Prepare Now for When the Support Spigot Runs Dry
The winding down of government handouts... Prepare now for when the support spigot runs dry... 'Um, get a job?'... Corporate America's debt problem... The 'Bond King' thinks U.S. Treasurys are 'garbage' today... If you're savvy, you can seize this opportunity...
When COVID-19 shut down the U.S. economy in early 2020, the federal government acted fast...
And for more than a year and a half now, it has propped up our economy with massive fiscal and monetary support.
We can argue all day about the size and scope of the support, but one thing is clear...
It worked.
The government's swift actions kept food on people's tables... It kept folks from being kicked out of their homes... And it kept money flowing into the financial markets.
But we all know the handouts can't go on forever. Eventually, the government will need to remove the guardrails... and everyone will be on their own again.
Of course, the Federal Reserve has talked about tapering its purchases of U.S. Treasury bonds for a while... But the central bank is waiting for unemployment numbers to improve before it makes any changes.
And even if the COVID-19 Delta variant gives lawmakers a reason to keep propping up the economy in the short term, the fact is... the government's support will end at some point.
In today's Digest, I (Mike DiBiase) want to discuss the aftermath of all this support...
As you'll see, America is already facing a major problem. It's going to slow our economic recovery from COVID-19 and risk sending us into another financial crisis.
But fortunately, you don't have to be a victim whenever the next crisis unfolds...
Today, I'll show you a way to protect your portfolio and make money from this coming storm. It involves a wealth-building strategy that some of the world's best investors use.
Let's begin by diving into the winding down of government handouts...
The pandemic's unemployment benefits ended, perhaps fittingly, on Labor Day...
Around 7.5 million Americans who had been collecting $300 weekly payments from Uncle Sam now need to figure out their own way to make ends meet for their families.
On Twitter, Republican Sen. Ted Cruz of Texas bluntly offered a suggestion to these folks in response to the headline "Jobless Americans will have few options as benefits expire"...
Um, get a job?
In his tweet, Cruz pointed out that millions of jobs are available in the U.S. – especially at small businesses that have struggled to hire workers during the pandemic. You've likely seen this firsthand if you've ventured out to eat lately... Many restaurants are short-staffed.
Some other government support is set to end soon, too...
For example, the federal eviction moratorium is set to expire on October 3 – about two weeks from now. It was supposed to expire last December, but the government has extended this protection several times since then.
In other words, in the next month or two, a lot of Americans will be pressured to finally heed Cruz's advice – as direct as it might've been – and take those open jobs.
What will our economy look like when all of the financial support is removed?
Some folks won't be able to find jobs that pay as much as the benefits they were collecting. If they can't pay their rent, they could find themselves out on the streets... And they would need to get used to making do on their own again.
Even worse, many folks are already stretched thin financially...
After all, we know many people didn't use the government's handouts wisely.
They should've used the money to get their financial houses in order. Instead, they bought "meme stocks" like GameStop (GME), joke cryptocurrencies tied to dog pictures, and off-the-wall non-fungible tokens... or in some cases, they simply gambled it away.
And the sad truth is... many Americans are already up to their eyeballs in debt.
The average U.S. household owes more than $12,000 in student loans, $11,000 in car loans, and $6,000 on credit cards. In total, that's $29,000 in nonmortgage debt.
Here's another alarming statistic... That's 50% higher than the $19,000 of nonmortgage debt that the average American owed back in 2007 before the last financial crisis.
Debt makes digging out of tough times even tougher...
Take 'Christina,' a 32-year-old essential health care worker in Reno, Nevada, for example...
That's the pseudonym she used on Real Simple's Money Confidential podcast earlier this year.
On the surface, Christina has done everything right... She's a good employee, a good student, and a good mom.
Despite being raised very poor – including being homeless for a bit as a kid – she worked hard and earned a college degree. And she recently bought a home... which is a major milestone for financial independence.
But after paying for her mortgage, student loans, and health care for her autistic son each month, Christina doesn't have much money left over. And worse, unexpected bills keep popping up. So she does what most Americans do when that happens...
Christina pays for the additional expenses with credit cards.
Her credit-card balance has ballooned to around $17,000. She desperately wants to pay down this debt... But she already works two jobs. And despite her hard work, she can't make a dent in the balance. She can barely afford to make the minimum monthly payments.
The credit-card industry traps people with its minimum payments...
According to a Federal Reserve study, around a third of all Americans only pay the minimum amount due each month. That's a recipe for disaster...
A few decades ago, these minimum monthly payments averaged around 5% of the total amount owed. But banks have lowered them over time to make debt more "affordable"... Today, minimum payments average only around 2% of the credit-card balance.
By paying only the minimum required, it would take more than 30 years for the average American to pay off a $6,000 credit-card balance... And that's assuming they don't charge another dime on the card over that span.
When you only pay the minimum, you're practically paying nothing but the interest on the debt. That's what the banks want, though... The more you owe and the longer you owe it, the more money they make.
When you get to the point that you can only afford to pay the interest on your debt, you're truly trapped by your debt. There's little hope of ever paying it off.
I hate hearing stories like Christina's... Her only mistake was taking on too much debt. I doubt she was careless and spent her money extravagantly.
There's an important lesson here...
Unexpected things happen... Prices go up faster than you anticipated... Expenses pop up that you didn't plan for... You lose income that you thought was safe.
When you have too much debt, life's uncertainties will kill your financial future. Christina made one mistake... Now, she's on the verge of declaring bankruptcy.
And everyday Americans aren't the only ones suffering from this problem...
Corporate America has a debt problem, too...
U.S. companies owe more than $11 trillion – nearly double the amount leading up to the last financial crisis.
All of this debt is a huge weight on the economy's recovery... As so many companies struggle with debt, how will they afford to hire more workers, add new factories, or open new stores?
A quarter of all U.S. companies today can barely afford the interest on their debt.
These companies are known as "zombies" because they're like the walking dead... They rely on banks and other creditors to continuously refinance their debt as it comes due.
It won't take much to kill these companies... A slower economic recovery than expected, a decline in sales, higher interest rates, or higher inflation in the form of wages and costs that they can't pass on to their customers.
Christina plans to add a third job to increase her income and help pay down her debt. But American corporations don't have that "luxury"... They can't pull a "just get another job" lever.
Today, one in every four companies is a zombie. There have never been more zombies in history.
Granted, not all of these companies will go bankrupt. Some of these businesses only became zombies because of the pandemic... Their businesses have already started to recover. Others will be bought by other companies for pennies on the dollar before they go belly up.
But many will go bankrupt.
More than $2 trillion is owed by companies with poor credit. They're considered noninvestment-grade (or "junk") credits... You can think of these companies as subprime corporate borrowers.
A huge portion of this debt will never be repaid.
You would think people would be scared of junk bonds today, given how many zombies are walking around...
But it's just the opposite...
Ironically, COVID-19 has kept some of these zombies alive longer than they would've otherwise survived. The government's massive, unprecedented response to the pandemic was an unexpected lifeline...
The Fed lowered interest rates to almost zero and promised to buy corporate bonds for the first time in history... That gave a false sense of confidence in the bond market. Investors began practically throwing money at companies looking to borrow, including the zombies.
Companies across the board went on borrowing binges...
Stronger companies hoarded the borrowed cash. Meanwhile, the zombies refinanced their debt and pushed their maturities out several years.
All that has done for the zombies, though, is delay the day of reckoning. As the government withdraws its support in the weeks and months ahead... many zombies won't make it.
And yet, investors are downright giddy for junk bonds these days...
Bond prices are stretched to absurd levels... Junk bonds now yield less than 4%, on average. That's the lowest junk bonds have ever yielded. (Remember, as bond prices rise, yields shrink.)
Junk bonds are supposed to pay you the highest rates because they're the riskiest of all debt. And it's even worse nowadays when you factor in inflation...
The 'real' interest rate on junk bonds is less than zero today...
The interest rate adjusted for inflation is known as the "real" interest rate. And when you deduct the latest inflation figure – August's 5.3% rate – the real interest rate for junk bonds is negative 1.3%.
That's right... the riskiest bonds in the universe now yield less than nothing. If that doesn't scare you, I don't know what will.
Junk bonds have never plunged into negative territory before. Take a look...
Perhaps you believe what the Fed is telling us about today's soaring inflation being "transitory" – but as I said in the April 14 Digest, I don't. And even then, a 4% yield still wouldn't be enough to compensate investors for the bankruptcy risk in these bonds.
If you own an exchange-traded fund full of junk bonds, I'd get out now while you can.
But don't just take my word for it...
Listen to the 'Bond King'...
Regular Digest readers likely know I'm talking about Bill Gross... He's the famed co-founder of fixed-income investment company PIMCO.
In his blog last month, Gross wrote that funds that buy long-term bonds belong in the "investment garbage can." He wasn't even talking about corporate bonds... He was talking about safe 10-year U.S. Treasurys.
As Gross explained...
I'll come right out and say it: At 1.25% for the 10-year Treasury, they [interest rates] have nowhere to go but up. How quickly is the real question...
Remember, as interest rates rise, bond prices fall.
If Gross thinks Treasurys are garbage, I wonder what he thinks about junk bonds.
He pointed out that when the Federal Reserve begins to taper its bond buying, demand for Treasurys will plummet... That will lead to higher interest rates and lower bond prices.
Gross' point applies to corporate bonds, too... The interest rate that companies pay on their bonds moves up and down with the interest rate on U.S. Treasurys. So if the prices of Treasury bonds fall, corporate bonds will follow... And they'll fall much harder.
That's because corporate bonds are much riskier – and therefore, much more volatile – than U.S. Treasurys. A small move in the prices of U.S. Treasurys can lead to big – and sometimes, even extreme – moves in the prices of corporate bonds.
Here's why this is important...
If you're savvy, you can use this knowledge to make a lot of money...
You see, the market's perception of corporate-bond risk changes over time. And it can change very fast... Similar to the stock market, the corporate-bond market can go from a period of extreme euphoria to a period of extreme fear in the blink of an eye.
The best way to measure the market's view of this risk is the "high-yield credit spread"... It's the difference between the average yield of junk bonds and the yield of similar-duration U.S. Treasury notes at any given time.
The high-yield credit spread is measured in basis points ("bps")... Each bps is 0.01%.
Today, it's around 310 bps. In other words, the average yield of junk bonds (4%) is just three percentage points more than U.S. Treasurys (0.9%).
The spread is normally much higher than 300 bps... It has averaged about 550 bps over the past 25 years. And it mostly stays in a range between 350 bps and 750 bps.
In periods of extreme euphoria, the spread falls below 350 bps. It's an indicator that bonds are super expensive – like what we're seeing today... Even risky bonds issued by companies on the verge of bankruptcy are expensive right now.
On the other hand, the corporate-bond market swings to extreme fear and pessimism when the spread soars above 750 bps. That's when bonds are really cheap. And it's when you can buy bonds – even high-quality bonds – for much less than they should cost...
Buying safe bonds at discount prices is a wealth-building strategy used by some of the world's best investors...
I'm talking about billionaires like Warren Buffett... John Paulson... Paul Singer... Sam Zell... and Wilbur Ross. When a crisis unfolds, these guys pounce on the opportunity.
It's a way to make more money than you ever thought possible by buying "boring" bonds.
It's also the strategy that my colleague Bill McGilton and I use in our Stansberry's Credit Opportunities newsletter... We recommend cheap corporate bonds issued by companies that should have no problem paying us.
In times of extreme fear, when the high-yield credit spread skyrockets, this strategy can deliver stock-like capital gains... And it involves taking on less risk than investing in stocks.
On top of that, you can earn interest rates up to 10% or more.
Most investors have never bought a corporate bond. They have no idea this strategy even exists... So, armed with this knowledge, you're ahead of 99% of all investors today.
When the bond market swings from euphoria to fear, you have to act just as fast. We saw this happen last year...
The high-yield spread briefly spiked from around 350 bps in February 2020 to more than 1,000 bps a month later when the World Health Organization declared COVID-19 a global pandemic.
In Stansberry's Credit Opportunities, we seized the opportunity... The eight bonds we recommended between March and May 2020 produced an average annualized return of 59%.
And all of these bonds were issued by investment-grade or near-investment-grade companies. In other words... they came with virtually no risk that you wouldn't get paid.
But don't worry, this doesn't mean you've missed your shot to profit in the corporate-bond market...
The best opportunities always occur during a credit crisis. Last year was just a tremor... We haven't seen a real credit crisis since 2008. We're long overdue for another one.
And as I've discussed in today's Digest, we're inching ever closer to that harsh reality...
The government can only prop up the markets for so long. At some point, the support spigot will run dry... And U.S. citizens and businesses will be left to survive on their own.
Fortunately, you can arm yourself today with the right tools to thrive as this all plays out...
With that in mind, I'd encourage you to check out this presentation from one of our loyal subscribers. He's just like many of you reading this essay except for one big difference...
Thanks in part to our bond-investing strategy, this subscriber retired at age 52.
I'll let you hear the rest of the story from him. And after that, you'll learn how you can claim instant access to Stansberry's Credit Opportunities at the lowest price we've ever offered.
New 52-week highs (as of 9/15/21): Analog Devices (ADI), Asana (ASAN), Black Stone Minerals (BSM), Continental Resources (CLR), Denison Mines (DNN), Intuit (INTU), Ingersoll Rand (IR), Cheniere Energy (LNG), Lynas Rare Earths (LYSDY), Microsoft (MSFT), Invesco S&P 500 BuyWrite Fund (PBP), VanEck Vectors Russia Fund (RSX), S&P Global (SPGI), and Viper Energy Partners (VNOM).
In today's mailbag, we're sharing some of your feedback on potential cryptocurrency regulation – the focus of yesterday's Digest. We'll publish more responses tomorrow. In the meantime... what's your opinion? As always, send your comments or questions to feedback@stansberryresearch.com.
"I don't believe I've ever responded to a Stansberry Digest, in spite of the fact that I've been a subscriber since pretty much the beginning. If the SEC wants to protect the consumer, perhaps they should understand the asset behind which they are attacking. I personally do not need the U.S. government or any division thereof to protect me from anything. I understand what I'm investing in, I take full responsibility, and I don't need any part of the 'we're from the government and we're here to help' to protect me." – Paid-up subscriber Rob M.
"I think it would behoove one to remember just what 'decentralized' means – outside the purview or control of a central bank or government. The very definition of crypto by the inventor was to prevent the corruption of it as is possible with any fiat currency. I know that in [World War II], cigarettes were used as a medium of exchange. If you try to regulate anything of value, you will just push the masses on to the next thing that is not regulated. The only possible outcome will be that the world will move on with crypto/blockchain technology building the next iteration of the internet, and the U.S. will be left behind, forever giving up its superpower status. It is that simple." – Paid-up subscriber Marc B.
"Crypto should not be regulated. As you say, the point of it is that it should be outside the legacy financial system. Most regulators are subject to industry capture and so are corrupt, or if not that, then they are toothless. Essentially, regulators are useless or worse than useless. The answer is to scrap regulation so that business is subject to the law not corrupt regulators. I mean Gensler comes from Goldman Sachs for heaven's sake!" – Paid-up subscriber Steven I.
"I agree with Eric Wade – a great big NO! Stay out of my business and others' business. Let the buyer beware. I believe the following quote from the first century Roman Senator Cornelius Tacitus (55-117 AD) says it all: 'The more corrupt the state, the more numerous the laws.'" – Stansberry Alliance member Harry D.
"I could not agree more, Eric is right on the money with government overreach. I would go even farther to say everything they touch, they wreck. I can't think of one government program that works. Most are nothing more than a waste of money, bloated bureaucracies making politicians rich. We need term limits and an end to all lobbyists." – Paid-up subscriber Kelly H.
"Thank you Corey for [the] straightforward account of what could happen to cryptocurrencies in the future. Sketching out people's positions and how their proposed scenarios might affect the future crypto market adds a good dose of reality to my thinking. I love cryptos and Eric's newsletter, but unfortunately I'm too inept with software to follow Eric's deep dive into earning interest on what I have. Maybe next week?" – Paid-up subscriber Peggy F.
"I think Mr. Gensler will get his way, but he may not bother about gift cards. Also, he may not be harsh on the [U.S. Postal Service] even though the postage stamps are promissory notes to deliver your mail. In fact, a Forever Stamp appreciated in value from 44 cents in April 2011 to 58 cents in August 2021 (up 31.8%), while CPI-Urban went up only 21.6% during the same period." – Paid-up subscriber Tito S.
"I find it quite ludicrous that the U.S. SEC even entertains the thought of regulating crypto. The whole point of blockchain is that it monitors itself. Let us consider monitoring the used car market instead." – Paid-up subscriber PaulaLee F.
Regards,
Mike DiBiase
Atlanta, Georgia
September 16, 2021