Today was the first trading day of the new year. So for this week's Stansberry Investor Hour episode, we thought it'd only be fitting to kick off 2023 with our fourth annual "Top 10 Potential Surprises" for investors.
Dan Ferris teams up with co-host Corey McLaughlin to bring you this year's list. Keeping with Dan's favorite adage of "Prepare, don't predict," these 10 surprises aren't predictions... They're possible events investors are unprepared for, based on current market conditions.
We won't spoil the surprises. But just to give you an idea, you'll hear about...
Dan and Corey also ask each other the show-standard "Final Question," as today's special episode doesn't feature a guest (we'll return to our normal format next week). Plus, Dan reveals his four tips on how to best prepare for all that 2023 could unleash.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, we're going to take a look at our potential surprises for 2023 and also touch on what happened in 2022.
Dan Ferris: And remember, you can e-mail us at [email protected], and tell us what's on your mind. That and more, right now, on the Stansberry Investor Hour.
Well, here we are at the end of another year. I feel like it went by in about 10 minutes.
Corey McLaughlin: Yes. Again. I was thinking about how this year compared to 2020 the other day. That one seemed to distort time. This one just felt a little more "dragged on" and a little more, in the markets at least, a little more tedious.
Dan Ferris: Yeah, you know, it did surprise me. I would have guessed that after the biggest financial mega-bubble in all of recorded history that it would be a lot crashier. But it wasn't crashy. It was kind of a well-ordered decline with a few little rallies here and there.
Corey McLaughlin: Yeah, it was just a steady burn with bear market rallies in stocks at least. Bonds, you know, worst year since the pen and quill. And –
Dan Ferris: Exactly.
Corey McLaughlin: And a lot of people surprised about what happened with stocks and bonds falling in tandem. But I won't say we could see this coming, but we did write about this in the Digest in the middle of 2021. Like stocks are super expensive. Bonds... prices can't really go any lower because interest rates are going to go higher. And you know, we didn't know it was going to be the worst year for the 60/40 portfolio. But something like that.
Dan Ferris: Right, the 60/40. I mean, you and I, I think you and I have pretty good bearish credentials at this point. So we do get some credit for that going into this year, for sure. But still, I don't know. I mean, had you ever heard of FTX and Sam Bankman-Fried before November? I hadn't.
Corey McLaughlin: No, honestly, well, yes and no. No, not the details of it. But probably the only thing I remember is a Super Bowl commercial with Larry David last year. If you rewatch that, it's all about how ideas that sound a little too good to be true, so.
Dan Ferris: It's hilarious, yeah.
Corey McLaughlin: So it actually played out. But that's the most I heard about it, to your point.
Dan Ferris: Maybe I did know something because I do remember that commercial. Talk about irony. Like he was supposed to be the fuddy-duddy who didn't get it on that commercial, and the truth is now looking backward... He's the guy who got it right and everything else was wrong. Don't make a commercial like that. There's too much hubris in that commercial. It was a sign of the top, right?
Corey McLaughlin: It was, I think, right? February '21. Along with ARK and all the tech names of the past however-many years, taking a tumble this year, right?
Dan Ferris: That was like, if you went on Twitter, all the crypto people were saying things like NGMI – "Not Going to Make It." You're not going to make it if you're not super bullish on all crypto – especially like bitcoin. And there was another phrase, "Oh, have fun staying poor," was the other one. You know? That was too much hubris. It was all a sign. And like I said, you and I get some credit. I was writing about ARK the day before it peaked, and you know, you've certainly written your share of bearish stuff.
Corey McLaughlin: I know, which is, I don't want to be bearish, to be honest. But if you weren't kind of preparing for something like this, I don't think I would be doing my job.
Dan Ferris: Right. It wasn't about making a prediction, it was just about risk management and recognizing insane valuations and insane speculative activity, which wasn't hard to do. I don't think. You know?
Corey McLaughlin: I don't either, yes. It was pretty, you know, when you see the price-to-earnings ratios and everything at – this has happened three times in the last 200 years,. OK, that seems like something to pay attention to.
Dan Ferris: That's right.
Corey McLaughlin: Let's not make it more complicated than it needs to be.
Dan Ferris: Exactly. "Hey guys, nothing has ever been this expensive ever. I just want to point that out. Carry on." Right?
Corey McLaughlin: Right.
Dan Ferris: But one of the things that I have been talking about for a few years – I mean, I was way ahead... I was wrong for years, put it that way – was, as I kept telling people, especially at our annual Stansberry conferences, the best companies in the world that everybody thinks are the best companies in the world, they're going to treat you poorly, too, in the end. They're not going to do well.
And we actually had Rob Arnott from our Research Affiliates on the program talking about this, the top dogs. And the top dogs are just the biggest market cap companies like Apple, Amazon, Alphabet, Microsoft, Meta, Tesla... all those. Each one of those lost more than $750 billion in market cap from its all-time high for a combined loss of more than $5 trillion from their all-time highs, reported recently by Bespoke Investment Group.
And Amazon recently became the first company to lose, how much, $1 trillion in market cap? Like the first trillion-dollar market cap was 2018. It was Apple. And now we're having our first trillion-dollar loss in market cap. How the times are changing.
Corey McLaughlin: That tells you something right there. It tells you a lot, actually.
Dan Ferris: You know, a trillion here, a trillion there. Pretty soon, you're talking real money, right?
Corey McLaughlin: Yeah, that's right. Eventually, dollars, yeah. My daughter this morning was talking about, we don't have enough money. "We need to go to the dollar store to buy the money." I was like, "That's not a bad way of thinking about what happened in the last two years," the Fed going to the dollar store.
Dan Ferris: That's cute. Kids, huh?
Corey McLaughlin: Yeah, they make it easy.
Dan Ferris: Many mainstream analysts are predicting that stocks will recover soon. But I say we'll instead witness a cash frenzy unlike we've experienced in 21 years before stocks recover. And I'm urging Americans not to buy a single stock until they see it.
I predicted the Lehman Brothers crash in 2008, and I called the top of the Nasdaq in 2021. But this is the most important thing to pay attention to for 2023. And I'm not talking about another market crash or politics or inflation or any of these other things. As all this unfolds, the financial consequences of what I'm talking about could last for several decades if you don't understand what's happening. There will be winners and losers, and now is the time to decide which one you'll be.
This is why I strongly encourage you to read about my warning, totally free today. It's all spelled out in a free report we put together. Get the facts yourself. Go to www.stockdeadzone.com to get your free copy of this report. You can learn how to get my four steps to prepare for what's coming. Again, that's www.stockdeadzone for a free copy of this new report.
All right, so let's get on with our list of top 10 surprises for 2023. This is a list of items that we believe would surprise the market. We're not predicting these things would happen. But markets have a way of surprising us, as we've just discussed. And right now the way things look, we think this list of 10 items would really surprise the daylights out of everyone.
And Corey, why don't you start? Because this first one is yours. You came up with this and I didn't even think of it. So why don't you do top 10 surprise No. 1 for 2023?
Corey McLaughlin: All right, here we go. My first thought when you guys asked me to do this exercise was, I don't think anybody's expecting a normal year. And by normal, I mean something around average annual return of the S&P 500 which is around 10% in the last 30 years.
Yeah, I think most people, at least in the financial opining space, or a lot of people, are expecting a recession ahead. What does that mean for stocks? Generally speaking, not good things. However, we don't know what kind of recession it's going to be. Yes, people will lose jobs, which nobody wants. So yes, companies will, their earnings will be hurt.
But maybe, just maybe, it's not as bad as people imagine. And by the end of the year, we're at, say even slight gains or the 10% number. Now I'm not saying that it couldn't be volatile in between that. I suspect anything that happens is going to be volatile. But maybe not. Maybe it's more of a smooth ride ahead. And that would be a potential surprise, I think.
Dan Ferris: Absolutely.
Corey McLaughlin: So my point with that, yeah. And we can get into why I bring this up. But that's kind of where my first thought was.
Dan Ferris: Well, it would surprise me, that's for sure. And you're right, though, to consider scenarios like recession or whatever. Like part of the thing that is frequently on the lips of Jerome Powell, chairman of the Federal Reserve, is labor market tightness.
And we could imagine, could we not, that this labor market tightness, it loosens up not by lots of people being put out of work, but by lots of job openings just closing up and going away, right? So there are different ways for things to work out, and it's always good to consider movement in any or all of the variables, not just the usual, you know, whatever's happened in the past most often. I agree with you, an average year, you know?
Corey McLaughlin: Couldn't we all use an average year next year, all things considered?
Dan Ferris: All things considered, yes.
Corey McLaughlin: Like come on. Let's just do it, yes. But my point in bringing it up as this idea is you don't have to be all out of the market at this point, even if you think a recession's coming. You know, I think being in the market in downtimes, if you're in good companies that will reward you over time and with dividends and buybacks and all of those sorts of things.
Like good-quality companies that will then reward you when things get better again. If you have a really long term, you know, depending on your investing horizon and all that, and your goals. I think if you're a long term, you look beyond the cycle of whatever this turns out to be and compound over time. Even if there's a sideways-ish market, that's going to be better than sitting there, if inflation's high and your dollars are just losing value.
So that's why I bring that up, to say, "Hey, you don't need to be all out if you think bad things are coming." If anything, the opposite, if these companies are going to reward you as a shareholder in the next 12 months.
Dan Ferris: Well stated. All right, let's get to No. 2. No. 2 is S&P 500 down 30% for the year after a blistering 50% rally off the October 12 bottom. Now, that's very specific. So, maybe I should explain myself. I guess what I'm saying is maybe a simple way to put it is lots more volatility, I think.
That much volatility, right? Not more of what we've seen this year with the slow burn, the gradual ordered decline, but like a blistering 50% rally, maybe topping out in something like March or February. You know, in a couple of months, 50% off that bottom. And then winding up down 30% or some crazy number like that for the year.
I think that would surprise the hell out of everyone, and I think it would be terrifying. Like they'd be euphoric after the rally, and then they wouldn't see the rest of the year coming. And a 30% decline for the year after that would be like "whoa" because if we just sort of look around, the reason I think this would be a surprise is if we just look around right now.
Like look at the VIX, for example. It's right around 20, its long-term average. So, maybe that's the market saying we just kind of expect an average year, you know? I don't think that's true. I think the average return would still surprise people. But like, average volatility is a little different. That doesn't mean average return, right?
So I think a super-volatile year, where we get big rally up, big crash down, I think that would really just shock the hell out of everyone.
Corey McLaughlin: I think so, too. And I think the thing that struck me when you said that was, if that happens, that would be a bottom. I think at that point, that would scare a lot of people and be like, "All right, if the market can go up 50% and then still lose another 30, now I'm out."
And that would probably be the worst time to sell. But it would feel like the right time to sell but it would probably be the worst, I think at that point. And I think a lot of people who are in the market casually, or you know, since 2020, that group of people, if you lose another 50% of everything. I mean, another 30%, sorry, either one. How about 30%? Whatever numbers are involved, you're still going to lose.
Dan Ferris: Exactly.
Corey McLaughlin: The volatility at that point I think would scare a lot of people off.
Dan Ferris: Yeah, it would, people would be saying things like, "The stock market is uninvestable." The death of equities, you know? Like Business Week 1979. So, yeah. Huge surprise there.
Corey McLaughlin: Why would you think the blistering rally could happen?
Dan Ferris: So my view of the current market is that looking at it as an average bear market is a mistake, because I think it's one of the three great mega-bubbles of the of the last century, the other two being the 1929 peak and the 2000 dot-com peak. And that's just according to the CAPE ratio, the Shiller cyclically adjusted P/E ratio of the S&P 500, which, you know, got up around 30 or more in all three of those episodes. So, the current one peaking earlier this year, late last year.
So, if we use those examples, don't look at the average of all previous bear markets. Look at those huge events, right?
Corey McLaughlin: Right.
Dan Ferris: Which is hard to do, because statistically, this is a losing argument, because there's not enough data. There aren't enough examples. So it becomes anecdotal immediately. And serious, I'm doing air quotes here, serious people wouldn't consider it. But maybe I'm not so serious, because I'm saying those are my examples. And 1929 includes a blistering rally into the early part of 1930. I think it was a 48% rally maybe, off the top of my head. But yeah.
Corey McLaughlin: Got it.
Dan Ferris: Yeah.
Corey McLaughlin: That makes sense. A similar thing happened when the dot-com bubble burst. There was a huge – I can't remember the exact numbers, but there was a huge, 40% or 50% rally over an extended period of time. And nobody talks about that anymore. They just talk about the bubble bursting.
Dan Ferris: Right. I mean, I've talked about this before. But just real quick. It would be normal to me if there was a really crashy episode in this bear market. We haven't seen it so far. I'm talking like down 30% in a month or two. Something really, really quick and steep. And we just, it hasn't been like that. It's been the way it's been. We all know how it's been. It's just been a slog all year. Down, down, down, little rally, down, down, down.
Corey McLaughlin: All right, so now we're ready for an average year. We're ready for an extremely volatile year. I'll go with No. 3 here of our potential surprises. The Russia-Ukraine war envelopes nearby countries and large numbers of NATO and U.S. troops get involved. This would be a surprise, I think, for a lot of people.
I think people are hoping or seeing signs of this war coming to an end. Russia, more questions coming up about what they can sustain in Ukraine as far as the fighting. Ukraine getting a lot of support from the U.S. and other people financially. And basically looking like they've successfully defended their country for the most part from Russia. You know, not without massive casualties and damage that's going to take who knows how long to recover from and what that looks like.
So, I think generally speaking, you'd think after a year or so of bloody war that it would come to an end one way or another. But what if it doesn't?
Dan Ferris: I know.
Corey McLaughlin: What if something triggers? What if there's another pipeline that explodes mysteriously? Now, go down the list... What if Sweden, Finland –there's all kinds of possibilities – get involved? That tips it into a whole other level. Yeah, that would really surprise people. And something, I can't imagine a lot of, I think it's on the minds of a lot of people. But I think many people probably hope it doesn't happen. So they're not kind of preparing for that.
Dan Ferris: Right. This is a very interesting one to me. There's certainly a lot of nearby countries that are in NATO, right? Poland, Hungary, Romania, and Slovakia. So, any war activity that winds up there, you would think that that would bring in large numbers of NATO and U.S. troops – or could. I won't claim to know about the complexities and vagaries of how war gets waged and how these decisions are made.
But certainly, like if something like World War III were to break out because lots of other countries get involved, I think it would surprise, by definition, that just surprises the heck out of everyone. This is a good one. I'm glad this is in here.
All right, let's get on to No. 4. And I almost didn't put this one in here. But this is just looking at what the market is saying right now, OK? So, I think the surprise is that GameStop and AMC Entertainment, the two big meme stocks, fall 90%. That would be the surprise in 2023.
And why do I say that? Well, as we're speaking here, GameStop has a market cap of more than $6 billion, which is absurd. You know, like even $600 million would be absurd, let alone $6 billion. And AMC has a market cap of well, let's see, the AMC stock has a market cap of $2.69 billion, as we speak.
And then, these APE securities that have a market cap of $4 billion... so just call it $7 billion or $4 billion, almost $4.5 billion. Just call it $7 billion, OK? So $6 billion, $7 billion market caps on companies that are arguably worth zip, right? Indebted, troubled, declining, deteriorating, money-losing businesses stuck in industries that are going away, you know? Why this would surprise anybody, I don't know. But the market caps tell me it would.
Corey McLaughlin: The market caps, yeah. That's a good point. We haven't had the credit-crisis part of this yet. So, all of those, not just these companies, but all the zombie companies that can't afford to pay their own interest, their own debts, are going to be in trouble too. And GME and AMC are at the top of the list.
They might go back to when what they were before meme stocks became a phrase. When it's all said and done, they're down. I was just looking at AMC. It's down 80% in the past year. But you can still go down another 50% from there. It's not too hard to do when you're in a situation like them.
Dan Ferris: I'm glad you mentioned the credit. I just pulled up a list of AMC bonds on Bloomberg, and the prices are like, everything is below $90. And only two are in the $80s. It's like $38, $38, $28, $25, $38. I mean that's like the market saying, "This will go bankrupt," you know what I'm saying? Stuff is rated like CC. It's just, it's like a whisper. It's a breath away from bankruptcy. They're just like inhaling their last breath, and they're about to let it out and die, you know? It's not looking good.
Corey McLaughlin: Not good. Not good for them. All right. Let's move on to our next potential surprise. The Federal Reserve continues raising rates throughout the entire year. I think a lot of people would think, you know, they're going to pause. They're going to pivot. That's the main narrative out there right now. They could keep on going. Just keep on going like all of 2022.
Inflation sticks around above their goals, which the Fed has already said, they expect in 2023, for inflation to stay above 3% by the core number that they use. They've also been wrong on all these projections for the last year, as far as underestimating it, just the way they work. You know, the way they share information. Just the way they work.
I say they're wrong because they predict out what they can, in the meantime. Not predictions that actually matter. They predict out what happens in the next three months, and how they see things. And so they've underestimated inflation, we know that, for two years.
So why would they suddenly not be underestimating inflation? And keep raising rates and say, "Hey, the job losses haven't piled up yet." Maybe the job openings have gone away to a certain point. Maybe not all the way. And so they just keep on raising rates, and then we're in, clearly in the higher-rate era that we've kind of been talking about happening for the last year, since everything started turning around with inflation and the rate hikes.
Dan Ferris: Yeah. They're talking, I mean, they're saying higher for longer. And I'm thinking, "OK, well, what does that mean?" Probably, what it means, probably, and so far it's meant surprising the heck out of everybody that they haven't pivoted by the end of this year already. You know, that was the big talk earlier in the year. Oh, they'll pivot. They won't, they can't see this through.
I continue to maintain that the paradigm is like, it's a kind of peer pressure. Right? The paradigm for decades was looser and looser and looser monetary policy because gosh darn it, we are not going to allow a repeat of the Great Depression. So we're going to stimulate and stimulate and stimulate all we can.
And now I think the paradigm has flipped. And it's more like the '70s, you know. Arthur Burns and especially Paul Volcker era. And Jerome Powell is looking at Paul Volcker and saying I want to be like Jerome. And it sounds simpleminded, but I just believe that human dynamic more than I believe anything else about this.
So he absolutely, just like Ben Bernanke said, I'm not going to be the guy who lets the Great Depression happen. Jerome Powell is saying, "I'm absolutely not going to be the guy who lets double-digit '70s-style inflation happen. And I'm going to beat this thing back down to 2%." And what is the CPI? It's like 7%. So, there's a ways to go here.
Corey McLaughlin: There is. And then the current projections are accounting for no surprises, really. You know, what if the one we just talked about happens? You know, the war gets even worse. That's inherently inflationary. So that's going to cause all kinds of issues. So yes, I think it's wise to prepare for these sorts of possibilities that we're talking about, actually.
Dan Ferris: All right, let's do No. 6. No. 6 falls hard upon No. 5 because No. 6 is simply that the CPI doesn't fall below 5%. And you could sort of pick whatever number would surprise you. And that really is the point. But at this point, there's a lot of talk about recession. And that certainly would be a year-over-year change in the monthly CPI of less than 5%.
So I think it will surprise people, not only if they continue raising rates, but if the CPI continues being 5% or more. I think it would surprise me. It would surprise the heck out of me.
Corey McLaughlin: Yeah, I would say 5% would surprise me, too. But you look at –
and I haven't done like a super-great calculation on it – the housing numbers are going to stay higher for the housing part of CPI, which makes up about a third of it. They're going to stay elevated for a while because of the way it's just calculated based on this owners' equivalent rent metric, which is basically what you would pay if you were renting your own home.
And so rents, the rent numbers are obviously on a lag, just the way rents work in lease terms. So that's going to be in CPI for a while, probably another year or so. And then who knows what happens with energy prices, you know, Biden put in place for buying back oil... when it gets to a certain number? So that's not going to drag down oil prices? So those are the two big components of CPI. So, possible.
Dan Ferris: Possible... Probably unlikely. Certainly a big surprise. All right, so what have you got for No. 7?
Corey McLaughlin: No. 7, bitcoin. How could we not talk about bitcoin? Now when we got together to talk about these, you had bitcoin falls below $5,000. And I said a surprise would be bitcoin at new all-time highs. I'm willing to bet a lot of people would be surprised at all-time highs, and I think you would be too. Because when I said it, you smiled and said whoa.
My point there is maybe some people think this FTX debacle, that's the bottom of the crypto sell-off. "This is it, that's the bottom." To me, the reason I said crypto all-time highs would surprise people was to encourage people who might still own bitcoin, Ethereum, that things could get better in 2023. I mean, we've seen this through bitcoin's cycles of peaks and valleys.
A drawdown from $60,000 to where it's at now is, what, around $15,000? That's pretty big. I mean, when you look back at the history of bitcoin and the previous spikes and bubbles. I mean, I personally wouldn't see it going much lower. So if you're holding bitcoin, I would say keep holding on to it as a long term, kind of if that fits your goals, hold on to it long term and see what happens this next year... because right now, it can't have more bad sentiment around crypto in the mainstream world, at least.
Dan Ferris: That almost sounds like famous last words. But I agree. Certainly just even anecdotally, sentiment, can it really get much worse? I don't know. I guess it always can. It can always surprise you, which is the point of this exercise. But that is a point very well taken.
I think it's interesting. I have to say, you know, you pointed out that my surprise was below $5,000. Yours was new all-time highs. Yours strikes me as really the superior surprise. You know, new all-time highs from wherever we are, around $16 grand or so, after falling from $69 grand or whatever it was. Wow. That would be a major surprise.
And I'll tell you what, you could imagine it happening. We did have Mike McGlone from Bloomberg on this show, and he was talking about bitcoin no longer behaving like another speculative tech stock, falling and rising with the Nasdaq... mostly falling this year. And I've heard other people suggest the same thing, you know? Decouples and becomes more of an inflation asset, a risk-off type asset.
So far, we haven't seen it. But I'm just trying to post a scenario, under which maybe some of these other bad surprises happen. Yet bitcoin does go and make new all-time highs. But yeah. That would surprise the hell out of me.
Corey McLaughlin: I think a scenario where along those lines, where it could happen, and so I didn't really say, didn't give any good reason for it, was say a situation like we were just talking about with the Fed, that they do cut rates and people get all scared about inflation again. And just central-bank mismanagement, you know?
Bitcoin can kind of get some more wind behind its sails again, and crypto, and it's more of like an anti-central-bank kind of play more than anything.
Dan Ferris: Right. At some point, you would expect maybe even all the meme stockers, if they have any money left, they could turn completely anti-Fed... because maybe they're the same people, I would suspect, who bought the ARK Innovation ETF. They're down 80% on that one. And they hear Cathie Wood blaming the Fed for it.
Corey McLaughlin: Right, that's true.
Dan Ferris: And they even, maybe they bought Tesla and they've heard Elon Musk saying a few words about raising interest rates hurting Tesla stock. So then maybe they pick up on that, and they become a thundering herd of bitcoin buyers, because they hate the Fed now. That's their main thing. They don't want to cause the mother of all short squeezes in meme stocks anymore, and they don't want to buy Tesla, and they don't want to own ARK anymore.
But now they're going to hate the Fed and they're going to buy bitcoin and have BTC with little rocket emojis on Twitter and stuff about that. And maybe that causes a big spike to a new all-time high. But, I mean, I'm almost wanting to go out and buy some bitcoin.
Corey McLaughlin: There you go.
Dan Ferris: All right. Let's move on to No. 8. Of course, the point of the surprises are extremes, right? And it's funny that we started out with an average S&P 500 return because that would seem extreme to some people at this point.
But the next one, No. 8, is mortgage rates either above, I'm going to say, 12% or below 4%. Right now, you know, the, I don't know what you call it. The Bankrate national, it's actually the Bankrate national average, which they publish, is around 6.6%, say. And the Fed has said they're going to keep raising rates. So we know that's going to happen. We don't know if it's going to happen all year. Like the surprise that we just put up.
But we know rates are going to go up. But from 6.6% to 12%? No, nobody's thinking about that. Nobody's thinking about double-digit mortgage rates. And that may seem like the bigger surprise, but given that the Fed is going to continue to raise rates, below four would also shock the hell out of anyone.
Corey McLaughlin: Yeah, I'm with you. Those are the two extremes right there... 12% rates, wow. That would be, I know a lot of people have experienced that sort of thing, from their homes, when they first bought homes. And to me, that's always, "How could people afford that today?" I'm not sure. And that would be the sign of a terribly bad recession happening. And 4% would be, I guess, the optimistic scenario in the equation.
You know, we're not going to go down much lower than that, I would think, anytime soon. So yeah, the housing market is, definitely I think what this question is getting at, is what we'll be watching a lot this year, to see how that develops because as we've said, the long term fundamentals for housing and residential housing are there. Will the demand be there? And the desire of companies to build new homes? Remains to be seen. We will see.
Dan Ferris: We will. You know, I want to throw one more thing in here. I saw on Twitter I think, it must have been on Twitter, because it was a guy posting a picture of, maybe it was an e-mail that he had gotten about his adjustable-rate mortgage. Remember those? They were lots of fun during the housing crisis.
Corey McLaughlin: Oh yeah.
Dan Ferris: And he had started out with this adjustable-rate mortgage at something like 2.85%, and he was showing an e-mail from the mortgage company that said, "Your new rate," and he had gotten a bunch of these, and his latest one said, "Your new rate on your adjustable-rate mortgage is 6.1%." And he started out with like a $2,500 or $2,800 mortgage and now he has like a $4,200 mortgage. I mean, the brutality of that. You know, I'm not looking, ugh.
Corey McLaughlin: The amount of debt that will pile up because of high mortgage rates I think is the thing to watch from that, because people pay however they can. And most of the time, that's going to be on a credit card or something. So yeah, that would be a spin cycle that I don't think any economy wants to get into.
Dan Ferris: You're right though, too, to point that out. Because two of the data points that I'm constantly seeing in places where I just get a lot of data from various services, are lower savings rates. Like people depleting their savings. And higher credit card balances. So, just higher rates all around. Boy, it would really stress people out.
Corey McLaughlin: One more thing on that before... higher rates, higher mortgage rates... more debt... interest you pay on that debt is higher. And on and on and on it goes. It's like, for the individual, you can see why inflation is ultimately a terrible thing. High inflation. So we have everybody to thank for that. All right. Let's move on.
No. 9, speaking of inflation, our next surprise, gold below $1,000 an ounce or above $5,000 an ounce. This is a good one, I'm glad this is on here because I feel like a lot of supporters of gold have been waiting for it to break out because of inflation. And we saw it in 2020 when it became clear that we were going to have inflation based on what the Fed was doing, and fears of inflation. I think that was warranted. But since then, it's just kind of no joy for gold holders.
But I think the big one, that's around $1,800 an ounce right now. You know, with the dollar, I like to look at it in the context of the dollar, and if the dollar's going to get a little bit weaker this year compared to the euro – the yen now, actually. There's a lot of reasons for gold to go higher, just from that perspective. If the dollar's getting weaker, gold should go higher.
Now, a lot of these surprises we've talked about have been maybe the dollar keeps getting stronger. But even if the Fed keeps raising rates, strengthens the dollar, maybe some of these other countries will be raising rates, slightly higher rates, or that sort of thing where the dollar overall keeps weakening. And so in that case, gold and silver and hard assets. Anything priced in dollars should have a good time in that situation.
Dan Ferris: I'm glad you mentioned other currencies, too, because that really is the point. Like year to date, as we speak here, gold is about flat. It's almost flat. It's down less than 1%. In dollars, OK? In Japanese yen, it's up 14%. In euros, it's up 11%, or I'm sorry, 6.5%. In British pounds, it's up 11%.
So, you know, it's interesting to think about the same asset from the perspective of what it's priced in, right? Like you can own dollars, and you can own gold, because you're thinking about gold being priced in dollars, and you're thinking about dollars being priced in those other currencies. I think this confuses a lot of people.
So that's all in the general direction of maybe we get above $5,000 an ounce, and maybe that will surprise people. You know, we go the other way and that's your extreme sort of recession scenario, with gold going below $1,000 an ounce, and nobody believing it's a good inflation hedge because of the way it's behaved this year. Even though they're just not looking at it in those other currencies.
You know, of course it's up 11% in British pounds, like British inflation is 10.7%. Just go right on the Bank of England website. It's like huge letters, you can't miss it. First thing, top of the page... middle of the page, you know, 10.7%. So of course, like gold is up 14% with Japan inflation, Japan's CPI at like three-ish, it seems to make less percent. But it's up, right? It's doing its thing. And it's doing its thing in euros, too.
So eventually, those weaker currencies... relative to the dollar, it looks like a strong dollar. People say, "Oh, I don't want to own gold." No, no, no, a dollar can be weaker relative to gold, so you want to own them both.
Corey McLaughlin: Right. It's a game within the game there, as far as the currencies relative to each other and relative to gold. You know, a lot of times people get wrapped up in the home-country bias of just thinking about things priced in whatever country they're in. And with gold, the gold situation, there's something I realized early on was, when I got into this, was exactly what you're talking about as far as the gold price moving differently compared to depending on what currency you're comparing it to.
It's really obvious in this case with the dollar because of the strong dollar trend. But when that turns around, boy, like you're saying, if gold's been rising in these other places and then the dollar weakens, there you go. Gold party.
Dan Ferris: And to be fair, though. You know, the DXY Index is – it's mostly euros and then it's also Japanese yen and British pounds and maybe a few other things. But those are the three big ones. And lately, the dollar has weakened. That index has weakened.
Corey McLaughlin: That is true, yes.
Dan Ferris: And it got a big shot last week when Japan sort of made this bizarre surprise announcement. It surprised the hell out of the bond market, and yields went up, right? And the yen strengthened relative to the dollar. When they announced that they were going to widen the target range for the Japanese 10-year bond from 25 basis points on either side of zero, literally from negative 0.25% to positive 0.25%.
They're going to widen that to 50 basis points on either side of zero, right? So they're still at zero. They're just widening the range. And the market took it like a rate hike, which the Bank of Japan was no help, because they previously said, "Yeah, we widen that range, you should take it like a rate hike." And now the rhetoric is, "Well, no, it's not really a rate hike."
Corey McLaughlin: Yeah, well whatever you want to call it, they haven't done this since the late 1990s. Raising this rate. So it's been at, you think we've had low interest rates. We got nothing on Japan for the last, since the '90s. So it's, it is a big deal from that perspective. And it made me wonder about what's going on there with inflation and the number they have.
They are, NewsWire editor C. Scott Garliss told me they look at a core, core number, because they import so much and don't export as much as they used to. And that number has gone above 2% for the first time since 2015. So they're starting to feel inflation too, which I wonder if this is a reaction to that.
Dan Ferris: Right. They are also the single most indebted nation on earth, with debt of 260% of GDP. And I think the next most indebted is like Greece or someplace, with less than 200%, maybe half of what Japan has. So, you can understand why they have suppressed rates and continued with more dovish policy right up until this moment versus every other country in the world which has been raising rates. All the big ones, anyway.
So, it's an interesting and epic struggle I think playing out. It's the epic struggle for 6,000 years. I mean, there's literally a story of some Greek guy, I forget his name. But it was like 6,000 years ago, and he said, "Well, let's see. I've got a lot of debts here. And I don't have enough money to pay them." So he ordered everybody in the country to turn in their coins on pain of death, if they didn't do it.
They all turned in the coins, and they were like one drachma, right? And so he stamped them all "two drachma." And had plenty of money to pay off all the debts. Of course, history doesn't tell us what happened, but everybody probably more than doubled the price of everything, right?
Corey McLaughlin: We've been doing it ever since.
Dan Ferris: We've been doing it ever since. It's the age-old struggle. Like the debt market and the banks versus the currency. And the currency, as in that example, the currency always loses eventually. So this strengthened yen recently, I don't know. You know, the market took it as a rate hike. That strengthens the currency. And it was like, it was at that critical level of 151 to the dollar and strengthened into 130s now.
Corey McLaughlin: And if the yen strengthens versus the dollar, to bring this back to gold, that should help gold a bit too, silver, with the weakening dollar. We can play that game. There's all kinds of different inputs you can weigh there that will add up to the dollar value.
Dan Ferris: It's 3D chess, man. All right. Are we ready for big No. 10? I think we might be.
Corey McLaughlin: I'm ready. Let's do it.
Dan Ferris: So No. 10 is like, I'm going to put this on the list probably for the rest of my life, because it's probably never going to happen and it would certainly shock the daylights out of absolutely everyone. But it's like my pet surprise that I'll keep writing about forever. And it is simply essentially a repeat of October 1987, when the Dow Jones Industrial Average lost 22.6% in one day. And the surprise would be, I'll say this time the S&P 500, not the Dow, down more than 20% in one day.
And the main reason that would be a surprise is not the size of the move but the institution of circuit breakers. One of the things that came following the 1987 Monday crash was the exchanges all use circuit breakers now... which means like if the S&P 500 falls 7% or more during one session, they stop trading for 15 minutes, then they start trading again. If it falls, the next one is 13%, that day, stop for 15 minutes. Then they reopen trading and if it falls 20% they close the exchange.
So naturally, people say to me, Dan, you know they close the exchange when they're down 20%. How could it fall more than 20%? My perspective on this is not technical. Lots of people know a lot more about how circuit breakers work and how the electronic markets work and everything than I ever will.
My perspective is philosophical, and we talked about this on a recent episode, too. Just philosophically, I think that people don't create markets. Markets happen to human beings. We are in markets the way fish are in water. And the fish don't control the tides or the wind or the waves or the currents or the temperature or any of that stuff.
And I don't think humans have the kind of control over markets that they purport, or that many people believe. They think the Fed controls the market and can make it go up and down by lowering or raising rates. And I don't think it works that way. I think that the market is going to do what it does. It's extremely complex. It's not 3D chess, it's a million-D chess every day. And there are too many inputs. It's too complex. We can't control it. We can only participate in it.
And I just refuse to believe that they have so much control that they can just stop the loss right at 20%. There will be no, "What if there are just a gazillion bids and asks below minus 20% on the day?" You know, circuit breaker or not, there's a market down there being made. And I don't think it's going to go away just because they close the exchange.
And even if they can close it, I don't even know for sure if they can always definitely close the exchange quickly enough, you know? Will it be down 20% exactly in its close? Or 20.5% or 21% or something? I don't know. But I'm skeptical of it, to say the least. You must admit this would be a big surprise, right?
Corey McLaughlin: I think it would be a big surprise, to enough people. The circuit-breakers thing, I mean honestly, you know more about it than me, as far as how that works. And I don't know much about it. All I know is that they're there, and people seem to trust them. So it's maybe a mistake to think about... that a mistake can be made there somehow. You know, we've seen all kinds of hacks and everything else.
Dan Ferris: Actually, Corey, you make a great point. The fact that everyone trusts it is why you need to be skeptical. I'm glad you brought that up. That's exactly the point. Everyone thinks there's no way it can go wrong. Ooh boy, that can't be good, right?
Corey McLaughlin: Right. We saw this during the COVID crash. You know, those circuit breakers were tripped three or four times in a week I think, and the market was still down. It went down 20%, 30%. So even if they are in place, the COVID crash took a lot of people by surprise. The speed of that... we were all talking about how quick that was.
So even with them, the average investor doesn't know when the circuit breakers are going to hit. You don't know that unless you're really involved and really looking at things. And even then you don't know. So the point is, these surprises, that's why they're surprises. They can happen, and they do happen.
Now, what this also made me think about was there's no circuit breakers for individual stocks. Maybe at some level, you get to that point with certain, you halt trading on certain stocks. But generally speaking, if Facebook goes down 10%, 20%, now I'm not talking about a massive flash crash where you would halt trading or something that would stop trading.
I'm talking about just a surprise where this is, like you've said before, the Big Tech stocks, the big mega-caps can lose a lot of money in a short period of time, and so that's when you see. When Netflix loses however much after earnings, or Facebook loses however much after earnings, that's big news.
And then that takes a lot of people by surprise and scares a lot of people, and volatility. So those things can happen is my point. There's, maybe if it's not even at a flash-crash level, it's close enough for you. And plus, as we've been talking about this, I was kind of thinking about, there's so many stories about how, out there.
And I couldn't remember the exact one from this past year. Maybe it was last year where somebody typing in one decimal point in the wrong spot on a trading desk causes all kinds of billions of damage. Those things happen, you know. They happen.
Dan Ferris: That's the fat finger. It's called the fat finger.
Corey McLaughlin: Yeah, the fat finger. Don't get your decimal points in the wrong spot. So there's still people behind all these computers. So as long as people are around, we'll have people problems. And people good things. But there's the human element still and all in this.
Dan Ferris: So essentially what we're saying is, these things are viewed as highly unlikely by lots of people. It seems to us at this moment, based on the data we look at, it seems like these things are viewed mostly as highly unlikely by a lot of people.
I wonder, one of the things that I like to write about in the Digest each week is things that are admittedly highly unlikely, and this whole list is... but which are more likely than anyone believes. It can still be unlikely, you understand what I'm saying? But it has a higher probability of occurring than anyone believes.
So, I don't know, if you could pick one or two or however many you want to pick that you thought were, you know, these are still unlikely. But if you thought they were more likely to actually occur, what might you pick?
I might pick the first one, which is average return for the S&P 500. I think that's more likely to occur than most people think. But the other ones I just look at them, I think, "Well, they're highly unlikely. They'll surprise the heck out of everyone." Do you have one that you think would be more likely than most people think?
Corey McLaughlin: Yeah, I guess in a way more likely would be my first one, which I thought would be most surprising. It was average S&P 500 return... which definitely is kind of, I don't know, average. So, yeah. That's, maybe that's more likely than we think. You know, given the amount of volatility that people are expecting ahead.
Yeah, that one would be more likely. But maybe, honestly, I would not be surprised at all by your one about the S&P having a blistering rally and then losing another 30%. That would not surprise me, actually.
Dan Ferris: Really?
Corey McLaughlin: Yeah, no. I think the way things are going with inflation, I think those numbers will come down. And will lull a lot of people into that part of the story being over, which I think might already be here. But then, like I think a recession, any kind of significant recession I think can cut that down by the end of the year.
Dan Ferris: What about, another way to ask this question would be you've got to bet real money on one or more... which one do you pick then? I mean, the average S&P 500 return is like not a bad –
Corey McLaughlin: Not a bad bet?
Dan Ferris: – not a bad one to bet real money on, right?
Corey McLaughlin: No, or your idea too. I mean if you're paying attention to it. You know, if you think there's going to be a blistering rally. And then you see signs that things are breaking down. You might not time it exactly. But you'll enjoy some upside and hopefully protect yourself from most of the downside if you're able to follow the indicators that lead you in the right spot.
But yeah, you know. I would say I think I would bet on, not being all out of this market, but being choosy. And specific on what you put your money in this year. You always want to do that. But as opposed to a long bull market, this isn't a long bull market. So you've got to be a little more deliberate with what you do.
Dan Ferris: Yeah. So I might also bet on No. 4, GameStop and AMC Entertainment fall 90%. If you do it in the right way, if you just short the stock, you can be one-tenth right and you'll still do fine. You can be half right and that would be a fantastic result, right?
Corey McLaughlin: Yeah.
Dan Ferris: So you could do that. And also gold, well we said the surprise would be an extreme move in gold. Below $1,000 or above $5,000 an ounce. I don't mind betting on the above five. Just because I own gold, I'm going to stay long anyway. But that's all I got for a real bet. I'm not betting on any of the others.
Corey McLaughlin: Well, a bet maybe, maybe with the mortgage-rates one, if you're in real estate, or residential, with your own home. You know, if you have a rate that's below 4%. And we think the best-case scenario might be rates going back down to 4%. Stay where you're at with that. Or don't try to sell your house if rates are above 12%. Don't be moving this year, I guess. And that's something that I think speaks to the real estate market. That might speak to the real estate market eventually, throughout this year.
Dan Ferris: Yeah. I was talking to my wife the other day, and I said, "One of the regrets I have in life is not borrowing enough cheap fixed-rate money." I wasn't always like, "When I was younger I borrowed more and I really got in over my head." But as an older man, I've been making the opposite mistake I think.
And I've always been, like we had one house we lived in paid off. I paid off the house way ahead of time. You know, it was a 30-year mortgage. We lived in the house, I think it was paid off within like eight or nine years or something... maybe less. And I thought, "Oh, that's really great." And it was. And I'm actually still proud of it. But, and this is hindsight too. This is 20/20 hindsight.
But there's something to be said about cheap fixed-rate money for 15, 20, 30 years. It can be a very good thing, especially in a fiat-currency system. What do we know? What is guaranteed to happen to the value of that currency over time? Even if it's only at a rate of 2% a year, right? Even if the Fed gets us back down to 2%, there's always inflation. Your money is always losing value. So paying back in cheaper dollars in the future at a fixed rate is kind of a no-brainer.
I'm not telling people to run out and get a bunch of fixed rate debt. It's just a personal thing where I'm looking backward and I'm thinking, "Well, what if the CPI doesn't fall below 5%, and I can borrow against the house at whatever it is, seven or eight I guess it would be I guess, now. I mean, that's two or three real, you know?
Corey McLaughlin: Yeah. It's certainly better than – what were we talking about before with the adjustable-rate mortgages?
Dan Ferris: Whole different ballgame, yeah.
Corey McLaughlin: That's tough.
Dan Ferris: Screw that. Not doing it.
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All right well, maybe I should once again turn our traditional final question from the interview on each of us, and ask if we could leave our listener with a single thought today, what might it be?
Corey McLaughlin: Do you want to go first this time? Or am I up again?
Dan Ferris: OK, fair enough. Fair enough. I can't do better than a couple of mantras. You know, my traditional one of "Prepare, don't predict." These are not predictions. They're things we think would surprise the market. And you must, I think now more than ever the world has changed. It's no longer the continually ever-looser monetary policy, you know, "rates going down, valuations going up" environment.
And you need to embrace that and understand and prepare for it and own plenty of cash and some gold at the same time. And be careful of what stocks you own. It's a 3D-chess game now, and that monolithic "buy the dip" strategy that everyone used for the last 40 years is over. I think the 60/40 portfolio is over.
So, take that information. Embrace it. Embrace the "Prepare, don't predict" mantra. And do as our previous podcast guest Brent Johnson said. Survive in advance. And I think survival, the people who are worried more about capital preservation and survival and preparing for what's to come, preparing for many different scenarios, are actually going to do more than survive. They're going to earn the good returns. That's my final thought.
Corey McLaughlin: Cool, that was great. In the spirit of this episode, too, I'm going to say, "Expect surprises." You know, you don't know what they're going to be, specifically. But surprises happen, or at least that people call a lot of surprises happen. But at the same time, when you look at history and human nature, a lot of stuff that we think are surprises have been done plenty of times before. You know, pandemics... crashes... rallies... fear and greed.
So it, all of this is not, we've talked about specific things that may be new for today. But a lot of this stuff, I assume if people are doing a podcast 500 years ago or 2,000 years ago, in the forest somewhere, they might be talking about similar sorts of things with what's going on with this animal, and the, who's the bad hunter and who's the good hunter, and those sorts of things.
My point is, all this stuff we talked about today, it's good to think about these ideas when it comes to the portfolio in 2023. But you know, there will be other things that happen, and you've just got to make sure you're protecting yourself while also not being out completely and being smart about it and risk managing and to the best of your ability. And that's all you can really do. You don't know what's going to happen. But something will happen.
Dan Ferris: Well said, sir. And that is another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.
We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you like this episode and know anybody who might like it, tell them to check it out on their podcast app or at InvestorHour.com. And do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts.
And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram – our handle is @investorhour. On Twitter, our handle is @Investor_Hour. If you have a guest you want us to interview, drop us a note at [email protected], or call the listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host Corey McLaughlin, till next week, I'm Dan Ferris. Thanks for listening.
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