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Bad News Is Good News – Until It's Not

Aug 30, 2023 | Stansberry Digest | Corey McLaughlin

The latest jobs numbers... What the whip of a 'long and variable lag' feels
like... Bad news was good news – today... It was not happenstance... Fodder for
a Fed 'pause'... The impact for stocks...

--------------------------------------------------------------------------------


THE JOBS MARKET MAY FINALLY BE 'COOLING OFF'...

Today, we saw a substantial economic report suggesting the jobs market may
finally be weakening to the point where it matters...

The U.S. had 8.8 million job openings at the end of July, according to the
latest report from the Labor Department. That's down from almost 9.2 million a
month earlier.

This is the fewest job openings in almost two-and-a-half years and well off the
12 million peak from March 2022. Perhaps not coincidentally, that's when the
Federal Reserve began finally hiking interest rates to "fight" inflation.

The same Job Openings and Labor Turnover Survey ("JOLTS") report today showed
fewer people quitting their jobs than we'd seen since early 2021. This suggests
more and more people, on balance, are holding onto their existing jobs rather
than chasing increasingly lucrative new job offers – an inflation driver.

Today, there are just 1.5 job openings per unemployed person actively seeking
work... That's the lowest ratio since September 2021, and it's inching closer
back to a pre-pandemic "normal."

Put together, these numbers show a weakening economy. It's likely feeling the
whip of those hard-to-predict so-called "long and variable lags" of tighter
monetary policy, which intended to slow the economy without killing it –
"intended" being a key word.


PERVERSELY, THIS IS GOOD NEWS FOR THE MARKETS TODAY...

You and I (Corey McLaughlin) may see bad news in fewer job openings and fewer
opportunities to get a better job. And for everyday people in the workforce,
yes, this is a turn for the worse. But for folks at the Federal Reserve who pull
the strings on the cost of dollars – and many investors in the markets – this
economic pinch is cause for celebration.

That's because it means the Fed may not have to raise interest rates as much to
keep "fighting" inflation. And lower rates generally benefit the "stakeholders"
in our debt-based economy.

We've talked for more than a year about the macroeconomic scenario facing the
U.S. economy: inflation at decades-highs... unemployment near record lows... and
a Fed raising interest rates and making dollars more expensive throughout the
system.

The official inflation data since last summer has told a story of price growth
slowing down (though with prices still going up, of course) while the Fed keeps
hiking rates. That's because with millions of open positions, the jobs market in
central-banker parlance remains "tight."

As we've said, when inflation is still above "normal," the Fed will keep raising
rates until the job market shows substantial weakness. And any further hikes
that catch the market by surprise could be a headwind for stock prices and
growth expectations.

But if the labor market shows signs of weakness and, importantly, the pace of
inflation continues to slow (not a guarantee), the Fed would be more likely to
"pause" or stop its rate hikes. This would be good news for stock prices, on
balance, as we wrote recently.

The Fed's next meeting is September 19 and 20, assuming its members can find
their way through the clouds using the stars to get there.


A PAUSE IN RATE HIKES HAS HISTORICALLY BEEN FAVORABLE FOR STOCK PRICES...

As Stansberry Research senior analyst Brett Eversole explained back in a May
issue of the free DailyWealth e-letter, and we re-shared earlier this month...

> Remember, the stock market is a forward-looking machine. It prices in whatever
> we expect to happen over the next six to 12 months.
> 
> Because of that, buying when the Fed pauses rates is a smart bet. The table
> below shows what happened a year after each pause in the rate-hike cycle over
> the past four decades.
> 
> Take a look...
> 
> 
> 
> We've seen six other rate-hike cycles in the past 40 years. In five of those
> cases, stocks were dramatically higher a year later. And the average gain was
> an impressive 19.5%.

Again, this is the bigger-picture stuff, not about any particular stock.
Different companies will weather the environment in different ways. And there's
a notable exception in the list above in 2000 when a pause didn't do much good
for stocks and more downside was ahead.

But we talk about this so much because it provides a backdrop for the market as
a whole.


THIS IS WHAT WE SAW TODAY...

Right after the latest jobs data was reported at 10 a.m. Eastern time, each of
the major U.S. indexes surged higher. It was not happenstance.

The benchmark S&P 500 was up a little before the report, then finished 1.4%
higher today after it. It was the index's biggest one-day move higher in more
than a month.

The tech-heavy Nasdaq Composite Index behaved the same but better, closing today
1.7% higher. The small-cap Russell 2000 was also up more than 1%. The Dow Jones
Industrial Average lagged but was up 0.8%.

The S&P 500, Nasdaq, and Dow also moved above their 50-day moving averages, a
technical measure of a short-term trend, for the first time in two weeks. This
suggests that the correction we've seen in August could be near its end rather
than a middle.

We will see... If this theme continues, we'll know soon.

The latest personal consumption expenditures ("PCE") index report – the Fed's
preferred inflation gauge – comes out Thursday. And a different jobs report with
an updated unemployment rate for August will be published Friday morning.


IN ANY CASE, 'BAD NEWS' WILL EVENTUALLY BECOME BAD NEWS FOR STOCKS, TOO...

A weakening job market is good news – until those job openings drop so much that
they turn into job losses and the unemployment rate rises... or this environment
eats into companies' profits and outlooks.

At that point, the Fed will likely be inclined to cut rates over fears that the
economy needs help. Stock prices could be sliding ahead of that move, sort of
like what just happened over the past few weeks with respect to the Chinese
economy. The Chinese central bank has been intervening with stimulus as growth
has stunted.

Here in the U.S., things are actually going better...

It has taken a while to get to this point, from 12 million job openings to just
under 9 million... It may take a similar long time for the 9 million openings to
dwindle to a point that marks the next big turning point in policy for the Fed,
too, where it would step in for a rescue.

At the moment, futures traders are betting that the central bank won't start
cutting rates until June of next year. That's the latest timing I've seen since
the whole rate-hiking cycle began.

Though let's note: These same traders were expecting cuts early in 2023 at one
point. So, of course, the consensus expectation in the market for the U.S.
economy can also change quicker than anticipated – for better or worse.

But for today, at least, bad news was good news.

THE HOTTEST SECTOR TO FIND BEATEN-DOWN VALUE

In the latest episode of the Stansberry Investor Hour podcast, Stansberry
Venture Value editor Bryan Beach details his investing approach and shares the
sector he's looking at to find beaten-down value today...



Click here to watch this video right now. For more free video content, subscribe
to our Stansberry Research YouTube channel... and don't forget to follow us on
Facebook, Instagram, LinkedIn, and X, the platform formerly known as Twitter.

New 52-week highs (as of 8/28/23): Brown & Brown (BRO), CBOE Global Markets
(CBOE), Cameco (CCJ), Ingersoll Rand (IR), Eli Lilly (LLY), Verisk Analytics
(VRSK), and West Pharmaceutical Services (WST).

In today's mailbag, feedback on yesterday's Digest in which we talked about
Federal Reserve Chair Jerome Powell's latest comments on sailing by the stars
when making monetary policy... plus a reply to a piece of mail from yesterday...
Do you have a comment or question? As always, e-mail us at
feedback@stansberryresearch.com.

"Corey, After reading your article and Jerome Powell's comments I am more
convinced than ever that Ron Paul is correct. The entire Fed needs to go away.
It really is that simple. His prognostications are consistently off target and
we cannot afford to have this knucklehead, (or any other), monkeying around with
rates and 'monetary policy', which always costs the taxpayer more as inflation
continues to wreak havoc on the economy. What value does the Fed add to the
economy? None that I can see.

"I'm sick to death of this 800-pound gorilla called the U.S. Government
constantly getting more and more involved in every single aspect of our lives.
The Fed is just one example. Now they're talking about a 'FedCoin' digital
currency. That is the ultimate nightmare scenario and will also spell the end of
any freedoms we have left! Good Grief, when does this catastrophe end? Hope you
have a great day, and thanks for your insights. Always appreciate it." –
Subscriber Warren W.

Corey McLaughlin comment: Thanks, Warren. Appreciate the feedback. I'm similarly
bearish on the ability of the U.S. government to govern.

"Hey Corey, Also your comments on Powell navigating by the stars, last month
Powell said he wasn't going to tell Congress to stop spending because it isn't
his job. Well, whose job is it? That is his job. That's why the central bank is
independent of Congress." – Subscriber Neal W.

McLaughlin comment: Good points!

"The Fed's 2% inflation target is so important and subscriber R.M.'s explanation
of its origin is so spot on that I think you should publish any additional
emails seconding what R.M. wrote. So I offer this: 'Bingo!'

"My comments: This explanation is something that can be pieced together from an
undergraduate economics course or two, as R.M. implies. But it does require at
least that limited background and some critical thought about various topics
covered in those classes.

"Therefore, it could very well be that Powell doesn't actually know the origins
of the target. He has an undergraduate degree in politics, a law degree, and a
career in investment banking. By the time he came on board at the Fed, he'd
probably heard the 2% target bandied around so much that he might not have
thought twice about asking about its origins – or might have felt stupid if he
did. (As R.M.'s explanation shows, Powell actually would have been stupid for
not asking, if he didn't know.)

"As for Yellen, she has a PhD in economics and was an economics professor, so
maybe she felt some need to hide the explanation. Or maybe her economics mind
just turned to mush from all that 'high-level' economics stuff involved in being
an economics professor. She'd just go through the motions doing her unimportant
duties – like teaching undergraduates how the Federal Reserve system works – and
hustle back to her office to the important work of doing the obscure research
that economics PhDs so love doing." – Subscriber S.G.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 29, 2023



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LATEST ARTICLES

--------------------------------------------------------------------------------

Industrial REITs Seem to Break the Laws of Economics

Aug 30, 2023

Editor's note: As investors, we want to pay attention to quirks in the market.
Right now, Marc Gerstein from our corporate affiliate Chaikin Analytics is
digging deeper into one sector's strange behavior. And in this essay – recently
published in the Chaikin PowerFeed free e-letter – he explains why it could soon
create a buying opportunity... Like many undergrads in 1971, I went against
anything from the "establishment"... We weren't impressed with Economics 101,
for example. "Supply and demand" sounded like something the old guard just
wanted to shove down our throats. (But at least we knew how to regurgitate
enough to pass our exams.) As the years passed, I matured. Now, five decades
later, I understand and embrace market economics. That's why I was so shocked to
see this headline in the Wall Street Journal earlier this month... Based on the
fundamental laws of economics, that doesn't make sense... Falling demand should
depress rents (prices). Industrial real estate investment trusts ("REITs") own
and lease warehouse space. So assuming that demand really is dropping,
industrial REITs should be suffering across the board. But at a glance, this
space is a microcosm of today's odd economic conditions... The Power Gauge
system – a tool we use at Chaikin Analytics that gathers investment fundamentals
into a simple rating – gives only one industrial REIT a "bullish" rating today.
Two other REITs are rated "bearish" right now. And the rest of the companies in
the space are stuck in "neutral." So today, let's use the Power Gauge to dig
deeper – and see what's really happening in this part of the market...
Industrial REITs seem to be breaking the laws of economics. But that doesn't
mean this situation will last forever. And for investors, an opportunity could
be brewing... First, warehouse rents are rising... According to data from
commercial real estate services firm Cushman & Wakefield, rents jumped 16% year
over year in the second quarter. They're up 50% since the spring of 2020. At the
same time, demand is really softening... Cushman & Wakefield's data showed that
warehouse vacancy rates rose from 3% in late 2022 to a little more than 4% in
the second quarter of this year. And newly leased space fell 36% in the second
quarter. But we need to consider the big picture. Sure, demand for warehouse
space is currently hitting a soft patch. But overall, demand is still higher
than before the COVID-19 pandemic. In early 2020, the vacancy rate was 5%. The
type of demand is shifting, too... E-commerce demand has come down from the
sizzling pandemic pace. People are out and about again. And higher inflation and
interest rates have caused some weakening as well. But a new source of demand is
emerging. Specifically, more manufacturers are coming into (or returning to) the
U.S. And in the coming months and years, they're going to need a lot of
warehouse space. As a result, rising vacancy rates are likely temporary. When it
comes to warehouse demand, the long-term prospects remain favorable. Warehouse
customers know that. They want three- to five-year contracts. They don't want to
wind up emptyhanded when the "spot" rents eventually rise. Supply is tilting
toward more advanced, automation-enabled warehouses as well. Modern logistics
providers need these types of facilities... And these places command premium
rents. Ultimately, warehouse-rental trends are looking past the current demand
dilemma. And they're still progressing toward a more positive long-term future.
That's an encouraging sign for the U.S. economy as a whole. We're talking about
the "boots on the ground" perspective. Warehouses and related companies know
they need to have space and services available when merchants need it. They know
what's going on long before the official data reflects it. But for investors
like us, this space isn't a buying opportunity... at least, not yet. The Power
Gauge's Power Bar ratio tells us all we need to know. Take a look... That's the
Power Gauge's breakdown of the 11 industrial REITs it tracks. And as you can
see, it's not a pretty picture... This industry is mostly in a "wait and see"
mode. It's full of "neutral" ratings right now. But here's the deal... This
trend could soon change in our favor. You see, the Industrial Select Sector SPDR
Fund (XLI) has one of the strongest sector-level Power Bar ratios today. This
exchange-traded fund currently holds 29 stocks with "bullish" or better
rankings. And only seven positions rank "bearish" or worse. In the end, that's
good enough for a "bullish" rating from the Power Gauge. Put simply, industrials
are still burning hot – even if industrial REITs are acting funny. And since the
long-term future for this industry remains bright, it's worth keeping an eye on.
Good investing, Marc Gerstein Editor's note: We're in a stock-picker's market.
That's why the founder of Chaikin Analytics is stepping forward with an
important update on this rally. He shares his take on the health of the bull
market... and reveals how one signal would have warned investors of this year's
bank failures before they happened. Plus, he shares a strategy that could
position you for quick gains – even if volatility continues in September. This
presentation goes offline at midnight... So make sure you get the full story
here. Further Reading "In the case of housing, the age-old case of supply versus
demand has won out," Brett Eversole says. Everyone expected a housing crash last
year. But the shortage of homes on the market is keeping prices high. Two key
metrics show just how huge that imbalance is... Learn more here. Stocks have
entered a bull market – but not every sector is thriving. One group of stocks
took a hit earlier this year. And right now, the Power Gauge tells us this
beaten-down space isn't likely to turn around anytime soon... Read more here.

Keep reading...

Dare I Say… The Bond Market Could Be Presenting an Opportunity

Aug 29, 2023

Stocks have been on a tear so far in 2023. The S&P 500 Index is up 16% year to
date as investors have been chomping at the bit to get into stocks. But if you
can believe it, there's one area of the stock market that has been even more
popular... and it's not one you're likely to guess. I'm talking about bonds. I
don't talk about this market often in Daily Insight, on my podcast, or in my
newsletters. But the action I've seen there recently is something that shouldn't
be ignored. So on today's episode of Making Money With Matt McCall, we dive into
bonds. And a discussion of the bond market wouldn't be complete without also
touching on interest rates. There's a direct inverse relationship between the
two... As interest-rate yields have moved to levels not seen in years, the price
of bonds has fallen. Bond funds are now trading at or near multiyear lows – even
as fund managers are piling in. In fact, many investors are actually
"overweight" in this asset class, which means they have an outsized investment
in bonds in their portfolio. On the podcast, I share a group of statistics that
highlight just how much money is flowing into the space right now. And not only
does this create opportunity... But it also tells us a lot about where stocks
are headed in the future. According to the futures market, there's a 50% chance
that the Federal Reserve will raise interest rates one more time before the end
of the year. Now, it's no secret I like to take the contrarian bet. My
investment viewpoints are often against the masses – especially when it comes to
next-generation technologies like flying cars and nuclear energy. But this time,
I have to admit that I'm siding with the crowd... I believe it'll be a coin toss
as to whether the Fed raises rates or finally stops its rate-hike nonsense once
and for all. But just because I'm confident rates are at near-term highs, it
doesn't mean there isn't opportunity still to be had in the bond market.
Regardless of how much of your investment portfolio you typically allocate
outside of stocks, you need to hear what's going on in the market right now.
This isn't something you want to miss out on. Click here to watch the latest
episode of Making Money With Matt McCall now. Here's to the future, Matt
McCallEditor, Daily InsightAugust 29, 2023 P.S. Something is happening in the
stock market... It has happened time and time again throughout history, almost
like clockwork. And all of my latest research is indicating that it's starting
again. I'm talking about a massive reset of America's top stocks as we enter
this new bull market... one where many of the household names you know begin to
decline and drop down the ranks. Meanwhile, a new crop of dynamic innovators are
beginning to rise to the top of the Wall Street food chain. Early investors who
know what's coming stand to make 1,000% or more. I've joined forces with one of
the most brilliant market analysts I know to bring you the complete story. Click
here for more.

Keep reading...

The 'Experts' Are Wrong About Inflation

Aug 30, 2023

Inflation has been a wild ride over the past few years... going from 0.1% during
the pandemic... to 9% in June 2022... to about 3.2% today. It's a polarizing
topic. Everyone wants to talk about it at dinner parties. But no one knows what
the Federal Reserve will do next. But we've been right on inflation across our
Retirement Millionaire, Income Intelligence, and Retirement Trader newsletters.
First, many "experts" warned of inflation rising in the shadow of the 2008
financial crisis after the Fed expanded the money supply. We said it wasn't
going to happen. It didn't. Then in 2018, we started to highlight that the
strong labor market and growth risked finally stoking inflation. It did start to
tick up, but then the pandemic stimulus really ramped things into overdrive. We
then argued it wouldn't be transitory – when everyone was saying it would be.
Here's what we wrote in Retirement Trader in September 2021 – when inflation
readings were hitting 4% and Federal Reserve Chair Jerome Powell kept pounding
the transitory narrative... But today, the economy is finally heating up. Plus,
full employment leads to higher wages as businesses compete for workers. And
more people buying more goods drives up the price. Have you noticed that the
price of corn is up 43% over the past year? Or that gasoline prices are up 50%?
Or even that homes are being sold for nearly 17% more than they were last year?
Inflation is here. And it's not going away anytime soon. And finally, when
inflation was around 9%, we said that we were past the worst of it. True the
whole way. Well, now, after a handful of soft inflation reports, people think
the inflation story is totally over. But we think they have gone too far... You
can look at inflation expectations by comparing interest rates on different
inflation-protected bonds. These are called the inflation "breakevens."
Expectations have dropped sharply, and markets now expect inflation to come in
at 2.18% per year for the next five years... That's too low... Currently,
inflation sits just over 3%. It will take time to decline further. To even that
out to 2.18%, that means markets think inflation will go below 2% and spend some
time there. We're not worried about hyperinflation. But in our view, we'll
likely see 3% to 4% inflation around the world for another few years. That's not
enough to ruin your trip to the grocery store, but it's enough to affect
financial markets and the "real" return on your investments. And the markets
could take a hit once investors realize this. As we've written recently, we
expect to see more volatility in stocks in the near future. And inflation is
just another reason for it. This is the exact kind of volatility my friend Marc
Chaikin said to expect when he predicted a volatile bull market had begun on
January 17 of this year... Fortunately, Marc says this bull market is the
perfect environment to apply a strategy he designed for this kind of moment. It
has already shown folks how to earn gains like 76% in four months... 85% in
three months... 75% in just 40 days... and a remarkable 113% in only 26 days. So
if you want to try Marc's timely market strategy risk-free, today is your last
chance. What We're Reading... A short history of transitory inflation. Something
different: Biden administration unveils first 10 drugs subject to Medicare price
negotiations. Here's to our health, wealth, and a great retirement, Dr. David
Eifrig and the Health & Wealth Bulletin Research TeamAugust 30, 2023

Keep reading...

Episode 325: The Hottest Sector to Find Beaten-Down Value

Aug 29, 2023

This week in Stansberry Investor Hour, Dan and Corey are joined by their
Stansberry Research colleague, Bryan Beach. Bryan is the editor of Stansberry
Venture Value, which is Stansberry's small-cap value newsletter. During their
conversation, they discuss how to find the best value out there today. But
first, Dan and Corey kick off the podcast by dissecting the latest in the
market, starting with the recent Republican political debate and Federal Reserve
Chair Jerome Powell's presence in Jackson Hole, Wyoming. Corey discusses how the
interplay between politics and the markets is a recurring theme – particularly
with the current injection of inflation into the presidential race. Bryan then
joins the conversation to break down his value-investment approach. This
approach extends across industries and is guided by the pursuit of "value
nuggets." One of Bryan's central investing tenets involves identifying companies
that have experienced significant declines in value. And right now, the Software
as a Service ("SaaS") space is a prime example of such undervaluation. The
conversation then shifts to Bryan's previous role as an accountant. He recalls
Wall Street's historical inclination toward upfront software-purchase models,
which encompassed future maintenance packages and fees. But Salesforce changed
all that in the early 2010s by reshaping the software landscape. The transition
toward the SaaS model gained remarkable traction between 2015 and 2021. As Bryan
notes... The Benioff model, the SaaS model – Wall Street immediately fell in
love with it. And they realized that after six or seven years, it's much, much
better to be a SaaS company than trying to sell perpetual licenses. More
recently, SaaS companies have experienced a downturn in popularity. But Bryan
sees this as an opportunity. He highlights their affordability and upward
momentum, which makes them prime candidates for investment. He identifies these
types of "beaten down" stocks as ripe for consideration within his investment
strategy. Click here or on the image below to start listening right now.
(Additional past episodes are located here.) The transcript will be on the
website soon.

Listen to the episode



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