Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers. And every Friday, I answer as many as I can.
Today, we have questions on the Fed’s dual mandate (which I first wrote to you about in more detail here)… portfolio diversification in this period of Great Distortion… and whether cash will be obsolete if the government launches a digital dollar.
But before we get started, I want to thank everyone who made it to my Enron 2.0 emergency briefing on Wednesday. Thousands of your fellow readers tuned in.
I did a deep dive into a historic distortion unfolding in the energy markets… And I showed you how you can turn it into the chance to make as much as 10x your money.
If you missed it, I’ve asked my publisher to make a replay available. I can’t promise it will be online for long, but really anyone that buys gas or pays high electric bills should view this. So be sure to watch it here.
Now, on to today’s mailbag. Up first, reader Joshua S. has an important question about portfolio diversification…
I am very much a newbie with investing. I just started putting money down in various companies in the range of $1,000.
My question is, how can I make money solidly if I only invest in a few shares? Is it better to invest in many companies and a few shares, or just a few companies with a lot of shares in them?
I’m asking because I currently have 150 stocks I’m eyeing to buy. Yet not sure how to “diversify” as far as betting on long-term stocks or new, up-and-coming ones. Any advice for a newbie?
– Joshua S.
Hi Joshua, thank you for your email. And thanks for sharing a question that I’m sure is on the minds of many here and those who are participating in the broader market.
There’s no single best answer. And to be clear, I can’t offer individual investment advice. But I’ll give some general advice that applies to all my readers.
In general, it’s best to diversify as much as possible with as few names as possible.
In other words, it’s good to be involved in different sectors. For example, across our paid publications – including Distortion Report and Distortion Money Matrix – we consider names in the five themes that stem from The Great Distortion between markets and the real economy.
Those themes are New Energy, Infrastructure, Transformative Technology, Meta-Reality, and New Money. For a quick recap on those, you can read my earlier essay, where I outline my thesis behind each of these.
But I think it’s important to “know” your investment and build from there, rather than spread out too much. This gives investors more confidence for the long term.
I generally think staying under 20 names is a safe, manageable way to do that.
Next, reader Jim S. has a question about one of the Federal Reserve’s official mandates – to maintain full employment…
Will the Fed use the “max employment” mandate to justify the likely pivot back to easy money policies?
– Jim S.
Hi Jim, thanks for your question. I think the Fed will mainly use the slower growth in the U.S. economy as its reason to pivot towards easy money policies again.
This is what it used in the middle of 2019, when it started reducing rates. Not to mention in the wake of the financial crisis of 2008 and the pandemic in 2020, when it dropped rates to the floor.
We’ve just had two consecutive periods of negative GDP growth (-1.6% in Q1 and -0.06% in Q2). And I believe we’re probably about to have another flat to negative one.
This will factor into the Fed’s next announcement, scheduled for early November. It may well be enough for it to take its foot off the gas, even slightly.
When that happens, or along the way to that point, it may also note that wage pressures have declined. And again, that would be due to the slower GDP growth.
But this is an even more complex topic than that. That’s because at present, wage growth is already lower than inflation.
But the Fed doesn’t seem to notice that.
Also, the unemployment rate is currently 3.7%. This is more or less where it was in the early part of 2019, just before the Fed started reducing interest rates.
But the Fed doesn’t seem to notice that right now, either.
Also, it’s worth keeping in mind that I believe there are three stages of the pivot the Fed will go through.
You’ll know what I mean if you watched the special video update I recorded for you last month, after Fed chair Jerome Powell’s speech at Jackson Hole…
First, it will slow down the pace of its interest rate hikes. Or at least reduce the size of them.
Second, it will stay neutral for a while, meaning it will pause the rate hikes.
Third, it will start cutting rates again, when it becomes blatantly obvious that the Fed is killing the economy.
How long it will take to get through those three stages will depend on a lot of factors.
After the 2008 financial crisis, interest rates remained at almost zero for about seven years. Then in 2015, the Fed gradually increased rates over the next four years by a total of 2.25%.
But I think the process will be a lot more condensed this time. The Fed is facing so many pressures that didn’t exist back then.
From an energy crisis that could soon affect every person in America… to war in Europe – which has impacted supply chains and prices for necessary goods here at home, from food to gas… to record high debt… to a slowing economy.
I don’t think the Fed can ignore these major distortions for long, as I told viewers at my emergency briefing on Wednesday.
So I’ll be keeping a close eye on its next moves. And especially its next policy meeting in November.
Next up, reader Vikas J. wants to know if investing in stock indexes like the Dow and Nasdaq is a sure bet…
Hi Nomi, it is great to read your insights. Could you please share your thoughts on trading indexes like Dow 30 and Nasdaq-100 versus individual shares?
Many friends of mine and I are of the view that every government since 2008 in the U.S. has been printing money without any prudence. And that’s a cause of the mess that is created on Wall Street.
Dow 30 is comprised of only blue-chip companies with fair representation of all sectors. Whereas Nasdaq-100 is technology heavy, which goes up and down with the fate of technology companies.
Is it true that indexes like Dow 30 can only go up, though in the short term, we might see corrections?
– Vikas J.
Thank you for your questions and observations, Vikas. I absolutely agree with the sentiment that cheap money is at the root of the problem with Wall Street.
And it’s not exactly limited to just Wall Street, either. In fact, this is at the heart of what I call The Great Distortion. That’s the permanent disconnect between the markets and the real economy.
As you may recall, the Fed fabricated $1.2 trillion to combat the 2008 financial crisis. It claimed this would “stimulate the economy.”
Instead, the Fed ended up creating not just a housing bubble or a tech bubble, but an “Everything Bubble”… the biggest financial bubble in human history.
Fast forward to 2020. Between mid-March 2020 and the end of April 2020, the Fed churned out $2.3 trillion. That’s about $55 billion created out of thin air daily.
The Fed really took it to a whole new level. It was the greatest money-creating experiment in history. It led to all sorts of bubbles across multiple asset classes – and the worst inflation we’ve seen in 40 years.
All the main stock market indexes responded as expected. For example, within a year of its March 2020 low, the Dow had shot up around 70%.
But back to the nub of your question…
Here’s the thing… There is no crystal ball to tell us what the Dow, Nasdaq-100, or any stock index will do in the future.
But it’s true that the stock market has been the best-performing asset class historically, by far. That’s even when factoring in inflation.
For instance, the S&P 500 has averaged historic gains of about 10% a year. And, since 2009, it has returned roughly 15% a year.
We also know that the longer you stay invested in the market, the more you increase the odds of making money from it.
As I showed in a recent essay, if you stay invested for 20 years or longer, you’d boost your chances of making money to 100%.
So, the performance of the stock market (whatever the index) really depends on your time horizon.
Granted, one can expect the tech-heavy Nasdaq-100 index to outperform most other indices when the economy is doing well.
But the opposite is also true. Tech companies can really suffer when interest rates rise, because many of those companies rely on cheap capital for their growth plans.
So, when the Fed puts the supply of cheap money in doubt, those stocks are usually the ones that tend to get hit the hardest.
We saw that play out earlier this year, when the Nasdaq dropped about 33%. The Dow dropped by “only” 18% over the same period.
But Nasdaq-100 or not… as long as you’re a long-term investor, you have time on your side.
It doesn’t mean it’s going to be a smooth ride. But if you stay invested long enough, you will not walk away empty handed.
Finally, reader Darby M. has some valid concerns about the government’s push for a digital currency, which I covered in detail in this recent video presentation…
Thank you for your honesty in sharing the disturbing news of the possible introduction of the digital dollar coming our way.
I have a question: What happens to fiat money? Does it disappear altogether? I would be most grateful for your thoughts because I find this part of the digital dollar discussion completely overlooked.
My sincere thanks for your wonderful advice. I’m so pleased you came into our lives.
– Darby M.
Hi Darby, thank you for your email and kind words. Those are important questions.
I don’t think fiat money will ever go away. I think it just takes on another form – that of digital money.
That’s because governments want to be able to use their might and history to back their currency. Especially those presiding over large economies that have powerful central banks.
To me, a digital dollar, if you take the technology out of it, is still a dollar. It can be created at will, attached to the U.S. government.
That’s why I don’t think the fiat money out there will disappear. It will just slowly merge into digital form.
As far as cash goes, I still think it’s an important medium of exchange right now. And it’s an easy and necessary mode of payment for people who don’t have access to a bank account or credit card.
In 2019, the Federal Reserve reported that 6% of Americans have no bank account. A further 16% are “underbanked.” This means they have some sort of bank account, but they also rely on alternative financial services.
One thing we are constantly looking at here at Rogue Economics is how our distortion theme of New Money will evolve.
And how online forms of payment will adapt to include people that aren’t currently “banked” by traditional banks – and offer them ways to exchange money for services.
Besides good old hard cash, applications such as Block (previously Square) and PayPal are possible ways to do that.
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in with questions for this week’s mailbag.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins