If the Government Doesn't Default, the 'Zombies' Will
The 'debt ceiling' deadline came and went... Congress goes back on vacation... A financial crisis is brewing... If the government doesn't default, the 'zombies' will... Two ways to prepare right now...
We wish we had Congress' deadlines (and vacation schedule)...
If that were the case, this Digest would probably arrive in your inbox sometime in October...
And today, instead of meeting my deadline, I (Corey McLaughlin) would be swimming in the ocean near my taxpayer-funded beach house, at the start of a month-long vacation.
Alas, we're not complaining about our reality... All things considered, we're fine.
But the same cannot be said for the national budget. Here's what we mean...
Another potential financial crisis is quietly brewing in Washington...
A key deadline came and went over the weekend without any resolution... or repercussions... and vacation went on as usual for those who can do anything about it.
Congress adjourned for its annual August "recess" without even seriously talking about the "debt ceiling" and the two-year suspension of it that expired on the final day of July.
This essentially means that the federal budget is in limbo... and that the government could conceivably default on $28 trillion of federal debt in the next few months if an agreement on how much debt the U.S. should take on can't be reached in Congress...
Essentially, the government has so much debt and needs an even higher credit limit, but Congress cannot agree on whether it should raise that limit. The stalemate is already having a short-term effect. From CNBC today...
The Treasury Department will begin conducting emergency cash-conservation steps on Monday to avoid busting the federal borrowing limit after a two-year suspension of the debt ceiling expired at the end of July.
Economists say those so-called extraordinary measures will allow Treasury to pay off the government's bills without floating new debt for two to three months. After that, Congress will need to either raise or suspend the borrowing limit or risk the U.S. defaulting on its obligations.
In a letter to Speaker of the House Nancy Pelosi today, Treasury Secretary Janet Yellen outlined the "cash conservation" steps. They include not fully funding retirement programs for government employees through the end of September.
In other words, they're playing with pensions and benefits now...
Now, before you get too frightened, there are a few important things to know...
This is nothing new... The debt ceiling has been raised by Congress roughly 90 times since 1940 and has been part of regular political debate before. As we wrote in the June 24 Digest, the last time we talked about this story...
More debt leading to more debt has been the practical answer that people of various political views have seemed to agree on over the years.
And this topic is coming up now because a deadline is looming... Most recently, the debt ceiling was raised or suspended several times under former President Donald Trump – including an August 2019 suspension that's set to expire on July 31.
At the time, Yellen said before a Senate panel that the U.S. could run out of money in August, unless it raises the debt ceiling. Yellen said...
It's possible that we could reach that point while Congress is out in August. I think defaulting on the national debt should be regarded as unthinkable.
We're at that point, and the Treasury Department found a way to prevent that – for now.
We have no doubt that the biggest driver of this story is that this is all just a game of political football between Democrats and Republicans who are also negotiating a trillion-dollar infrastructure bill.
But it doesn't mean this debt-ceiling debate is not happening... and shows you how leveraged our government really is.
We owe it to you to raise the point...
Yes, default. It has never happened in American history so if that sounds startling to you, it should be.
Practically speaking, funds are needed to do things like pay government workers and send out Social Security checks, so any delays are significant and could cause panic – not exactly what anyone wants with an economy that is still recovering...
And there's a whole lot more to the story, right down to the core of what money really is...
As we wrote last month, famed investor Warren Buffett has said the U.S. could never default on its debt because it can continue to simply print more money, or issue more bonds in its own currency.
And this is a prevailing thought among supporters of Modern Monetary Theory ("MMT"), which is driving a lot of today's fiscal and monetary policy.
If you're unfamiliar with the concept, here's a quick primer from our Stansberry's Credit Opportunities editor Mike DiBiase from the April 14 Digest...
Understanding MMT is important... The Fed has been following this policy for years.
The basic tenet of MMT is that governments shouldn't worry about budget deficits...
And MMT says we shouldn't even think of income taxes as the government's main source of revenue. It reasons that governments pay for the things they want by printing more money. (I'm not making this up.) Increasing taxes is just a way to cool an overheated economy.
According to MMT, a government can print as much money as it wants as long as there is "slack" in the economy. Slack means things like stable prices and less-than-full employment.
If any slack at all exists in the economy, the printing presses can keep on running.
That's one school of thought... and politicians have been running with the idea for years, because they only think in terms of election cycles... and no matter the circumstances, over the last century, they've pretty much all agreed on spending more money...
A consequence of MMT – and printing more and more money – is something we've heard a lot about lately in the real world... inflation. Even if the government doesn't default, the devaluation of the currency will happen... which is bad on so many levels.
But one of the great things I've learned at Stansberry Research is to think about the unthinkable...
What if the U.S. government does default, or even gets close?
We can't possibly get into every angle today, but we will get into a few...
For one, the mere possibility of a debt default is likely to rattle the markets as we get closer to the real deadline – October 1, the beginning of a new fiscal year... Be prepared for at least some panic-selling based off the headlines.
In 2011, for example, Congress and the White House came to a deal within days of a default... and Mr. Market didn't like it... In the five days leading up to the conclusion of negotiations, the benchmark S&P 500 Index dropped 4%...
And as a result, the credit rating agency Standard & Poor's downgraded the U.S. credit rating from AAA to AA+ for the first time in the country's history...
Beyond that, in an unprecedented situation where no agreement is reached, lenders around the world might demand that the U.S. government pay higher interest rates, which could force rates higher throughout the economy...
This would obviously be before the "easy money" Fed wants to hike rates... or perhaps this would be another reason for central banks to hike rates this fall in advance, which would cause a cascade of effects on the markets. As Mike wrote in the Digest back in April...
Here's the bottom line... While we can't know for certain exactly when it will happen, higher interest rates will be the bubble-popping pin for both the stock and bond markets.
Higher interest rates make stocks less valuable. Many investors will sell them in favor of safer, higher-yielding fixed-income securities.
Higher interest rates are also a problem for another reason... They cost companies more to service their debt. And as I've explained in the Digest in the past, servicing debt is already an enormous problem for many companies today.
As Mike explained, corporate balance sheets are fatter than ever... The pandemic caused corporate debt to increase $1 trillion last year to more than $11 trillion today – the highest it has ever been.
And many companies are choking on their debt even with interest rates near historic lows... In fact, one out of every four public companies is considered a "zombie." As Mike wrote in the July 13 Digest...
Zombies are companies that don't earn enough profits to cover their interest – let alone repay their debt. They're the walking dead, only kept alive by creditors willing to lend them more money to pay off their debt as it comes due.
Zombie companies are now at an all-time high. The current mark of 24% far eclipses the previous record of 16%. Take a look at how much it has surged in recent years...
Think about that... One out of every four companies is a zombie. They're only alive today because the Fed has consistently lowered interest rates, allowing them to keep kicking the can down the road.
This is why Mike expects a wave of bankruptcies to sweep across the economy. You can see why even the mere mention of higher rates and a debt default can spook the markets big-time.
In short, even if the government doesn't default, plenty of other companies likely will...
At the same, though, some of these fears will be overblown...
A full-blown credit crisis in a debt-addicted world is as bad as it sounds. But a wave of bankruptcies is nothing to fear – if you're prepared for it. As Mike wrote on July 13...
If you've never considered buying corporate bonds, hear me out... Unlike stocks, bonds are the legal obligations of companies. That makes them much safer to own than stocks. Companies must pay their bond investors no matter what's happening in the economy or the markets.
Here's why you should consider investing in corporate bonds...
When the next credit crisis arrives, many corporate bonds will get much, much cheaper. As bankruptcies begin to soar, investors will want nothing to do with corporate bonds. You'll be able to buy some of them for pennies on the dollar – even the safe ones.
And the less you pay for these bonds, the more money you'll make.
In fact, Mike and his colleague Bill McGilton's strategy in Credit Opportunities works best during a credit crisis... Between March and May 2020, for example, eight bonds they recommended produced an average annualized return of 59%.
Investing in bonds can be complicated, but it doesn't have to be... and doing a little extra work can really pay off in the long run... But don't just take our word for it. Listen to what one of our paid-up subscribers had to say about his experience with Mike and Bill's strategy.
Today, Fed governors also seem increasingly divided on how to handle policy...
Some see inflation and want higher rates now... and to start slowing asset purchases. Others – namely, Federal Reserve Board Chair Jerome Powell – say there's a ways to go before that happens.
The topic will be up for big debate later this month during the central bank's annual billionaires retreat in Jackson Hole, Wyoming.
In the meantime, candidates are already emerging to be the next Fed chair should President Joe Biden choose to replace Powell.
Throw in the continued infrastructure spending debate and the fact that there are billions of created-from-thin-air dollars sitting around doing nothing – it all makes us want to bang our heads against our desks.
On the other hand, we're very happy that we know of an opportunity to take advantage of the next credit crisis – and to diversify out of the system, too...
We've told you before that cryptos can help you 'opt out' of the traditional financial world...
What we've talked about today is a perfect illustration of why...
A U.S. debt default aside (and that's a pretty big one to ignore), investors everywhere are facing a terrible dilemma. Stocks are the most expensive they've ever been... Bonds are offering negative real yields... And thanks to the recent boom in housing prices, real estate is suddenly out of reach for most investors.
So if you're looking to make the most of your money today... what exactly can you do?
We've said it before... It's smart to look outside the system to alternative investments, such as gold, silver, and cryptos... Frankly, if you're not at least considering these sectors today, you're taking a big risk with your portfolio...
The crypto "system" doesn't worry about stalled Congressional debates, August recess, or other political motivations... The technology involved simply doesn't allow for it.
And now is a great time to add crypto exposure... and we're not talking about something as basic as "buy bitcoin"... "buy Ethereum"... or "buy any other crypto" available in the world today.
When it comes to cryptos, Eric says decentralized cryptocurrencies like bitcoin started the financial revolution... but a disruptive new opportunity is going to finish it... and it is only just starting to play out in real-time today.
Eric has identified an emerging story in the crypto space that could allow investors to generate yields as high as 35%... all while capturing the massive upside of cryptocurrencies with much less risk.
Listen to Eric explain all the details in his free Crypto Cash Summit. And don't waste another minute... The replay of Eric's event will go offline soon.
The Fed Is Letting Society Down
Rick Rule, founder of Rule Investment Media, speaks with our editor-at-large Daniela Cambone about the Federal Reserve's next moves after hitting $8 trillion on its balance sheet. "The Fed is in a box... they have placed themselves in a box with their policies," Rule explains, and he says the central bank is sending the wrong signals to society...
Click here to watch this video 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 Twitter.
New 52-week highs (as of 7/30/21): Automatic Data Processing (ADP), CBRE Group (CBRE), Comcast (CMCSA), Costco Wholesale (COST), Quest Diagnostics (DGX), Intuit (INTU), Lynas Rare Earths (LYSDY), Novo Nordisk (NVO), ResMed (RMD), S&P Global (SPGI), Stamps.com (STMP), Thermo Fisher Scientific (TMO), Trane Technologies (TT), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), Waste Management (WM), and Zebra Technologies (ZBRA).
In today's mailbag, feedback for Ten Stock Trader editor Greg Diamond, whose short-term "bottom" call in U.S. stocks we wrote about last week... What's on your mind? Send your questions or comments – praise or rage – to us at feedback@stansberryresearch.com.
"Very much enjoy reading, studying, and hearing daily from Greg. You take all the emotion out of trading, which I find refreshing. You hold no bias. You just take what the market gives. Keep it up. I love it and continue to learn every day." – Paid-up subscriber Frank S.
All the best,
Corey McLaughlin
Baltimore, Maryland
August 2, 2021