One Thing You'll Want to Own When This Bubble Implodes

A warning from the most famous financial disaster of all... Does this sound familiar to you?... A modern-day 'South Sea Bubble'... One thing you'll want to own when this bubble implodes... Prepare for a 'value' resurgence... How to spot stocks that could double or triple next year...

It's a familiar story to anyone who knows much about financial history...

In the decade or so following the greatest spree of money printing and credit growth in history, we witnessed a tremendous bubble in financial assets.

This bubble saw interest rates on government bonds plummet as bond and stock prices soared.

It saw financial innovations no one had ever thought of before, including new ways to organize capital and banking systems.

It even saw the emergence of new currencies, which soared in value, creating an entirely new class of wealth.

Most people had no idea what to make of all of these new financial innovations. They couldn't believe how much wealth was being created. And in the days following a national holiday, huge crowds of investors stampeded to join in this new financial revolution.

Everyone would soon be rich!

Obviously, I (Porter) am describing the most famous financial bubble of all...

The South Sea Bubble started in 1716, when a degenerate Scottish gambler, John Law, convinced France's bankrupt king (Louis XV) and his regent (the Duke of Orleans) that he could solve their financial crisis by printing a little money.

Not to worry, John explained, these new bank notes would be backed by gold and silver held at a new central bank, the Banque Générale. The bank could then lend the government money (at more favorable interest rates) and thereby increase the amount of money in circulation.

Like a modern-day economist, Law explained that this new money would have a "multiplier effect," increasing aggregate demand, stimulating growth in gross domestic product, and leading to new tax revenues. The positive effects of all this new money and credit would far outpace the negative risks (inflation and soaring debt payments). "You'll see," he promised...

The following year, Law created the Mississippi Company...

Or as it was called in French, the Compagnie d'Occident (which translates to "the company of the West"). This company was granted a royal monopoly on trade with Louisiana and Canada for 25 years. And here's the key to understanding the swindle: Its shares could be purchased using the newly issued bank notes.

In 1718, the company's charter was expanded to cover tobacco trading with France's colonies in Africa. And so, as Law's bank created more and more paper money, that new money then flowed directly into shares of the Mississippi Company.

Law had performed a financial miracle: He had turned the inflation caused by printing money into a positive force for the French economy. Commodity prices didn't rise – share prices rose instead. This was a kind of inflation that made people feel richer, instead of poorer.

What happened next?

The apparent success of the swindle – I mean, the new bank and the Mississippi Company – led to even greater prestige and power for Law and the Banque Générale.

In 1718, the bank was given a royal charter and a new name: Banque Royale. With this new status, the king guaranteed the bank's deposits and the bank began to handle all of France's tax collection.

Just imagine if Google's parent company Alphabet (GOOGL) was also the Federal Reserve and you could buy shares in it. That's essentially what Law had cooking.

Shares in the Mississippi Company were trading at around 500 livres tournois in 1719 when Banque Générale received its royal backing. By the end of the year, they were trading for 10,000 livres, an increase of 1,900%.

The incredible gains were so appealing – thousands of people had become millionaires in only a few months – that people from all over France and from all walks of life lined up in front of the bank trying to buy shares in the Mississippi Company. They could do so in cash or, even better, by making a small 10% down payment on a French government bond, which could then be exchanged for shares.

You'll never guess what happened next...

A small move down in the price of the bank's stock led investors to sell and lock in their gains. As the selling pressure grew, more and more investors demanded gold for their shares.

Law, who by then was an acclaimed financial genius, had been appointed France's treasury secretary. To stem the flood of gold out of the Royale Bank, he converted the bank's paper money into legal tender... It could be used to pay all debts and taxes, even where contracts stipulated payment in gold. He further agreed to exchange his bank's notes for shares in the Mississippi Company for its previous high price of 10,000 livres.

But as you know, once a great monetary illusion has been shattered, you can't put it back together again...

By refusing to allow his bank notes to be exchanged for gold, Law was proving that his scheme wasn't stable and wouldn't last. Soon, the inflation he had engineered was flowing into commodities that could still be exchanged for notes, like food.

Inflation soared by 23% in January 1720 and would continue to rise. More and more investors wanted out of the Mississippi Company's shares. Bank Royale could no longer afford to pay 10,000 livres, because of the resulting inflation of food prices.

By September, the price was down to 2,000 livres... then 1,000 in December. By the next year, they were trading at 500 livres again – right where the bubble had started.

About 80 years later, the U.S. would buy Mississippi (the Louisiana Purchase) for about $3 million in gold and another $12 million in bonds – or about $0.04 per acre. In today's dollars, that's about $309 million.

Of course, this all happened a long, long time ago...

In the modern world, it's unlikely that millions of people would fall for such a swindle. After all, we have knowledge of history. We know that paper money always fails. Sooner or later, all attempts to create huge new amounts of money and credit (in excess of savings) will lead to big increases to commodity prices.

The idea of a "monetary multiplier" is as dumb as believing that you can create more pizza by slicing it into more pieces. But everyone knows that now. And who in this day and age could be so foolish as to fall for a brand-new currency, made up out of thin air – and then buy it after it has appreciated by 10,000-fold?

Nobody would be that dumb anymore.

By the way...

When our current bubble implodes, one of the things that will do well are solid, well-financed businesses.

All of the money won't flee into gold and commodities. If you can remember the tech bubble of 2000, you'll recall that "value" stocks returned to favor in 2001 and 2002 even as most stocks did poorly.

My research team and I have been spending a lot of time trying to figure out an accurate indicator to know which deeply discounted stocks are the most likely to do well. We've found a surprising indicator. I hesitate to even tell you about how well it performs. I fear that you won't believe me. And I'm also worried that if too many people know about this secret way of looking at stocks, it will make these opportunities even harder to find.

But this is real...

And even though it works across all kinds of market conditions, I suspect it will work best as the current mania for bitcoin and "FANG" stocks fades. We're hosting a free webinar on Wednesday night at 8 p.m. Eastern time to cover what we've found in detail. But for now, I just want to show you one part of our research.

We used our indicator to look at the entire retail sector – including stocks in companies like JC Penney (JCP), which is probably going bankrupt. As you know, the retail sector has been hammered as investors have piled into shares of online retailer Amazon (AMZN).

But Amazon isn't going to put every other retail company out of business. Some of these firms will survive. And at these levels, the survivors could see their share prices double or triple next year.

Can our indicator help us figure out which ones to buy?

At our Alliance Conference in Las Vegas in late September, we presented the following list of stocks to attendees. These were the seven retail stocks our indicators told us should rebound. We haven't left any out. Surprisingly, JC Penney was on the list. (We disagree about that one.)

We haven't included the other names here, but we'll show you the full list on Wednesday night during the webinar...

Here's the point: On average, these stocks have gone up 15% since our presentation. That's a return of 84% on an annualized basis. Only two stocks didn't go up. One – JC Penney, which we wouldn't have bought – is down 10%. The other is down 15%.

This is only a small demonstration of how this unusual indicator works. But we've tested it over several years and across all different sectors of the market. There's a very logical, fundamental reason why it works so well: It shows us the companies that have far stronger businesses than the market realizes. It shows us the anomalies across huge numbers of companies. Trust me, no one else is doing this kind of research anywhere.

We'll explain how it all works on Wednesday, December 6 at 8 p.m. Eastern time. Please join us. Save your seat here.

In today's mailbag, kudos from a couple of longtime subscribers... and Porter responds to two more "boo-birds." Send your questions, comments, and complaints to feedback@stansberryresearch.com. New 52-week highs (as of 11/30/17): AbbVie (ABBV), AMETEK (AME), American Express (AXP), Boeing (BA), Becton Dickinson (BDX), Berkshire Hathaway (BRK-B), CBRE Group (CBG), CME Group (CME), iShares Select Dividend Fund (DVY), iShares U.S. Aerospace and Defense Fund (ITA), iShares Transportation Average Fund (IYT), JPMorgan Chase (JPM), McDonald's (MCD), NVR (NVR), PowerShares High Yield Equity Dividend Achievers Portfolio Fund (PEY), PNC Financial Warrants (PNC-WT), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), Sysco (SYY), Travelers (TRV), and ProShares Ultra Financials Fund (UYG).

"Porter et al, it's simply fantastic how you and the team continue to do what you do (provide us valuable insights and learnings) and at times in the face of the negative complainers out there. Some of these people who write in to complain like children are embarrassing.

"I and my family appreciate the fact that you and your team CHOOSE to provide your services, as clearly you'd all be just fine making money as you do without stopping to teach the rest of the masses how to. I think about that often and realize that many professional investors couldn't be bothered to put up with the general public's comments, complaints and inability to read a FAQ page.

"I and my family are grateful for all that you and your team does for us, you've all made me a much more successful and happy investor and a better provider for my family. Thank you, keep it up!" – Paid-up Stansberry Alliance member Jason Cleveland

"Dear Porter, I just wanted to make sure you heard from those of us that enjoy your personality and style so much. No matter how wealthy and successful you and your firm become, you remain as honest and real as if you were just starting out. It's so refreshing.

"So many in your position become dried up prunes; they become less passionate, less honest and more afraid of offending their increasing subscriber base. You, on the other hand, passionately state your views and give it back to those who question your integrity; the surest mark of someone who has integrity.

"So, thank you for remaining honestly straight-forward in your writings and I look forward to more of that in the future. P.S. I should mention that this is coming from someone who has mostly followed Steve's recommendations and is patiently waiting for your precious metal recommendations to turn around and turn losses into gains. So you can consider these comments as equally honest and sincere as your own." – Paid-up subscriber Dan French

Porter comment: Well... thank you. As I'm sure you can tell, I can't help myself. And Sjug is brilliant. But... I hired him!

"Obviously you think I'm a millionaire, this costs more than I spend in groceries every week. Please take me off your mailing list." – Paid-up subscriber Andy A.

Porter comment: Sorry about that, Andy. We serve investors. Typically, they have capital to invest.

"Well, I am sure that Porter is one of the smartest financial experts in the world and his thesis on corporate debt is on target. However, the market doesn't believe him and I have lost all of the money I allotted for the big trade $10,000! That's probably nothing for Stansberry because he has a straw into my wallet anyway. Sadly, with this experience, I couldn't possibly tolerate investing another dollar in that direction. I am sure that his response would be 'hold on now.' I am tired of the infomercials and trying to suck more money out of me for another scheme that will lose me money." – Paid-up "very sad" subscriber Alan G.

Porter comment: Alan... buying naked options is always a risky proposition. The only reason we embarked on the Big Trade strategy (buying naked options) is because we believe we are near the top of the greatest credit bubble in history.

There are HUGE risks in the market right now, risks that are being completely ignored. I've written about this for months, so I won't repeat myself here.

But until sentiment shifts, none of these fundamental problems will matter. In fact, as more and more debt is piled on top of balance sheets around the world, more shares can be bought back, more acquisitions can be financed... And stocks can go higher and higher still.

In the short term, this makes me look extremely foolish.

But it's also why we have the opportunity to buy "insurance" on stocks with horrible balance sheets at record-low prices. Eventually – and nobody knows when – this insurance will pay off for us in a big way.

We understood the risks when we started... And we were very clear with every subscriber that there would be losses until the market turned. That's why we haven't put on a major position. We've just been nibbling.

The Big Trade strategy allows you to remain in the bull market until the end by providing you with "tail risk" insurance. If you wake up in a week and find out that half of China's banks are closed... or that the world's biggest insurance company is folding... or that the euro is in free fall because France has defaulted... or whatever the catalyst will be that ends this massive global credit bubble... your Big Trade positions will give you the liquidity and the gains you need to get you out of the market with your skin.

But because that hasn't happened yet, you're convinced it won't ever happen.

I sincerely regret that. And I understand your anger and frustration at losing capital. I do.

But I'm afraid you're only looking at half the ledger. Yes, our advice on using cheap puts to hedge against the risk in this market has cost you some coin. And it's been wrong – so far. But what about the other advice we've given you this year?

What about the advice to remain long this bull market and enjoy the chance at huge gains in the "blow off top" that Sjuggerud was forecasting?

In The Total Portfolio, we've been between 85% and 100% long all year.

Sjug has been pounding the table on Chinese stocks. Eight of them are up more than 40%, including a nearly 100% gain in Tencent.

Have you seen my long portfolio in Stansberry's Investment Advisory this year? How about the double-digit gain in Nvidia (NVDA)? What about the 50%-plus gains – since October – in Overstock (OSTK)? What about the continuing gains in McDonald's (MCD) and Microsoft (MSFT)? And the big gains – more than 50% - in Facebook (FB)?

Doc Eifrig has subscribers long the biggest tech companies of all: Amazon, up about 25%, and Alphabet (GOOGL), up nearly 30%.

And what about our short positions that have paid off, like GGP (GGP), Sprint (S), Hertz (HTZ), and Avis Budget (CAR)?

Alan... my point is that you're pointing your finger at the one strategy we endorse that hasn't worked this year. But that was far from our only advice. In fact, that product was introduced as a way to hedge your exposure to the stock market. If you took our advice and used these ideas as leveraged hedges, you shouldn't have lost more than 5% of your portfolio.

Meanwhile, if you've been investing the bulk of your wealth in our core ideas, you should have made a fortune this year – far more than you lost in Stansberry's Big Trade. That's how it's supposed to work: Risk a little in the Big Trade so that you can stay long and make a lot.

I hope that has happened for you.

If it hasn't, then I highly recommend you try following our advice in The Total Portfolio. It gives you step-by-step instructions, down to the number of shares to buy.

Or if you don't have the time or the inclination to manage a portfolio of 30-40 positions, then call an asset manager and have him do it for you. When you're shopping for an asset manager, give Stansberry Asset Management a call, too. I don't know if their service is right for you, but I know they've helped a lot of our best customers.

Regards,

Porter Stansberry Baltimore, Maryland December 1, 2017

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