When It's Far More Profitable to Own Bonds Than Stocks
Editor's note: The stage is set for a huge moneymaking opportunity...
Several key indicators signal that a recession is imminent. According to Stansberry's Credit Opportunities editor Mike DiBiase, the next recession will create a major wave of buying opportunities for investors who are paying attention.
In today's Masters Series, adapted from the August 2024 issue of Stansberry's Credit Opportunities, Mike details how you can use corporate bonds to profit when stocks are likely to disappoint...
When It's Far More Profitable to Own Bonds Than Stocks
When Apple (AAPL) made "the call," a DJ sitting on a ski lift was its best hope...
It was January 2001. At the time, Apple was in real trouble.
Steve Jobs was struggling to keep his company in business. He was fighting a no-win battle with Microsoft (MSFT) over PC market share. And he wanted a way out.
Jobs had already pulled the company back from the brink of bankruptcy before by turning his fruit-colored iMac computers into consumer fashion products. But it wasn't enough.
Jobs wanted to develop something completely new. And he knew 32-year-old Tony Fadell – who was vacationing in Vail, Colorado, at the time – was the man who could do it. Fadell was a prodigy the company knew well.
When he got the call on that ski lift, Fadell was a part-time DJ with his own tech startup, Fuse Systems.
The caller wouldn't share many details... just that Apple wanted him to work on a top-secret project. He would have to go to Apple if he wanted to find out more.
Fadell took the meeting. And after signing nondisclosure agreements, what he learned surprised him...
Jobs wanted Fadell to create a prototype for Apple's first portable music player... the iPod. The small device ended up saving Apple... and becoming the predecessor for the iPhone.
The iPod and iPhone dramatically changed the trajectory of the company.
With a market capitalization of $3.6 trillion, no company is more valuable than Apple today... not Alphabet (GOOGL), not Microsoft, not Nvidia (NVDA).
But Apple's growth has since stalled, leaving many to question its sky-high valuation. And the company made news last year when Warren Buffett's conglomerate Berkshire Hathaway (BRK-B) disclosed it sold more than three-quarters of its shares in Apple.
Some investors interpreted Buffett's sale as a sign that the stock market had reached its peak. The legendary investor may be right.
He may be seeing the same signs we are... Things are getting ugly in the economy, and they're only going to get worse.
The U.S. consumer is up to his eyeballs in debt. Credit-card debt is up 31% since before the pandemic. It now totals a record $1.2 trillion, according to the New York Federal Reserve. Auto loans are up 24% to a record $1.7 trillion.
Credit cards account for the fastest-rising debt in America. Considering credit cards are the most expensive form of debt, this spells disaster.
Unsurprisingly, credit-card delinquency rates are soaring. More than 11% of credit-card accounts are now more than 90 days delinquent, the highest since 2012.
Consumers are in deep financial trouble... and it's getting worse by the day. Considering consumers make up nearly 70% of our economy, a recession is not far away.
Every single recession indicator says the same thing... A recession is imminent.
During recessions, corporate earnings fall by 25% on average. The stock market typically falls even more... by 37% on average over the past five recessions.
Economic uncertainty and the threat of the next recession might be bad news for most. But it's what corporate bond investors wait for. Bonds are at their cheapest when fear is in the air and credit is tight. And this always happens during recessions.
Based on the economic data piling up, it sure feels like we're getting close to this point. But we're not there yet...
My favorite gauge of fear in the credit market is the high-yield credit spread. It's the difference between the average yield of high-yield corporate bonds and similar-duration "risk free" U.S. Treasury bonds.
The spread is near historic lows today... around 300 basis points ("bps").
During recessions and credit crises, the spread soars. You can see this in the chart below. It also shows what has happened to the high-yield credit spread since the 1990s, with recessions highlighted in gray...
During recessions, bankruptcies spike and investors want nothing to do with corporate bonds. Their prices plummet, and their yields soar. That makes them safer to own.
Today, with the spread so low, bonds are expensive.
But they can still be better investments than stocks. I wouldn't touch Apple's stock today given its slowing sales and rich valuation. But I recently recommended one of the company's incredibly safe bonds. I expect to see an annualized gain on this bond of more than 20%.
Bonds are legal obligations of the companies that issue them. That makes them much safer than stocks. And when the next recession comes, the prices of many bonds will go on deep discount. You'll be able to pick them up for pennies on the dollar and earn massive, stock-like returns with far less risk.
That's why, in times like these, it's far more profitable to be a bond investor.
Good investing,
Mike DiBiase
Editor's note: Mike stresses we'll see plenty of opportunities like Apple popping up moving forward. You see, he believes we're on the verge of a key inflection point in the markets that could leave unprepared investors in financial ruin...
So to help you prepare for this market shift, he just hosted an online presentation to reveal how you can use bond investing strategies to profit from this setup. Learn more here...