Beware the Vain and Shallow Persons of Authority

Two huge, related events happened this week... The public is buying what the Fed is saying... Not so fast, my friends... Jerome Powell, high-school quarterback... 'This is how the system is meant to work'... Call me a conspiracy theorist if you want... Beware the vain and shallow persons of authority... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Two huge, related events happened this week... The public is buying what the Fed is saying... Not so fast, my friends... Jerome Powell, high-school quarterback... 'This is how the system is meant to work'... Call me a conspiracy theorist if you want... Beware the vain and shallow persons of authority... --------------------------------------------------------------- Regular readers know I (Dan Ferris) can't just not say something... I've written these Friday Digests for several years now. In that time, I've shared my take on every huge event that has happened in the markets. I've shown you that [the present often parallels the past](. And I've recommended that you "[prepare, don't predict]( for a wide range of possible scenarios – including extreme outcomes that I believe are more likely than most other folks think. Heck, I've worked at Stansberry Research since the Clinton administration. That means I've talked our readers through the dot-com boom... the dot-com bust... the housing boom... the housing bust... the COVID-19 boom... the COVID-19 bust... and everything in between. In other words, I've seen plenty of ups and downs in the markets over the past 24 years. So when I tell you that two huge, related events happened this week... I mean it. Even worse, these two events lead me to a concerning conclusion... Trouble is still brewing in the financial world. But as I'll show you today, the prevailing narrative is too complacent. And there's no way I can just sit here and not say something. It's my chosen mission to do what I can to help you. Let's take the most recent huge event first... On Wednesday, the Federal Open Market Committee ("FOMC") – the Federal Reserve's policymaking arm – raised the federal funds rate by 25 basis points. It's now in a target range between 5% and 5.25%. It was the Fed's 10th rate hike since March 2022. And notably, it's the fastest rate-hiking cycle since 1980. The popular belief is that this will be the Fed's last rate hike. My colleague Corey McLaughlin [reported on that possibility in Wednesday's Digest](... In short, the FOMC's latest post-meeting statement excluded some language from previous months about attaining "a stance of monetary policy that is sufficiently restrictive." And it excluded the words, "in determining the extent of future increases in the target range." The Fed was very careful with its language. It telegraphed to the markets that a change could be coming in the near future – without actually saying those exact words. And the market is buying it... Based on the current odds from the CME Group's FedWatch Tool, traders expect the Fed to leave rates unchanged for the next two meetings. Then, they expect it to begin cutting rates at its September meeting. By December, the odds favor a target range of 4.25% to 4.5%. And by December 2024, the FedWatch Tool says a target range between 3% and 3.25% is most likely. The FedWatch Tool's odds are based on the market's pricing of fed funds futures contracts. So it's the market's most direct expression of how traders believe the Fed will act. The language in the FOMC's latest statement seems to lean less in the direction of further rate hikes. And the market thinks the Fed has reached its "[uncle point](... will tough it out at the current level through the summer... then start cutting rates without stopping into 2024. The expectation of rate cuts is part of our national DNA at this point... Alan Greenspan took over for Paul Volcker in the top job back in August 1987. Since then, Greenspan and his successors – including current Fed Chair Jerome Powell until a little more than a year ago – have taught investors to expect consistently "easy" monetary policy. So I can hardly blame most folks for concluding that the Fed is done hiking rates this time. But there's always another way to look at things – and that's what I try to do in the Digest... As I said, the Fed's latest move was a huge event. But maybe not how you'd think... I looked at every sentence in the [FOMC's statement](. And I graded each one as "hawkish," "dovish," or "other." The FOMC's statement included 16 sentences across four paragraphs. Here's the breakdown of grades... - Hawkish – 8 - Dovish – 2 - Other – 6 The language seemed mostly "hawkish" to me. The only way you would interpret the statement as "dovish" is if you give a lot of weight to the language the Fed left out. Investors are always looking for a new trend, too. By reading between the lines, they interpreted a "less hawkish" message to mean "a new dovish trend is underway." Here's my take... That's more likely the wrong viewpoint than most folks believe right now. I agree that the Fed's carefully eliminated language suggests a pause in rate hikes. But I don't believe it indicates that rate cuts are imminent – not even close. Regular Digest readers know I don't mind repeating myself. That's especially true if I'm saying something I don't hear anybody else saying. So now, I'll repeat my paradigm for understanding Fed Chair Jerome Powell's mindset. It's the key to figuring out the Fed's likely course of action in the coming months – and possibly years... Powell is like the quarterback on a middle-of-the-road high-school football team... He's not a bad player. He's calling the shots as the quarterback, after all. But he has made enough mistakes and lost enough games that he always feels like he has to prove himself. He's fighting a bit of an uphill battle, too. No matter how many good plays he makes, some kids still make fun of him for dropping the ball and losing games he should have won. As he walks down the hall every day at school, Powell passes a glass case full of trophies and photos of all the school's sports heroes. Among them is the school's greatest quarterback, who played more than four decades ago. The school's football team was terrible when the old quarterback took over. But it won three straight state championships during his four years at the school. And if you listen to most folks talk about this old quarterback these days, the state titles only happened because of his great talents. Volcker is that old quarterback... He's lionized as the hero who restored the Fed's credibility by "getting tough on inflation." As Fed chair, he shoved the fed funds rate to 20% four times between March 1980 and May 1981. Inflation fell from nearly 15% in March 1980 to 1.1% by December 1986. But when I look at Volcker's performance, I come to a much different conclusion... Like every other Fed quarterback, he had no idea what he was doing. He just threw the ball up in the air and hoped his wide receivers would catch it. Then, after they caught it and ran 80-plus yards for a touchdown, he acted like that was what he intended to do all along. Volcker took over as head of the Fed in August 1979. The following chart shows what happened to the fed funds rate during the first few years of his tenure... You can see that Volcker thought the job was done in mid-1980 after his first trip to 20%. He pushed the fed funds rate down to 9.5%... before quickly learning he wasn't done yet. It took three more trips to 20% over the next 18 months to actually finish the job. We treat Fed officials like they're highly trained experts who can guide us through troubled times... But in reality, they're just [arsonists masquerading as firefighters](. They light the fires before running home, changing into their firefighter uniforms, and telling us they'll save the day! For better or worse, Volcker is looked upon as a hero. He's revered as the star player who made the hard choice and saved Americans from the death grip of inflation. That's exactly how Powell sees Volcker. He walks down the school hall every day, thinking... I'm going to be just like Paul. I'm going to leave a legacy that all the other Fed chai-, er, I mean quarterbacks in our school's future will remember forever. It's a mistake to underestimate how much Powell wants to restore the Fed's credibility and create a Volcker-like legacy for himself. Do you really think he won't watch the American people suffer horribly, all the while telling us it's for our own good? I mean, that's what Volcker did. And Powell figures he can get away with it, too. Powell knows the Fed kept rates way too low for way too long. Then, the central bank showed even more weakness in January 2019. It stopped hiking rates just because the stock market plunged 19% over the last four months of 2018. Rates were back at zero a little over a year later. And they stayed there until March 2022. Sure, you can at least partially blame the Fed's response to the COVID-19 pandemic. But that doesn't mean it was right to push rates back to zero – and then leave them there for so long. Heck, the Fed even showed weakness again in the early days of the latest rate-hiking cycle. Remember when it tried to sell us on the idea that inflation was a "transitory" problem? So now, Powell must do something to restore the Fed's credibility once and for – well, at least a few years. The bottom line is simple... I believe the Fed will keep rates higher for longer than anybody believes right now. That will ultimately become the biggest surprise of this year. And don't be shocked if it carries into 2024 as well. At the outset of today's Digest, I said we would discuss two huge, related events... Like Corey did with the Fed's latest moves, he also discussed the other event this week... Specifically, I'm talking about JPMorgan Chase's (JPM) acquisition of most of the assets and certain liabilities of the now-failed First Republic Bank. As Corey explained [in Monday's Digest]( First Republic reported on April 24 that it lost more than $100 billion in deposits in March. Of course, that month will forever be known as the end of the line for two other major U.S. banks (Silicon Valley Bank and Signature Bank). And on Monday morning, it was First Republic's turn to fail... Regulators seized the bank and turned it over to the Federal Deposit Insurance Corporation ("FDIC"). Then, the FDIC sold it to the highest bidder – JPMorgan. I'll get to the nitty-gritty details of JPMorgan's deal in a minute. But first, you need to know one more thing about this event... Nobody would blame you for thinking JPMorgan's 'rescue' proves the banking system is on solid footing... For starters, [President Joe Biden told us everything was "safe"]( less than two months ago. And I could see how you might come to this conclusion... Bank failures are unpleasant. But sometimes, they happen. And like clockwork, this is how we deal with them... Regulators step in. Then, a big, stable bank takes over the failed bank. It's good for the depositors, good for the acquiring bank, and good for the banking system as a whole. On JPMorgan's call to announce the deal, CEO Jamie Dimon almost said those exact words... This is how the system is meant to work... You're never going to have no bank failures. But if this is how these things are going to work in the future, that's a very good thing. Lather, rinse, repeat. That's why I can understand how a lot of folks – including the most sophisticated Wall Street professionals – could believe that JPMorgan's takeover is good for everybody. It's a constant narrative in the mainstream media. So most folks either believe it or don't think much about it. But for me, it's different... It's like when an important government official says, "The U.S. banking system is sound and resilient." Yes, that did happen. It was one of the 16 sentences I graded earlier from the FOMC's statement. Most folks probably don't give it a second thought when they hear something like that from a high-ranking source. And if they do think about it, it's something like... Well, I guess if anybody would know, the government would. And they probably wouldn't lie to us about it. I mean... what am I, a conspiracy theorist? You can call me a conspiracy theorist if you want. But after hearing it over and over again, I start to wonder why Dimon, the FOMC, and other supposedly powerful figures feel the need to tell us that "the system is meant to work" or that it's "sound and resilient" so much. Ultimately, it leads me to believe... the opposite is likely more true. A huge event like JPMorgan's deal for First Republic really shows us how broken the system is... Essentially, JPMorgan got $173 billion in loans and $30 billion in securities (bonds), while taking on the liabilities of $92 billion in deposits and $28 billion in debt owed to the Federal Home Loan Banks (the government's lender of second-to-last resort). For all that, Dimon and his megabank paid $10.6 billion to the FDIC – the agency that insures all the bank deposits. JPMorgan will also pay back $25 billion in deposits to the 10 other banks that collectively put $30 billion into First Republic along with it on March 16. And JPMorgan will cancel its $5 billion contribution to that effort. JPMorgan will also get a $50 billion, five-year, fixed-rate loan from the FDIC. The interest rate on the loan is so juicy (meaning low) that JPMorgan Chief Financial Officer Jeremy Barnum refused to disclose it on the call. He simply said it was a "market rate" loan. If that's true, why not tell us? Because it's not true, that's why. In addition to all that, JPMorgan worked out loss-sharing agreements on the loan portfolio... The FDIC will cover 80% of losses on single-family residential mortgages for seven years. And it will cover 80% of losses on commercial real estate and related loans for five years. Finally, the FDIC will pay First Republic's depositors $13 billion from its insurance fund. JPMorgan will record an instant $2.6 billion after-tax gain on the deal. And it will get to spread $2 billion in restructuring costs over the rest of this year and 2024. In the end, JPMorgan said the deal to "rescue" First Republic will add about $500 million to its earnings. And that's excluding the big, upfront gain on the initial purchase. It also immediately increases JPMorgan's tangible book value per share – a key metric for banks. Nice, huh? Dimon admitted how sweet the deal was on the call. He said that JPMorgan got "a very clean bank in the cleanest way you can get it." In other words, the assets aren't distressed like when JPMorgan took over Bear Stearns and Washington Mutual in 2008. Those two institutions had a lot of bad mortgages on their books. Here's one other thing that nobody else mentioned... JPMorgan is considered a "systemically important bank." That's financial-industry jargon for "too big to fail." So no matter what happens to JPMorgan from here... the Fed will bail it out. Besides the fact that this deal just drops more Fed-backstopped money into JPMorgan, there's something else... The FDIC officially insures deposits up to $250,000. But when Silicon Valley Bank failed, the government decided to insure all deposits – even those above $250,000. It did the same thing with Signature Bank, which failed shortly after Silicon Valley. And earlier this week, it did the same thing yet again with First Republic. So let me ask you this... If you're Dimon and you know a bank will soon fail, that the FDIC will pay the depositors more than you'll have to pay the FDIC, and that all depositors will be saved (including the folks with more than $250,000)... Why would you ever do anything but sit and wait for the bank to fail? It's a lot cheaper than buying the bank before it fails. By buying the bank after it fails, you don't have to pay its pesky common and preferred shareholders. They get zero. And you get to buy all the bank's assets at a steep discount. Plus, after the bank fails, the government will probably backstop everything, share the losses on loans, give you a sweet financing deal with interest rates so low that you're embarrassed to say them out loud in public, and offer all the rest of the incentives. Do you see what's happening here? The system is set up to let smaller banks fail and push their assets into the hands of the "too big to fail" banks like JPMorgan. It's set up to create a banking oligarchy. Our government is beholden enough to special interests. We don't need anything else like that. This is where fiat currencies, heavy regulation, and fractional reserve banking will ultimately lead us... We're entrenched in a system where all the banks will eventually go broke except for the few lucky ones that the government and central bank's printing presses decide to protect. The two huge, related events that happened this week lead me to a concerning conclusion... Our regional-banking crisis is far from over. Biden promised again Monday that the banking system is "safe and sound." The FOMC said Wednesday that it's "sound and resilient." And Dimon called it "very stable" this week. But yesterday, regional-bank stocks took it on the chin... PacWest Bancorp (PACW) plunged roughly 50%, Western Alliance Bancorporation (WAL) fell more than 38%, and First Horizon (FHN) dropped about 33%. It doesn't matter that all three stocks are soaring higher today. They're still lower than they were Wednesday. And of course, the day-to-day volatility is alarming... In fact, as I write this sentence, PacWest's stock is halted because it's too volatile. After losing half its value yesterday, it surged as much as 96% today. Totally normal, right? No, of course not. That's the kind of crazy action you see when things are falling apart... It happened as the mortgage bubble started popping in 2007 and 2008. Folks made big gains on subprime-mortgage companies with quick trades as the calamity unfolded. I remember telling a friend about one of the stocks I thought might have a chance (in hindsight, it didn't). He told me he bought a Mercedes with his profits from owning it for just a few days. The beaten-down regional-bank stocks rallying so much today isn't a good sign at all. It's typical price action for an industry in deep distress. And it means danger is still lurking. The powers-that-be are working overtime to reassure us that everything is safe and stable. And yet, the market is puking up bank stocks like it ate too much after a tequila bender. That's how we know some serious stuff is unfolding in front of our eyes. I've stewed about the Fed, JPMorgan, First Republic, Powell, and Dimon for the past couple days... And it reminded me of a passage from one of the all-time-classic books about banking. English author Walter Bagehot's Lombard Street: A Description of the Money Market was originally published in 1873. All the way back then, he warned readers about banks – and more specifically, the people who run them... A large Bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. If he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done. The time of contraction has arrived. The figures are very large. And vain and shallow persons in authority are reckoning evil. We'll see if the evil becomes infinite. Don't say I didn't warn you. --------------------------------------------------------------- Recommended Links: [A Historic Wall Street Event Is About to Rock the U.S. Stock Market]( The largest hedge funds like Millennium Management, Citadel, Point72, and more are anxiously awaiting the greatest Wall Street event of 2023. More than $10 trillion and more than half of the U.S. stock market will be impacted. And abnormally large gains – and losses – are set to follow. [Click here to prepare now](. --------------------------------------------------------------- [The NO. 1 Gold Play for 2023]( Some of the richest men in the world are jumping into gold right now... because evidence suggests we could see MUCH HIGHER prices in the coming weeks. But if you're not taking advantage of a little-known way to invest for around $5 today, you're missing out. [Click here for full details](. --------------------------------------------------------------- New 52-week highs (as of 5/4/23): Agnico Eagle Mines (AEM), Alamos Gold (AGI), Biogen (BIIB), Franco-Nevada (FNV), General Mills (GIS), SPDR Gold Shares (GLD), London Stock Exchange Group (LNSTY), Madison Square Garden Sports (MSGS), MYR Group (MYRG), Novartis (NVS), OMRON (OMRNY), Sprott Physical Gold Trust (PHYS), Sprott Physical Silver Trust (PSLV), Seabridge Gold (SA), iShares Silver Trust (SLV), Spotify Technology (SPOT), Torex Gold Resources (TORXF), Tudor Gold (TUD.V), ProShares Ultra Gold (UGL), Vericel (VCEL), Verisk Analytics (VRSK), and the short position in Capital One Financial (COF). In today's mailbag, more feedback on [Wednesday's Digest]( which included coverage of the debt-ceiling "debate"... a call for suggestions to name a Federal Reserve-owned racehorse... and an example of inflation in the mailbag. What say you? Let us know with an e-mail to feedback@stansberryresearch.com. "I enjoyed reading your take on the federal debt-ceiling debate, but nobody seems to be serious about addressing the underlying causes. One idea I have that would be a good start, and one I'm going to suggest to my elected officials, is to take away the blank check capability the president seems to have with a law stating that any executive branch expenditure exceeding a certain amount has to be approved by Congress." – Paid-up subscriber B.W. "True [regarding [the price inflation for Ford vehicles]( since 1934 used by subscriber John M.], but you are playing fast and loose with your definition of the price inflation. Cars now are safer, faster, more convenient, and with more bells and whistles (GPS, lane assists, etc.). You would not want to drive one of those old Fords today. That said, inflation (rising costs with no corresponding functional improvements) does suck, and does hurt everybody." – Paid-up subscriber Herbert H. "Hi Corey, Try this one [for a Fed-owned horse name], but do say it out loud as written. Race 2 0 24." – Paid-up subscriber Paul H. Good investing, Dan Ferris Eagle Point, Oregon May 5, 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 1,105.5% Retirement Millionaire Doc MSFT Microsoft 02/10/12 952.7% Stansberry's Investment Advisory Porter ADP Automatic Data 10/09/08 770.0% Extreme Value Ferris HSY Hershey 12/07/07 663.2% Stansberry's Investment Advisory Porter wstETH Wrapped Staked Ethereum 02/21/20 639.5% Stansberry Innovations Report Wade WRB W.R. Berkley 03/16/12 508.4% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 467.4% Retirement Millionaire Doc AFG American Financial 10/12/12 394.5% Stansberry's Investment Advisory Porter FSMEX Fidelity Sel Med 09/03/08 323.6% Retirement Millionaire Doc ALS-T Altius Minerals 02/16/09 307.3% Extreme Value Ferris 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 wstETH Wrapped Staked Ethereum 12/07/18 1,508.0% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,153.2% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,064.6% Crypto Capital Wade MATIC/USD Polygon 02/25/21 887.1% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 667.8% 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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