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The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
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| Folks in the mainstream financial media are enamored with the idea of a "soft landing"... This is the idea that the Federal Reserve can pull its economic "levers" just so – gradually raising interest rates and slowly unwinding its quantitative easing program – and withdraw its unprecedented stimulus efforts without triggering a recession. Unfortunately, history suggests this is unlikely... According to the official record, the Fed has pulled off this feat just once before. Then-Fed Chairman Alan Greenspan doubled rates in 1994 without causing a recession (though you could argue the burgeoning tech boom may have had something to do with that). Every other "tightening" cycle in its 100-year-plus history has been followed predictably by an economic slowdown. It's not hard to see why... When the Fed cuts rates or otherwise eases monetary policy, it isn't simply "stimulating" the economy. It's also distorting the most important source of information in the economy. As Stansberry Research founder Porter Stansberry explained in the April 28 Digest...
In other words, when the price of money is artificially lowered, bad things tend to happen... Investors and entrepreneurs are incentivized to take more risk than they otherwise would... Businesses and consumers load up on debt that they otherwise couldn't afford... And lenders extend credit to borrowers they would otherwise avoid. So it follows that when the Fed eventually raises rates or tightens monetary policy, much of this activity no longer makes sense. The false signal is removed, and the economy slows as economic reality sets in and bad debts are wiped out. This perpetual teeter-totter is known as the "business cycle"... And it's largely the Fed's doing. To be clear, that doesn't mean we wouldn't see booms and busts without the Fed. So long as the economy is made up of humans and their emotions, periodic excesses are unavoidable. But without broad manipulation of money and interest rates, these would be far less severe. This is bad enough. However, the Fed has managed to make it even worse. You see, for the past several decades, the Fed has refused to let even this process fully play out... Instead, it has responded to every downturn – or perceived threat of a downturn – with more "easy money" than before... The Fed's response to the emerging markets crises of the 1990s helped fuel the dot-com boom and bust. Its response to that recession led to the housing bubble and the global financial crisis that followed. And its response to that crisis – in concert with central banks around the world – has now created the biggest and most pervasive bubble the world has ever seen. So no... we don't expect to see a soft landing this time around, either. What comes next will be no ordinary recession or bear market. ----------Recommended Link---------
Of course, inevitable doesn't mean imminent... As regular DailyWealth readers know, this boom could continue awhile longer. In fact, our colleague Steve Sjuggerud – who has "called" this bull market better than anyone we know – believes the "Melt Up" could run for another year or two before it finally ends. Steve follows a number of long-term indicators that have warned of previous downturns many months in advance. And none of them are signaling danger at this time. Today, we can add another data point in favor of the bulls... One of the biggest drivers of higher stock prices over the past few years remains intact. Back in December, Congress voted to cut the corporate tax rate from 35% to 21%. As we explained, this lower tax rate – combined with the potential for a "repatriation holiday" – could lead to a surge in corporate share repurchases (or "stock buybacks"). And it looks like we're already starting to see that play out... According to investment-research firm TrimTabs, U.S. companies have repurchased nearly $5 billion worth of shares per day through the first two-plus months of the year. That's double the pace from the same period in 2017. Bloomberg reports that companies bought back more than $153 billion in February alone. That's more than any single month in history. All told, investment bank JPMorgan Chase (JPM) expects a record of more than $800 billion in buybacks in 2018, up from $530 billion last year. The numbers could be a major boon for investors this year... After all, a falling share count means that each remaining share gets a bigger piece of the earnings "pie." And rising earnings-per-share – one of Wall Street's favorite metrics – could continue to drive the market higher. But while this could be bullish for the market in the near term, it's important to remember that share buybacks are a double-edged sword. They're only beneficial to shareholders over the long term when a company buys back shares at a reasonable valuation. And as Extreme Value editor Dan Ferris reminded us in a private e-mail this week, this is relatively uncommon...
Worse, many companies are compounding this mistake today... They're paying out more to shareholders in the form of dividends and buybacks than they're actually earning from their operations. And they're using debt to make up the difference. Again, the reason isn't hard to understand. Thanks to central bank manipulation, debt is relatively cheap today. Management teams can "juice" their numbers by using buybacks to convert this debt into higher earnings per share. And it surely doesn't help that many executives – whose compensation is often tied to these metrics – are actively incentivized to risk the long-term health of their companies in exchange for short-term boosts in share prices. Dan agrees... With many stocks near all-time highs, Dan is wary of companies spending billions of dollars buying back shares today. As he explained...
This is especially relevant today... At this stage in the historic bull market, Dan says it's more important than ever to invest in companies with proven management teams that use buybacks wisely... And he says he recently found one of the best he has ever seen. Not only does this firm reward shareholders through a generous dividend and opportunistic buybacks, it also checks the box on each of Dan's other "five financial clues." It gushes free cash flow... boasts thick margins... has hundreds of millions of dollars' worth of cash with zero debt... and generates a consistently high return on equity. It's no wonder Dan is calling this company his "brand-new, No. 1 recommendation." In fact, he says if he had to put every penny of his life savings into one stock, this would be it. Learn more about this opportunity right here. Regards, Justin Brill Editor's note: We're almost a decade into this historic bull market... It's getting harder and harder to find cheap stocks. But Dan recently found a stock that he predicts will become the first 20-bagger in Stansberry Research history. Dan says this is "the kind of stock opportunity you get once or twice in a lifetime, at most." Get all the details right here. |
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