Don't Make This $100,000 Mistake

Don't make this $100,000 mistake... If only he had listened to Porter... Investors are going down the same road again... Avoid falling into this trap... A massive wave of bankruptcies is coming... How to prepare for the coming credit collapse...

With just one mistake, Dennis Buchholtz lost a quarter of his life savings...

In today's Digest, I (Mike DiBiase) want to share Dennis' unfortunate story with you.

That's because many honest and hardworking folks just like Dennis are about to make the exact same mistake again right now.

But the good news is, you can avoid it...

By learning about Dennis, I hope you'll never fall into this trap. And I believe this essay will serve as a timely warning for everyday investors like yourself in the coming months...

For more than 30 years, Dennis worked as a diemaker in the auto industry...

He spent countless days and weeks turning sheet metal into fenders, roofs, and hoods.

Finally, in 2005, Dennis retired to spend more time with his wife, Judy. Although he didn't have any pension or retirement plan, he managed to save about $400,000 in his life.

Like everyone, Dennis wanted to find a safe way to earn income in retirement...

And after spending decades in the industry, Dennis believed the biggest automakers would always survive... no matter what happened in the world. So he put about $100,000 of his savings into a "safe" bond from the largest automaker at the time – General Motors (GM).

Every year, the retired couple received around $7,000 in interest from the bond. They used the income to pay their property taxes and utility bills, as well as for groceries.

At the time, after more than a century in business, GM was one of the most important U.S. industrial companies. On the surface, it seemed like a safe investment to Dennis.

But in reality, it was a highly speculative bet on a company with a massive debt load that it could never repay...

I'm certain that Dennis didn't spend a single minute studying GM's financial statements before making his big bond purchase. If he had, he might've wondered how the company planned to pay back $455 billion in liabilities when it stopped making profits in 2005.

At the time, it was easy for average investors to make mistakes like this...

Stocks were rising, and banks were lending. And that's simply not the kind of deep analysis that most investors do when times are good and credit is flowing.

I'm also certain that Dennis wasn't a Stansberry Research subscriber...

You see, as longtime subscribers might recall, our founder Porter Stansberry first started warning folks about GM's dangerous financial situation in the Digest in January 2007.

At the time, no one thought GM would go bankrupt – no one, that is, except Porter. As he put it very clearly in the Digest on January 11, 2007...

GM is already bankrupt... shareholders just haven't realized it yet.

Porter noted that GM's total debt had doubled over the previous 10 years as its market share and profits plummeted. Said another way, for roughly a decade, the company had been burning the family furniture just to keep the furnace running.

Given its mounting debt and shrinking profits, Porter knew GM was running out of time...

That's why he recommended selling the stock short in the February 2007 issue of our flagship Stansberry's Investment Advisory newsletter. In that issue, he warned subscribers that "GM will be bankrupt within three years – or perhaps sooner if the economy slows."

Then, starting in March 2007, Porter penned a series of letters to shareholders in the Digest as the "Chairman of General Motors"...

The series included everything that Porter would write if he were GM's chairman. And unlike the overly optimistic and difficult-to-read letters from GM's actual chairman, Porter's versions were easy to read, entertaining, and brutally honest. (Read them all right here.)

In reality, GM's investors only needed to read the last line of Porter's first letter on March 14, 2007...

As I hope you can understand, unless something radical happens to free us from our employee obligations, there is no way I can honestly tell you that GM will not go bankrupt.

If Dennis had read that letter when Porter originally wrote it, he could've sold his GM bonds and avoided nearly all of his losses. But maybe I'm giving Dennis too much credit. After all, some Stansberry Research subscribers did read Porter's warnings on GM at the time and still refused to see the dangers...

In the mailbag of one of the GM-focused Digests, a paid-up subscriber named Herb M. mocked Porter, saying, "GM... isn't going [bankrupt] – Uncle Sam will step in."

Of course, we now know that Porter was exactly right...

GM declared bankruptcy in June 2009, a little more than two years later.

Stockholders were completely wiped out. And investors who owned the $27 billion worth of GM's "safe" unsecured bonds – including Dennis – only got around $0.10 on the dollar of their initial investments. The massive loss wrecked Dennis' grand retirement plans.

To be fair, Herb was partially right... Uncle Sam did step in.

The Big Three automakers – GM, Ford, and Chrysler – were protected by lawmakers in Washington, D.C. These lawmakers would never let the automakers go out of business and shut down operations, costing thousands of jobs for everyday Americans.

But here's the important point that most investors miss...

While the government made sure GM survived, it didn't stop the company from going bankrupt first.

President Barack Obama referred to GM's unsecured bondholders as "profiteers" as the government then used its powers to step in front of the company's creditors in the bankruptcy. Politicians mainly wanted to protect GM's union employees and their massive pensions.

The government invested around $50 billion in GM to get the company through bankruptcy. And unlike Dennis and other unsecured bondholders who were mostly wiped out, the government eventually ended up recouping the vast majority of its investment.

Sadly, inexperienced investors like Dennis make this mistake all the time...

These folks believe the government will protect regular investors with bailouts the same way it protects vital businesses like the Big Three automakers. But the truth is... the federal government couldn't care less who owns GM's stock or who's holding its debt.

In other words... the government doesn't have your back as an investor.

And yet, more than a decade after GM went belly-up, many investors still haven't learned this lesson... They still believe the government will step in to save businesses and their investors. Many people are about to make the mistakes that Dennis made back in 2005.

The airline industry is just one example...

The three major airlines – Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL) – owe a combined $198 billion in debt. And now folks aren't flying nearly as much because of the COVID-19 pandemic... With little revenue coming in, these companies are being forced to borrow against every asset they own just to pay the bills.

Just like GM in the past, they're burning the family furniture to keep the furnace running. But investors don't seem to care. They're once again turning a blind eye and ignoring risk...

These three airlines' combined market cap is more than $36 billion today. Coincidentally, their $12 billion average market cap is around the same valuation as GM at the end of 2005, when Dennis invested in its bond... And debt investors have also piled into the airlines' risky bonds, which currently yield 5% to 7%, on average – about the same as Dennis' GM bond back in 2005.

This is a recipe for disaster.

And it's not just airlines that we're talking about... This reach for yield while ignoring risk is everywhere. The stock market is near an all-time high. And the bonds of the least-creditworthy companies yield just 5% today, on average.

But despite the calm in the markets today, the U.S. economy and most businesses are in serious trouble. To put it simply...

U.S. corporate debt has never been more burdensome than it is right now...

Nearly one in five U.S. companies can't afford their debt. That's an alarming statistic... And as the current recession drags on, I expect this percentage to soon surpass 20%.

The truth is, many companies – like the airlines – have only been able to pay their bills during this pandemic by borrowing more money and kicking the can farther down the road.

But you can't borrow yourself out of a crisis... Even if a COVID-19 vaccine became widely available tomorrow, this debt won't go away. Eventually, it must be repaid or refinanced.

And with lower sales and profits for many companies, the prospect of that happening is looking less likely with every passing day. For many companies, the shift to a remote and digital economy means their sales and profits will never recover to pre-pandemic levels.

This leads me to a simple conclusion... Much of this enormous, ever-increasing pile of debt will never be repaid.

The only way it will be cleared off the books is through bankruptcy. That's why I believe...

A massive wave of bankruptcies is coming in the months and years ahead...

In fact, it's already getting started... According to credit-ratings agency Standard & Poor's ("S&P"), 124 U.S. companies have defaulted on their debt so far this year.

The default rate has steadily climbed from 3% at the start of the year to around 6% today. That means 6% of all U.S. corporate borrowers have defaulted over the past year.

But it's going to get much worse...

S&P currently predicts that the default rate will rise to 12.5% by next June. That would be the highest default rate since the Great Depression in 1932. A 12.5% default rate means that another 240 companies in the U.S. will go bankrupt over the next year.

However, I believe that's a conservative estimate...

It likely will be even worse than that, closer to S&P's pessimistic forecast of 15.5%. A 15.5% default rate means more than 300 companies will go bankrupt over the next year.

By my estimate, a default rate of 12.5% to 15.5% will translate into somewhere between $100 billion and $250 billion in defaulted debt – and billions of dollars of credit losses for unsuspecting investors. It would be the worst period for corporate defaults that we've ever seen.

The good news is, as I've said before in the Digest...

You don't have to be a victim of this coming credit collapse...

If you're prepared, you could make a killing. And you can do it while keeping your money completely out of the stock market, using a much safer type of investment...

Distressed corporate bonds.

The coming wave of bankruptcies will open the door to tremendous opportunities in bonds...

Now, let me be clear... I'm not talking about investing in risky, expensive corporate bonds like the GM bond Dennis bought. I'm talking about safe bonds whose prices have collapsed.

You see, when the default rate soars, investors panic and dump their bonds. When they do, it causes bond prices to collapse. Bond prices and bond yields move in opposite directions... so the cheaper the bonds get, the more they yield.

But not every company with a bond whose price collapses will default... In a crisis, investors even beat down the bond prices of companies that can easily fulfill their debt obligations.

The key to success with this strategy is knowing which bonds are safe to own.

That's where my colleague Bill McGilton and I come in...

We do all the work for you. Each month, in our Stansberry's Credit Opportunities newsletter, we tell you which distressed bonds are safe to invest in.

Bill is a former corporate lawyer. He pores through the key debt agreements of the companies we're interested in. And I analyze whether we'll get paid all of the interest and principal with our bonds. I've been analyzing financial statements for more than 25 years, including around 20 years as an auditor and corporate finance and accounting executive.

Over the past five years, we've put together a track record that we're very proud of...

Since launching Stansberry's Credit Opportunities in November 2015, we've closed 37 bond positions with an 86% win rate (32 were winners). And the average annualized return of these 37 positions, including our losers, is 22.3%.

That's more than 2.5 times the 8.8% return you would've earned if you had instead just invested your money in the overall high-yield corporate-bond market in that span – as measured by the iShares iBoxx High Yield Corporate Bond Fund (HYG). We've even beaten the 19.7% return of the stock market (S&P 500 Index) over the same holding period.

As you can see, when you're able to buy safe bonds at bargain-basement prices, you can make equity-like returns... with far less risk than investing in stocks.

Some of the world's greatest investors use this strategy. When a crisis unfolds – like what we're expecting soon – they pounce.

And today, you can be just like these world-class investors...

Bill and I just put together a brand-new special report for our subscribers called "Your Complete Guide to the Coming Credit Collapse." It details the "secret" of this strategy and dives deeper into why the next crisis will be worse than anything we've ever experienced.

Bill and I believe the next crisis will bring some of the best opportunities of our lifetimes. I get it, though... If you're like most folks when they first hear about bonds, you're probably still skeptical while times are good. Fortunately, you don't have to take my word for it...

One of our longtime subscribers came to us to share his own experiences with our corporate-bond research. I guarantee you won't want to miss what he has to say...

Listen to his message right here. And remember, everyone who signs up today – at the lowest price we've ever offered for this research – will get instant access to our new report.

I hope you'll join us for this ride... After all, your retirement could depend on it.

What We Know So Far

The election is not quite finished yet... But we do know a few things. As 2020 election results materialize, we put together a special panel to discuss results... what may come next... and what it all means for investors.

Our colleagues Jessica Stone and Thomas Carroll were joined by Empire Financial Research's Berna Barshay and Pangaea Policy founder Terry Haines. They unpack what has happened so far, and what actions investors can take now... even before the result is final.

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.

New 52-week highs (as of 11/4/20): ARK Fintech Innovation Fund (ARKF), Autohome (ATHM), Biogen (BIIB), BlackLine (BL), Morgan Stanley China A Share Fund (CAF), Cognex (CGNX), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), iShares China Large-Cap Fund (FXI), Alphabet (GOOGL), Green Thumb Industries (GTBIF), JD.com (JD), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CICC China Leaders 100 Index Fund (KFYP), KraneShares CSI China Internet Fund (KWEB), Lonza (LZAGY), MarketAxess (MKTX), Match Group (MTCH), Intellia Therapeutics (NTLA), Flutter Entertainment (PDYPY), ResMed (RMD), Sea Limited (SE), Zebra Technologies (ZBRA), and Zendesk (ZEN).

In today's mailbag, more feedback on Kim Iskyan's recent essay about the "soft power" of the U.S. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Kim, oh lord did you hit the nail on the head in your discussion of Soft Power and where America has headed over the last four years. I am so happy that Stansberry Research supports free speech as your comments today do not align with what is written by some of your Stansberry peers." – Stansberry Alliance member Frank A.

"Kim Iskyan did a great presentation on Soft and Hard power. I was quite impressed...

"The ramifications of where the U.S. is headed is very interestingly posed. However, that said, the long-term solution to maintaining our hard and soft powers requires that we analyze our fundamentals, our Constitution, citizen responsibilities, government responsibilities, the interplay between the political system and economic system as they exist now.

"To truly solve problems, we have to lay a solid foundation. It strikes me that Kim is ahead of himself by going straight to the Soft Power Quandary. While the U.S. may be losing ground, and I do concur – we have big problems in the U.S. that need to be refocused on at basic levels – the key to mankind's progress has been man's creativity. What captures that is competition. Anywhere that doesn't allow that to flourish is a definition of decline.

"Our education system is in decline because we are not teaching students to think critically, one of the most fundamental purposes. In order to do that, the students must have strong building blocks in their language and respect for math and the information that math and statistics (a specialty in math) present. Properly applied, this helps focus the students on logical conclusions and not emotional desires.

"If we all talk emotionally, we will just battle for effectively 'unknown' purposes. Without logic, you can't even express a purpose. Only when critical thinking and logic are well thought out, can arguments carry the day to reform and improving our society.

"I enjoyed the presentation today. I hope this response adds some deeper perspective." – Paid-up subscriber J.D.

Regards,

Mike DiBiase
Atlanta, Georgia
November 5, 2020