The Game Within the Game

Watching Wall Street from a palatable distance... The bond market – ugh... The game within the game... Are inflation fears overblown?... The future is still somebody else's problem... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Watching Wall Street from a palatable distance... The bond market – ugh... The game within the game... Are inflation fears overblown?... The future is still somebody else's problem... --------------------------------------------------------------- We're happy we don't work on Wall Street... We would rather observe and participate in the markets from an independent point of view here in the Digest instead of being part of the always-chasing-outperformance, in-the-muck crowd that often makes us shake our heads. Take last week's sell-off in the major U.S. indexes, for instance... The tech-heavy Nasdaq Composite Index was down roughly 5% last week. Index leaders like Amazon (AMZN) and Apple (AAPL) fell 4% and 6%, respectively, over that span. But then, just like that, things reversed today... The Nasdaq gained 3% on the day, while the Dow Jones Industrial Average and the S&P 500 Index each closed up about 2%. As Stansberry NewsWire editor C. Scott Garliss – who spent 20 years working on Wall Street before joining Stansberry Research – explained today, the recent price behavior has a lot to do with the game... I (Corey McLaughlin) am talking about the game often played between institutional money managers, who are paid for their performance, and the economic string-pullers at the Federal Reserve, who play with other people's money. Today, we'll talk about how the cat-and-mouse game moves the markets in the short term... and what the Fed's latest reaction could mean for stocks until further notice. Last week, the battleground of 'the game' was the idea of inflation and higher interest rates... The venue was the market... and Congress, where Federal Reserve Chair Jerome Powell gave his regular testimony via videoconference in front of the Senate Banking Committee. The relevant indicator in the background was the rising yield of the 10-year U.S. Treasury note, which on Thursday, [briefly matched the 1.6% yield of the S&P 500 stocks](. We've been tracking this indicator closely over the past several months for a few reasons... First, the direction of Treasury yields – how much money investors can make from buying a low-risk government bond – can generally show whether an economy is strengthening or weakening... Second, the 10-year Treasury yield represents one end of the "yield curve" indicator – the two-year yield is the other – that can tell us a lot about the plumbing of the economy, like whether a recession is likely over the next year. An inverted yield curve, for instance – when shorter-term rates go higher than longer-term rates – is a funky behavior that warns of economic trouble ahead. [As we wrote in the January 12 Digest](... 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. The trend continued into February... Today, after spiking over the past few weeks, the 10-year Treasury rate trades around 1.4%. The "spread" between 10-year and two-year rates has widened to roughly 130 basis points – its largest number since December 2016. As we also mentioned in January, this behavior is healthy... and logically, it makes sense. Most times, long-term rates are higher to compensate for the trouble of tying up your money for a longer period of time. But rising yields are also often linked to something with a negative connotation... We're talking about inflation fears, which we wrote about [in last Tuesday's Digest](. According to our colleague Dr. David "Doc" Eifrig, who tracks inflation closely [in his excellent Income Intelligence advisory]( if you wanted to point to three sources of inflation, you'd look to accommodative monetary policy, expansionary fiscal policy, and a strong economy. We have the first two (with more of the second likely on the way this month). And it looks like the third is on the way, too, as folks begin to "reenter life" en masse after receiving the COVID-19 vaccine. In the year ahead, Wall Street investors are concerned about pent-up demand outpacing supply and driving prices higher... ultimately leading to inflation. Indeed, we've already seen this dynamic in sectors like housing, [as some readers wrote to us last week](. When it comes to inflation expectations showing up in bond yields, it comes down to this... Yields trade inversely to bond prices. So when yields are rising, prices are dropping... signaling to the government and the market that investors are demanding a higher yield for the risk of tying up their money. The bond market, ugh... Now, I will readily admit that this is the sort of idea that reminds me of when I first got into the financial-newsletter business... I worked with a former Wall Street bond trader, and my head hurt as I tried to make sense of everything. (It still does in many cases, but we try to get as close to making sense of this crazy world as possible.) And from a business standpoint, the folks in our marketing department usually had no interest when the idea of bonds and Fed policy was brought up in a meeting. It just isn't as exciting as cryptos, small tech stocks, or the next big investment opportunity. But as I started to spend more time observing and then putting money in the market, in one way or another, I often found myself constantly describing the idea that the Fed has way more influence on the economy and markets than most people can imagine. Today, it's almost an afterthought that the Federal Reserve is buying $120 billion in bonds per month, keeping yields positive to begin with. This is the point we've reached in history. And this intervention is often expressed in the bond market. Longtime Digest readers know what I'm talking about... and maybe you have your own thoughts to share on this point. (We'd love to hear what you think, as always, at feedback@stansberryresearch.com.) Anyway, this is where we pick up the game... Powell has said that easy-money policy most likely will be the rule of the day for years... And a "there is no alternative" environment has pushed investors into stocks. But market-driven longer-dated bond rates, ticking higher for whatever reasons – inflation fears, in this case – can present an alternative. If you can get the same yield on a lower-risk bond than a riskier stock, why wouldn't you take it? Investors also consider inflation particularly dangerous to high-flying stocks like the expensive Big Tech companies... thus their sell-off last week and a new high in the Dow Jones Industrials as 10-year yields ran back to new highs. Before today's rebound, the Nasdaq sold off as much as 7% from its mid-February high. For those watching the game within the game, it could be a signal of how this government-fueled "Melt Up" might start unraveling... The central bank plans to plant its benchmark federal-funds interest rate near zero for the foreseeable future until employment numbers get back to where it wants and/or inflation runs above its previously stated goal of 2%. But it also doesn't want runaway inflation, like what happened in the 1970s. And raising rates has been the quick solution for that in the past... encouraging people and corporations to hold on to more money or borrow less than they would have if rates were lower. So according to Scott, ahead of Powell's regular testimony before the Senate Banking Committee last week, Wall Street investors wanted some proof of the Fed's conviction in its easy-money policies as the economy starts to rebound – or reinflate, to say it another way. As Scott wrote this morning to NewsWire readers... Asset managers could press the yield-rise issue, forcing the Fed to make its intentions known. Even though Powell and other central bank governors have stated they'll step in when needed, some investors aren't good at reading between the lines. They need to hear words or see actions before responding. So, by selling stocks and bonds to test the market, Wall Street money managers are pushing yields higher. They're forcing the central bank to acknowledge the situation and to act on it. In response, the Fed has two courses of action: It could hike rates once more, but that seems unlikely because it could choke off growth... Or it could inflate its balance sheet by buying more bonds. That would force rates back down, supporting the outlook for borrowing. From either course of action by the Fed, cautious investment managers would get a concrete answer, removing uncertainty from the market. Predictably, Powell was asked about the rising 10-year Treasury yield in his testimony last week – and what it might say about inflation expectations. And while he didn't explicitly say, "We can just expand the balance sheet like we are now," he did so implicitly. As Scott told us today in a phone call... If there is inflation, [the Fed is] saying we can deal with it. It may not be the right long-term answer, it may not be what we like, but the Fed is saying we can do what we want. If you want to play that game, we'll play that game. If there was any doubt that the Fed remains all-in on easy money, read this exchange... It comes from a few minutes of the video discussion between Louisiana Sen. John Kennedy and Powell during the testimony before the Senate Banking Committee last Tuesday... Kennedy: How do you think we ought to pay all this money back that we're going to borrow and that we already have borrowed? Powell: We will need to get back on a sustainable fiscal path, and the way that has worked, when it's successful, is you get the economy growing faster than the debt. I think that we're going to need to do that, but it doesn't need to happen now. Kennedy, a folksy kind of guy, then asked Powell if the government should "go Catwoman on the budget and actually look for savings there." Powell laughed and said he didn't understand the cultural reference – and honestly, neither did we. Then, the two had a more direct, brief, and revealing dialogue... Kennedy: Well, do you think that deficits matter? Powell: Certainly. In the long run, I do believe they do. In the long run, I do believe they do. In other words, in the short run... nope. The Fed is basically saying... We shall let stocks Melt Up higher. We shall keep buying bonds and keep rates low. We shall keep intervening and running up the debt-to-gross-domestic-product bill for the next generation. As we've said before, the central bank's motto could be "[the future is somebody else's problem]( That approach might be good enough for some people... But the future can also become the present quicker than many folks may imagine. That is our condition today. As always, we'll keep you posted in the weeks and months ahead on what we see, as the "game within the game" continues. For now, don't expect anything new or different from the Fed. We wrote last week that we would look carefully at the central bank's preferred inflation measure – the Bureau of Economic Analysis' personal consumption expenditures ("PCE") rate – when it came out last Friday. The PCE rate showed an annualized gain of 1.5% last month – or 25% below the central bank's 2% inflation target that it says it will be happy to overshoot in the years ahead. In other words, as far as the Fed can see, there's no reason to change a thing. We'll leave you today with a final thought from Scott on the NewsWire... At the end of the day, the Federal Reserve is taking a long-term approach. It's focused on helping the economy regain jobs lost during the coronavirus pandemic, price stability, and achieving sustainable growth. Inflation is something it wants because it's a sign the economy is growing once more. Growth is a sign the economy is headed in the right direction. A year ago, we were headed into one of the worst quarterly contractions in U.S. history. And as the country reopens, companies will realize the stay-at-home environment likely created peak sales for the immediate future. Market rallies don't happen in straight lines. They take time and require patience. Don't be surprised if the current pullback proves to be exactly that: a respite on a steady path higher. The Silver Squeeze Is Real Where does the price of silver go from here? "We're in the process of a short squeeze right now, even though it's not showing up in the price," precious metals expert Vince Lanci recently shared with our colleague Daniela Cambone. "There are serious shorts in the silver market. This is not done." [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](. --------------------------------------------------------------- Recommended Links: [100% Conviction: ONE Stock to Own Straight Through the Next Crash]( The mania in speculative investments today cannot last. Nearly everyone agrees it will end very badly. And it's suddenly looking like the collapse could be a lot closer than anyone thought. But there's a way to see 10-bagger potential in a "coffee can" stock – the type we recommend you sock away for years. The best part? The upside potential could be HIGHER in a market crash. 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Since then, I have been purchasing gold and silver three or four times a year. I believe you know what the prices of precious metals were back then. It's been a fantastic investment! The most beautiful "bauble" I know is a St. Gauden's double Eagle, truly a work of art! Keep up the good work, I have learned so much from your writings." – Stansberry Alliance member Tommy G. "Mr. Ferris, I thoroughly enjoyed your top gold recommendation. But when you described gold as inherently appealing to human nature and, '... an unproductive object of beauty,' certain proofs of concept came to mind, e.g. my first two fiancés." – Stansberry Alliance member Bill W. "This reminded me of the time when I was attending an investment conference in San Francisco. It was mostly about mining resources. At one of the booths, I overheard someone whining 'Why should we mine gold, only to refine it, then stick it back into a vault – which is just another hole in the ground?' "I rounded on him. I asked him 'Are you crazy? There is ONLY ONE REASON to mine gold! It's to make beautiful women smile!' I'm with Warren Buffett: The best investment I ever made was in a wedding ring." – Paid-up subscriber Kurt S. "For Dan Ferris: Great article on February 27! The concept was comprehensive yet short and to the point. Your examples were perfect to understand the points you made." – Paid-up subscriber Joseph G. "Pure Dan at his best with many most valuable observations. He's a great anchor for the Digest and for Stansberry! My first 'feedback' after perhaps 10+ years of following Porter/Steve/Doc publications." – Paid-up subscriber Don B. Corey McLaughlin comment: Thanks for writing in, Don. I agree and consider myself fortunate to read Dan's essays and look forward to them arriving in my inbox at the end of each week. For anyone who may have missed Dan's latest Friday Digest, you should know that right now he's sharing what he says is "hands down" his No. 1 stock idea of all time. In fact, Dan says if he had to put all his money into one stock, this would be it. Dan's belief in gold as a store of value – which he detailed beautifully on Friday – is behind his conviction in this company. But this recommendation from Dan is not a gold miner, explorer, gold-related exchange-traded fund, or frankly, anything that most people outside of Dan's Extreme Value subscribers have likely heard of before. This company makes money from gold, unlike most others. Dan calls it "one of the greatest businesses I've ever found," and notes that it's trading at an excellent valuation today... He believes it could return as much as 10 times your money over the next decade. To hear more about this recommendation, [click here to watch Dan's latest video message]( right now. He invited a video crew to his home in Washington state to talk all about it. 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All the best, Corey McLaughlin Naples, Florida March 1, 2021 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst BTC/USD Bitcoin 11/27/18 1,136.6% Crypto Capital Wade ETH/USD Ethereum 12/07/18 1,060.4% Crypto Capital Wade MSFT Microsoft 11/11/10 816.0% Retirement Millionaire Doc CVC/USD Civic 01/21/20 778.9% Crypto Capital Wade BNB/USD Binance Coin 09/17/19 717.9% Crypto Capital Wade SI Silvergate Capital 01/31/20 708.4% American Moonshots Root MSFT Microsoft 02/10/12 699.3% Stansberry's Investment Advisory Porter POLY/USD Polymath 05/19/20 691.0% Crypto Capital Wade ADP Automatic Data 10/09/08 608.7% Extreme Value Ferris RVN/USD Ravencoin  12/31/18 569.7% Crypto Capital Wade Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 6 Crypto Capital Wade 1 Retirement Millionaire Doc 1 American Moonshots Root 1 Stansberry's Investment Advisory Porter 1 Extreme Value Ferris --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Nvidia^ NVDA 4.12 years 777% Venture Tech. Lashmet Rite Aid 8.5% bond 4.97 years 773% True Income Williams PNC Warrants PNC-WS 6.16 years 709% True Wealth Sys. Sjuggerud Maxar Technologies^ MAXR 1.90 years 691% Venture Tech. Lashmet Constellation Brands STZ 5.45 years 631% Extreme Value Ferris ^ These gains occurred with a partial position in the respective stocks. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You're receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberrycustomerservice.com. 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