The weekend edition is pulled from the daily newspaper Stansberry Digest.
It doesn’t matter if you want to pretend we’re not in a recession…
It doesn’t matter if inflation falls by a few tenths of a percent from month to month.
Crucial to your portfolio’s future returns is what comes next.
If you think we’re getting close to the point where it makes sense to get back into stocks, I urge you to read on.
Investors are completely over-optimistic these days. Sure, our economy has grown over the past two quarters. Inflation is also lower than six months ago. But as I look to the near future, one thing is clear to me…
Things are about to get a whole lot worse…
Dark economic clouds are gathering on the horizon. I believe we are in the midst of a deep, prolonged period of slowing economic growth.
As more people come to terms with this economic reality, it will trigger an even deeper stock market sell-off… and trigger the next credit crunch.
Let me be clear: this is not something I do want happen.
But if it’s going to happen, as my colleague Dan Ferris likes to point out, then so be it prepared for this. And it’s even better if there’s a way benefit of that.
Luckily there is… While my economic outlook is bleak, informed investors can still make money.
Successful long-term investors need to understand credit cycles…
As editor of Stansberry Research’s corporate bond newsletter Loan options from Stansberryit’s my job to monitor what’s going on in the credit market.
Credit cycles are a “normal” part of the economy. A full-fledged credit crunch occurs about once a decade. The last one was 2008-2009. The one before that was 2001. So we’re overdue.
Here’s what’s important…
Recessions or credit crises need not be feared. Once you accept this, you can prepare your portfolio so that it doesn’t have to suffer.
Credit cycles are easy to understand…
When times are good, lenders (like banks, private equity firms, and institutional investors) start relaxing their underwriting standards. This leads to an era of “easy” credit.
Eventually, as the loan pool grows, lenders run out of people with good credit to lend to. In the hunt for profits, they target borrowers who are progressively lower down the credit ladder.
Eventually, some of the bad credit starts to go bad. For whatever reason, people or businesses cannot afford to make their loan payments. (Today, for example, it could be the effects of high inflation and rising interest rates.)
Then creditors begin to “tighten” their lending standards. This means that credit is harder to come by, loan amounts are smaller, and credit terms are more favorable for lenders.
This slows down the economy and makes it harder for other borrowers to repay their loans. Late payment leads to payment defaults that lead to bankruptcies – both on a corporate and individual level. credit runs dry.
The result is a credit crunch. It eliminates the bad debt and bad underwriting practices… and then the cycle begins again.
Today we are at the “easy credit” point in the cycle where bad credit is just starting to go bad.
The flagship of this cycle’s easy credit has been Buy It Now Pay Later (“BNPL”) loans…
These are short-term, interest-free or below-market installment loans with a limited credit check. They are offered by companies like Affirm (AFRM), Afterpay and Klarna.
I’ve seen a BNPL payment option on more and more websites. And people also use it to buy goods in stores. According to consumer financial services company Bankrate, more than 60% of people under the age of 45 have used BNPL.
Thanks to low interest rates and an approval that takes only a few seconds, BNPL tends to entice people to spend more than they do when using credit cards. A study by Barclays Bank and non-profit StepChange Debt Charity found that 1 in 3 BNPL borrowers say lending has left them in unmanageable debt.
Of course, the people most likely to take out BNPL funding are those who cannot get credit elsewhere. Credit bureau TransUnion reports that almost 70% of BNPL users are subprime borrowers.
This is exactly the kind of loose underwriting you see at the peak of credit cycles.
Some people are now using BNPL loans to pay for groceries… Car foreclosures are on the rise… And more than 20 million American households are in arrears on their utility bills.
But the days of easy credit are over…
Lending has tightened progressively in each of the last three quarters, according to surveys by the Federal Reserve’s Bank Loan Officers.
In other words, banks are becoming more cautious about all types of lending, including lending to large and small businesses and credit card lending to consumers.
Lending is now “scarcer” than at any time since the last financial crisis, except for a brief spell early in the pandemic. Just look…
As credit tightens further, I predict we’ll see more and more stories of rising arrears, defaults, and bankruptcies in the coming months.
The Fed stepped in with unprecedented post-pandemic stimulus the last time lending tightened. But powerless to stop credit crunch this time due to ongoing inflation…
Folks, an economic winter is coming. And when it does, the stock market and the even larger corporate bond market will move much lower.
I hope you have prepared for the coming economic winter…
But if not, it’s not too late.
You see, a credit crunch would be one good thing for my subscribers.
The distressed corporate bond strategy that my colleague Bill McGilton and I use in ours Loan options from Stansberry Newsletter performs best in times of crisis. That’s when perfectly safe corporate bonds sell off to absurd, distressed levels. Smart investors snag them for pennies on the dollar and make a bunch of money.
These bonds pay a statutory yield on a set schedule, which means you know what your yield will be when you buy them. That’s why we call these bonds safer than stocks, whose returns are always uncertain outside of a dividend payment.
Well, we don’t need bad economic times for our strategy to work. Since launching the newsletter in late 2015, we’ve done very well without a real credit crunch.
We have achieved an average annualized return of 13% from 59 positions closed. That’s twice the return of the entire high yield bond market.
Since the pandemic, we’ve done even better. We have achieved an average annualized return of 36% from 22 positions closed, almost three times the overall high yield bond market. That even surpasses the return of the entire stock market. And we did it with investments that are much safer than stocks.
We expect to do even better in the next credit crunch.
Some of the world’s top investors use this strategy to make fortunes…
In a credit crunch, the bonds of good companies are often diminished by their association with bad ones. These falling prices are driving yields (and potential returns) higher, making these investments incredibly attractive at a time when many people are panicking.
In the next crisis, even the bonds of companies with little or no chance of bankruptcy are trading for pennies on the dollar. Then you can make massive, stock-like returns in this often-overlooked segment of the market…
If you’re interested in profiting from the next credit crunch — with much safer investments than stocks — I’d love for you to join me Loan options from Stansberry. Click here for more details on the strategy and how to get started with a subscription.
invest well,
Mike DiBiase
Editor’s note: If you’re still skeptical about bonds, don’t rely on us. One of Mike’s paid subscribers took to the camera to explain how this investment strategy helped him retire at the age of 52…and why he doesn’t have to worry about his money in any market environment. Additionally, you could potentially earn triple-digit annual returns from bonds alone as the next credit cycle unfolds. Click here for full details.
