The topic of the day... Inflation (again)... An $8 Big Mac... McDonald's is inflation-proof... But inflation is still a problem... A CPI surprise... Kicking rate cuts down the road... A key turning point...

In western Massachusetts, just off the turnpike...

Near the border of Massachusetts and New York, you'll find America's most expensive Big Mac in a service plaza off Interstate 90. The signature McDonald's (MCD) sandwich costs $8.09 there.

That's more than double what it costs on Main Street in Stigler, Oklahoma – where you'll find the cheapest Big Mac in America for $3.49. The national average is $5.69, according to the Economist's "Big Mac Index."

Now, McDonald's prices – like inflation – vary depending on where you live, local prices of real estate and gas, and interest rates, along with other cost inputs and who's making decisions.

It's part of the franchise model that makes McDonald's so successful... The company owns or leases most of the land its restaurants operate on, and it charges franchisees rent and royalties as they handle day-to-day business.

Anyone who has read our colleague and regular Friday Digest essayist Dan Ferris' January issue of Extreme Value knows this. If you plug the ticker MCD into our Stansberry Score filter, you'll find a lot of information, too.

But I (Corey McLaughlin) am not bringing all this up to point out the long-term strength of McDonald's franchise model.

It's to talk about inflation, the topic of the day in the markets (again)...

While prices vary depending on location, Big Macs in America today are much more expensive than they were just a few years ago... more than 20% on average since the pre-pandemic era...

As the days go on, we can say this with even more confidence...

It turns out the consequences of pumping trillions of dollars of stimulus money into the economy during the pandemic, coupled with ultra-easy monetary policy, take a long time to wear off in a $28 trillion economy. It's certainly taking longer than Wall Street expected.

This morning, Uncle Sam published higher-than-expected inflation numbers... which were the catalyst for a bearish day. The major U.S. indexes were all down, with the small-cap Russell 2000 leading the losses, off roughly 4%. Bond yields were up across the board. (More on this in a moment.)

If you've been following along here for the past few months, this shouldn't have caught you off guard...

The pace of inflation is off its 40-year-high peak, but the disinflationary trend is still volatile because of "sticky" high housing prices and volatile energy prices that are, in part, tied to geopolitical risks.

That's why we've been warning over the past few months that the Federal Reserve's interest-rate cuts would likely come later than Wall Street was anticipating... and some market repricing could be in order.

After all, 2023's rapid year-end rally appeared to be based largely on the expectation that the Fed would cut rates to juice the economy early this year. Today, that looks increasingly less likely...

An economic bellwether...

Last Monday, McDonald's reported what some analysts described as a "mixed" earnings report for the fourth-quarter and full-year 2023. Same-store sales showed growth over both periods and were a remarkable 30% higher than in 2019.

But it was McDonald's CEO Chris Kempczinski's comments about inflation that caught my attention because of what they say about the near-term direction of U.S. markets and the current state of the economy.

As industry publication Nation's Restaurant News reported...

In the U.S., McDonald's is navigating transaction reductions from its lower-income consumers making $45,000 and below. Kempczinski noted that these consumers are likely opting to eat at home as grocery/supermarket inflation has cooled faster than food-away-from-home. The company is focused on re-engaging these customers this year.

"The battleground is with the low-income consumer. What you're going to see is more attention to affordability. Think about that as an absolute price point, which is more important for that consumer to get them into the restaurants than maybe value messaging," Kempczinski said. "We are set up well to go after that; we have our Dollar 1, 2, 3 platform. There will be some activity at the local level to make sure we continue to provide value for the lower income consumer."

This is an economic bellwether comment... A growing number of lower-income customers are staying away from McDonald's. They don't see the value. Prices are too high compared with food available elsewhere.

This indicator is in the same ballpark as United Parcel Service (UPS) recently announcing it will lay off 12,000 workers after negotiating with a labor union just six months ago to raise full-time drivers' salaries by nearly 20%... or seemingly every big tech company cutting costs to keep profit margins strong.

To be clear, rising prices aren't a bad thing for McDonald's...

There's a reason McDonald's can charge $8 for a Big Mac... Because demand is there. And this is replicated, more or less, in about 40,000 McDonald's locations across more than 100 countries.

McDonald's is still attracting enough customers with enough money that the company is seeing overall growth, like a roughly 10% annual rise in same-store U.S. sales. It has also managed its costs effectively and weathered the need for wage increases to find and hire workers.

McDonald's has "pricing power," a massive reach, and importantly for investors, a long, storied history of growth and rewarding shareholders. McDonald's generates billions of dollars per year in free cash flow and has raised its shareholder dividend every year since 1976.

Businesses that raise prices without a significant dent in demand while continuing to reward shareholders are precisely the type of recession- and inflation-proof companies that should be part of every long-term investment portfolio.

However, here's the main takeaway...

While you might hear that "inflation is dead" from some sources (not here), the pace of inflation is still high enough in the U.S. to be at the forefront of the business strategy for massive companies like McDonald's.

And the high-inflation battle isn't over yet...

As we said, the U.S. government released its highly anticipated January inflation numbers this morning... and they came in higher than Wall Street predicted.

The consumer price index ("CPI") was stickier than expected, with headline inflation at 3.1% year over year, significantly higher than the expected 2.9%. And the CPI rose 0.3% on a month-over-month basis compared with estimates of 0.2%.

The jump in inflation was largely attributed to rising prices of food, car insurance, medical care, and shelter costs. This basket contributed to nearly two-thirds of the overall increase for January.

Core CPI, which excludes more volatile prices for food and energy, also rose more than expected. It showed 3.9% annual growth and a 0.4% monthly increase. Initial estimates had the yearly core CPI measuring 3.7%.

Prices for housing also increased 0.6% in January, nearly reaching a one-year high. Those numbers need to ease if inflation is going to get closer to the Fed's 2% target. So the Fed will focus on housing costs over the coming months.

Shifting expectations...

Based on this data, the market expects the Fed to continue to delay cutting rates.

According to the CME Group's FedWatch Tool, federal-funds futures traders have put 65% odds on the Fed "pause" continuing through May and the earliest rate cut coming at the central bank's June meeting.

That's in part because last week Fed Chair Jerome Powell said the Fed would like to see "more good data" to build confidence that the pace of inflation is cooling before it decides to cut rates.

Today's numbers didn't support that idea.

Looking forward, the Fed will use the upcoming months to evaluate price trends and the labor market, which remains relatively strong with an unemployment rate below 4%.

The Fed will have access to more robust data, including one more CPI report, before its next policy meeting on March 19 and 20. It's unlikely that any additional data will suggest an outcome other than maintaining the current rate. And a sustained increase in prices may even shift talks back toward additional rate hiking.

Just about every major asset class sold off today...

A "higher for longer" rate environment means the "cost of money" will be relatively more expensive for longer than enough investors may have expected... and portfolio adjustments will need to be made.

Stocks and bonds sold off today. The S&P 500 Index and Dow Jones Industrial Average, which have been trading at new all-time highs, were off 1.3% today.

Bond yields (which trade inversely to prices) were up across the curve again (as we've seen in recent weeks). But this time, they were up sharply. The 10-year Treasury is now above 4.3% for the first time since late November.

The two-year Treasury yield similarly rose above 4.6%, where it was in December before the market started to expect Fed rate cuts this year. Even bitcoin (BTC), which hit $50,000 for the first time in more than two years yesterday, sold off today.

The only major asset class that bucked the trend was oil, with the benchmarks up around 1% in the past 24 hours... in and of itself an inflationary indicator.

All in all, it looks like a turning point for the markets...

As our colleague Greg Diamond wrote to his Ten Stock Trader subscribers today, the volatility and short-term "top" he has been anticipating arrived this week...

Since the start of the year, my reasoning or the "why" (aside from time and price, obviously) was that the consensus among investors was wrong about inflation and the Federal Reserve.

In other words, inflation hasn't been contained and the Federal Reserve won't start cutting rates. The inflation report this morning confirms this outlook.

Greg says some stocks will attempt to rally over the next week or so, but the "topping process" for the market in general – a setup that he described in the debut of Diamond's Edge last week – is well underway.

Today, Greg sent Ten Stock Trader subscribers a bearish recommendation with the potential to double, and he expects to send more trade alerts during this turning point for the markets.

If you want to learn how to access all of Greg's recommendations, check out his free presentation here. He shares a free trading recommendation for anyone who tunes in and explains much more about his outlook for the markets.

As always, Stansberry Alliance members and Ten Stock Trader subscribers can find Greg's latest recommendations and intraday updates here.

On this week's Stansberry Investor Hour, Dan and I are joined by the "Convexity Maven," Harley Bassman, a managing partner at Simplify Asset Management. He spoke with us about the biggest risk he sees in the markets today, where bond yields might be going, and more... Click here to listen to this episode right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and X, the platform formerly known as Twitter.

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Tomorrow (February 14) Will See the Biggest Move of 2024 The market will see a massive move on February 14. That's the newest prediction from the man who called the 2020 and 2022 crashes and last year's turnaround within 24 hours. But if you know what's coming, you could double your money 10 different times, without buying a single stock. By tomorrow, see his outline (and No. 1 recommendation) here. Prepare NOW for the Fed's Next Move on March 11 The analyst who called the 2008 collapse of Lehman Brothers believes the Federal Reserve's next meeting could trigger "the craziest, most difficult time in our financial history." No, it's not the next rate hike, more fudged economic data, or whether we'll have a "soft landing" in 2023. The last time this happened, Americans became 41% poorer overnight. Get the full story here now.

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In today's mailbag, feedback from a longtime subscriber for Ten Stock Trader editor Greg Diamond and a story about finding Stansberry Research... As always, send your questions and comments to feedback@stansberryresearch.com.

"Hey Greg... I finished [Samuel Benner's book] Benner's Prophecies. It amounts to a long overdue explanation of the results of my business life. I got caught long in the real estate market in 2009 and eventually went bankrupt. I spent years trying to figure out what went wrong. Apparently, throughout the ages, thousands of businessmen who don't understand cycles and timing of market advances and declines get caught and lose all their money.

"By 2011, I found Stansberry Research and began reading newsletters. There were rumblings in the early days of the Stansberry Investor Hour podcast of a company called Uber that was hiring drivers. Porter Stansberry and friends indicated driving for Uber might be a great way to get a renewal on life post-recession. And that's what I've been doing since 2014.

"As you may already know I joined up with Ten Stock Trader about a year and a half ago. I find your work fascinating and I'm incredibly grateful for your insights and timing of trades. I'm currently studying Elliott Wave and wish to do so until I master it.

"You once said on your Twitter to me that there is no Holy Grail to trading, however, there is and I found it. The Holy Grail to trading is called correct 'position sizing'. I hope you find this funny and true. Basically, no one will ever go broke with proper position sizing." – Subscriber Anthony C.

All the best,

Corey McLaughlin with Tyler Jarman
Baltimore, Maryland
February 13, 2024