My top lesson from VALUEx Vail... Danger signs in the bond markets... The only 'stress test' that means anything... Regulatory theater... The right way to be scared...
 It's 'a clear and present danger' that would catch everyone off guard...
As I (Dan Ferris) mentioned last Friday, I just attended the annual VALUEx Vail investing conference in Colorado. Forty investors gathered to pitch investment ideas. Of all the pitches I heard, one has really stuck with me... VALUEx Vail is a stock picker's conference. Every presentation is about one of the presenter's favorite stocks. I like contrarians, outlaws, and firebrands, so I loved hearing a presentation about bonds at a stock picker's event... The idea came from investor/author Paul Podolsky of Connecticut-based Kate Capital. Paul is a smart, worldly, well-traveled investor who once worked closely with Ray Dalio at Bridgewater Associates, the biggest hedge fund in the world. (Paul and I had a great conversation about China and other topics last July on the Stansberry Investor Hour.) Paul's thesis is relevant to the entire market... and he calls the situation "a clear and present danger." You've heard plenty of noise about the Fed's next moves... Paul noted how futures traders are counting on the Federal Reserve to lower interest rates over the next year or so. But the Fed doesn't control all interest rates... Recall that the "rates" you'll hear mentioned about the Fed really mean one thing: the federal-funds rate. It's the annualized interest rate that commercial banks charge each other for overnight loans of their excess reserves. That's it. The fed-funds rate can influence other interest rates and yields across the markets and the economy, sure. But many traders are overlooking the other forces that can determine interest rates. Paul pointed to the inverted yield curve as a notable trend. That's when short-term interest rates are higher than long-term ones. Historically, this is an unusual condition... You'd expect to get a higher return from locking up your money for longer. But these days, the market has gotten used to this phenomenon. It's unprepared for things to return to normal. As you know, the Fed lowers the fed-funds rate to stimulate the economy and raises it to reduce inflation. The market is overwhelmingly focused on rate cuts, ready for money to get cheaper and boost stocks. And today's stock prices already reflect the expectation that this will happen. So if the Fed cuts rates by less than the market expects, everyone will feel that effect. It would suggest that the Fed sees greater inflation pressures than the market currently believes. This shift could also drive up long-term yields like the 10-year Treasury note, creating a yield-curve reversion. Stocks priced near record valuations are wholly unprepared for higher long-term interest rates, which would drive up companies' borrowing costs. In other words, the Fed could cut rates... only to see other rates rise. And that would be bad news for stocks. It's a classic contrarian view... When the market has strong expectations priced in, any data that doesn't support those expectations can set off a powerful reversal. Mike Barrett and I use very similar logic to pick stocks in our monthly Extreme Value report. And the expectations of rate cuts are getting stronger, not weaker... At the Fed's last meeting, Chair Jerome Powell said the central bank expects to cut rates just once this year. You might be wondering how the Fed could possibly disappoint the market's expectations when it has set them so low. Part of the answer is that market participants have minds of their own, and the Fed's statements are only one of the inputs they consider. Plus, the market is looking beyond 2024. Bloomberg reports that traders in short-term interest-rate options are betting on as much as 300 basis points of Fed rate cuts by March 2025. Also, both Podolsky and Bloomberg note that falling interest rates aren't necessarily a good sign. Bloomberg's report explicitly pointed out that 300 basis points of cutting is unlikely unless a recession starts soon. So two different sources suggest smart folks are seeing danger signs in the bond market right now. Perhaps you're thinking that people have been talking about the inevitability of a recession for more than a year now. In 2022, many folks thought we'd have one by 2023. Not only has a recession not appeared, but stocks have climbed that wall of worry to new all-time highs. Maybe the whole idea of worrying about a recession is stupid to begin with... Maybe the stock market is right, the worrywarts are wrong, and the future remains as rosy as today's rich valuations imply. Besides, even if a recession strikes... big deal, the Fed's got your back, right? In the event of a recession, it'll just send interest rates plummeting and make it easy for everybody to borrow their way out of whatever mess they're in. If you lose your job, you'll at least be able to buy a house with a 2.5% mortgage. See, no problem. What, you think you'd need a job to buy that low-mortgage house? Nonsense. If the housing bubble taught us anything, it's that no mortgage is too large. If you think the banks are better disciplined now than they were back then, you're just telling me you don't know any bankers. Plus, the Fed says the biggest banks in the country will be just fine and will keep lending and doing other things banks do even in a recession. You see, yesterday, the Fed put the 31 largest banks in the country on a treadmill, hooked wires up to their skin, and took their vital signs while they were walking and jogging – its annual stress tests. The Federal Reserve Board conducts these tests every year "to help ensure that large banks can support the economy during downturns." And guess what, wouldn't you know it, they all came through with flying colors... According to the board's statement, this year's stress tests included: [A] severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 36 percent decline in house prices. The unemployment rate rises nearly 6-1/2 percentage points to a peak of 10 percent, and economic output declines commensurately. The Fed started stress tests in 2011 – three years after the housing bubble it helped create blew up the global financial system. You can always trust bureaucrats to marshal the resources necessary to make damn sure the barn door is closed after ushering each and every horse out of it. You can always count on them to amass an army of underlings and flex their regulatory prowess in the noble cause of fighting the last war. Just look at how these guys can keep a global recession and a real estate bust and other cool stuff in their back pockets and whip them out whenever they need to do one of these spiffy tests. They must be real smart. We're so lucky to be ruled by such a great race of philosopher kings. The Fed is the biggest bank regulator in the country. So it has a big responsibility to make sure the banks can withstand some punishment when the economy gets rough. That's why it tests the biggest banks each year, putting them through a rigorous exercise designed by its army of PhD economists. It's all very complex, and regular folks like you and me should feel proud that the Fed is doing everything it can to keep us safe. Just kidding, I couldn't resist trying to sound like a normal idiot for a minute... The Fed is a joke, because you can be sure it'll print every penny it needs to bail out every one of those 31 banks if any of them start failing... either propping them up outright like in the 2008 financial crisis or facilitating a sale to another bank, also like in the 2008 financial crisis. And let's face it. The stress tests are a bunch of hypothetical nonsense. The only meaningful stress test that happens is out in the real world. That's where banks fail if the losses in their loan and bond portfolios get too big and depositors start withdrawing money at lightning pace through their online accounts... Like what happened to Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic last year. They didn't pass the only stress test that means anything. And they didn't even take the Fed's stress tests, because Donald Trump signed a law in 2018 that raised the testing threshold from $50 billion in assets to $250 billion. The biggest bank failure of 2023, Silicon Valley, had reported $212 billion in assets before it started failing. Bottom line: the Fed's stress tests didn't stop three of the four biggest bank failures in U.S. history. The real point is regulatory theater... It's no better than when TSA agents feel up your wheelchair-bound grandmother at the airport. The point is to look purposeful, not to achieve anything. The Fed couldn't stop the Great Depression, the great inflation of the 1970s, the savings-and-loan crisis, the dot-com bust, or the housing bubble or the great financial crisis that followed it (which included the Great Recession). It couldn't stop the ridiculous COVID lockdown bubble or the bear market and 40-year-high inflation that followed it. Some folks might even say the Fed was among the main causes of all the greatest financial disasters since its 1913 founding. But it can't seem to stop the worst economic and financial calamities from making rich people richer and poor people poorer. If I were a real conspiracy theorist, I'd say the Fed's top experts were doing it on purpose... But they're such a bunch of idiots, it's hard to believe they get out of bed and get dressed on purpose. It's scary out there in the real world... In addition to Podolsky's warning about a yield-curve reversion, our friend Jason Goepfert of SentimenTrader recently identified another area of concern. He pointed out on the social platform X... The spread between the weakest and strongest investment-grade credits bottomed nearly two months ago. Credit concerns are rising even as stocks hit record highs. This is unusual and was last seen in late 2021. Wider credit spreads are a classic sign of bond market distress. A wide spread between AAA and BBB bonds might not sound like a big deal, but it could mean that investors are worried enough about a recession, they've begun moving their money out of the riskiest bonds. Despite everyone's obsession with the Fed and interest rates, most of the equity investors I talk to don't pay much attention to the bond market. I get the impression most folks find bond discussions boring, esoteric, and outside their immediate circle of concern. It's a big mistake. Bonds should concern everybody with a 401(k). As Podolsky put it in Vail and again in the most recent issue of his Substack letter: A bond is in the stock... If bond yields rise, [price-to-earnings] ratios fall and debt service rises. So if you are betting on stocks, you are also betting on bonds. At the very least, anybody with a brokerage account who lived through the 2008 crisis ought to relate somewhat to Podolsky's point. Big trouble in the stock market is frequently preceded by big trouble in the debt market. Besides Podolsky's point, there's also the fact that debt is higher in the capital structure of companies than equity... In other words, equity – all those stocks you and I hold in our 401(k)s and other brokerage accounts – gets wiped out if a company goes bankrupt. By contrast, bondholders are entitled to recover their money from whatever assets the company has left. If you're buying higher-quality businesses, you rarely have to worry about bankruptcy. The point is to remember the relationship: Equity takes the losses before debt. Even worse, the stock market can behave the opposite way, with equities continuing to fly high while the bond market is starting to wring its hands about an impending crisis. Mostly, you don't need to worry about this stuff – but there are times when you should. A potentially reverting yield curve in the wake of the most aggressive rate-hiking cycle in 40 years is one of those times. And it gets a little scarier when you factor in a stock market trading near some of the highest valuations in all recorded history (which tends to get that way when nobody is scared). Fear in the bond market amid complacency in an expensive stock market is not a good combination... Like me, portfolio manager/economist John Hussman of Hussman Funds dislikes making predictions. He's focused on assessing the implications of the current environment. In his latest missive to investors, he adds to the concerns I've noted above, also with a nod to current bond yields... If your notion of passive investing doesn't allow for a realistic possibility of a market loss well in excess of 50%, or a decade or more in which the S&P 500 lags Treasury bills, you've not only decided to be a passive investor, you've decided to ignore history. So, whatever your discipline, examine your risk exposures. It's a similar message to my own "prepare, don't predict" mantra of the past couple years. Hussman says he hasn't changed his investment position, but he added that his current positioning is "already defensive based on extreme valuations, unfavorable internals, and overextended conditions." Amen. As you might guess, I'm feeling just as defensive as Hussman and expressing that concern in the advice I give subscribers of Extreme Value and The Ferris Report. Mike Barrett and I are preparing to add our third new short position in the next issue of Extreme Value. We added the first two last month. We're focusing on "dead companies walking," a phrase borrowed from the title of investor/author Scott Fearon's 2015 book on short selling. (For those who've read Joel Greenblatt's excellent investing books, Fearon is the Greenblatt of short selling and his work is a must-read.) And for the first time since its inception in December 2022, the current issue of The Ferris Report (published today) does not include a new buy recommendation... though it does tell the story of how I won $3,500 betting Donald Trump would win in 2016 and how an eerie parallel to the key event at that time surfaced last week. The story starts out in a library in England and wends through Las Vegas and China, makes a long stop at the Canadian housing market, and then goes global about housing. There's lots to unpack and one of the more concerning though likely off-your-radar stories of our time. (Ferris Report subscribers can check it out here.) Perhaps it seems like I'm trying to scare you, and that might even be true... Whether I am or not, it's not about selling everything and heading for the hills. It's about understanding risk exposures and preparing your portfolio for a wide variety of outcomes – many of which might not be on your radar. Don't panic, but do understand your risk exposure.
| Recommended Links: | |  Urgent Warning About the Magnificent Seven Wall Street veteran Marc Chaikin predicted this bull market... last year's bank collapses... and even the rise of Nvidia as early as 2014. Now, he's sounding the alarm on what's coming next for the stock market and warns: "Folks getting distracted by the Magnificent Seven right now, especially Nvidia, risk getting sideswiped by what's coming next." | |
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New 52-week highs (as of 6/27/24): Amazon (AMZN), Coca-Cola Consolidated (COKE), iShares MSCI Emerging Markets ex China Index Fund (EMXC), Alphabet (GOOGL), iShares iBonds December 2024 Term Treasury Fund (IBTE), Intuitive Surgical (ISRG), KraneShares MSCI Emerging Markets ex China Index Fund (KEMX), Kinross Gold (KGC), Eli Lilly (LLY), Medpace (MEDP), Microsoft (MSFT), and Vanguard Short-Term Inflation-Protected Securities (VTIP). In today's mailbag, feedback on yesterday's edition, in which Digest editor Corey McLaughlin looked ahead to last night's presidential debate and also discussed inflation and speculation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "I enjoyed the article on inflation, which has been quite nasty in this recent period of history. I have some doubts about the validity of the CPI/PCE [the consumer price index and personal consumption expenditures price index] reported when the prices I'm paying at our local Kroger continue rising. The problem is that the new higher prices are not going down even though the CPI/PCE has made progress going down..." – Subscriber Rodger G. "Corey, I shop for almost all of my groceries at Walmart. I can believe that they have gone up in price since the start of COVID. However, 288% as this guy is stating from your letter is ridiculous based on what I buy." – Subscriber Hubert O. Corey McLaughlin comment: Thanks for the notes. Hubert, this is why we used the word "claims" about the 4x increase that the fella described... But we shared it to make a broader point that prices are higher for many people than the "official" data suggests, as Rodger points out. "Thanks to Stansberry Research, I invested conservatively in an IRA brokerage retirement account using one of the big brokerage houses. I turned $100,000 into $600,000. The rest of my IRA with a company match of funds was invested in bonds and money market funds, and I retired with just over seven figures. My mantra was value, dividend reinvestment, and forever stocks. So it can be done if you start early, and have some discipline. Thank you! "Ahh the debate! I don't plan on watching it. [Editor's note: That was a good decision if you like to avoid painful television.] The cast of characters will most likely make it a 3 on 1 debate... with the same tired old bromides slung back and forth... with the same expected fire brand responses. What I'd like to hear is the plan to conquer inflation, border and immigration policies that make sense, and ideas on prosperity for all Americans without exuberant speculation. A nation can dream, right? "I expect to see all the gotcha moments replayed continuously on Friday and into the weekend, with rampant speculation on who won the night. As usual, the middle class will be loser because of the [nutty] ideas that rile up the base of each party. How about a return to the values that made America great before the Nixon gold decree... savings, manufacturing goods, outlawing usury borrowing rates (30% rates on credit cards), moving away from the financialization of everything, and instead pay down some of our debt... both private and public debt. Debt is not wealth. Savings and investment in America is wealth." – Subscriber Rob C. "The article has a lot about psychology and human nature: both forces underlie markets. "For example, when you say 'Practically, debate about the past and hearing promises about the future shouldn't mean much...' I think you are correct on the surface but today the economy, businesses, and the markets are significantly driven by (at least in the short term) expectations. So, the gibberish in the debate doesn't mean much, but the expectations it creates mean a lot in the short term. "The psychological phenomenon of expectations also adds to subscriber Kevin S.'s description of 'faster cycle onset... [and] shorter life of market bubbles' that he (correctly) attributes largely to AI-driven technologies. The concept of investor 'expectations' is supported by the National Bureau of Economic Research findings they call 'exuberant overreactions' that you discussed later in your article. "Turning to human nature, I think human behavior is at times driven by human nature in the form of some of the 7 Deadly Sins such as Greed, Pride (arrogance and ego?), Envy, Gluttony, and Sloth (laziness leading to the desire to make a quick buck) [and wrath and lust]. These also tie into 'faster cycle onset... [and] shorter life of market bubbles'. And then there is speculation... "For the record, I've fallen prey to all the above. Great article!" – Subscriber Michael U. Good investing, Dan Ferris
Eagle Point, Oregon
June 28, 2024
Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open stock positions across all Stansberry Research portfolios | Investment | Buy Date | Return | Publication | Analyst | MSFT
Microsoft | 02/10/12 | 1,443.6% | Stansberry's Investment Advisory | Porter | MSFT
Microsoft | 11/11/10 | 1,434.5% | Retirement Millionaire | Doc | ADP
Automatic Data Processing | 10/09/08 | 868.9% | Extreme Value | Ferris | WRB
W.R. Berkley | 03/16/12 | 729.5% | Stansberry's Investment Advisory | Porter | BRK.B
Berkshire Hathaway | 04/01/09 | 623.3% | Retirement Millionaire | Doc | HSY
Hershey | 12/07/07 | 454.1% | Stansberry's Investment Advisory | Porter | AFG
American Financial | 10/12/12 | 440.6% | Stansberry's Investment Advisory | Porter | TT
Trane Technologies | 04/12/18 | 433.8% | Retirement Millionaire | Doc | NVO
Novo Nordisk | 12/05/19 | 420.9% | Stansberry's Investment Advisory | Gula | TTD
The Trade Desk | 10/17/19 | 375.9% | 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 | | 5 | Stansberry's Investment Advisory | Porter/Gula | | 3 | Retirement Millionaire | Doc | | 1 | Extreme Value | Ferris | | 1 | Stansberry Innovations Report | Engel |
Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio | Investment | Buy Date | Return | Publication | Analyst | wstETH
Wrapped Staked Ethereum | 12/07/18 | 2,291.8% | Crypto Capital | Wade | BTC/USD
Bitcoin | 11/27/18 | 1,538.0% | Crypto Capital | Wade | ONE/USD
Harmony | 12/16/19 | 1,164.2% | Crypto Capital | Wade | MATIC/USD
Polygon | 02/25/21 | 771.9% | Crypto Capital | Wade | AGI/USD
Delysium AI | 01/16/24 | 364.3% | 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 | | Microsoft^ | MSFT | 12.74 years | 1,185% | Retirement Millionaire | Doc | | Inovio Pharma.^ | INO | 1.01 years | 1,139% | Venture Tech. | Lashmet | | Seabridge Gold^ | SA | 4.20 years | 995% | Sjug Conf. | Sjuggerud | | 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 | | PNC Warrants | PNC-WS | 6.16 years | 706% | True Wealth Systems | Sjuggerud | | Maxar Technologies^ | MAXR | 1.90 years | 691% | Venture Tech. | Lashmet | | Silvergate Capital | SI | 1.95 years | 681% | Amer. Moonshots | Root | ^ 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%.
Stansberry Research Crypto Hall of Fame Top 5 highest-returning closed positions in the Crypto Capital model portfolio | Investment | Symbol | Duration | Gain | Publication | Analyst | | Band Protocol | BAND/USD | 0.31 years | 1,169% | Crypto Capital | Wade | | Terra | LUNA/USD | 0.41 years | 1,166% | Crypto Capital | Wade | | Polymesh | POLYX/USD | 3.84 years | 1,157% | Crypto Capital | Wade | | Frontier | FRONT/USD | 0.09 years | 979% | Crypto Capital | Wade | | Binance Coin | BNB/USD | 1.78 years | 963% | Crypto Capital | Wade | | 
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