Credit Stress Is Spreading to 'Nearly Every Corner' of the Market

Worse, one out of every three companies around the world is already unable to earn enough to cover those debts.

Considered together, Bloomberg says the data show "the seven-year global growth model based on cheap credit from central banks is running out of steam." Or as Bonnie Baha, a money manager at DoubleLine Capital – founded by respected "Bond God" Jeffrey Gundlach – put it, "We've never been in a cycle quite like this. It's setting up for an unhappy return."

Where have we heard that before?

The news out of China continues to worsen...

Another measure of the country's economic activity – the Purchasing Manager's Index ("PMI") – fell for a record sixth straight month this morning.

According to the Wall Street Journal, the manufacturing "gauge" fell from 49.7 in December to 49.4 in January. Like the PMI measures here in the U.S., numbers below 50 represent contraction in the sector.

To quickly review, China is in a difficult position. The government is trying to balance two conflicting goals...

As we've discussed, the yuan has grown significantly weaker in recent months, following a surprise devaluation against the U.S. dollar last summer.

The U.S. dollar had soared over the previous year against virtually every other emerging-market currency... except the yuan. This put China at a relative disadvantage.

China also wanted to show the International Monetary Fund ("IMF") that the yuan was (sort of) "freely tradeable," so it could be included in its basket of world reserve currencies.

The devaluation was likely carried out with both those goals in mind. But it appears even the Chinese government was not prepared for the waves of selling the move set off.

Following the move, the government quickly stepped in and used its massive foreign currency reserves to prevent the yuan from weakening too quickly. In simple terms, this means it sold dollars and other currencies it was holding, and bought yuan.

This helped stabilize the yuan until October, when China announced a surprise cut in interest rates and its "reserve ratio" – how much money banks are required to keep with the central bank. A lower reserve ratio tends to increase liquidity, because banks have more deposits to lend.

These cuts set off a new decline in the yuan, and required more intervention from the government.

In the months since, this trend has continued. And while China still holds approximately $3.3 trillion in reserves, the latest data say China burned through more than $500 billion last year. This was the first yearly decline in China's reserves since 1992.

Worse, the weakening yuan has set off fears of further declines, and so-called capital "outflows" – money moving out of China – have soared. Bloomberg estimates nearly $1 trillion fled the country in 2015.

In short, China can't simply ease monetary policy further without causing even more capital to flee the country, spending hundreds of billions more in reserves, or causing a full-fledged crash in the yuan... or possibly all three.

But if it does nothing, the slowdown in its economy could get far worse.

That's not just our opinion, either...

According to newspaper the South China Morning Post, a memo leaked last week from the country's central bank – the People's Bank of China ("PBOC") – admitted to exactly that. From the article...

According to the memo, Zhang Xiaohui, an assistant central bank governor in charge of monetary policy, told commercial bankers that the PBOC had to be very careful in maintaining the renminbi's exchange rate stability when managing liquidity.

"A too-loose liquidity situation may result in relatively big pressure on the yuan exchange rate," Zhang was quoted as saying.

Finally, on Friday we published the second report in our ongoing Bear Market Survival Program. Module 2 – titled "How to Use Distressed Corporate Bonds to Generate Current Income and Future Capital Gains During a Bear Market" – detailed how to find the best opportunities in distressed debt and shared three of our favorite opportunities from our new bond-advisory service, Stansberry's Credit Opportunities.

If you'd like to join the Bear Market Survival Program, it's not too late. Click here for the details. And if you're already a member, we would love to hear what you think so far. Send your thoughts to feedback@stansberryresearch.com and put "Bear Market Survival" in the subject line.

New 52-week highs (as of 1/29/16): Invesco Value Municipal Income Trust (IIM), McDonald's (MCD), Public Storage (PSA), and Constellation Brands (STZ).

As we expected... a small number of subscribers – less than a dozen – were outraged... outraged... that we would change our policies on the Flex Alliance. As you may recall, we have offered a "flexible" lifetime subscription to our newsletters that allows subscribers to switch among any five products they'd like to receive. This makes subscribing to several trading services (for example) far more affordable than it would be otherwise.

A very small number of people, however, have badly abused this program. Rather than acting in good faith to swap their subscriptions when their interests genuinely changed, they have defrauded us by constantly switching their subscription choices on sometimes a daily basis. One subscriber, for example, swapped his subscription choices 60 times in only a few months.

By abusing our offer, this handful of folks were able to enjoy free and ongoing access to ALL of our subscription products, rather than the FIVE products we legitimately were offering. You may (or may not) care about the hubbub, but we think it's a brilliant example of human nature at its finest. Enjoy the spectacle. We would love to know your position: feedback@stansberryresearch.com.

"You repeatedly state that changing from one subscription to another, any time you want and as often as you want, is not an issue. What is occurring may not have been your intent but it's spelled out pretty clearly. I'll be quite disappointed if you change our 'contract' and your promise by limiting changes to one per month and although you may not like it, your 'conniving subscriber' was doing nothing that hadn't been promised to him as well as to all of the other subscribers of the Flex Alliance program." – Paid-up Flex Alliance subscriber "Danno"

"You fancy yourself a libertarian. And you have told us repeatedly that your political/life philosophy is based upon 2 premises. 1. Do all that you agree to do and 2. Never trespass/aggress against another's person or their property. When you 'close this loophole,' you in fact will be reneging on what you previously agreed to with your current Flex Alliance members. I would be interested in hearing you reconcile your planned actions with your previous statements." – Paid-up Flex Alliance subscriber Eric Shay

"If you don't like the way a few subscribers are using your Flex Alliance, the honorable thing to do would be to buy back their subscription and terminate your relationship with those subscribers. Punishing all subscribers because a handful of subscribers are acting improperly is inappropriate. Changing the rules for all subscribers, after you sold them that service is just wrong." – Paid-up Flex Alliance subscriber Gary Helwig

"I don't know who put a bee in your bonnet, but you are not talking about the same 'Flex' Alliance program that I joined in September 2012. I am afraid that whatever your conception of the offer is now, it most definitely is not what the offer stated in my 'Welcome' letter to the Stansberry Flex Alliance. You are putting stipulations on why, when and how I can pick and choose which five Stansberry Research letters I want to receive and how often I can swap one letter for another. Don't be a poor sport and back out of your promise. After all... A man is only as good as his word." – Paid-up subscriber C. Anderson

Porter comment: All of our communications and descriptions about the Flex Alliance program have been clear, consistent, and made in good faith.

We established the program to make access to a reasonable number (five) of our products available on a lifetime basis to customers who, for whatever reason, were not interested in subscribing to all of our products. And the vast majority of our subscribers (99%) understood the offer and have used our program in good faith.

The Flex Alliance represents tremendous value – value that we have continued to build over the years. As an example, consider that we have always included access to all of our new products over time, even expensive and exclusive new products, like Stansberry's Credit Opportunities, which we launched last fall.

The flexible nature of the program was designed to allow subscribers to change their product line-up at any time and without any restrictions on the number of changes made. Thus, subscribers didn't have to wait for an "enrollment period." And there wouldn't be any limit to how many switches they could make – meaning you didn't need to worry about "using up" your right to switch from product to product as you see fit.

However, it was also abundantly clear that our offer was to allow access to only five products. That is, the ability to switch was never intended to allow ongoing and continual access to all of our products. That's spelled out again and again in our marketing materials. Yes, switch as often as you want... but only to gain access to a mix of five products.

After offering this level of service for many years and adding tremendous value to the Flex Alliance by creating (and ALWAYS including) several high-quality new products, you'll have to forgive my chagrin at the notion that I'm somehow now cheating our subscribers. Nothing could be further from the truth. Yes, you're right, I have changed the terms of the deal – I've consistently given subscribers far, far more than I ever originally promised.

And now... I'm making an incredibly minor adjustment that shouldn't bother any legitimate user. I'm simply asking a handful of miscreants to stop stealing from us. To make sure they do, we're not going to change anything about the terms of our offer. You can still have five products. You can still switch whenever you want. And you can still switch as many times as you like. But you can't make more than one change per month. If there's a special circumstance or if you feel like that's not fair to you, just give us a call. Provided you're not attempting to access ALL of our materials, I'm sure we will honor your request.

So... who is really upset about this change? Only folks who thought it was fair to steal. And for those folks... I'd rather part as friends. If you want to cancel, just let us know. We're happy to refund any unused portion of your subscription.

"I appreciate the change you announced concerning the number of changes allowed. Frankly, I was surprised there was no limit in the past. I think you can go even further and allow just two changes per quarter with a maximum of five per year. I made a couple of changes recently to work out how I was going to fit Stansberry's Credit Opportunities into the mix. Thank you for such a great product and service. I am anxious to be able to upgrade to the full Alliance service soon." – Paid-up subscriber Bob B.

Porter comment: Bob, I agree with you. There's really no reason to swap out 12 subscriptions a year. But when it comes to our customers, we will always err on the side of providing too much value. Anyone who wants to read a wide range of our products every year is still welcome to do so – even up to making 12 swaps per year.

But what we won't allow is people who are trying to read all of our materials, in real time, while only paying for five of them. I can't imagine any reasonable person wouldn't agree with our position. But... when it comes to human nature... I've learned to expect the worst.

Regards,

Justin Brill
Baltimore, Maryland
February 1, 2016