The obvious and unseen perils of loan forgiveness⦠[TradeSmith Daily]( Joe Bidenâs loan forgiveness campaign continues… War drums beat ever louder… âSell in Mayâ season may have come early… Protect yourself with defensive stocks and quick trades in the Age of Chaos…
By Michael Salvatore, Editor, TradeSmith Daily Canceling student loans will probably wind up as the most inflationary policy of Bidenâs presidency… full stop. It will assure a longer, more painful inflation fight and terminally higher education costs for everyone… in exchange for the short-term benefit of a relative few. Hereâs why… Loan creation is money creation. We know this because, as [we discussed last Friday]( itâs how the Federal Reserve adds money to the system. By buying bonds, the Fed lends money to the counterparty — the federal government and the banks who stash the created money in reserves. When the bond matures, the money comes back to the Fed with interest. Student loans are different and rely on some greater assumptions. When an 18-year-old freshman in college is granted their first student loan, the lender is essentially buying a bond from that student with whatâs assumed to be a guaranteed return, with interest… but no fixed maturity date. Another difference is the money thatâs created from this bond doesnât usually wind up with the student. It goes to the university. The idea is that the student will use their education — or some other means, the lender doesnât really care — to go out and earn the money and pay it back. Another assumption. President Biden has been busy breaking these assumptions, though. Heâs thus far forgiven $153 billion in student loans for about 4 million Americans, with $3.6 billion in forgiveness recently announced. Hereâs the thing though. When you forgive a loan, the debtâs monetary value is partially or completely destroyed — for the lender. Meanwhile the intangible value the debtors received — their education — is not. All the money that was borrowed (created) to spend on education went to the university. The lender never got the money back. But the university got paid… and the student got their education… so allâs good, right? Not so. The money that was created when the debt was issued is still in the system, but the value that was derived from that money has been eroded significantly. From this whole exercise, universities learn the lesson that they can keep charging higher and higher tuition fees — inflationary. Students learn the lesson that they shouldnât pay back their debts because the governmentâs got their back — more bad behavior leading to more potential inflation. And lenders — which happen to be the federal government in many cases — turn what shouldâve been a return into a deficit. Higher deficits, higher prices, and poor financial education all in one fell swoop. RECOMMENDED LINK [The Next Nvidia?](
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This is just one more sign to expect inflation to stick around longer than weâd all like. How to defend yourself? The plan is simple and evergreen:
- Buy high-quality, dividend paying stocks — and use TradeSmithâs tools to find them. (See [Saturdayâs dispatch from TradeSmith CEO Keith Kaplan]( for a great example of how.)
- Buy physical, hold-in-your-hand gold. 10 gold bars bought you a house 50 years ago, and they can buy you a similar house today. There has been no better long-term safeguard against inflation, save for…
- Bitcoin. Bitcoinâs disinflationary monetary policy makes it an essential part of an all-weather portfolio. Focus on the long term, not the daily swings up and down.
This is far from the only threat to your wealth lurking about right now, though…
- The beat of war drums grows ever louder…
And traders are going risk-off in response. On Friday, headlines splashed across screens everywhere suggesting an imminent retaliation attack from Iran on Israel, after a missile strike on a diplomatic compound in Syria killed 13 people two weeks ago. Seemingly in reaction, stocks had the worst day in months — with the S&P 500 down 1.65% as I write and getting worse by the second. Itâs been a true âflight to safetyâ day, with commodities like crude oil, precious metals like gold and silver, and the U.S. dollar holding up while equities tank. The 10-year Treasury yield, which as weâve pointed out has been charging higher lately, sank more than 2% as traders sought safety in long-term U.S. debt. Are we finally getting that [correction we warned about a few weeks back]( It could well be. We are entering a historically flat, if not outright rough period for stock prices. The phrase âSell in May and go awayâ exists for a reason. The [Trade Cycles Seasonality indicator]( shows that over the last 75 years, the S&P 500 returns a mere 0.25% on average from the end of April through the end of June — with a few dips in between.
Though notably, the last two weeks of April, beginning today, tend to see a 0.95% average return with a 66.2% accuracy rating. Should Middle East tensions escalate (by the time you read this, they may already have), itâs impossible to know whether stocks will follow this historical model. But if youâre worried that weâre about to enter a free-fall zone, I urge you to look to the right of the chart. RECOMMENDED LINK [Next President (Not Trump. Not Biden.)](
Do you want to see who I believe will be the next president of the U.S.A? It wonât be Biden... And it wonât be Trump. [Click here to see why it will be ▁▁▁▁▁▁▁](. Even if we do see an early summertime slump, we should keep in mind that the final few months of the year tend to bring a strong tailwind to stocks. And this year, being an election year, the effect is even more pronounced.
During the past 19 election years, the S&P 500 historically returned an average of 5.15% from the end of June through the end of the year. That tells me that whatever doldrums are coming our way, theyâre a buying opportunity. Both for the three defensive sectors I mentioned earlier, and for the juicy growth stocks that tend to rise the highest when the tide comes back in. (You should know, the Seasonality tool is just one part of a Trade Cycles membership. In addition, subscribers get access to the TradeSmith Peaks and Valley indicator, volume profile, and regular expert recommendations based on these tools. [Learn more here.]( For more on this idea, make sure to tune into TradeSmith Daily later this week. Iâll share a conversation I recently had with contributing editor Lucas Downey, highlighting some great ideas for both periods…
- Everything weâve discussed today proves how important it is to âexpect the unexpectedâ…
Louis Navellier, senior investment analyst at our corporate partner, InvestorPlace, has said weâre entering an Age of Chaos in the years to come. With surging inflation… government policies egging it on… worsening conflicts overseas that the U.S. is increasingly entangled in… and an endless âwill they, wonât theyâ debate on the direction of decades of high interest rates… itâs hard to argue with. But so few market participants are prepared for such a time. The 13 years of low volatility and low inflation between the Great Financial Crisis and the 2021 pandemic bubble trained investors to âbuy the dipâ so long as the Fed was in their corner with easy monetary policy. Today, things have changed completely. Inflation is high alongside volatility… and interest rates have fewer reasons to come down than ever. Thatâs why Louis recently teamed up with Charles Sizemore, chief investment strategist of the Freeport Society, to [help everyday investors stay on their toes in this new era](. Charles is someone I know very well from working together in the past. And I can tell you that, beyond his 20 years of experience trading the markets, he has a specialty for generating inflation-beating income no matter what kind of market weâre in. That alone should tell you heâs worth following. But even more so, heâs crafted [a model portfolio of defensive stocks that will survive and thrive anything an Age of Chaos would throw at us](. And in addition, heâs shared a trade opportunity to take advantage of this election cycle. I urge you to [check out what Charles has to say alongside Louis in their recent Election Shock Summit presentation, aired last week](. To your health and wealth, [Michael Salvatore]Michael Salvatore
Editor, TradeSmith Daily P.S. How do you think the election will affect the markets? And how do you plan to prepare? Iâd love to hear your thoughts. Send me an email at [feedback@TradeSmithDaily.com](mailto:mailto:feedback@TradeSmithDaily.com). Get Instant Access
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