A Shocking Sign From the Corporate Credit Markets

Bad news for cryptos... The SEC rejects nine more bitcoin ETFs... A $4 billion bet on legal marijuana... A shocking sign from the corporate credit markets... A way to profit no matter what the market does next... In the mailbag: Are we too bearish?

We'll begin today's Digest with updates on two of the most controversial and polarizing trends in the financial world right now...

Of course, we're referring to the rise of cryptocurrencies like bitcoin and the growing market for legal cannabis, better-known as marijuana.

Each has attracted near-evangelical support, as well as vehement criticism. And each has handed certain early investors mind-boggling returns unlike else in the traditional investment markets to date.

Regular readers know we've been relatively cautious about cryptocurrencies...

We agree that "cryptos" – and the blockchain technology behind it – have the potential to change our world as much as the Internet. And we believe they could create unimaginable amounts of wealth for investors as they do. However, we're also concerned that this could take longer than many folks expect.

The long-term bullish case for these assets largely rests on widespread public adoption. However, following a brief "mania" late last year, public interest in bitcoin and other cryptos has all but disappeared.

And for good reason... Bitcoin has plunged as much as 70% since December, and many other cryptos have fallen even more. We've seen dozens and dozens of media reports about everyday folks who have suffered devastating losses, and we suspect it could be years before these horror stories are forgotten.

Recently, crypto bulls have adopted another narrative...

And this is that a wave of Wall Street institutional money will push crypto prices higher.

We'll admit, this narrative is compelling... After all, the entire cryptocurrency market is currently valued at less than $300 billion. If even a tiny fraction of the tens of trillions of dollars in institutional money were to flow into these assets, they would likely skyrocket in price.

However, these assets are still relatively illiquid and difficult to buy, sell, and safely store. Most of these big investors simply can't own them today.

Instead, this bullish thesis largely depends on the creation of exchange-traded funds ("ETFs") for bitcoin and other cryptos. But here, too, we suspect this could take longer than many folks believe. As the Wall Street Journal reported last night...

The Securities and Exchange Commission rejected applications for nine separate bitcoin-based exchange-traded funds on Wednesday, once again thwarting an attempt to build an ETF product based upon the volatile cryptocurrency.

The bitcoin and the ETF industries have been trying to get an ETF approved by the commission, beginning four years ago with one proposed by Cameron and Tyler Winklevoss. That ETF has been rejected twice. Another proposal from a firm called SolidX has also been rejected...

The commission leaned on the same reasoning as for the earlier rejections, mainly that there aren't enough protections against fraud and market manipulations of the underlying products. In the case of the Direxion ETFs, for example, the commission said the market for the underlying assets wasn't of "sufficient" size to ensure that prices weren't being manipulated on other exchanges.

The news for legal cannabis is more positive...

In short, while marijuana remains illegal in the U.S. and many countries, it is quietly becoming a legitimate commodity.

As we noted back in March, more than half the states in the U.S. already allow some sort of legal marijuana. For the first time ever, an overwhelming majority of Americans support federal legalization. And we're now seeing mainstream politicians and businesses getting involved. As the Journal reported in a separate article last week...

Corona brewer Constellation Brands is investing about $4 billion into Canadian marijuana grower Canopy Growth Corp., one of the biggest corporate wagers on the potential global market for cannabis-infused drinks and other products.

Constellation, which also produces Robert Mondavi wines and Svedka vodka, has benefited from strong U.S. sales of its Mexican beer imports, Corona and Modelo. But overall beer consumption in the U.S. is in decline, as consumers abandon American lagers for wine, spirits and nonalcoholic drinks...

Over the past year, three big beer companies – Constellation, Heineken and Molson Coors Brewing Co. – have announced development plans for cannabis-infused beverages in Canada or the U.S. Heineken's Lagunitas brand launched a cannabis-laced, hop-flavored sparkling water in California in July.

The reason is clear...

According to independent research firm Euromonitor International, legal marijuana sales this year will total $7.5 billion in Canada – where recreational use is set to be legalized this fall – and $10.2 billion in the U.S.

These figures are set to soar as the legalization movement continues to spread across the U.S. and the world. In fact, according to Constellation CEO Rob Sands, as many as 30 countries are currently considering legalizing cannabis use. "This is really the first time anything like this has happened since Prohibition," he said.

Yesterday, we noted signs that the consumer-debt binge could continue...

In short, despite Americans racking up record amounts of student, auto, and credit-card debt over the past several years, recent data suggest consumer spending is now rising at its fastest pace in years.

Today, we'll share another sign that suggests a similar trend could be underway in the corporate credit markets as well.

The following chart compares the results of a quarterly Federal Reserve survey of bank officials – known as the Senior Loan Officer Opinion Survey on Bank Lending Practices – with corporate loan growth.

The dark blue line represents these banks' reported lending standards – in other words, whether they're loosening or tightening their lending standards on corporate loans – with a 10-month lead. The light blue line is simply growth in U.S. commercial and industrial ("C&I") loans...

As you can see, these lines have moved in lockstep for most of the past several decades. In other words, looser or tighter reported lending standards have predictably been followed by higher or lower loan growth, respectively, 10 months later.

Longtime readers may recall we warned that corporate loan growth was slowing dramatically in early 2017. Fortunately, it bottomed soon after and has been moving higher since. And if the results from the Fed's loan officer survey are any indication, companies could continue to ramp up borrowing well into next year.

Like the ongoing boom in consumer borrowing, this trend can't go on forever. But this chart suggests it's not over just yet.

One last thing before we sign off tonight...

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New 52-week highs (as of 8/22/18): Automatic Data Processing (ADP), American Express (AXP), Eaton Vance Enhanced Equity Income Fund (EOI), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Direxion Daily Retail Bull 3X Fund (RETL), ProShares Ultra Health Care Fund (RXL), and Viper Energy Partners (VNOM).

In today's mailbag: a "boots on the ground" report on consumer spending... a reader is "disturbed" by our warnings... and a question about Sjug's recent bond recommendation. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.

"In regard to the comments in [Wednesday's] Digest, I would like to add my recent experiences at the PGA Championship in St Louis a week or so ago. Sure it was a big event. Sure Tiger was there. Sure it was the year's last Major. I've been to several events like this, usually at Southern Hills in Tulsa. But I've never seen people 'opening their wallets,' as you say. Huge long lines everywhere for $10 burgers, $8 Hot dogs, $4 bottles of soda, $3 bottled water, $10 beer. Probably most impressive was the merchandise tent. Nearly the size of a football field. Packed both days I was there. Cheapest polo? $85. T-shirts around $50, hats $30. The lines to check out were between 30 minutes to an hour. Crowds everywhere. Yup I'd say people were opening their wallets alright. My host and I remarked to each other, if this is a 'slowing' economy we'd hate to see a booming one. Ain't prosperity great?" – Paid-up subscriber Jim M.

"Justin, every time (or almost every time) I read your daily Stansberry Digest I feel somewhat depressed after I hit the delete button. Your negative bias is disturbing to me. Some day you will get that bear market you have been warning about since oh about 2015. You seem skeptical about the 'melt up' thesis which probably will come before that bear market.

"I hope you haven't put too much of your personal portfolio in the put recommendations of the Big Trade or the short positions of the Total Portfolio. That has been VERY expensive insurance. Thanks for listening... now I won't feel quite so disturbed when I hit the delete but on today's Digest." – Paid-up subscriber Tim N.

Brill comment: Sorry, Tim, but we aren't going to sugarcoat the facts to spare your feelings. The reality is today's market environment is anything but "business as usual." The excesses of this boom are without precedent... And what eventually follows it is likely to be much, much worse than merely a bear market. We're absolutely serious when we say that folks who aren't prepared for it could be wiped out.

However, we're baffled by your suggestion that we've been too bearish. Yes, we have been documenting the growing risks to the bull market for several years now. But we have also repeatedly and consistently urged Digest readers to stay long stocks because the market was likely headed higher still. And that has remained the case even in recent months as we've grown more cautious and suggested adding some "hedges" to protect your portfolio. Perhaps you should read more closely.

We'll also point out that we would never advise readers to do anything that we didn't personally endorse, and we have generally followed this advice in our own portfolios as well.

Finally, I don't personally manage The Total Portfolio, but we'll also remind you that despite this "VERY expensive insurance" as you called it, this portfolio returned 19% over its first full year.

Sure, this trailed the S&P 500 by a handful of percentage points over that same time period. But it's still an impressive annual return for a hedged, low-risk portfolio that is likely to dramatically outperform when this bull market ends. How did you do last year?

"I don't understand how to square two of [Steve Sjuggerud's] recommendations... [In the latest issue of True Wealth, he] recommended to essentially go long T-bonds suggesting that the current near 3% yield of the 10-year bond will fall to 2% or less over the next 6 months.

"If that happens, the yield curve will be inverted, with the 10-year treasuries at a lower interest rate than the 2 year, which is what you have promoted as a major indication of a coming recession and a time to sell out long positions.

"In the last several weeks, [Steve has] been saying the Melt Up started in April, indicated by the NASDAQ significantly outpacing the Dow... and will continue for another 12 to 18 months.

"But if [his] first prediction comes true, then an inverted curve is likely to happen within 3 or 4 months from now, so how [does Steve] reconcile that with [his] second prediction that the Melt Ups going to continue for at least another 12 to 18 months? Thanks." – Paid-up subscriber Dave L.

Brill comment: Thanks for the question, Dave. You're right, if the yield on 10-year Treasury notes falls to 2% over the next several months, the yield curve will most likely invert. But that is no great contradiction to Steve's Melt Up thesis.

You see, as we and Steve have explained several times, yield-curve "inversion" is an incredibly reliable predictor of bear markets and recession. But it is a leading indicator rather than an immediate sell signal. History shows inversion typically occurs six months to as many as 18 months before the stock market peaks.

In other words, there is no fundamental reason both of Steve's predictions can't be correct.

Regards,

Justin Brill
Baltimore, Maryland
August 23, 2018