Inflation Is Not a Dial on the Fed's Headphones

Bottom? The top isn't even in yet... Still in a mega-bubble... Bullish on profitless tech stocks... The hawkish (mixed) messaging... The Fed's new 'cool'... Chainsaw dentistry... The most reliable leading indicator is collapsing... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Bottom? The top isn't even in yet... Still in a mega-bubble... Bullish on profitless tech stocks... The hawkish (mixed) messaging... The Fed's new 'cool'... Chainsaw dentistry... The most reliable leading indicator is collapsing... --------------------------------------------------------------- I (Dan Ferris) can't believe anyone is talking about the stock market bottoming... I keep reading financial news articles saying, "The market may have bottomed, so buy these stocks." The latest comes yesterday from Bloomberg, complete with a picture of the Wall Street bull statue...  Even the articles that say the market hasn't bottomed are off the mark. As I and others have said in the Digest, when the market finally does hit bottom, [nobody will be talking about bottoms anymore](. That likely means the ultimate bottom is absolutely, positively nowhere in sight. If I'm right – and we all know I can be wrong – it's likely that we're still in the early stages of an extended bear market that'll last more than a year (maybe as much as two to five years). Regular readers know I see a big risk of an [extended bear market]( because that's what tends to happen after a massive "everything bubble" bursts. And no enormous mega-bubble has ever ended without a massive, extended bear market of more than a year. But you simply won't hear about this at many other places in finance today... There have been too few mega-bubbles over the past century to do quantitative comparisons that math-savvy types will recognize as statistically significant... Plenty of bull markets have been followed by bear markets, of course. But mega-bubbles like the one we're still in right now have not been common... I count five from the past 100 years: U.S. stocks in 1929 and 2000, Japanese stocks in 1989, U.S. housing in 2006, and U.S. stocks today. By all means, send us a line if you think I should add another one or two to the list. But no matter how many I've left out, it won't be enough to impart statistical significance to the data... The point is, rare as mega-bubbles are, spotting them is essential if you're interested in protecting your wealth. If you don't learn how to do that when you're in one, you'll get ruined. Depending on your age, you might never recover. Now that we have that straight... The mega-bubble we're still in... Did you catch what I said a few paragraphs ago? I said mega-bubbles like the one we're still in right now. Even though stocks and bonds are down for the year, we're still in a mega-bubble. So forget about the bottom. The top isn't even fully in yet. I've said this before, but like all the most important investing advice and insight, it doesn't merely bear repeating. It must be repeated, because investment success is like jumping out of a fully functioning aircraft. Even with a parachute on, it's an unnatural act. So it takes some effort to stay focused on what'll make the biggest difference between growing real wealth and losing it all. The risk of naïve performance chasers and all but the savviest short-term traders getting whipsawed and incurring large losses quickly is especially high. In a mega-bubble, you must be careful not to be bamboozled by the market... As Corey McLaughlin showed [in Wednesday's Digest]( there's plenty of bamboozling going on... He told you how wild-eyed speculators drove the share price of a highly questionable Hong Kong-based, Cayman Islands-incorporated company called AMTD Digital (HKD) from less than $10 per share on its July 18 debut to an intraday high of more than $2,500 per share on Tuesday. It traded closer to $700 today. AMTD reported just $25 million of revenue last year, but its market valuation briefly reached more than $472 billion... higher than the market caps of companies like Johnson & Johnson (JNJ), Meta Platforms (META), and Visa (V). Just so we're clear, when I say, "Hong Kong-based, Cayman Islands-incorporated," it means "shady company, stay away." So it's a typical "meme stock" – a highly questionable business whose share price investors have pushed into outer space. Meme stock AMC Entertainment (AMC) is up more than 60% since its June bottom. GameStop (GME) is up 30%. And like both of those, AMTD is still egregiously overvalued, even though it's more than 50% off its 52-week high. None of these businesses is worth even half a billion dollars, and the three of them collectively trade for a combined market cap of roughly $150 billion. I promise you, when we're anywhere near the bottom of the bear market, the meme-stock phenomenon will be long dead and buried... And all the poor, sad fools on Twitter who think they're smart for buying those godawful, disastrous businesses at insane, stratospheric valuations will have disappeared and gotten real jobs again. Maybe at that point, somebody will think to ask, "Remember meme stocks...? What ever happened to all that garbage?" But they're not asking that today. Today, they're still looking for the next one... In fact, investors are back in love with all kinds of unprofitable garbage... The UBS Profitless Tech stock index fell 72% from its February 15, 2021 high to its June 16, 2022 low. The index's five largest components are Carvana (CVNA), Cloudflare (NET), SoFi Technologies (SOFI), Roblox (RBLX), and Unity Software (U). They're weighted at 24% of the index, collectively lost $2.2 billion in the last 12 months, and sport a combined market cap of roughly $80 billion. Since the June low, the index has surged 33%, compared with a 19% rise for the Nasdaq Composite Index and a 13% rise in the S&P 500 Index – the latter two of which contain between them hundreds of profitable tech companies, many of them large enough to push the indexes around quite a bit. To be fair, investors are also ramping up bets on the big, profitable tech companies. Market data firm Vanda Research reports record flows into a basket of tech stocks including Meta, Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOGL), Microsoft (MSFT), Tesla (TSLA), Advanced Micro Devices (AMD), and Nvidia (NVDA). There are some great businesses in there, and I bet most of them are still around many years from now... when the bear is finally over. They'll probably be even more profitable than today. So maybe not all the tech bets are crazy ones right now... And I understand wanting to buy the dip in great businesses, tech or otherwise. But still, I thought the speculative frenzy in the unprofitable stuff was over. Why go all in on garbage tech stocks right now?... The reason is arguably more insane and more deserving of a deeper dive than the recent meme-like price action... I think it comes down to this... Tech speculators think they can predict what the Federal Reserve will do and believe that the world's most influential central bank has their backs. At least that's what the Wall Street Journal reported last week, and it sounds right to me... Tech stocks have been on the rebound of late, partly on investor hopes for a slower path of interest-rate increases in the months ahead. Take a look at the phrase "Fed pivot" on Google Trends. The hope that the Fed will save the stock market is palpable...  Hope is not a strategy. It's more like a guaranteed way to lose money. But I understand where people get the idea that the Fed will soon stop raising rates and start cutting them again. After all, as I pointed out in our [June 24 Digest]( the central bank has consistently done exactly that for four decades. During that time, it has always lowered interest rates more than it has raised them. As I wrote in June... Here's the history of the fed-funds rate since 1982... This chart shows a series of lower highs and lower lows... In other words, the Fed frequently felt it had to lower interest rates, usually to try to prevent or tame a recession... and has never been able to return the benchmark rate to its previous high. There was always a new crisis or simply no courage to push it higher and risk creating one. The market sees the Fed as a supporter of asset prices... Folks believe that when it lowers interest rates, that makes stocks go up – despite the multiple bear markets and two massive bubbles that have occurred in the last 40 years. Many people believe the Fed saved the world from the financial crisis in 2008, an event which it helped cause. That only reinforced widespread confidence that the Fed is on the side of stock and bondholders. Investors' confidence is egregiously misplaced... Why anyone has any confidence that a bunch of PhD economists – the most useless people in finance – can tweak, repair, and manage a $24 trillion economy from the top down continues to befuddle me. If anybody understands it, I should. I went to Catholic schools for 12 years. I was taught to mind my manners, do what the nuns and Christian brothers told me, revere the pope, obey my parents, respect the police, and don't make God mad... And even I still don't understand how anyone sees the Fed as a respectable authority with awesome powers, which towers above multitrillion-dollar markets and economies. But let's say investors are right... Let's say the Fed really can support asset prices at will, simply by lowering the target range of its benchmark fed-funds overnight bank-lending interest rate. Let's say the Fed really does have your back... You'd still have to work hard to convince me that the Fed intends to lower interest rates this year or next. Sure, in his most recent press conference, Fed Chair Jerome Powell said the following... Recent indicators of spending and production have softened. Growth in consumer spending has slowed significantly, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has weakened, in part reflecting higher mortgage rates. And after a strong increase in the first quarter, business fixed investment also looks to have declined in the second quarter... The pace of [future rate] increases will continue to depend on the incoming data and the evolving outlook for the economy... As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation. He made a few similar comments, which the market has seized upon as evidence the Fed will soon pivot and start cutting rates again. But Powell said a lot more than those summary comments. He said more than once that future rate increases are likely, that the labor market is tight (an inflation indicator), that inflation is running way above the Fed's 2% target, and that the central bank is totally committed to taming inflation... He also mentioned more than once the Fed's plan to reduce the size of its balance sheet, which means it'll become a net seller of Treasury debt, putting more upward pressure on interest rates. And Powell isn't the only Fed official telegraphing tight monetary policy for this year and probably next. Minneapolis Fed President Neel Kashkari told the New York Times in a recent interview... I'm surprised by markets' interpretation [of the Fed's plans]... The committee is united in our determination to get inflation back down to 2 percent, and I think we're going to continue to do what we need to do until we are convinced that inflation is well on its way back down to 2 percent – and we are a long way away from that... Cleveland Fed President Loretta Mester told the Washington Post recently... We have more work to do because we have not seen that turn in inflation... It's got to be a sustained, several months of evidence that inflation has first peaked – we haven't even seen that yet – and that it's moving down. Chicago Fed President Charles Evans said Tuesday that "in spite of less favorable inflation reports" than he expected in June, he hopes it's "reasonable" for the Fed to raise rates by smaller increments later this year. The message is clear... If you think big rate increases won't continue, perhaps even into next year, all you're basing that on is hope... Now maybe you're wondering if this is the same Dan Ferris... You know, the one who is always telling you not to believe what the Fed or the government tells you... I'm the guy you go to when you want to fade the headlines, read between the B.S., and plan on all the authority figures' predictions turning out exactly the opposite of what they promised. Maybe I'm endangering my own credibility by telling you to believe the Fed when it says it'll keep raising rates until inflation is back at 2%. Only time will tell for sure... But at the risk of suggesting "it's different this time," the answer to this conundrum lies in the title of my [June 24 Digest](... The end of the world as we've known it... Interest rates fell for the previous four decades. Nobody thought we'd ever see inflation again. All the big central banks around the world joined in and consistently lowered rates. Some interest rates even went negative (a few still are), all without apparently producing much inflation. And stock and bond bulls kept being right, over and over again, for years. It all seemed to make sense. Then COVID happened, world governments locked down their economies, and then they printed massive amounts of new money to counteract the extreme economic damage they created. And that's why we have a 9% consumer price index ("CPI"). Inflation is not rising prices. It's printing a bunch of new money way too fast. Money gets cheaper relative to stuff, and stuff gets more expensive relative to money. And the effect is always stickier and longer lasting than anyone thinks it'll be. All the cool kids are doing it... To understand why the accommodative Fed of the past is gone, just think about "coolness." Adults learn to do what's responsible and right, but most younger folks are stuck doing what all their friends think is cool. I promise you, the Fed is not a group of responsible adults doing what's right – although the pain that higher rates cause will help them push that narrative. You should instead think of central bankers as a group of high school students who are afraid to step outside the confines of coolness and will follow any idiot who looks good and tells the right story. So the Fed's basic orientation has changed from "it's cool to support asset prices" to "it's cool to help folks out by beating inflation back down to 2%." It's 'cool' for central bankers to raise interest rates now... It's cool to be an inflation fighter now. Central bankers who lowered rates all the time were uncool, old fogies. Cool kids raise rates, man. Don't ya get it? Former Fed Chair Paul Volcker is often lauded as a hero by establishment creeps who credit him with taming the horrendous 1970s double-digit inflation by shoving interest rates to 20%. For the record, he's not a hero. He's just another imbecile with a hammer acting like he's an engineer using precision tools and parts machined to fine tolerances. He plunged the country into a deep recession, causing millions to suffer. But nobody ever says that. Everybody thinks he's cool – especially other central bankers. The Fed has been talking about its 2% inflation target for as long as anybody can remember. But it's a stupid target. It's a completely arbitrary number, plucked out of thin air for no reason but to justify the eternally easy policy of the past. Now central bankers will use it to justify the opposite policy. The Fed's like a dentist trying to use a chainsaw... What nobody ever seems to want to say out loud is that inflation is absolutely not a dial the Fed can turn up and down at will (hat tip to @RudyHavenstein on Twitter for saying it recently). The Fed's belief that its dial-turning will work is why it's doomed to break everything it touches. More accurate, the Fed is like a dentist who says he can fix your teeth with a chainsaw. He spends all his time oiling the thing... sharpening the blades... and talking about the type of steel on it, the high-tech chains, how finely tuned the engine is, and how it has special textured grips so he can hold it steady... But it's a freaking chainsaw, and if he tries to fix your teeth with it, he'll just end up cutting your head off. And now the Fed thinks it can use its chainsaw to lop 7% off inflation as though it were a surgeon removing a brain tumor. But it will keep trying. It'll raise interest rates as the CPI continues to print higher-than-expected numbers. And the stock and bond markets will react with "surprise," as inflation keeps prices of real things high and the rising cost of borrowing pushes the prices of homes and financial assets lower... So, the advice from all of this... Don't fade the Fed's intent to push inflation to 2%... Instead, fade the arbitrary, delusional 2% target since it makes life harder, especially for wage earners and middle- and lower-class families. Fade the whole idea that these Fed idiots control anything but their own silly, ill-conceived actions. Fade the belief that the Fed has your back. Fade the attempts to assuage markets with dovish hints and comments. Fade the hubris of thinking inflation is a dial that the Fed can turn up and down like it's adjusting the volume on its headphones. You see? I still have plenty of contrarian, skeptical takes on the Fed. As long as it exists and engages in the wholesale manipulation of the most important prices in capitalism, fading it will be an easy exercise for sane, reasonable folks. Finally this week... While crazy investors misinterpret the Fed's attempt to spin a moderate narrative about its hawkish intent, the most reliable leading indicator of all is collapsing... The average U.S. home price fell 19.8% from April through June. That's the biggest two-month move in any direction ever since at least 1975. And Bank of America reports housing affordability is at its lowest since 2006 – the top of the biggest housing bubble the world has ever seen. So... the asset (real estate) that most reliably leads other economic indicators, including the stock market, is telling us that it's less attractive than right before its worst crash – which lasted six years... And that it's already falling apart again... And that makes it a good time to buy meme stocks and talk about market bottoms? Nope. --------------------------------------------------------------- Recommended Links: # [Man Who Called 2022 Sell-Off Warns of Huge August 29 Event]( The man who predicted the bottom of the market – to the day – during the 2020 crash has a new prediction: A historic unveiling in Houston, Texas could soon decide which stocks will crash next... and which could soon rise 1,000%. [Learn more (includes free ticker)](. --------------------------------------------------------------- # [Oil's New Inflection Point (Prepare NOW)]( It's a new turning point for oil that could drastically alter our economy this year. Goldman Sachs says it's the crux of its next 2022 play... And numerous top hedge funds have just changed their oil positions. [Click here for the full oil story](. --------------------------------------------------------------- New 52-week highs (as of 8/4/22): Huntington Ingalls Industries (HII). In today's mailbag, feedback on T-bills and the H.L. Mencken quotes from the Great Depression that we cited [in yesterday's Digest](... Do you have a question, another "mega-bubble" that comes to mind, or any other comments? As always, e-mail us at feedback@stansberryresearch.com. "Good evening. Just wanted to say thanks for the recent T-Bill article. I explored the TreasuryDirect website for info and easily initiated purchasing of 4-week T-Bills with the option to roll-over for an additional 6 periods. By that time maybe (that's a big maybe) local banks and credit unions may finally get out of the less than 1% rate on CDs. Until then this will allow me to let my fluid/flexible money currently languishing in savings to earn a decent rate of return with the T-Bill recommendation. You guys are GREAT!!" – Paid-up subscriber Dave B. "Thanks for sharing those past Mencken quotes. There is no truer statement than, if we learn nothing from the past then we are doomed to repeat it!" – Stansberry Alliance member Jim M. "Stansberry editors definitely need to use the term hornswoggled with regularity." – Paid-up subscriber Mark B. Good investing, Dan Ferris Eagle Point, Oregon August 5, 2022 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,017.4% Retirement Millionaire Doc MSFT Microsoft 02/10/12 875.6% Stansberry's Investment Advisory Porter ADP Automatic Data 10/09/08 857.2% Extreme Value Ferris ETH/USD Ethereum 02/21/20 568.8% Stansberry Innovations Report Wade HSY Hershey 12/07/07 533.8% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 419.3% Retirement Millionaire Doc AFG American Financial 10/12/12 403.1% Stansberry's Investment Advisory Porter WRB W.R. Berkley 03/16/12 337.2% Stansberry's Investment Advisory Porter NTLA Intellia Therapeutics 12/19/19 313.6% Stansberry Innovations Report Engel FSMEX Fidelity Sel Med 09/03/08 313.3% Retirement Millionaire Doc 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 3 Retirement Millionaire Doc 4 Stansberry's Investment Advisory Porter 1 Extreme Value Ferris 2 Stansberry Innovations Report Engel/Wade  --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst ETH/USD Ethereum 12/07/18 1,309.1% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,191.1% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,073.8% Crypto Capital Wade MATIC/USD Polygon 02/25/21 862.7% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 502.2% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio.  --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet 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 Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%.  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. 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