The Most Important 'Divergence' in the World Today

The most important 'divergence' in the world today... 'Hard' data is still lagging... Growth or depression... What comes next?... Five-year highs for inflation... A jaw-dropping fact about autos...


It may be the most important "divergence" in the world today...

We're referring to the difference between so-called "soft" economic data – survey-based indicators like consumer sentiment and small-business optimism – and "hard" (or quantitative) data.

As you can see in the graphic below, soft-data measures have soared since November's election. But hard-data measures have yet to follow...

According to new analysis from Morgan Stanley economists, this "gap" between soft and hard data has never been greater. As the Financial Times reported last week...

Following the election, numerous survey-based economic gauges have surged amid expectations that the Trump administration will take measures that are supportive of the economy and will lift growth. One example is consumer sentiment, which shot up this month to its highest level since 2000. Another can be found in small business optimism, which has hovered around its highest readings in 43 years.

But hard data have told a more muted story. For instance, retail sales edged up by just 0.1% in February from the month prior, the weakest pace since August. A closely watched measure of capital spending also underwhelmed that month.

"Upside surprises appear to be completely driven by the soft data while hard data are simply coming in about as expected," said Morgan economist Ellen Zentner.

What accounts for this difference?

It's simple: Businesses have cheered President Trump's proposals to cut taxes, loosen regulation, and boost growth... But expectations alone haven't been enough to "move the needle" on the economy. And until one of more of these proposals come to fruition, that's unlikely to change.

Of course, regular Digest readers know we believe tax reform is perhaps the most important of these proposals.

As Porter explained on Friday, the current trade and tax regime hurts our economy in three major ways. First, it favors debt over equity...

Companies are allowed to expense the total amount they spend on interest. This is a huge incentive for them to use Wall Street's big investment banks to borrow as much money as possible. It reduces their cost of capital. This explains why, since 2000, nearly all of the net debt issued by Wall Street has gone toward mergers and acquisitions or share buybacks...

American companies are now more exposed to either rising default rates or rising interest rates than they've ever been before.

This trend has been great for Wall Street. But it's not great for America.

Second, the current tax regime actively discourages businesses from making the critical investments necessary for long-term growth...

Some items – like computers and software – can be fully expensed in the year they're purchased. They're treated like a routine cost of doing business. But longer-term corporate investments can only be expensed over many years. Inflation robs companies of the real value of these tax credits, providing a perverse incentive to not make big, long-term investments...

There is no other proven way of increasing productivity (and thus, wealth). We must make far more and far larger long-term investments in American productive capacity. And we shouldn't have a tax policy that makes this harder to achieve, instead of easier.

And finally, it actively encourages businesses to move as much capital (and value) outside of the U.S. as they possibly can...

Why does every important American software maker (including Apple and Microsoft) have its international headquarters in Ireland?

By keeping their core intellectual property in Ireland, these companies can pay far, far less in taxes. Meanwhile, they can import that intellectual property back into the U.S. (after manufacturing in China) for free. This allows them to pay a tiny fraction of the taxes they would otherwise have to pay. And it also keeps a lot of their employment and capital outside of the U.S. (Microsoft, for example, just spent around $250 million building a new campus in Ireland.)

Similar strategies are being employed at some level by almost every U.S. multinational company. This is completely insane.

So what happens next?

Will hard data play "catch up" with soft data as economic growth begins to pick up? Or will soft data crash back to Earth as the economy rolls over? As Porter explained, it could depend largely on what happens over the next few months...

This is the most important political debate and potential economic reform in the U.S. since I was born in 1972...

This debate – about tax and trade reform – will determine the economic fate of our country for the next few decades.

We're either heading into a new era of growth (and potentially a lot of inflation) or we're sliding back into a depression caused by a mountain of bad corporate debt.

Fortunately, we believe the bullish outcome remains more likely.

As Porter noted on Friday, our sources believe there's a 70% or better chance that significant tax reform will pass this year. Yet, the market is still trading as though there's virtually no chance it will happen. This gives us a huge potential opportunity to position our portfolios and businesses before it becomes front-page news.

Again, this is why we're holding a special event this Wednesday, April 5 at 8 p.m. Eastern time. The "Metropolitan Man" will be joining us live in our Baltimore headquarters to explain it all... including a near-term development that could quickly raise the odds of tax reform to 99% or more. And you can be there...

Simply click here to reserve your seat for a small one-time fee.

In the meantime, the Federal Reserve's favorite measure of inflation continues to tick higher...

On Friday morning, the U.S. Department of Commerce reported its personal consumption expenditures ("PCE") index rose 0.1% in February. This was smaller than January's 0.4% monthly gain, but it officially pushed PCE inflation to a 2.1% annualized rate...

While economic growth has yet to pick up, inflation is now running at its highest rate in nearly five years. It is now well above the Federal Reserve's official 2% target for the first time since April 2012.

Longtime readers know we've been tracking the bubble in the auto finance market for nearly two years now...

In short, auto lenders – including the financing arms of the big automakers themselves – have pulled out all the "stops" to keep the party going...

They've extended financing terms as far out as 96 months – eight years – and they've pushed deeper and deeper into subprime territory, offering cars to folks with worse and worse credit.

But now, despite these tricks, car sales appear to be peaking. And many of these loans are already going bad at an astonishing rate. As we wrote in the March 23 Digest...

Subprime auto loans are going bad at the fastest rate in years...

According to Fitch, delinquencies of 60 days or more on these loans are now well above 5%... And they're quickly closing in on 6%. As you can see in the following chart, these loans are going bad faster than they did during the 2008-2009 financial crisis...

But a new report suggests even we may not be bearish enough. According to data from Edmunds and Morgan Stanley, more than 30% of trade-ins made toward the purchase of a new car now hold negative equity. Worse, these trade-ins are underwater by an average of more than $4,800 each.

Each of these figures is an all-time record... far worse than during even the worst of the 2008-2009 financial crisis, when the economy was in free fall...

Said another way, nearly one out of three folks trading in for a new car today owes a record $5,000 more than his new car is worth... before he even drives it off the lot.

This will not end well.

New 52-week highs (as of 3/31/17): Euronet Worldwide (EEFT), National Beverage (FIZZ), Microsoft (MSFT), and Stanley Black & Decker (SWK).

In today's mailbag, loads of subscribers respond to Porter's Friday Digest request. Send yours notes to feedback@stansberryresearch.com.

"Porter, that piece was not just excellent, it was outstanding. May I suggest that you do some editing, to remove the references to subscribers, and also remove references to successful predictions of the past, and submit it as an op-ed to various newspapers, starting with the New York Times (remove that reference too). This is education that should be in the head of every thinking person in this country (and yes, I'm aware, that on the subjects of politics and economics, the number of people who think, is preciously small)." – Paid-up subscriber Norm R.

"Porter, after the 2008/09 meltdown, I searched for reasons why I did not see it coming and how to ever keep it from happening again. After finding Stansberry Research, I was able to build our wealth back to pre-2007 highs and beyond. My wife and I have been Alliance members for over three years and have never looked back. We have learned so much from your services and feel blessed for it. At times you are on the high strung side but it always seems to play out. My wife and I will be listening April the 5th. Thank you for all you and your team do." – Paid-up Stansberry Alliance member John

"I'm joining this webinar because of Porter's Friday Digest article where he dropped the hyperbole. A more considered review of the economics around taxes and the impact to businesses and the consequences of changing tax policy appealed to me. I look forward to hearing this information. Thank you." – Paid-up subscriber Craig E.

"Dear Porter, I've been following your work for several years. Here's why:

• you and your editors really know how to tell a compelling story.

• you have a knack for explaining financial concepts in simple terms that I can understand – giving me the confidence to manage my own wealth rather than put it in the hands of others.

• you provide relevant, insightful and actionable information that can significantly grow and protect my wealth.

"Your recent articles about the 'Metropolitan Man' are a fine example of how you truly care for us to be in the know. So I'm really looking forward to listening in to your Wednesday night broadcast. Thanks." – Paid-up Stansberry Alliance member F.P.

"Dear Porter, I'd be a fool to miss this event for a mere 20 bucks. Using the information you and your team have provided, I've done much better than the overall market over the last 18 months. Any window into Deep State activity is worth its weight in gold. Thanks for what you do." – Paid-up subscriber John S.

"Porter, unless your webinar is a total bust and I highly doubt it, $19.95 is way too low. Thanks for your great work" – Paid-up subscriber Kevin K.

"I'll be at the meeting. Porter, great so every one will be rich when the tax cuts are approved, but at the expense of the environment, good old Mother Earth. Believe it or not it is not a good thing when Trump cuts the budget of the EPA 43%, to boost the economy. One must think of future generations, they are more important than the all mighty buck." – Paid-up subscriber Phil Michael

"I want to thank you for writing this [Digest]. I have heard about the tax reform initiatives but was not aware of the particulars. You explained this subject quite well and have opened my eyes for which again, I thank you. I am looking forward to the April 5th conference." – Paid-up subscriber Vic S.

"Thank you for providing the detail to make up my mind about attending the Met Man webinar. I was reluctant because the hype seemed manufactured and really didn't distinguish itself from the other must see, must attend once in a lifetime events that will change the investing world, other than the $19.95 charge." – Paid-up Bob Buckley

"Once I found out it was replay-able after the fact (my nights are busy), how could I not sign up for the pittance of $20? Thank you for all that you do." – Paid-up subscriber Brian W.

"I am definitely attending and thanks to Porter for providing this. I am never disappointed. Keep up the good work regardless of what the nay-sayers do. No matter what you say they will never be happy." – Paid-up subscriber Harold P.

"I will absolutely be attending remotely on April 5. Can't wait to hear more. Attending in person I am sure would be fascinating, and I'm also sure that bringing my school age child would be The Field Trip for The Ages. But the damage the ex would inflict over that would be daunting. All those family court people are swamp wannabes, and they buy right into his dramas of distraction. So I will listen online." – Paid-up Stansberry Alliance member Sally E.

"I, like many others, have a conflict with attending the Metro Man meeting live at 8PM on April 5th. But since you told us that by buying in, we will be able to listen later, you bet I'm in!" – Paid-up subscriber Gary C.

"I have paid my money and have my on-line seat. I will actually be at a wedding rehearsal dinner for my granddaughter in Pensacola, FL at the time of the interview, but I called and have been assured it will be available as a recording soon after the meeting." – Paid-up subscriber Herb S.

"I will not be able to attend the meeting. Subscribed to listen to the meeting for $19.95." – Paid-up subscriber Joseph M.

"Porter and team, can't attend in person, but am signed up to listen and really looking forward to it. Thanks for setting it up." – Paid-up subscriber Don S.

"Porter, per your request... I have already signed up to attend via Conf Call. I hope to be able to listen Live. I say hope because I am having several laminectomies and a Spinal Fusion on Monday morning, 4/3. If I can, I will be on my laptop Wednesday night. Looking forward to it! Wish me luck! Best wishes to you and the SR Team on a flawless event." – Paid-up subscriber Tim H.

"Yep, Porter, I will be attending, with my wife listening in with me. She talked me into paying the 20 bucks. I'm sure it will be worth the money. I was surprised to hear you bashing the Democrats, though, after all these years of your equal opportunity bashing of both parties! In suspect you still feel that way; but the Friday Digest did come across pretty partisan. Personally, although I continue to be an equal opportunity basher, it does seem that the Democrats have become much worse than the GOP in their swampiness..." – Paid-up subscriber Tim S.

Porter comment: Partisan? Not at all. The whole problem is the Deep State elements in both parties. Look at the divide between the Republicans in the White House alone!

Regards,

Justin Brill
Baltimore, Maryland
April 3, 2017