The Global Manipulated Boom Is Running out of Gas

A service unlike virtually any other we've ever published... Investing versus speculating... The global manipulated boom is running out of gas... How to protect your portfolio from crisis and set yourself up for windfall profits at the same time...

This week, we're "pulling back the curtain"...

In today's Digest, we'd like to offer loyal readers a sneak peek at the big ideas behind our new Stansberry's Big Trade service, set to launch next month.

Why? Because even if you've been with us for years, you've likely never seen anything quite like it.

You see, unlike nearly every other service we've published, Stansberry's Big Trade isn't actually an "investment" newsletter at all. We aren't seeking safe, compound returns on our capital... nor are we trying to produce large income streams while protecting our savings.

It's also not a trading service in the traditional sense. We aren't looking to profit on short-term extremes in emotion and sentiment.

Instead, the "Big Trade" is about speculation. And speculation, to us, has a specific meaning. Speculation is an attempt to profit from the inevitable collapse caused by misguided government manipulation.

Speculators identify how government actions have distorted the markets... and then position themselves to earn massive profits when, inevitably, market forces overwhelm the government's intervention.

This is exactly what a handful of speculators did 10 years ago... when decades of flawed government policies pushed U.S. home prices to absurd levels.

It was one of the biggest speculative opportunities in history...

This situation had all of the hallmarks of a market that had been warped by politics and government...

First, there was a false belief, held almost universally by politicians of both parties: Everyone should own a home.

Second, the government lent virtually unlimited (and largely undocumented) financial support to these ideas.

Fannie Mae and Freddie Mac had a de facto guarantee from the U.S. Treasury via a line of credit that had never been tapped. But it would end up costing the U.S. government almost $250 billion in losses and $5 trillion in guarantees.

And third, there was massive graft surrounding the government's support of Fannie and Freddie.

These firms were among the largest and most aggressive lobbyists in the U.S. They had more political clout in Washington and were more brazen about their power than any other corporation... And they had been for more than 40 years.

They were so powerful that, for virtually their entire existence as public companies, they were the only firms in the U.S. that were not required to file routine reports with the United States Securities and Exchange Commission. They were simply exempt.

Of course, most folks know how this situation played out...

In short, home prices eventually soared to levels that were simply unaffordable for most Americans. Despite continued government support, demand dried up... prices plunged... and the entire manipulated boom unraveled.

And those speculators – many of whom were profiled in Michael Lewis' bestselling novel and Oscar-winning film, The Big Short – made a killing.

Here's the key point... What happened during the housing bubble can happen in virtually any market where the government interferes, be it cars, colleges, or even stocks and bonds.

Whenever and wherever the government acts to push up prices for things – and perversely, it's often sold under the guise of helping the public, such as making home ownership "affordable" or "improving access" to education – the end result is the same.

Sooner or later, prices will reach a level where incomes can no longer sustain further demand. When this happens, the jig is up.

Which brings us to today...

Central banks are manipulating the world's securities markets on an unprecedented scale...

Today, virtually every government or country around the world agrees that lower interest rates and higher stock prices are in the public's best interest – regardless of whether the stocks in question can support the valuation with earnings (or whether the bonds can with cash flows).

In fact, somewhat ironically, the central banks are largely using blunt instruments (market-cap-weighted ETFs) to buy huge numbers of equities in a manner that puts most of their capital into the most expensive stocks. Doing the same with bond ETFs means that the central banks are lending the most financial support to the companies that have the most debts.

Both strategies involve behavior that no rational investor would consider prudent.

Even worse, government support for the global-securities markets has been virtually undocumented. Neither the Federal Reserve nor any other global central bank is audited or subject to review from any national securities regulator.

We have no idea what's really on their books. We don't know who they bought their assets from. We don't know what they paid. And we really don't know what they're worth.

Likewise, we have no way of knowing how much economic damage could be wrought if they were forced to liquidate these assets because of a currency crisis.

But we do know that such a crisis is likely – even inevitable – at this point. Governments have warped the global bond and equity markets in a profoundly unstable way.

How so?

• In the U.S., stocks and bonds have never before traded at these levels relative to GDP.

• Emerging-market corporations and noninvestment-grade U.S. issuers have never issued so much corporate debt... And these kinds of "junk" bonds have never traded at such high prices (and low yields).

• Sovereign bonds have never traded with negative yields, nor was it even conceivable that sovereign bonds covering 30% of the world's GDP would pay negative rates of interest.

• In the "safest" segment of the U.S. corporate-bond market, the government's interest-rate manipulation has led investors to crowd into the lowest-quality (BBB) tranche of investment-grade debt, sending this segment of the market from only 17% of issuance to more than 30%. Inevitably, this amount of issuance will profoundly increase the default rate of investment-grade bonds, sending a genuine shock into the U.S. banking system.

• Finally, the scope of this government manipulation of global stock and bonds markets is enormous – far larger than the U.S. government's manipulation of housing prices. In total, central banks around the world have created more than $11 trillion in new money – all of which has been invested in financial securities. There's simply no way any government intervention in the markets on this scale, over this time period, won't cause a massive problem.

Yet all of this financial manipulation and stimulus doesn't seem to be working...

What's happening? Why, despite the unprecedented and massive government intervention in the markets, are all of the world's major economies so weak? To us, it's a clear sign that the globally manipulated boom is running out of gas.

As we explained, manipulated markets always correct themselves eventually...

Today, the U.S. stock market is trading at record highs and at record-high valuations (when adjusted for the amount of debt the companies are carrying today), but earnings have fallen for five straight quarters.

All around the world, in one form or another, the world's major economies are groaning with a debt burden they simply can no longer afford and with inflated securities prices that aren't supported by earnings or interest rates.

Sooner or later, investors will realize this game can't continue...

As default rates rise (which they have been since 2014), as corporate earnings fall (which they have been since 2015), and as global economic activity slows (which we've seen with industrial-production numbers and global trade figures), the underlying strains on the real economy are going to become harder and harder to ignore.

What will happen when that moment arrives – when investors realize that just because the government has bought billions in junk bonds, for example, it hasn't actually made those junk bonds safe investments?

And how in the world will all of these central banks unwind these assets when the holders of their currency demand it?

That moment in time is approaching. We believe investors will become far more skeptical of the central banks' ongoing manipulations next year because a global recession will emerge and credit risks will become far more important.

We can't know exactly when it will happen, but we do know how...

It will be rising default rates – first in junk bonds, and then later in BBB-rated investment-grade bonds – that start the panic.

As equity investors realize the risks they face from a global debt crisis (and as major banks begin to fail), the world's equity markets will panic like we haven't seen in many generations.

Seemingly overnight, virtually all financial assets will collapse and no paper currency will be trusted. Volatility, which has been dormant for years, will reappear like a hurricane.

Stansberry's Big Trade is designed with one goal in mind...

As we've explained in recent Digests, the current situation – a huge bubble in stocks and bonds combined with historically low volatility – gives us an opportunity to essentially buy "insurance" at record-low prices.

Again, in Stansberry's Big Trade, we will be buying long-dated put options against many of the world's 30 worst corporate credits, a group we've called "The Dirty Thirty." This strategy will allow us to simultaneously hedge our portfolio AND set ourselves up to make windfall profits – as much as 10 to 20 times our money – as the inevitable bust plays out.

If you'd like to learn more about Stansberry's Big Trade – including how you can get immediate access to "The Dirty Thirty" and ongoing "beta" issues of our preliminary research BEFORE the service officially launches next month – click here.

New 52-week highs (as of 10/13/16): short position in Hertz Global (HTZ).

A smorgasbord of questions and comments in today's mailbag. And keep your eyes peeled for Monday's mailbag, where Steve Sjuggerud will answer a subscriber's question about the latest action in gold. As always, send your notes to feedback@stansberryresearch.com.

"I loved P.J.'s latest essay. As to his point #3 that neither candidate has addressed fiscal or monetary policy, hopefully this will change for at least a few brief moments during the last debate, as this is one of the topics scheduled to be brought up. It will be fascinating to see how each candidate will try to wiggle out of giving any type of honest and/or cogent answer.

"One need only to look to Alexis De Tocqueville (misattributed?) 'The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money' to see HOW we've gotten into this mess. But then one can understand WHY by remembering H.L. Mencken's all-too-true observation that 'Democracy is the theory that the common people know what they want, and deserve to get it good and hard.'

"In closing, let me just quote more wit & wisdom from P.J. himself... 'Giving money and power to government is like giving whiskey and car keys to teenage boys.' as well as 'When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.' I love having P.J. write for Stansberry, God bless y'all and keep it up!" – Paid-up subscriber W. Gordon

"Just wanted to let you know that I really like the new format for the Digest. It is much more 'readable' and quite simply looks better. I love the fact that you are always trying to upgrade what you do and generally succeed." – Paid-up subscriber Mark Miller

"Jeff Clark says the [Commitment of Traders] report is heavily net short which is bearish. Sjuggerud says the COT report is bearish because traders are heavy long... Are there two different reports?" – Paid-up subscriber J.M.

Brill comment: J.M., the simple answer is that Jeff is referring to commercial traders (the so-called "smart money"), while Steve is referring to non-commercial traders (known as the "dumb money"). They're essentially the opposite sides of the same trade.

"Hi, as a long time UK subscriber and fan, albeit unfortunately not wealthy enough to join you in London (PS: I'm a Millwall fan so Chelsea are a sworn cross-town enemy!), I am most interested in [Porter's "Big Trade"] webinar. Funnily enough, I was reading through [Tuesday's] Digest and was just thinking given the predicted rout in the stock market, where you were suggesting us to invest our funds? And then along comes the invitation to the above. However, unfortunately, it is timed for 0100hrs on the 17th UK Time, will a recording be available online or will I have to have a late night?" – Paid-up subscriber Mark

Brill comment: Mark, unfortunately we aren't planning a replay of our Stansberry's Big Trade webinar at this time... But we don't think you'll regret staying up late for this one. And of course, if you're interested in Porter's research, you can learn how to get early access in advance of next month's official launch by clicking here.

Regards,

Porter Stansberry and Justin Brill

Baltimore, Maryland

October 14, 2016