Masters Series: The Absolute Best Way to Make a Fortune in the Markets
Editor's note: The coming bear market is going to wreak havoc on unprepared investors. But you can use it as an opportunity to produce outstanding returns for your portfolio.
In today's edition of our weekend Masters Series, Stansberry Research founder Porter Stansberry shares the details behind this once-in-a-decade opportunity...
The Absolute Best Way to Make a Fortune in the Markets
We're approaching a period of vast credit default... and if you're not prepared, you'll likely get wiped out.
Credit-market troubles are different from equity-market troubles. Credit-market troubles are "contagious" and are amplified by leverage. Companies funded with equity go bankrupt and nobody notices. But when companies (or countries) funded with huge amounts of debt go bankrupt, it triggers a chain reaction. Institutions that would otherwise be sound can end up in default because they've invested in toxic debt.
That's what's about to happen all around the world.
Far, far, far too much money – mind-boggling amounts – has been borrowed by people and countries that are not creditworthy. These debts are going bad. The chain reaction is starting. And nobody knows exactly what will happen next because the world has never seen so much bad debt before.
This will be the greatest legal transfer of wealth in history.
Just consider what has happened in student lending. Students have borrowed $1 trillion for college. Most of these loans were used to purchase overpriced "online" educations of highly dubious value. Consider that in 2000 – just 16 years ago – the largest debt-funded college in the U.S. was New York University, a highly credible, longstanding institution that serves smart and ambitious students. At the time, former and current NYU students had $2.2 billion in student loans outstanding.
Today, the leading debt-funded college in the U.S. is the University of Phoenix, where $36 billion has been lent to current and former students, almost all of whom received an online education.
Eight out of the 10 largest debt-funded universities are online schools. I'd estimate the debts used to fund these educations make up around 80% of all outstanding student loans. These debts will never be repaid. And the default tidal wave is starting right now.
These defaults are now spilling over into securitized-debt packages worth hundreds of millions of dollars. They, too, will default, damaging our financial system in ways no one yet understands.
A similar outbreak of defaults is about to hit emerging markets... Big emerging markets with fragile, corrupt governments (Mexico, Brazil, Turkey, and Greece) have borrowed mind-boggling sums of money denominated largely in U.S. dollars. These loans will all go bad.
Brazil's currency has already fallen by more than 40%. That's tantamount to its loan balances growing by 40% because so much of its debt is denominated in U.S. dollars. The trouble is even worse in smaller markets, like Malaysia and Indonesia, whose currencies are trading at 17-year lows.
When you read about other countries' currencies falling apart, you should know it will eventually harm our own banking system and bond markets, which have financed all the debts...
Over the last decade, the emerging-markets bonds have grown faster than any other debt market – by more than 600%. In only 10 years, emerging-markets debts have gone from about 20% of the size of the U.S. high-yield market to roughly equal to our high-yield market. That means a much, much higher percentage of the world's fixed-income securities have significant currency and political risk than ever before.
Meanwhile, nearly all the growth in the U.S. high-yield bond market over the last decade is related to oil and gas exploration and production. Since 2010, more than $500 billion worth of new corporate debt was raised for U.S. onshore oil and gas producers. It's this capital that financed the oil boom – which is responsible for all the net job creation in the U.S. since 2009.
These debts cannot be repaid with oil prices at less than $60. And yet they're all coming due between 2016 and 2020.
As these debts go bad, even major oil companies will see their bonds downgraded and their dividends cut. There will be a huge opportunity for patient and liquid investors to buy tremendous energy assets out of these defaults. But for the banks, insurance companies, private-equity funds, and pension funds that provided this initial capital, there's a tremendous amount of pain ahead. Expect major bank collapses in Texas.
The auto-buying boom of 2010-2014 was financed with extraordinarily dubious subprime loans. Just look at General Motors' books. Roughly 90% of GM car buyers finance their purchases. And as recently as 2014, 83% of their loan book was subprime, with a shocking number of people categorized as "deep subprime." These are essentially people who don't have a credit rating or people who are currently in bankruptcy.
These loans were made using new, much-longer terms – 72 and 84 months. Given the high interest rates on subprime car loans (around 20%), these car "buyers" won't own any equity – zero – in the cars until after month 60. Until then – five years down the road – they have no economic interest in the vehicle they "own."
These loans are the auto equivalent of a subprime homebuyer who used his mortgage as a piggy bank between 2004 and 2007.
By the end of last year, total auto loans outstanding in the U.S. had reached almost $900 billion – up nearly 25% in only two years. Does that sound wise? Loans that originated last year have begun to default at a pace not seen since the 2008 financial crisis.
This problem is going to get a lot worse. It will probably result in massive losses to financial institutions that own these auto loans.
Even investors who aren't directly hit by any of these ticking debt time bombs are going to be severely hurt by the coming wave of debt defaults. That's because corporate America can rarely resist taking a good idea (buying back stock) and making it into a farce.
It should seem obvious to everyone that buying back stock when it's cheap (like in 2009) is a great use of a corporation's free cash flow (earnings in excess of capital investments).
It should also be apparent to all investors that borrowing huge sums of money to buy back stock after a six-year raging bull market will likely cause severe financial problems sooner or later. That's especially true when the company in question is already highly leveraged and when it operates in highly cyclical industries or industries with earnings that are largely dictated by borrowing costs (like real estate).
We're about to see a lot of big, wealthy investors panic when they realize how much of this garbage they own.
Now, that's the bad news.
The good news is that we're ready for it. And we can make a fortune over the next few years as this huge transfer of wealth plays out.
The world isn't coming to an end. All that's going to change is that these assets are going to shift from the leveraged and foolish to the wise and patient.
The next two or three years are going to be terrible for most investors. But they can be GREAT for you. Buying bonds for pennies on the dollar is the absolute best way to make a fortune in the markets.
That's why we've re-launched our high-yield, distressed-debt investing newsletter. We're calling it Stansberry's Credit Opportunities. Our previous bond letter, True Income, had an amazing run during the last crisis. It earned huge returns for investors who were wise enough to follow our lead in 2008, 2009, and 2010 buying bonds for pennies on the dollar while other investors panicked.
We made more money buying distressed bonds than most people ever make in stocks. And we're going to do it again over the next three years.
Investing in bonds is different from investing in stocks. It requires a little extra work to place a trade. And you must be patient. But as you'll see, the rewards can be outstanding. You can make high-double- and triple-digit returns without having to worry about what the overall stock market is doing. You know when you'll get paid. And what the exact returns will be.
Once you understand the strategy... and have invested this way for a while, you may never buy a stock again.
Regards,
Porter Stansberry
Editor's note: Done right, investing in bonds is far, far safer than investing in stocks. And the upside is huge. Porter believes investors will have the chance to buy distressed debt of world-class companies that could pay 100% or more in the coming months... PLUS double-digit interest payments.
Normally, you would have to spend thousands of dollars to gain access to our distressed-debt newsletter. But right now, as part of our Bear Market Survival Program, you can access this report – including three of our initial recommendations – for MORE THAN 95% OFF the regular price of a year's subscription to Stansberry's Credit Opportunities. Get started with this incredible offer right here.