The debt ceiling and the incredible rally in tech stocks have been two of the biggest stories of 2023.
The media hasn’t shut up about how a debt default could crash the economy.
And Wall Street’s obsession with ChatGPT and artificial intelligence (AI) has caused the biggest tech stocks to party like it’s 1999. The Nasdaq is up nearly 26% since the start of the year.
If you feel like you’ve seen this movie before – it’s because you have… And I know how it ends.
Something dangerous is playing out again. Different time, different place, but same ending.
At Intelligent Income Daily, our mission is to help everyday investors understand what’s causing market volatility. Once you do, you can avoid costly mistakes or even portfolio disasters when the highs turn to lows (as they always do).
Today I’ll show you why you shouldn’t let FOMO steer your actions right now. Thanks to one giant government fake-out, millions of investors are potentially set up for a world of hurt. I’ll tell you what to do to avoid this pain – and one way to defend yourself (and even profit) instead.
The Debt Ceiling Drama Is a Smokescreen
The debt ceiling story you’ve heard is not a lie, but it is misleading.
Yes, if the U.S. were to default for three months, the economy would likely crash as it did during the COVID-19 pandemic, and the stock market might be cut in half.
But every politician has been saying that they won’t let us default. And now the House has passed a bill to raise the debt ceiling. And the Senate plans to vote to do the same tomorrow.
But the world of hurt isn’t coming before the debt ceiling is raised, it’s coming after.
And the 2023 stock rally and the debt ceiling crisis are more closely connected than most know.
The S&P 500 might seem like it’s having a great year, up about 10%.
But it’s not actually true.
The top eight stocks are generating 100% of the net gains of the S&P. In fact, the median gain of the five largest companies in 2023 is 35%.
The median gain of the other 495 companies in the S&P is -2%.
Cyclical companies like financials are down 31%.
So where is the recession? Hiding in plain sight behind the impressive short-term gains of big tech. Here’s how…
In May alone, the Nasdaq was up 8%. As I said before, it’s up 26% so far this year. NVIDIA, Wall Street’s favorite AI stock, was up 36%.
Those are normally great stock returns over two to five years. But we’ve seen them in just five months.
It feels like the Pandemic bubble of 2021. And here’s how it’s happening all over again…
In 2020 and 2021, the Fed printed $120 billion per month via quantitative easing (QE). That means printing money to buy bonds and inject money into the financial system.
After that flood of money, the bubble burst. And the Nasdaq crashed as much as 35% in 2022. Some tech stocks crashed 75% or more.
What the headlines aren’t telling you right now is that the government has been printing money in 2023 at a faster rate than it did during the Pandemic.
The Fed printed $400 billion when the banking crisis started in March of 2023, and $190 billion of that is still in the financial system.
The U.S. Treasury has been effectively printing money and hoping no one is paying attention.
And there is an extra $600 billion in “stealth money printing” from the U.S. Treasury.
When the government borrows to fund deficit spending, it sells bonds. That sucks money out of the economy and financial markets.
After all, once you spend money on bonds, you can’t spend it on other things like stocks. This is called “negative liquidity,” or “reverse money printing.”
In January, the U.S. hit the debt ceiling, and the U.S. Treasury had to stop selling bonds.
It started paying bills with the $600 billion sitting in its account at the Fed, and thus didn’t pull that $600 billion out of the financial system.
This is no different than if the Fed injected $600 billion into the financial system directly.
Together, these create a $790 billion secret money printing program. And it all boils down to this: 33% faster money printing than during the Pandemic.
This has helped fuel the tech mania we’ve seen in the past few weeks. But here’s why it will likely end in a matter of days, if not weeks.
The Bubble Is Going to Burst
With the banking crisis is calming down, the Fed isn’t printing more cash to lend to the banks.
And after the debt ceiling is raised, the U.S. Treasury expects to sell $1.5 trillion in new bonds by the end of 2023. As far as the stock market is concerned, this is no different than if the Fed were to suck $1.5 trillion out of the financial system.
During this time, the Fed plans reverse money printing of $840 billion.
That’s over $2.3 trillion in reverse money printing compared to the $790 billion in money printing we’ve seen so far in 2023.
This is the fastest effective contraction in the U.S. money supply in history. And it’s about to create the headwinds for every popular investment of 2023, from tech stocks to crypto.
And this could begin as soon as the debt ceiling has been raised – likely on Monday, June 5.
The good news is if you are reading this right now, you have no need to panic.
The economy will slow as a result of $2.3 trillion in reverse money printing.
And this will create the mother of all headwinds for stocks like NVIDIA and bitcoin.
That doesn’t mean you have to sell everything you own and hide in cash.
Instead, there is a sensible strategy that anyone can use to avoid the carnage.
NVIDIA is up 167% this year. Meta is up 125%. Bitcoin is up 64%. Ethereum is up 54%. The money-printing music that has helped drive these insane rallies is about to stop.
And when the reverse money printing starts in earnest, it can throw us into a recession.
Now is the time to set trailing stops on all your big 2023 winners.
With a trailing stop, you can lock in most of your profits – but still benefit if the bubble lasts longer.
I can’t tell you whether the 2023 tech bubble will pop on June 5 or sometime later. But I can tell you that the money-printing that’s helped drive this crazy market will stop on June 5.
And likely soon after that, the recession the Fed is causing with rate hikes will end this bubble in a dramatic and spectacular fashion.
Don’t be caught with your pants down.
Lock in some of those tech profits with trailing stops. And when the crash comes, you’ll be able to buy back those same tech stocks you love at much better prices.
Safe Investing,
Adam Galas
Analyst, Intelligent Income Daily
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