Wrong, Wrong, and Wrong Again...

Investors are ignoring obvious warning signs... Time to 'brace for impact'... Inflation isn't going away... The bank crisis is not over yet... The stock market bottom is still in front of us... A new warning just triggered...

The folks we're supposed to trust get it so wrong, so often...

"Inflation will be transitory"...

Wrong.

"Inflation won't soar"...

Wrong.

"The Fed will start cutting interest rates soon"...

Wrong.

"Our economy is headed for 'no landing'"... "OK, make that a soft landing"... "OK, it might be a hard landing, but we'll avoid a recession"...

Wrong, wrong, and wrong.

Federal Reserve economists now think we should expect a "mild recession." The central bank will be wrong once again.

As I (Mike DiBiase) have been warning in the Digest since last September, things are about to get much worse for our economy...

Apparently, most investors don't agree...

Since mid-October, the S&P 500 Index is up 15%. The Nasdaq Composite Index is up 14%.

The optimism in the markets today astounds me...

Investors are ignoring enormous, obvious warning signs we're headed for a deep recession.

Many have been discussed in the Digest before...

The 2-10 yield curve – the difference between the yield on 2-year Treasurys and 10-year Treasurys – is the most inverted it has been in more than 40 years.

And the Fed's preferred yield curve – the 3-month/10-year yield spread – is the most inverted it has ever been.

The Conference Board Leading Economic Index, which is a composite of various economic indicators, has been signaling a recession for months. It plunged even further in March, its biggest decline since April 2020. Economists at Wells Fargo said it's time to "brace for impact."

These are reliable recession predictors. But you don't even have to know about them to see what's coming – that is, if you're paying attention...

Corporate debt has ballooned to a record $13 trillion today...

That's nearly double what it was at the peak of the last financial crisis. Household debt is now $17 trillion, also a record.

Combine those massive debt numbers with the fact that interest rates have soared over the past two years... and you have a recipe for disaster.

The interest rate companies have to pay has more than doubled since early 2021. Keep in mind, even before they shot up, about one out of every five companies were "zombies" – meaning they could barely afford the interest on their debt. Thanks to today's higher rates, many zombies are going to finally collapse starting this year.

Households are getting crushed, too...

Credit-card interest rates now average 21%, the highest they've ever been. That's a punishing number when you consider that credit-card debt hit $1 trillion last quarter, a new record. Mortgage rates have more than doubled since early 2021. Homes today are less affordable than they've ever been.

Add that to the fact that the price of everything from groceries to gas has soared over the past two years.

There are lots of signs consumers are about to tap out...

Americans' ability to spend is now stretched to its limit. U.S. retail sales have fallen for two straight months. Nearly two-thirds (64%) of all Americans are living paycheck to paycheck.

Folks are having trouble making their loan payments. You'll be reading more and more in the months ahead about rising auto-loan and credit-card delinquencies (late payments) and defaults (loans going bad).

It's already starting... According to credit-ratings agency Moody's, more than 9% of auto loans to people with poor credit are at least 30 days delinquent. Repossessions are about to soar.

High inflation and interest rates have brought our economy to its knees...

But you wouldn't know that listening to our leaders...

The consumer price index ("CPI") rose 5% in March. President Joe Biden liked the number. He actually said this meant "more breathing room for hard-working Americans."

Talk about seeing things through rose-colored aviators.

I'm not sure how prices rising 5% – on top of the past two years of blistering price increases – gives anyone "breathing room."

Core CPI – which excludes "more volatile" food and energy prices – is the Fed's preferred inflation measure. It rose 5.6% in March. That's an acceleration from the 5.5% reading in February. So by the Fed's own measure, inflation isn't easing at all.

And when you dig into the numbers, it gets even worse...

The headline CPI number has only been falling because of falling energy prices, which were down 6.4% in March. Almost everything else was up big... like food prices (up 8.5%) and shelter (up 8.2%). Transportation services – a category that includes car repairs, maintenance, insurance, and air travel – rose 13.9%.

Energy prices won't be able to save the headline inflation number for much longer...

They're on the rise once again after OPEC+ surprised the market with its recent decision to slash oil production by more than 1.1 million barrels per day. The price of oil rose to above $80 per barrel. It's going to put pressure on inflation readings in the months ahead.

In other words, no matter how hard government officials and bullish investors wish it, inflation isn't going away anytime soon. The only thing that will bring inflation down is a recession.

Unless the Fed starts easing again (which would be really, really bad because it would lead to even longer-lasting, higher inflation), we're headed for a deep, prolonged recession. We can't afford the higher interest rates needed to bring persistent inflation down. We simply have too much debt.

As lead editor of our corporate-bond newsletter, Stansberry's Credit Opportunities, I pay a lot of attention to debt and the credit market. This brings me to another thing investors are getting wrong...

The bank crisis is not over...

The combination of higher interest rates and record debt has finally begun to "break" things in our economy. Two of the largest bank collapses in U.S. history struck last month.

This was one of the first cracks to appear in the proverbial dam. But it won't be the last. The government rushed in and plugged the hole to prevent more bank failures, but other holes will soon appear in other places.

The leveraged-loan market may be the next victim. Or the commercial real estate market could collapse.

Regional banks hold around three-quarters of the $3.1 trillion in outstanding U.S. commercial real estate loans. This includes loans on apartments, offices, warehouses, hotels, and retail properties.

Here's why this is a big problem... Regional banks are already dealing with the flight of deposits to bigger banks and money-market funds. Soon, they'll be forced to deal with commercial-loan defaults.

According to Bloomberg, $1.5 trillion of U.S. commercial real estate loans is coming due by the end of 2025. These loans need to be refinanced at much higher interest rates. That makes them much more expensive for borrowers who are already struggling with empty office space. Downtown office-vacancy rates have nearly doubled since the pandemic to almost 20%. It's much higher in some cities like San Francisco.

The earnings of these properties determine their value... With higher interest rates and vacancies, commercial real estate earnings and valuations have plunged.

The defaults have already started. Columbia Property Trust recently defaulted on $1.7 billion in commercial real estate loans on buildings in New York, San Francisco, Boston, and Jersey City, New Jersey.

Regional banks are going to have to raise capital and sell risky assets like commercial real estate loans to meet regulatory capital requirements. They'll continue to tighten credit, especially to risky borrowers, at a time when credit is needed most.

Fed Chairman Jerome Powell even admitted this at the Fed's latest meeting. He warned that the banking crisis will likely lead to tighter credit conditions. That's bad news for the economy.

Credit is already tighter than at any time since the last financial crisis...

When credit gets tougher to get, weak companies begin to die. Bankruptcies are already on the rise. They've increased in the past four months, according to credit-ratings agency Standard & Poor's. In the first quarter of this year, 183 U.S. companies went bankrupt... the most in any quarter since 2010.

The thing is, as I've written here before, this is a normal part of the credit cycle. Periods of excess always lead to periods of tightening credit. And tightening credit always leads to recessions, with waves of defaults and bankruptcies.

Our economy is contracting. Businesses' sales and profits are falling. This is exactly what I predicted would happen. Corporate earnings have fallen in each of the past two quarters.

Coming into the year, investors were betting corporate profits would rise 7% this year and another 9% in 2024.

They're starting to wake up, but they're still asleep. They now expect earnings to fall 3% this year but to grow 10% next year.

I'm here to tell you corporate earnings are going to fall a lot more than 3% this year.

During recessions, corporate earnings always fall hard...

Over the past five recessions since 1980, corporate earnings fell by an average of 25%.

Take a look...

The blue line is the earnings of the companies in the S&P 500 Index, shown on a logarithmic scale to make it easier to see the changes in past years. The gray areas on the chart are recessions, including the one I'm projecting.

As you can see, Wall Street's earnings estimates are far too rosy.

Here's what's even more important to remember...

The stock market doesn't bottom before recessions...

Take a look at the next chart. It shows the S&P 500 Index – also on a logarithmic scale – over roughly the same period...

You can see the stock market never bottoms before recessions. It bottoms during or after recessions.

We're not even in an official recession yet. Most are predicting it won't start until later this year. That means the stock market bottom is still in front of us.

Remember, despite all of the investor optimism I'm seeing, we're still in a bear market. And bear markets don't end quickly or without a lot of pain.

Excluding the brief bear markets following "Black Monday" in 1987 and the pandemic in 2020, the average length of the last four bear markets was 675 days. We're only 479 days into the current bear market. The bear market of 2000 to 2002 lasted more than 900 days.

More important, the stock market fell an average of 45% during those bear markets, from peak to trough. So far, the market is only down 14% in this bear.

The chart below compares those bear markets with this one so far. As you can see, this bear has a long way to go...

Notice there are lots of "bear market rallies" in every bear market. Imagine all of the investors who were suckered into thinking the worst was over in those. Don't be one of them today.

If you still don't believe that we're headed for a recession or that we have already seen the stock market bottom... you should consider one more thing...

Our proprietary Complacency Indicator just flashed a new warning...

This is one of the stock market indicators we use in our flagship publication, Stansberry's Investment Advisory.

The indicator triggered a new warning in March. Whenever this indicator falls below a "bearish" score of 30, it signals a market drop of 10% or more is coming in the next 12 months. Today, the indicator is at 23, the same as it was in March when it triggered a new warning.

This is not something you should ignore.

This indicator has predicted nine out of the last 11 market corrections or bear markets over the past 25 years. And it rarely flashes false signals.

I hate painting such an ugly picture. But that's the way I see things. Today, I've given you the information I'd want if our roles were reversed... which is one of our guiding principles at Stansberry Research.

But there is a silver lining to these dark clouds...

You don't have to be a victim. Like I said, credit cycles are normal, but how people respond to them is not...

You can use this knowledge I've shared today to make a lot of money when the markets are crashing. I expect the bond market to crash along with the stock market, creating a huge opportunity to make money that most everyday investors will overlook.

When the bond market crashes, you'll be able to earn equity-like returns with investments that are far safer than stocks... corporate bonds. That's because these bonds offer bigger returns the cheaper they get. And they come with guaranteed income and legal protections that stocks simply don't have.

Here's the thing most people don't understand... In this next crash, the perfectly safe corporate bonds we recommend – which many folks simply don't know about or how to buy – will sell off to absurd, distressed prices. This includes bonds of good companies that will survive a recession.

This is the time my colleague Bill McGilton and I have been waiting for in Stansberry's Credit Opportunities.

Buying safe corporate bonds when they're cheap in times of crisis is what many of the world's wealthiest and best investors do... And owning corporate bonds is another "tool" every investor should have in his or her toolbox.

If you haven't already, I urge you to consider it...

There's no reason you can't do it. You just have to know which bonds are safe. In Credit Opportunities, Bill and I do the work and identify these investments for you. And you can buy them much like stocks.

The last time the bond market crashed was a brief period following the pandemic. Since then, Bill and I have recommended and closed 14 positions, of which 12 were winners.

The average annualized return of the 14 recommendations was 27%. That's nearly six times the 4.6% return of the high-yield bond market since then. And it even beats the 20% return of the stock market over the same time frames.

If you're like me and think a recession is ahead, then the markets are likely in for more trouble.

Preparing now is essential so that when the next credit crisis comes, you'll be ready to pounce and scoop up bonds of good companies at the cheapest prices we'll have seen in more than a decade.

If you're interested, click here to learn more. You'll hear the story of one of our subscribers who used this strategy to retire early at age 52 and all the details on how to get started with Stansberry's Credit Opportunities today.

New 52-week highs (as of 4/25/23): ABB (ABB), Activision Blizzard (ATVI), General Mills (GIS), Hershey (HSY), Novartis (NVS), PulteGroup (PHM), Spotify Technology (SPOT), Unilever (UL), and Zimmer Biomet (ZBH).

In today's mailbag, some feedback on yesterday's mailbag and essay... Do you have something to say? Send an e-mail to feedback@stansberryresearch.com.

"As Paid-up subscriber Frank S. stated, I also do appreciate Corey's daily after-the-market close summary so very much! He's excellent!" – Paid-up subscriber Tyco Z.

Corey McLaughlin comment: Well, thanks very much. I appreciate it. I'm glad you find the work helpful, and we welcome any feedback – praise or otherwise. In particular, I'm always interested in any subjects or questions you'd like to see us cover. So keep the notes coming.

"The amount of information given [yesterday] was fantastic. It wasn't a jump off the cliff warning type but it was 'proceed with caution.' I appreciated the graph and the possible scenarios for the Dow.

"I can't remember when it was but I believe someone from your publication said home builders and construction material companies would be a good place to look. I noticed today three new highs for stocks in that sector. I was in construction for over 30 years and when money gets tight and people don't want to get stuck with a high interest rate by purchasing a new house what they will do is spend that money on the house they currently have.

"Whether it's an addition or basement to create more luxury living space it's always done to create more value looking forward to the next house. We all know there is a housing crisis and I'll tell you by me up here in N.J. the projects they have going are enormous in single-family and apartments and condos. Any space that can be built on is being built. It could be raw land that needs to be cleared or older sections of high-dollar towns. It's being built. I have friends of mine so busy they are over a year out and turning down work...

"I know this market well and where I live this work will most likely not stop for another decade. Thanks for all you do." – Paid-up subscriber James S.

Regards,

Mike DiBiase
Atlanta, Georgia
April 26, 2023