Don't Believe the Fed's Fairy Tale

Taking on a familiar foe... A dire threat for investors... 'Tap the brakes' and 'gently bring the economy back'... The real purpose (and the ultimate effect) of interest-rate hikes... What we can do to prepare... Don't believe the Fed's fairy tale... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Taking on a familiar foe... A dire threat for investors... 'Tap the brakes' and 'gently bring the economy back'... The real purpose (and the ultimate effect) of interest-rate hikes... What we can do to prepare... Don't believe the Fed's fairy tale... --------------------------------------------------------------- Get ready for a lot of 'classic Dan schtick'... Before we get into today's Digest, I (Dan Ferris) must warn you... I'm taking on a familiar foe – the Federal Reserve. I know, I know... My thoughts on the central bank and its policies are pretty clear already. I'm not a fan. But what's going on right now is vital for investors – and it represents a dire threat. In short, earlier this week, Minneapolis Fed President Neel Kashkari provided yet another sign that these guys don't have a clue what they're doing. Here's a hint... Kashkari believes the Fed can just "tap the brakes on the economy" and we'll all be OK. He makes it sound so serene and peaceful. But of course... we all know it's just a fairy tale. Before we get to all the details, a quick refresher... Last Friday, we talked about [the 'horror of change'](... It's not a grand revelation. As I said... Humans will do anything to justify not changing their bad behavior. They'll twist their minds into shapes so impossible that M.C. Escher would kick himself for not thinking of them first. Ultimately, we turned our attention to the Federal Reserve. And we concluded that the central bank would keep fighting inflation until it wrecks enough lives. From that essay... I'm just saying that the Fed is like most human groups and individuals. It won't change what it's doing until the pain becomes unbearable. And no matter what you think about inflation peaking and the Fed backing off, the pain hasn't become unbearable. So the Fed won't change what it's doing yet. Historically, the Fed doesn't deviate from the status quo until it's under extreme duress and its narrative falls apart. The latest example is the post-pandemic "transitory" narrative... The Fed's new status quo of fighting inflation only emerged after that take on inflation proved to be wrong. It will now keep hiking interest rates until inflation is down to its arbitrary goal of 2% – even if it means a bad recession and mass unemployment. In other words... The Fed – and its 400-plus PhD economists who didn't know inflation had arrived until it hit 40-year highs last year – will now keep fighting inflation and hiking rates until the economic pain is severe and widespread enough. Don't expect any "pivot" to rate cuts this year. That's probably a good thing... We've pointed out before that prior Fed pivots have been lousy for stock market returns. That brings us to Kashkari's 'tap the brakes' comment... On Wednesday, he spoke and took questions at an event in Sioux Falls, South Dakota. Early in his opening remarks, Kashkari said wage growth is "too high" to be consistent with the Fed's 2% inflation target. What a messed-up sense of priorities... Kashkari is saying the Fed's arbitrary 2% target is more important than your ability to put food on your table and gas in your car. Hey, maybe that's why the Fed's favorite inflation gauge is the personal consumption expenditures price index... It excludes food and energy! Here's how Kashkari ended his opening remarks at the event... We're not yet seeing much of a sign of our interest rate increases slowing down the services sector of the economy and that is concerning to me. Ultimately... we want to achieve what's called a "soft landing." At that point, Kashkari softened his voice. He started talking to the Sioux Falls crowd like it was story time in your toddler's kindergarten class. And then, he said... We raise interest rates. We tap the brakes on the economy. We gently bring the economy back down to [a] 2% inflation environment. Think about the economy we had just before the pandemic hit. We had low inflation. We had low unemployment. We had healthy growth. It was a pretty good economy. That's what we want to get back to. The challenge, of course, is typically when the central bank raises interest rates to cool down inflation, most of the time it leads to a recession. We would like to avoid a recession, but we know we have to get inflation down. Getting inflation down is job one. Now, there's a lot going on in those three paragraphs. And some of it's alarming... First, notice how Kashkari planted the 'soft landing' fairy tale in everyone's minds... You would think he was trying to teach a nervous teenager how to parallel park... He talks softly and uses just the right words as if he's making sure the poor kid doesn't have a meltdown when they find out it takes 10 tries to even begin to get it right. He makes it sound so painless and easy... Don't worry folks. A little brake tapping will gently reduce your standard of living and wreck your life. But then, everybody will live happily ever after. You might even like it. Then, after he got folks to buy into the fairy tale, Kashkari casually slipped in the truth... Typically when the central bank raises interest rates to cool down inflation, most of the time, it leads to a recession. The Fed likes to pretend it's in control of the rises and falls of a $26 trillion economy. Earlier in his talk, Kashkari said the Fed "brings the economy back into balance," as if it knows what that balance is or how to achieve it. The Fed knows no such thing... It looks at economic data, executes monetary policy by interfering in the bond market, then prays and waits to see if anything breaks in the economy. If nothing breaks, it does more. If something breaks, it does a lot more. Rinse and repeat. And the outcome is a financial crisis or two every decade. It's probably the most fun a megalomaniacal psychopath can have without being a genocidal tyrant. It's too much to believe that hundreds of bureaucrats in Washington, D.C., know how to make the economy expand or contract exactly (or even roughly) as much as they want. The belief is pure hubris. The Fed's real job appears to be breaking things while acting like it's fixing them. Folks who study the history of the Fed aren't very confident in its abilities... For example, the University of Chicago Booth School of Business just published a brand-new paper that takes Kashkari's gentle soft landing off the table. The paper's authors showed that inflation-fighting rate hikes don't just "typically" lead to a recession... In 16 post-World War II disinflationary episodes across four developed economies, they've always led to a recession. The authors' main conclusion is... There is no post-1950 precedent for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession. The paper's authors drew conclusions about the type of monetary policy that central banks should pursue when fighting inflation. If the Fed wants to beat inflation down to 2% with the least amount of pain, they suggested "less gradualism and [a] more aggressive policy." Now, let me be clear... The paper's authors aren't saying more aggressive Fed policy wouldn't be painful. It would be. They're saying that the historical record implies it would be less economically painful than the Fed's current approach. Despite raising the benchmark rate by 475 basis points already, the paper's authors think the Fed will have to "tighten policy significantly further" to hit its 2% target by 2025. And importantly, they concluded that "an 'immaculate disinflation' would be unprecedented." In short... tapping the brakes won't bring about a gentle, soft-landing miracle. This is the dire threat I alluded to at the start of today's Digest. Investors who think a soft landing is probable – buying every dip along the way – will likely retire years later than planned. Of course, as we talked about last Friday, humans don't like the horror of change... So I don't expect the Fed to follow the prescription of the paper's authors. I don't expect it to act preemptively, reducing total economic pain by bringing it forward in time. Most people avoid pain for as long as they can. And that often makes it worse in the end. And if I'm right, we're in for a lot of pain... We're facing a deep, multiyear bear market that will take the big stock indexes down about 75%. After that, we'll endure a brutal sideways market during which stocks will fail to make new highs for a decade or more. The best-performing stocks of the bull market will languish while the laggards will become the leaders. It will likely be a chaotic stretch, too. After all, big macro events and trends like inflation, war, bank failures, currency crises, and even social uprisings and widespread violence in the streets occurred during and after past mega-bubble crashes and sideways markets. Historian Neil Howe's new book is called [The Fourth Turning Is Here](... Howe's generational theory of history says we're smack-dab in the middle of a great social, economic, and political upheaval. And at some point, it will end with a massive crisis. But regular Digest readers know I don't do predictions. I'm just fleshing out the idea that more systemic risk exists in the financial markets than most folks are prepared to handle. The vast majority of people are misguided. Their ideas about what to expect over the next decade are likely too rigid and based on an overly simplified understanding of past episodes. For example, everyone knows that inflation was brutal during the 1970s. But don't forget about the recession that took place from November 1973 to March 1975. Too many folks believe that inflation and recession are opposite or mutually exclusive outcomes. That's a mistake... Just think about the real purpose (and the ultimate effect) of rate hikes... The rising prices caused by inflation indicate that demand for goods and services has outpaced supply. And like Kashkari said, the Fed is hiking rates to reduce demand in hopes of bringing it into balance with supply. In plain terms, the Fed is trying to hurt Americans financially by putting them out of work, making their housing more expensive and their credit-card debt too burdensome. It alleges that the overall outcome will be better for everyone if it can do that because the inflation it's fighting is worse than the recession it's trying to cause. It's a typical, modern, political-style argument... I'm going to make your life worse by stealing more from you or hurting you more in some other way. But it's ultimately for your own good! It's never for your own good. That's just the song and dance these bureaucrats use to justify their desire to wield great political or economic power for sadistic fun and profit. The economy tweakers and world improvers always do more harm than good... Nobody can tweak economies. Nobody can improve the world through politics except by doing less of it and leaving people alone to live their lives. And yet, they don't do that. So yes... the Fed is purposely trying to cause Americans financial harm. The authors of the Chicago Booth paper use a metric called the 'sacrifice ratio'... This ratio measures the economic consequences of a 1% reduction in the rate of inflation. It's a way to quantify the suffering that happens when the Fed reduces demand. The Fed targets demand because it has no way to increase supply. So even if the prices of goods and services fall as Fed rate hikes crush demand, a lack of incentive to increase supply just means that prices will rise again when demand recovers. And then, the headlines will say that inflation has returned. Or maybe prices will never fall significantly at all. Beating down demand without creating more supply is a recipe for disaster. It basically guarantees that inflation will come back every time the Fed thinks it finally won the fight. It's not hard to imagine a scenario in which wages stagnate or more folks are out of work. And that would make it harder for people to afford still-high-priced goods and services. So the idea of the Fed taming inflation by raising rates is sketchy – if not downright stupid. But of course, investors like us need to know what we can do to prepare... Investing has never been easy. It requires consistency and discipline over long periods. That's harder to do right now than ever before... The current environment is the worst investing climate I've experienced as an adult. We can't take anything for granted these days... We can't assume that a strong U.S. dollar will always lead to lower prices for gold and other commodities. That's why I keep recommending you hold plenty of cash and precious metals. (Speaking of commodities, I just teamed up with 50-year market wizard Rick Rule for the first time ever to share a big new prediction for 2023. And spoiler alert... it involves commodities! It's a must-see message before Monday's opening bell. [Watch it right here]( We can't assume that higher interest rates will mean lower stock prices or that lower interest rates will lead to higher stock prices. That's why I keep recommending shares of great businesses – but also emphasize that you shouldn't overpay for them. I've mentioned one of the most dangerous assumptions before... Many folks believe the high stock valuations of a bubble era are normal. But anyone who does that forgets what 1970s-era inflation and the recession back then did to valuations... You can see what I mean on this chart of the S&P 500 Index's monthly price-to-earnings (P/E) ratio from 1968 to 1987. It dropped off a cliff and stayed there for a long time... The S&P 500's P/E ratio peaked at 20 times earnings in April 1971. Then, it plunged all the way down to around 7 times earnings during the recession in 1974 – and again in 1980. Both those lows in the S&P 500's P/E ratio happened during recessions. And yet, the decade is more widely known for the double-digit inflation that brutalized Americans' finances. For investors like us, it's wise to understand that cycles happen. But we also need to remember that history doesn't repeat. It merely rhymes. I've lived through a lot of different cycles. And I've learned that understanding cycles doesn't mean you should pretend to know exactly what will happen next. No one truly knows. Investing is an art. And like all good art, it requires flexible thinking and iron-clad discipline. As the Fed engineers the next crisis, we need to be flexible and disciplined. We need to prepare for a wide variety of outcomes to protect our wealth and sleep well at night. If you believe in fairy tales about tapping the brakes and gentle soft landings, you'll suffer. --------------------------------------------------------------- Recommended Links: # [Here's What You Missed Yesterday]( It has only appeared in the market twice in the past 50 years. And you could have made a 424% gain on the LOWEST-risk investment available the last time we saw this. This is why Stansberry's longest-tenured analyst calls it "THE biggest – and perhaps most obvious – setup I've seen in my entire career." You still have time to act – [click here to tune in now](. --------------------------------------------------------------- # ['The EXACT Day Stocks Will Finally Bottom']( Goldman Sachs doesn't know... Bank of America doesn't know... Morningstar doesn't know... but Marc Chaikin believes he does. He called the bottom in 2020, just 24 hours before the fastest bull market in history. Now, Marc has spotted the NEXT market bottom... and he's sounding the alarm. Plus, he's sharing the names of what he says will be the best – and worst – performing stocks of 2023. [Click here for full details](. --------------------------------------------------------------- New 52-week highs (as of 3/2/23): Atkore (ATKR), BorgWarner (BWA), Copart (CPRT), Comfort Systems USA (FIX), W.W. Grainger (GWW), Luna Innovations (LUNA), Madison Square Garden Sports (MSGS), MasTec (MTZ), MYR Group (MYRG), Novo Nordisk (NVO), Invesco Dynamic Oil & Gas Services Fund (PXJ), and Sprouts Farmers Market (SFM). The mailbag is quiet today. But we wanted to say thank you to everyone who sent in questions for the 300th episode of the Stansberry Investor Hour podcast on Monday. We'll cover as many questions as we can during the show. And in the meantime, as always, you can send your comments and questions to feedback@stansberryresearch.com. Good investing, Dan Ferris Eagle Point, Oregon March 3, 2023 --------------------------------------------------------------- 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 11/11/10 904.0% Retirement Millionaire Doc ADP Automatic Data 10/09/08 794.5% Extreme Value Ferris MSFT Microsoft 02/10/12 776.3% Stansberry's Investment Advisory Porter WRB W.R. Berkley 03/16/12 595.8% Stansberry's Investment Advisory Porter ETH/USD Ethereum 02/21/20 580.6% Stansberry Innovations Report Wade HSY Hershey 12/07/07 573.9% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 445.7% Retirement Millionaire Doc AFG American Financial 10/12/12 445.0% Stansberry's Investment Advisory Porter ALS-T Altius Minerals 02/16/09 332.5% Extreme Value Ferris FSMEX Fidelity Sel Med 09/03/08 302.7% 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 4 Stansberry's Investment Advisory Porter 3 Retirement Millionaire Doc 2 Extreme Value Ferris 1 Stansberry Innovations Report 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 1,330.7% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,182.0% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,063.9% Crypto Capital Wade MATIC/USD Polygon 02/25/21 954.1% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 524.2% 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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