More Like a Roller Coaster

Editor's note: The financial world expects the Federal Reserve to do something this year that it has only pulled off once in its history. As Mike DiBiase explains in this piece – adapted from the December 2024 issue of Stansberry's Credit Opportunities – the optimists are missing a fundamental truth about the economy. That means more pain is likely... But for investors who understand market cycles, so are hidden opportunities...

Interest rates and inflation appear to be under control now that they're headed down. That's a welcome relief for consumers and businesses alike.

Most economists and the mainstream financial media now seem confident that we'll achieve a "soft landing."

This term describes when the Federal Reserve is able to lower inflation and interest rates without the economy crashing into a recession.

But there's one problem with this rosy view...

Soft landings are incredibly rare. The only time the Fed was able to do it was in 1994. Every other time, it failed.

Despite the Fed's dismal track record for achieving a soft landing, this is exactly what everyone is expecting. And as I'll explain, we're in for a much bumpier ride...

Two months ago, as 2024 came to a close, the number of news articles mentioning "soft landing" had never been higher. I saw the same spike before the recession in 2001 and before the great financial crisis began in 2008...

In fact, I've seen recent headlines claiming that we will have no landing at all.

Here's the problem... If you buy into this soft-landing or no-landing narrative, you're saying you no longer believe in economic cycles.

The reality is that if you zoom out, you'll see that our economy always moves in cycles. It doesn't move in gentle straight lines. It looks more like a roller coaster than a plane landing smoothly.

Want proof?

Here's a chart of the annual change in U.S. real gross domestic product ("GDP") since 1950. GDP is a measure of the value of all goods and services produced by a country. It's what economists use to measure the health of the economy. Everyone wants to see GDP growing. When it shrinks, economists define that as a recession (shown in the gray-shaded areas in the chart)...

Do you see many soft landings in that chart?

Here's a chart of the unemployment rate...

Despite maximum employment being one of the Fed's two mandates (stable prices is the other), you can see the unemployment rate is anything but smooth or stable. It often spikes well above 6%.

Here's another roller-coaster chart. This is the high-yield default rate since 1980. It's the percentage of U.S. companies that can't pay their debt. You can see that the default rate makes big moves up and down. And it peaks following recessions...

Today, the default rate is around 4.4%. I expect it will soon rise to close to 10% during or following the next recession.

From these charts of broad macroeconomic measures, it's clear our economy is cyclical. If the Fed was so good at engineering soft landings, you wouldn't see charts that look like amusement-park rides.

Folks who believe in a soft landing or no landing are ignoring the cyclicality of the economy. Not only that, they're also arguing that every reliable recession indicator – which are all warning of an imminent recession − will be wrong this time, some for the first time ever.

I don't buy it.

It's very likely that we're headed for a recession this year... and one that will be worse than normal.

While this might be a scary forecast for most, I hope it isn't for you. It's exactly what I've been waiting for since launching Stansberry's Credit Opportunities in late 2015.

In recessions, corporate earnings fall by 25% on average. The stock market typically falls even more... by 37% on average over the past five recessions.

The high-yield spread often soars to more than 1,000 basis points. The good news is, that's when corporate bonds trade for pennies on the dollar... and offer stock-like returns.

Our best moneymaking opportunities are still in front of us.

Good investing,

Mike DiBiase

Editor's note: Mike says investors don't have much longer to prepare for a looming recession. The last time we faced conditions like this, he tripled the performance of his benchmark. And if he's right, this is about to be a "back the truck up and buy" moment for those following this No. 1 strategy for times of financial turmoil... Get the full details here.