The 'Social Phenomenon' Is Seeping Into Our Souls

Celebrating any excuse to buy... The financial press is cheering on investors... Mark my words – the bear market isn't over... Color me skeptical, Batman... The 'social phenomenon' is seeping into our souls... Degenerating into 'a gamble and a lottery'... A final word about preparing and predicting today... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Celebrating any excuse to buy... The financial press is cheering on investors... Mark my words – the bear market isn't over... Color me skeptical, Batman... The 'social phenomenon' is seeping into our souls... Degenerating into 'a gamble and a lottery'... A final word about preparing and predicting today... --------------------------------------------------------------- Who knew so many people loved inflation? That's the feeling I (Dan Ferris) got earlier this week, at least. As my colleague Corey McLaughlin [noted in Wednesday's Digest]( the consumer price index ("CPI") – the most widely watched inflation gauge – rose 8.5% year over year in July. The CPI was down slightly from the 9.1% reading in June. And it came in below analysts' expectations. As Corey eloquently put it in that Digest... For once, it wasn't the worst report we've seen in the past 12 months. And one not-the-worst report is apparently all the proof most folks needed... Everyone who thinks investing means chasing the latest headline by doing what everyone else seems to be doing got their wish on Wednesday. And they poured money into stocks... The benchmark S&P 500 Index surged 2.1%, closing at its highest level in three months. The tech-heavy Nasdaq Composite Index did even better... It gained 2.9% on the day, ending with its best close since late April. Now, of course, none of these folks were actually celebrating 8.5% inflation – at least I hope not. The still-way-too-high level is enough to cut the value of your money in half in a little less than eight years. Rather, these investors were likely celebrating any excuse to buy... The market has trained everybody to do that over the past decade or so. It doesn't matter how high it goes – or how expensive it gets. It will still never be very long until a new high. So every dip of any size is a reason to buy, buy, buy. And what's an overly optimistic market without the financial press cheering on investors? After all, the most compelling headline is the one that totally agrees with your thinking. We're in America. We don't need to think for ourselves. The media does that for us... Enter the Wall Street Journal on Wednesday evening... The headline doesn't make any sense to me. It claimed that the Nasdaq is back in a bull market simply because the index has risen 20% off its June 16 low. But the definition of a bull market as a 20% rise off the most recent bottom is asinine to me. To see what I mean, consider the following chart... On the chart, each move up or down is 20%. And based on the common definitions of a 20% gain meaning a new bull market and a 20% drop meaning a new bear market, this chart is what we get. But nobody would ever say that this chart shows a series of alternating bull and bear markets. At a minimum, it's a downtrend. And some of us might even refer to it as the orderly decline phase of a bear market. The obvious problem is that a market needs to rise at least 25% to erase a 20% decline. Otherwise, it will never get back to the previous high. As you can see from this hypothetical example, alternating 20% drops and 20% gains would just make you poorer. That's why the "20% rule" for a new bull market is flawed, no matter how many people say otherwise. For a new bull market, the index needs to make a new high. Period. That's the only way to create a chart in which everybody can see the new uptrend. And with the Nasdaq still down about 19% from its November 2021 peak, we don't have that today. Frankly, the semantics of whether it's an 'official' bull or bear market don't matter... This is still a bear market. Like I've said more than once in the Digest, we've never gotten out of a massive mega-bubble with a roughly six-month drawdown of 24% or 34%. That's how much the S&P 500 and the Nasdaq declined from their respective tops to their 2022 bear market lows. And like I've also said before, the market always rallies as much as it needs to in order to suck as many folks back in as possible. That's especially true during bear markets... It acts to inflict the maximum amount of pain on the maximum number of participants. Bulls and bears both get crushed in bear markets... Just when the downtrend is confirmed, it reverses and cuts the bears to ribbons. And then, just when media outlets like the Wall Street Journal declare that the bear market is over, the market will turn and trap the bulls with losses they'll hang on to until the next bottom. Mark my words... I promise you that the Wall Street Journal doesn't get a pass in a bear market. The next leg down will make the publication look as wrong and stupid as everybody else. I emphasize the word "look"... Everybody looks smarter on the way up and dumber on the way down... Gee, it's almost like how well you do in the stock market has absolutely nothing whatsoever to do with your general level of intelligence. But I digress... The real point is – or was, until I got distracted – that investors and the Wall Street Journal are likely getting ahead of themselves if they think it will be all sunshine and rainbows from here. They need to remember that inflation can peak and still stay high enough to cause a serious economic problem for a lot of folks. The CPI stayed at or below 2% for most of the past decade. What if it settles in around 4% for a few years? That's enough to slash the value of the dollars in your pocket by 20% in a little more than five years. Today, the 10-year U.S. Treasury note – the most important price in the world – yields just less than 2.9%. Any inflation reading above that level means you're losing money every year that you own it. And the CPI is still 5.6 percentage points above it. Even if the 10-year yield and the CPI were to meet in the middle, it would put the 10-year Treasury's yield at around 5.7%. And if the 10-year Treasury's "spread" above the federal funds rate remained constant, it would mean the Federal Reserve would need to raise the benchmark rate another 280 basis points from the top of today's range of 2.25% to 2.5%. That would put the federal funds rate at around 5.3%. How much do you want to bet that the stock market would hate that? If that scenario – or anything close to it – plays out, stocks will likely be quite a bit lower than today. Maybe the Wall Street Journal will then tell us we're in a bear market again. But let's face it, the numbskulls at the Fed can't do anything with that much precision... They're not in control of economic outcomes. They said they wanted inflation to be 2% or higher... and it went as high as 9.1% in June. Now, they're saying they want it to be back down to 2% again. As I pointed out last week, inflation isn't a dial that the Fed can turn up and down [like it's adjusting the volume on a pair of headphones](. The Fed badly overshot its inflation target the first time, letting things spiral out of control and costing millions of helpless Americans a lot of hard-earned money they need to make ends meet. And yet, now – according to the stock market's reaction this week – the central bankers really do have their backs and will nail the target right on the money this time. Really? Color me skeptical, Batman. If the Fed tries to bring inflation back to 2% by continuing to raise rates, it will generate all types of unintended, nasty consequences. The obvious ones, of course, are a recession ([if we're not already in one, of course]( and a new bear market low in stocks. I must repeat myself... The Fed and the government purport to know how to tweak, manage, and control the aggregate economic activity. But as we asserted a couple weeks ago, the ability to destroy something or cause a bad accident is a lot different than the ability to control it. Any vandal can blow up a bridge. It doesn't make them an engineer. It's like saying you can control how people feel when they start to realize their money isn't going as far as it did last year. Inflation isn't just the decline in the value of money that shoves the price of everything higher and makes ends harder to meet. In the words of real estate mogul and former hedge-fund manager Hugh Hendry... 'Inflation is a social phenomenon'... That's what Hendry told me [during a May 2021 interview]( on our Stansberry Investor Hour podcast. Hendry explained that most of our money is created within the banking system through borrowing activity. A dollar is deposited. Then, it's lent... spent... and deposited again. The chain keeps going and going. Banks lent money like crazy before the 2008 financial crisis. Then, they got burned. And since then, they've been shy about lending again. That's why, for example, the Fed's quantitative easing strategy never caused inflation as measured by the CPI. The money the Fed created simply went into bank reserves... But the banks balked. So the bulk of the new money was never lent, spent, and deposited over and over. That's what Hendry means by a "social phenomenon"... Based on his thinking, as long as the banks remain shy about their lending activity, money won't make the rounds through the system. And in turn, we won't see rising prices. In our interview, Hendry was talking about the banks' shyness toward taking commercial risk through lending to new businesses and making new loans to existing ones. A year and a half after my chat with Hendry, maybe that's still true overall. But it sure looks like American consumers are willing to pick up as much of that slack as possible. They're borrowing record amounts today, which means banks are lending them record amounts... A recent Fed report showed that from April through June, credit-card borrowing rose at the fastest rate in more than 20 years. Borrowing makes sense if you expect inflation to continue. That's true for a couple of reasons... For starters, folks need to borrow to make ends meet due to rising prices. But also... As dollars lose more value, folks will want to get rid of them... In other words, ongoing high inflation provides an incentive for folks to borrow as much as they can, sell those dollars for assets like homes, cars, and whatever else they want... then pay them back in the future with less valuable dollars. That's why buying a home with a 30-year fixed-rate mortgage works out so well for so many people. Most folks can't get their hands on hundreds of thousands (or even millions) of current dollars any other way. And no, I don't consider a home to be an investment. But it's convenient when you can borrow most of the purchase price, hold the asset for a decade (or three), then sell it for more than your price... having actually paid for it with a stream of depreciating dollars. If you think that sounds like what happens when you short stocks, you're right... You borrow the shares and sell them, hoping to buy them back in the future at a lower price. The mechanics of short-selling are largely unseen in the age of online brokerage accounts. If you want to sell a stock short from your online brokerage account, you just hit the "sell short" button and your broker does the rest. But the point remains... The more dollars you borrow, the more you have effectively sold short the dollar. And from the looks of the Fed's data about credit-card borrowing in recent months, real people buying and selling goods and services every day in the economy are shorting dollars at increasing rates. When inflation really starts to take hold, it doesn't just change how you spend money. Inflation creates a mentality that can seep into your soul. It can impact deeply ingrained cultural tendencies... Apparently, inflation can even make you less polite... If you've ever been to Japan, you know that you can't walk five feet without someone apologizing to you. If you hold an elevator for someone, they apologize to you for it. It's considered impolite not to apologize to fellow employees for taking a vacation. People even apologize for stuff that's not their fault. Almost every conversation in Japan is peppered with apologies. The apologies extend to the business world, too... In 2016, Japanese ice cream maker Akagi Nyugyo raised the price of several of its products for the first time in 25 years. To announce the move, Akagi Nyugyo executives went on TV, bowed deeply, and apologized. Fast-forward to the present day... Stable or falling prices prevailed in Japan for most of the past three decades. But then, this past April, Japanese consumer prices rose 2.5%. It was the first time prices rose more than 2% since 2008 – and the fastest increase since 1991. Inflation changes everything, including Japanese businesses apologizing for raising prices. The Wall Street Journal published an article this week titled, "Inflation Means Never Having to Say You're Sorry"... Akagi Nyugyo again plans to raise the prices of several products. But this time, it's making the move without the somber tone and apology. The company's market director was downright blunt in his explanation to the Wall Street Journal... We're suddenly facing a tsunami of price increases [for materials]. We will raise prices in order to survive. According to the article, another Japanese food company was even more blunt. Yaokin published a message on Twitter that read... We need to make a profit so that we can continue to ensure the survival of the snack industry. A tsunami of price increases. Ensuring survival. Maybe this shift in Japan is a cyclical development. If prices stabilize again, perhaps we'll see the return of corporate apologies for price increases. Until then, all bets are off. Japanese companies need to survive... And they're not apologizing for it. It's unsettling to see such a deeply ingrained tradition in Japan go away so easily... Does that speak to the ease with which Japanese culture adapts? Or does it speak to the power of inflation when its ill effects finally show up? I don't really know. But it tells me more is at stake here than just the purchasing power of the money in your bank account and the value of your 401(k) retirement account. In his 1919 book, The Economic Consequences of the Peace, economist John Maynard Keynes issued a warning about the effects of inflation following World War I. And he famously quoted Russian revolutionary leader Vladimir Lenin... Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens... and while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth... the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. I don't know if inflation is secret and unobserved. But it's certainly clear that none of us can do anything about it when the government decides to crank up the printing presses. That's why many folks begin to borrow just to make ends meet. And many others take what little cash they have, go into the financial markets, and... In Keynes' words, their 'process of wealth-getting degenerates into a gamble and a lottery'... That's what happened after Wednesday's CPI report. Many folks are hungry for a way to get ahead. They're looking for any excuse to buy. And one report that inflation might be subsiding is all they needed to become gamblers. But if my suspicions are right, their gambling will cost them dearly as the bear market continues... You'd be wise not to allocate a penny to stocks simply because you believe inflation has peaked and the market has turned a corner. The market would love to inflict more pain. You'd be much better off adopting my constant mantra, "Prepare, don't predict," and buy gold and silver instead. And if you do want to invest in stocks, you'll want to limit your purchases to the shares of good businesses that can generate enough cash on the capital they employ to continue to provide good investment returns even during inflation. Prepare yourself, too, for the Fed to overshoot its 2% inflation target to the downside by causing a much bigger recession than anybody buying stocks after Wednesday's CPI report sees coming. Holding plenty of cash and only the safest short-term debt instruments will help you do that. I'll leave you with a final word about preparing and predicting... An Extreme Value subscriber recently wrote in to say my advice is confusing because I'm "predicting" a market crash, but I haven't recommended selling all your stocks. And I've recommended preparing not predicting so many times in the Digest over the years that this seemed like the right place to set the record straight. The answer to his inquiry is simple... I haven't predicted anything. I've just learned that markets move in cycles. And when stocks trade at their highest valuation in recorded history – like they did at the beginning of this year – it's highly likely that they'll produce lousy returns for anyone who buys at that level or anywhere near it. That's why I've recommended selling speculative "garbage" stocks and other super-risky assets. And I've recommended being careful about initiating new positions in stocks. But I've never said to sell all your stocks because no better vehicle exists in the markets for long-term compounding at high rates of return than the stocks of great businesses. The simple realization that you have to buy assets at reasonable prices to earn a good return will naturally cause you to hold more cash when stocks and bonds get as expensive as they've been over the past year or so. Don't base your equity strategy on predictions about the direction of the overall market. When I say prepare, don't predict... it's an act of humility. It's a way of saying that nobody can predict securities prices consistently enough to call it a strategy. So if you're confused by my advice, always remember... I'm not predicting anything. And I never offer any help based on the assumption that I can. Rather, the key to long-term success is preparing for a wide range of possible outcomes. --------------------------------------------------------------- Recommended Links: [Why August 31, 2022 Could Change the Future of Money in America, Forever]( Top currency analyst issues major warning: "We're now just days away from a line-in-the-sand moment for the banking system – this massive shift is unstoppable... and you need to prepare NOW." If you hold any cash in a bank, [here's exactly what you need to know before August 31](. --------------------------------------------------------------- [Is this 'America's Nightmare Winter'?]( This could be much bigger than car, food, and computer chip shortages. And Bloomberg says it's "a situation that could worsen heading into winter," causing serious problems in nearly every sector. Will it affect you and your money? [Find out right here](. --------------------------------------------------------------- New 52-week highs (as of 8/11/22): W.W. Grainger (GWW), Cheniere Energy (LNG), ShockWave Medical (SWAV), and VICI Properties (VICI). In today's mailbag, more feedback on [Monday's Digest]( about jobs and making ends meet. What's on your mind? As always, e-mail us at feedback@stansberryresearch.com. And one quick housekeeping note... Following this weekend's Masters Series, we'll share a special "late summer series" of essays to highlight some of the most exciting investment ideas and opportunities from our team of analysts right now. Stay tuned. "One of your other readers criticized the Amazon worker Albert you used in an example for excessive spending. The reader says Albert should have almost $600 left over after he pays for living expenses. "I assume Albert, who is earning $30,000 a year at his warehouse job, has financed his car. The average car payment for a Soul is $388 per month. [So that] $600 is now $222. [And] I assume Albert pays for car insurance. "At one time gas was more expensive than the $3.66 used in your reader's calculation. If gas goes back to $5 a gallon, Albert would spend almost all his money. There would be nothing left to pay for car repairs, insurance copays, other emergencies, credit-card debt... "Some spendthrift." – Paid-up subscriber Edward M. "A friend works for a very large (1,000-plus students) public school hosting grades one through nine. She returned to work last week as a school monitor. "She reports that they are extremely short-handed in both teachers and assistant help and are not getting enough responses to job postings. The new administrator has not addressed this by delegating, but seems to be ignoring the issue and assigning increased workloads on everyone – teachers, staff, and assistants. There are classes without teachers. She has been assigned multiple workloads and added jobs to what she was hired for. "She is in her 70s and a grandmother. While she is retired, she likes working with kids and so is not concerned with the wage so much. But she is a constant critic who I enjoy conversing with and learning about what is happening in this one example of a public school system today. Kids today have a lot of hurdles in the school system... "My parents' families were raised in the Midwest and all children attended a single-teacher private schoolhouse with grades 1-12 included. Older kids were delegated to teach younger ones. In my opinion, for basics, it was better than many current schools. "I would like a return to private schools basis. Not likely, since most people are convinced public schools are the best way for their kids. "I have one cousin who kept her two girls out of public school by teaching them herself. They passed tests for high school equivalency and never attended such a school, [but] few parents can do this, especially today." – Paid-up subscriber Paul B. Good investing, Dan Ferris Eagle Point, Oregon August 12, 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 1,029.9% Retirement Millionaire Doc MSFT Microsoft 02/10/12 886.5% Stansberry's Investment Advisory Porter ADP Automatic Data 10/09/08 877.7% Extreme Value Ferris ETH/USD Ethereum 02/21/20 650.6% Stansberry Innovations Report Wade HSY Hershey 12/07/07 533.6% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 425.7% Retirement Millionaire Doc AFG American Financial 10/12/12 421.4% Stansberry's Investment Advisory Porter WRB W.R. Berkley 03/16/12 362.7% Stansberry's Investment Advisory Porter FSMEX Fidelity Sel Med 09/03/08 316.0% Retirement Millionaire Doc NTLA Intellia Therapeutics 12/19/19 314.1% Stansberry Innovations Report Engel 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 1,459.1% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,243.3% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,082.2% Crypto Capital Wade MATIC/USD Polygon 02/25/21 870.0% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 537.3% 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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