Jerome Powell is willing to burn down the village to save it.
And the villagers don’t even realize their portfolios are about to go up in smoke.
I can’t blame them. They believe the Federal Reserve will come to the rescue and douse the flames with a fire hose of dovish policies like lower interest rates.
But Powell is the one lighting the match. And he’ll burn those who aren’t paying attention.
Let me explain…
The Fed chairman has made it clear he’ll continue cranking up interest rates until he brings down the inflation rate to his 2% target. But by jacking up rates, he’s kicked the stuffing out of the financial system.
We’re in the midst of the worst financial crisis since 2008… Banks are tightening credit… And corporate earnings are in a downtrend….
Despite this deteriorating macro environment, the market is still up 3.4% over the past two weeks.
The alarm bells are growing louder. But the market is covering its eyes and ears to the warning signs.
Yes, it’s true that Wednesday’s inflation numbers came in better than expected. The market was expecting a 0.2% increase in the March CPI reading. Instead, it came in at 0.1%.
As encouraging as that report is… The fact remains inflation is still running at 5%. That is far above the 2% level the Fed is gunning for.
We expect the Fed to still hike by 25 basis points in May and at the very minimum keep interest rates elevated for an extended period of time.
Short of a total financial meltdown, we don’t anticipate the Fed cutting rates this year.
As such our research indicates that the market is headed for another leg lower… At the worst, we could enter a nasty recession.
Friends, I’ve been warning you all year that Jerome Powell is on a scorched-earth campaign to eradicate inflation.
And he’s willing to burn down the village (in this case the market) to achieve it. But there’s a way to safely preserve your wealth during these volatile times.
Investors Are Ignoring the Warning Signs
The February Consumer Price Index (CPI) report showed that headline inflation continued to decline. It fell from 6.4% in January to 6%.
That was enough to excite investors. But under the surface, warning signs flashed that inflation would remain stubbornly high.
In February, Core CPI rose by 0.5% relative to January. That’s the fastest rate of growth in five months.
Core CPI tracks the CPI excluding food and energy prices. Those categories are historically more volatile, which can lead to misleading headline inflation rates.
This is a sign that prices of “sticky” goods remain elevated. It’s exactly what we’ve been warning about for the last year and a half: High inflation will remain persistent.
Sticky goods include items like rent and health care services. When their prices rise, they take a long time to come back down.
The Atlanta Fed tracks these sticky categories. And the prices for sticky items remained flat, growing at an annual rate of 6.6% – while headline CPI fell in February.
This suggests sticky prices have yet to decline… A key insight that Wall Street is seemingly ignoring.
Investors have been falling over themselves to price in a Fed interest rate cut as soon as July… So this will inevitably disappoint them.
Meanwhile, regional banks are the first major casualty of rising interest rates.
These banks have outsized securities portfolios filled with long-duration Treasury bonds. And the rise in rates has caused those bonds to plunge in value.
Because of this, some banks needed to take huge losses to cover customer withdrawal requests.
This led to bank runs that brought down Silicon Valley Bank… It also led to the demise of Signature Bank.
On March 27, I wrote that this recent banking crisis would evolve into a credit crunch.
During credit crunches, banks significantly tighten their lending standards. Loans become much tougher to get.
And we’re starting to see that happen…
The Dallas Fed recently released its banking conditions survey results. It asked 71 banks and credit unions across the Southwest to evaluate their general business activity.
The results showed that lending conditions have tightened sharply as of March 29. Its current reading is -18.3 – meaning 68% of respondents are actively tightening their lending standards.
But the Southwest isn’t the only area seeing a credit crunch. Bank lending is dropping dramatically across the U.S.
In the final two weeks of March, commercial bank lending dropped by nearly $105 billion. That’s the largest bimonthly drop in lending since the Fed began tracking this data in 1973.
This increased stringency in bank lending will have significant effects on the economy.
According to some initial analyst views, a credit crunch could be the equivalent of a 1.5% rate increase. It’s like a stealth rate hike.
That means businesses will become leaner by cutting staff and halting hiring. At the same time, consumers will find it harder to borrow money to make big-ticket purchases like buying a house or car.
This Metric Is Warning That Stocks Will Fall
Despite the numerous signs of a raging fire, investors are still buying the market. Since January, the S&P 500 is up 6.4%. And the tech-heavy Nasdaq is up 14.9%.
What’s worse: They’re pushing valuations up to insane levels.
Right now, the S&P 500 is trading at a forward price-to-earnings (P/E) multiple of 18.8x. That’s nearly 5% higher than its 17.9x multiple at the end of March.
Here’s why that’s so important…
Since World War II, the S&P 500’s forward multiple during every recession has dropped to 15x.
If S&P 500 earnings just remain the same over the next 12 months, a 15x forward multiple corresponds with a level of 3,277.
That’s an incredible 20% drop from current levels.
Ultimately, based on these flashing warnings, we’ll soon see – at the very minimum – an economic slowdown… and likely a pretty nasty recession.
Now Is the Time for Safety
The market continues to hold on to the irrational belief that Jerome Powell will come in and save the day.
But he’s clearly demonstrated he’s willing to burn the village down to save it.
He ignited this fire with the fastest pace of rate hikes since 1981. And he’ll only douse the flames when he brings inflation to heel.
In this economic environment, the name of the game is wealth preservation.
One strategy I’m using to protect my wealth is buying U.S. Treasuries.
Treasuries are the debt obligations of the U.S. government, issued by the U.S. Treasury Department.
The full faith and credit of the U.S. government secure the payments of that debt. (In other words, the government’s power to tax.)
This quality is why we call Treasuries a “risk-free” investment.
Unless the U.S. government goes bankrupt (a highly unlikely event), you’ll receive your entire principal back, provided you hold these securities to maturity.
Personally, I’m buying short-term Treasuries. These are T-bills issued for periods as short as 30 days and for as long as two years.
Right now, you can earn yields around 4% on these types of Treasuries.
Friends, it’s not about getting rich right now… It’s about not getting poor.
If you’ve developed any kind of capital, your job right now is to not blow yourself up bottom-fishing the stock market.
Eventually, we’ll be able to scoop up high-quality companies at fire-sale prices.
Let the Game Come to You!
Big T
P.S. If you’re looking for another way to boost your income in this volatile market, there’s a tiny subsector of the crypto market that I believe will benefit from a coming “buying panic.”
Unlike most cryptocurrencies, these tokens are programmed to pay you monthly income on top of capital gains. And they’re set to benefit from a surge of activity coming to one of crypto’s largest networks as early as this week.
I recently held a special event about these crypto-income tokens. During the event, I explained what this catalyst is and how cryptos will benefit from it.
For a limited time, you can stream it right here.