren't cheap.
But if you're in a position to enjoy the fruits of your labor and want to enjoy new friendships, adventures, or discover tremendous new opportunities, The Atlas 400 President Gray Zurbruegg urges you to join current members for cocktails while you're in Vegas... The Atlas 400 will host a party at 5:30 p.m. on Tuesday, October 8, at the Lift Bar in the Aria hotel.
This is the only opportunity that candidates will have to speak with current members, ask questions, and briefly experience the company of the club. If you would like to join, please contact Gray directly via e-mail at gzurbruegg@theatlas400.com... or by phone at 410-864-0878. And please, only come if you're interested.
Speaking of Vegas...
Comedian and political commentator Dennis Miller will serve as the keynote speaker at our conference this year.
The event will also feature presentations from famed investor Jim Grant, the editor and founder of Grant's Interest Rate Observer, a twice-monthly journal on the financial markets... "Dr. Doom" economist Nouriel Roubini... famous short-seller Marc Cohodes... and many more. You'll even hear from an astronaut and a former special operations sniper.
And of course, all of your favorite Stansberry Research editors will be there, too.
But don't fret if you didn't make plans to join us in person...
Unfortunately, it's too late for you to spend a few days mingling with other subscribers in the hallways of the Aria or trying your luck in the casino. But you can still catch the rest of the action...
With an "Online Access Pass," you can experience all the great presentations and special guests for yourself... LIVE from the comfort of your own living room or office... and for a fraction of the cost of attending in person. Better yet, you can watch and re-watch your favorite presentations as much as you want for up to 30 days after the event.
For everyone who claims an online access pass today, we're offering a special gift that's worth $399. Get all the details right here.
New 52-week highs (as of 9/30/19): Digital Realty Trust (DLR), iShares U.S. Home Construction Fund (ITB), Sysco (SYY), and U.S. Concrete (USCR).
In today's mailbag: One reader asks for permission to share Monday's Digest, while another has a question about the benefits of Professor Joel Litman's "investment truth detector" system. As always, send your comments, questions, and concerns to feedback@stansberryresearch.com.
"Good afternoon! I am an Alliance member, mortgage lender and a personal finance and lending blogger. I thoroughly enjoyed [Monday's] Digest and am wondering if there is a way I can re-post it to my blog with the proper credits to Doc Eifrig and Jeff Havenstein?
"I know that the content is copyrighted and will completely understand if there is no mechanism to be able to re-post content. Just let me know, thank you!" – Paid-up Stansberry Alliance member Jay M.
Brill comment: Thank you for asking, Jay. Unfortunately, we can't allow you to republish the Digest. However, all of our Digests are posted to our public archive (which you can find right here) one week after they're sent to readers. You're welcome to link back to that Digest (or any other) once it's posted there.
"Dan, I just read the [last Friday's] Digest. Well Done. Thanks for being a part of Stansberry Research." – Paid-up Stansberry Alliance member Bert D.
"Help me understand. Bad looking companies are actually good when your uniform reporting is used. What good is that when no one else looks at it that way? In other words, if the rest of the financial world still think the companies are bad, what impact could uniform reporting have?" – Paid-up subscriber Jim W.
Brill comment: As Professor Joel Litman put it during his online event last week, ultimately, "cash is still king." Eventually, a great company's cash profits will start to show up on its as-reported financials as well. His system simply identifies these situations months – and sometimes even years – in advance.
Professor Litman covered all this and much more during the event. If you missed it, you still have a few more days to watch a full video replay right here.
Regards,
Corey McLaughlin
Baltimore, Maryland
October 1, 2019