Welcome to your Friday mailbag edition of The Daily Cut.
Every week, your fellow readers send us their questions about markets… the economy… and how to build lasting wealth.
And on Fridays, I share the responses from the Legacy Research team.
So, if you have a question for Teeka Tiwari, Nomi Prins, Jeff Brown – or anyone on the team – write us at [email protected].
Coming up, we return to an investment theme I’ve been spotlighting recently – the surge of interest in nuclear power.
Our tech investing expert, Jeff Brown, has been tracking the latest advances. And in today’s dispatch, he delves into the pros and cons of nuclear-powered shipping.
First, a question for Nomi Prins.
She’s an investigative journalist, bestselling author, and former global investment banker.
Few people know more than Nomi does about how central banks affect the economy and markets.
She’s written two books that expose the influence central bankers have over our lives – All the Presidents’ Bankers and Collusion: How Central Bankers Rigged the World.
And at her daily e-letter, Inside Wall Street with Nomi Prins, she’s been tracking how the Fed – America’s central bank – manipulates markets.
Officially, the Fed has two goals – to keep prices stable by keeping inflation under control… and to keep employment high.
And Nomi reader Jim S. has a question about the second of those two goals.
Reader question: Will the Fed use the “max employment” mandate to justify the likely pivot back to easy money policies?
– Jim S.
Nomi’s response: Hi Jim, thanks for your question. This is still a counter-consensus view. But I believe you’re right. At some point, the Fed will become concerned about falling growth in the U.S. economy – and its impact on jobs – and back off on its aggressive rate hiking.
This is what it did in the middle of 2019 when it started cutting rates. It also dropped rates to the floor in the wake of the financial crisis of 2008… and during the COVID-19 pandemic in 2020.
We’ve just had two straight quarters of negative GDP growth. The total output of the U.S. economy fell 1.6% in Q1 and 0.06% in Q2 of this year. And the next quarter will be just as lackluster.
And falling economic growth isn’t exactly great if you’re charged with maintaining full employment in the economy.
This will be the backdrop of the Fed’s next decision on interest rates, which is scheduled for early November. It may be enough for it ease off on rate hikes… even slightly.
I predict the Fed’s pivot back to easy money policies will happen in three stages…
First, it will slow the pace of its interest rate hikes – or at least reduce their magnitude. So instead of more three-quarter point hikes (75 basis points), we may get half-point hikes (50 basis points).
Second, it will stay neutral – meaning it will pause the rate hikes.
Third, it will start cutting rates again. This will happen when it becomes obvious to the Fed that its actions are killing the economy.
How long it will take to get through those three stages will depend on several factors.
After the 2008 financial crisis, interest rates stayed around zero for about seven years. In 2015, the Fed raised rates to as much as 2.5% in 2018… before cutting them again in August 2019.
But I expect the pivot will be quicker next time. The Fed is facing so many pressures that didn’t exist back then.
The energy crisis could soon affect everyone in America. And higher interest rates make it costlier for oil and natural gas producers to borrow money and bring on more production.
Meanwhile, Russia’s war against Ukraine is hammering supply chains. Our national debt is at a record high. And we have a slowing economy.
The Fed can ignore these major distortions for only so long.
For more insight into where interest rates are headed, we turned to Teeka Tiwari.
Teeka is no stranger to gut-churning volatility. Like Nomi, he worked on Wall Street for more than a decade.
Early in his career, he saw the same kind of carnage we’re seeing in this year’s wild price swings. It was also a result of the Fed’s short-sighted policies.
Teeka’s response: The Fed is raising rates because inflation has gotten out of control. It believes it can’t stand by as inflation ravages the country.
In 1980, Fed chairman Paul Volcker jacked up rates to 20% to kill off the inflation that built up in the 1970s. Chairman Jay Powell is in the hot seat now. But the national debt is too high to spike rates like that this time around.
Back in 1980, the U.S. federal debt was $900 billion – or about 32% of GDP (which measures economic output). Today, the U.S. federal debt stands at $30.5 trillion. That’s 121% of annual GDP.
The federal government pays $63 billion in interest a month on that debt. If Powell jacks up rates to 5%, those monthly interest payments would balloon to $127 billion.
That’s more than the $100 billion spent on social security every month. Washington is already struggling to fund social security today… imagine what will happen when its bill more than doubles.
So he only has so much room to maneuver.
That’s why we don’t have to worry about the Fed pushing up its target rate into double digits.
But you do need to prepare for 5% interest rates by the end of the year.
That will keep up the pressure on stocks, cryptos, and real estate. Because rising rates are intended to slow growth… choke off spending… and dampen inflation as a result.
Just remember this is temporary. The Fed will pivot at some point in 2023. That will ignite a powerful rally.
Between now and then, our job is to identify and buy great assets trading at ridiculously low prices.
Bear markets are when you pull out your shopping list. Always remember, this bear market will be short-lived.
For reasons I’ve gone into here, we’re in a secular (long-term) bull market. Right now, I believe we’re caught in a cyclical (short-term) bear market within a multi-decade secular bull market.
It’s like what happened in 1987, 1989, 1991, 1994, and 1998. We got cyclical bear markets within secular bull markets. And everyone thought the bull market was over.
Millions of people made huge mistakes and dumped quality stocks… only to see them soar again when the cyclical bear market had run its course. I know because I was one of them.
Learn from my mistakes. Greet this bear market for what it is – an opportunity to buy amazing assets at heavily discounted prices.
I know it sounds strange to say. And I know it’s not the message you’re hearing on CNBC and in The Wall Street Journal. But this bear market is here for your benefit. When the Fed pivots – as it’s sure to do – asset prices are going to explode to all-time highs.
So going against the crowd… and availing of discounted prices to buy high-quality assets during this cyclical bear market… will reap massive rewards.
Of course, to do that, you need to be patient and cool-headed under pressure. That’s easier said than done. Nevertheless, I strongly believe it’s the best possible playbook you can follow right now.
Next, we circle back to a question that tech investing expert, Jeff Brown, tackled in last Friday’s Cut – why don’t we power commercial ships with clean nuclear energy instead of dirty diesel?
Jeff reached out to a contact who trains personnel to work on nuclear-powered military vessels for the U.S. Navy.
And as Jeff revealed, using nuclear technology for commercial shipping is still a long way off. Above all, it would cost too much. Jeff…
We know a nuclear submarine can cost as much as $4 billion. Large cargo ships – by comparison – typically cost closer to $100 million.
It’s also expensive to train folks to operate a nuclear-powered vessel. It takes two years of intense training, which costs upward of $200,000. The Navy is willing to pay for this. But for private businesses, these training costs would eat up their profit margins.
Jeff’s readers have since been in touch to share their insights on this question. And below Jeff weighs in again with some final thoughts…
Reader comment: Hi, Jeff. I just read your response to the question about nuclear-powered commercial vessels.
You are correct. The cost to build, operate, maintain, and repair each nuclear-powered submarine or aircraft carrier is enormous.
As your contact mentioned, the Navy uses highly enriched uranium. For national security reasons, it is not commercially available.
I am a retired Naval officer with 25 years’ experience in operation, maintenance, and repair of nuclear-powered ships and subs.
It is worth the expense for the Navy because we gain strategic and tactical advantage over our adversaries. That wouldn’t be the case in a commercial business.
– Michael P.
Reader comment: Another consideration is the physical security of the nuclear ship and the enriched fuel. Commercial ships aren’t armed and could be hijacked. The movie Captain Phillips comes to mind.
Also, some countries don’t allow nuclear-powered ships in their ports. Either they’re against nuclear power, or they don’t want floating nuclear bombs in their harbors.
– Jan R.
Jeff’s response: Michael, Jan – thanks for your input. These are valuable perspectives on why commercial ships can’t use nuclear power the way military vessels can.
Jan, you bring up an interesting point. Nuclear-powered commercial vessels would pose a security risk.
If commercial vessels were nuclear-powered, they would almost certainly need a security escort. And they’d probably need to be armed.
At the best of times, that’s not realistic. But given the current backlog of marine traffic, it’s a logistical nightmare.
To give us an idea, have a look at the image below. It’s a publicly available map of all commercial marine traffic.
Each of those dots represents a commercial vessel. And we should keep in mind that this is just a small snapshot of global marine traffic.
Commercial Marine Traffic
Source: marinetraffic.com
If all these ships were nuclear-powered, there would be no way to protect them. The cost of building, operating, maintaining, repairing, and protecting them would be too high.
To Michael’s point, this assumes commercial shipping firms could buy highly enriched uranium. And that’s not realistic either.
After all, someone with bad intentions could turn the highly enriched uranium the Navy uses into nuclear weapons. That’s not something the government would want trading freely on the open market. Neither would I.
But a solution is possible…
As I mentioned, a company called Avalanche Energy is developing compact nuclear fusion reactors. They’re small enough to be carried by a single person.
If the company is successful with its research and development, this technology could fuel planes, trains, and ships.
Better still, there would be no need for dangerous materials like highly enriched uranium.
That’s all for this week’s mailbag.
If you have a question for anyone on the Legacy team, be sure to send it to [email protected].
Have a great weekend.
Regards,
 |
Chris Lowe
Editor, The Daily Cut