Last week’s economic data has me feeling like the market is trying to gaslight us…
The United States reported its second consecutive quarter of negative GDP growth (the very definition of a recession).
The Federal Reserve raised rates by 75 basis points…
For the second quarter, 30% of S&P 500 companies that have reported earnings so far have missed guidance.
And inflation (while becoming less severe) is still at record highs.
Treasury Secretary Janet Yellen – who has one of the worst track records in the world when it comes to calling economic tops and bottoms – said last week the economy is not in a recession… but in a “transition” phase.
This is the same person who told us in 2021 inflation was “transitory” when anyone with half a brain knew it was not.
But then, like now, the market heard what it wanted to hear… and bought it.
By the end of Friday’s close, the S&P 500 and Nasdaq finished July up 8% and 16%, respectively. That’s their best monthly performance since 2020.
So armed with an up-market to support their “thesis,” every talking head was parroting the official party line that we’re not in a recession.
What world are we living in?
It’s like reading the former Soviet Union’s official rag Pravda telling us that up is down and down is up.
I’ve never seen this level of financial propaganda in my 30 years in the markets.
You don’t need to be a rocket scientist to know that the U.S. economy is slowing down.
Sure, the unemployment rate is low at 3.6%. And it’s rare to have an economic slowdown when you have full employment.
So what are the numbers telling me?
We’re in a Soft Recession
While most people have jobs… inflation is eating away at their purchasing power. In other words, we’re in an inflation-led “soft” recession.
Walmart sounded this alarm in its earnings report last week.
The world’s largest retailer said shoppers have pulled back on buying clothing and other discretionary items due to higher prices on necessities like food. And it expects a slowdown on customer spending for general merchandise in the second half of the year.
Walmart shares dropped 7.6% on the news, although they’ve since recovered.
Now, I’m not suggesting we’re in a full-blown 1982-style recession… or Stagflation like the 1970s… or a Financial Crisis like we saw in 2008.
Those recessions lasted years.
I also want you to know I’m not crazy bearish. I expect this to be a short-lived recession. That’s why we’ve still been active in the stock market.
But we’ve been very selective.
We’ve employed a low-risk strategy that had us close out July with gains of as much as 43.8%, 52.3% and 77.8%. (Check out the P.S. at the end of this essay for more details on how we’ve managed to do that.)
What concerns me, is the wishful thinking I’m seeing in the overall marketplace. It’s completely detached from reality.
The market is suggesting the worst is behind us. And I hope it is because I do believe inflation is gradually getting “less-worse.” That’s why I’ve suggested putting up to a third of your sideline capital to work in dividend-paying blue chips.
But we’re not ready to sound the all-clear alert and tell our subscribers to go all-in on high-flying tech stocks and crypto. There will be a time to do that. And that time might just be a few weeks away… but it’s not yet.
I get that the market disagrees with me and is gunning higher… for now.
And whether you’re managing money or writing newsletters – it’s death to your career to be out of the market when it’s running higher.
It’s the reason why Wall Street and many newsletter writers don’t get cautious until the very bottom when everybody is saying the same thing.
In these respective businesses (Wall Street and newsletters), there really is safety (career safety that is) in sticking with the herd.
I’m a widely read newsletter writer, so why am I breaking from the herd?
Because I’m also an investor. I have many millions of my own dollars invested in stocks, bonds (short dated), real estate, crypto, private equity, and collectibles.
In any given year, I’m typically allocating well over $2 million of my own money to new investments.
How can I tell you that everything’s rosy when I’m exercising caution and patience with my own investment funds?
Long story short, I can’t.
I’ve built my newsletter career on transparency and congruency. I may not always get it right… but you always know where you stand with me. I will always give you my straightforward opinion without regard to its popularity.
We Still Need to Tread Cautiously
So why am I still worried?
In a nutshell, I see more pain ahead before the uptrend in equities and crypto truly reasserts itself.
Last week, Fed Chair Jerome Powell announced a 75-basis point rate hike. Generally, when the Fed raises rates, markets tank.
But Powell telegraphed this increase months in advance. So Wall Street had already baked it into the cake. Now, we’re rallying because Wall Street is convinced Powell only has one more 50-basis point hike in him.
Wall Street might be right. And if it is, then yes, this rally will be justified.
But if it’s wrong and Powell comes in guns blazing and hikes 75-100 basis points during the Fed’s next meeting… the market will get its face ripped off.
Look, I hope I’m wrong about that.
But “hope” is not an investment strategy.
I have the bulk of my net worth in financial markets and crypto. So I’ll be doing backflips if the Fed turns dovish next month. No one would be happier than me.
But it’s too early to bet BIG on that outcome.
As I’ve written before, the Fed has a history of overdoing things. It either eases rates too much, or it tightens rates too much.
That’s why I’ve recommended deploying capital to just dividend-paying blue-chip stocks right now and to only commit a third of your new investment capital.
When I saw commodity prices dropping, I made the call that inflation may have hit a short-term peak and so I allocated the first third before the Fed’s July meeting.
I’ll deploy the second third if the Fed raises 50 basis points or less at its next meeting in September.
And the final third if the Fed says it’s done raising rates. If it explicitly says it’s done raising, I think we’ll see the market explode higher.
However, when it comes to crypto, I’m even more cautious right now.
What This Means For Crypto
We haven’t exited this current Crypto Winter… not by a long shot.
You can’t watch a market shed $2 trillion in value and expect it to turn around overnight. At least not without some external catalyst.
And that external catalyst comes back to the Fed…
If the Fed caps its rate hike to 50 basis points in September or by some miracle it says it’s done hiking rates (I seriously doubt that will happen.)… then it will be “risk on” again for crypto.
I’ll put on my rally cap and pound the table to buy.
But between now and then, there are still likely more dominoes to fall in the crypto space.
I expect more centralized crypto platforms to go bankrupt like we saw with Celsius, Voyager, and most recently Zipmex. And that’ll put more downward pressure on the crypto market.
What do you do in the interim if you feel I am wrong and you are right?
Use smaller position sizes. If you want to speculate here that the bottom is in and get into tech and crypto – then just be rational. Lower your normal position size by 70–80%.
So if you’re normally a $5,000-per-idea-investor, put up just $1,000–1,600. If you’re normally a $10,000-per-idea-investor, reduce your position size to $2,000–3,200.
That way you can have the satisfaction of being in the market if we truly have bottomed… without putting your financial future and peace of mind at risk.
Always remember: There will be another opportunity that presents itself. Now is not the time to FOMO into the market.
Be rational. Use smaller position sizes. And be patient.
Let the Game Come to You!
P.S. When it comes to crypto, being patient is the best thing you can do right now… but that doesn’t mean you can’t look for opportunities elsewhere.
In fact, I’ve been using a strategy that can return crypto-like gains from blue-chips in today’s bear market… and all without shorting a single stock.
This is the strategy we used to lock in those July gains I spoke about above to make as much as 43.8%, 52.3% and 77.8% in less than two weeks.
It’s why I held a special briefing recently to share the details with my subscribers…
I explained how an “Anomaly” in the market is creating a chance to make 21 years’ worth of S&P 500 returns in just three months… and I even gave them a list of three stocks to play it, absolutely free.
If you missed my briefing, you can watch a free replay right here… but do it soon.
This replay won’t be available much longer… and by the time this Anomaly fully triggers, it’ll be too late to take advantage.