The Real Root of Our Debt Problems

The craziest loans yet: online, subprime personal loans... You now have a huge advantage... The real root of our debt problems... How to make 16 times your money on Hertz...

There won't be any more numbers today...

Or Austrian economic theory. No more charts or data about corporate-default rates and declining recovery rates.

I (Porter) have done all I can to help you understand why, over the next three years, investors around the world will lose several trillion dollars. These credit losses will be by far the most powerful force in the equity market for at least the next three years and potentially longer.

Like I said, though, I don't want to dwell on the numbers today.

I've gone over all of that stuff already. You know the problem... in some detail.

Interest rates were manipulated far too low, for far too long. For more than five years, U.S. corporations borrowed more than $1 trillion... And about 25% of those loans were made to "junk" rated companies. A far less recognized problem was the "stealth" deterioration of investment-grade debt, as BBB-rated companies (the lowest tier of investment-grade debt) came to make up more than 30% of the market. It's these BBB-rated "time bombs" that will eventually cause the biggest problems, as highly leveraged financial institutions own these bonds.

I've done my best to give you a huge advantage...

You're aware of these problems. You can follow rising default rates. And you won't be surprised when losses on corporate debt are much worse than expected because you know why recovery rates have already collapsed. You've acquired a lot of knowledge and expertise. And I'm sure it will prove very valuable to you over the next few months.

But... there's something more. Something I haven't spoken about yet.

Avant is a new, Chicago-based, consumer-lending company...

It raises money from investors and lends the money to consumers. It's a simple business... or it should be. It's basically performing the same function as a community bank, but instead of paying for deposits, it's just paying investors for capital. Nothing too complicated. But wait...

Avant is in the online "peer to peer" lending sector. It makes loans to people who come to its website asking to borrow money with zero collateral. These weren't small loans, either. The firm's business model was based on making $35,000 personal loans with two- to five-year maturities.

So I'll ask you...

Would you lend $35,000 to someone you've never met before, with no collateral?

I wouldn't. It takes a lot of character to pay back debts on time. Most people can't do it. But let's assume for the sake of this argument that you were going to make loans like that. Wouldn't you at least insist on a proven history of timely repayment and a high credit score?

Not Avant.

In fact, that's what was so "new" and exciting about these peer-to-peer lending companies for investors. These firms found a new way to create subprime debt. Avant targeted borrowers with the lowest credit scores. They planned to make up for the risk of these loans by charging interest rates up to 36%.

You might wonder who in their right mind would borrow money at a 36% annual rate. Well, it's the same kind of person who from 2001 to 2008 was using his home as a kind of ATM and "refinancing" every year into yet another subprime mortgage. I suspect you know the type.

It's impossible to expect anyone to repay these loans. But why would Avant care? You see, to facilitate even more lending, Avant not only raised capital from investors to make loans, it also packaged these loans and sold them to investors. Some would say that's modern finance at its best. These securities "diversify" the risk of the loans. They allow more people to have access to credit... to build more homes... to buy more cars... to help with a medical emergency. Isn't that all good?

No.

Avant makes loans it knows people can't repay...

It then packages this financial toxic waste and sells it to investors by promising its "algorithms" are capable of finding subprime customers that are really saints. It's all lies.

But what influence has this had on our economy? A lot more than you may realize.

Avant alone has made almost $4 billion in loans. The online peer-to-peer lending sector as a whole has made something like $100 billion in loans during this cycle. Most people have no idea how big this space has become. The largest company in the sector, Lending Club (LC), went public in December 2014. Its shares soared 67% on its first day of trading and, for a time, the company was worth $9 billion, making it the 14th-largest "bank" in America. The stock has gone straight down since... and it's now down about 80% from its post-IPO peak.

What's happening with all of this debt?

You'd assume that if we really are entering a big credit-default cycle that this kind of debt would turn bad first – just like subprime mortgages did in 2007.

Take a guess. What do you think is happening right now with the securities that Avant made with its subprime, unsecured, online consumer loans? As Bloomberg reported yesterday...

A group of online consumer loans that were packaged into bonds is going bad faster than lenders and bond underwriters had expected, the latest sign that some startups that aimed to revolutionize the banking industry underestimated the risk they were taking.

Delinquencies and defaults are reaching key levels known as "triggers" for at least four different sets of bonds... Avant and its underwriters, for example, are going to have to begin to repay three of its asset-backed notes...

Online loans have shown other signs of weakening. Lending Club last month raised interest rates and tightened its standards for at least the second time this year after seeing higher delinquencies among its customers, especially those with the most debt.

The first test of any loan...

When J.P. Morgan (the man) was called to testify before Congress about the "money trust" and asked to explain why some firms received credit and some firms didn't, he famously explained that the first test of any loan was the character of the man borrowing the money...

The first thing is character, before money or property or anything else. A man I do not trust could not get money from me on all the bonds in Christendom.

Today, not only have our bankers lost all concern for character, these online, peer-to-peer lending companies were actively seeking out subprime customers. It's insane. And it's unbelievable that investors would have bought these packaged loans.

How did this happen less than 10 years after the subprime mortgage crisis? It happened because the Fed and other central banks around the world drove interest rates on virtually every asset so low that investors became desperate for yield. Any financial asset that could generate yield could find a buyer between 2010 and 2016. Subprime auto loans. "Junk" rated corporate bonds. Subprime student loans. And apparently, even subprime online personal loans.

The key to economic growth?

For most of the last 40 years, our political leaders and their puppet economists have preached that the key to economic growth is the expansion of debts and more spending. Just this morning on CNBC, I heard Larry Summers – the former Treasury Secretary under President Clinton and president of Harvard – criticize Trump's plan to eliminate estate taxes (the "death tax") by saying that ending it would incentivize people to save money, which would reduce economic growth.

Meanwhile, no human being has ever become wealthier by spending. Not a single empirical example. And no society has ever raised itself out of poverty, except by carefully saving.

But the most powerful economist in the United States – the president of Harvard University – believes that encouraging the formation of private capital is an impediment to economic growth. He argues for more government spending and the creation of even more government debt.

These policies, which have been favored by Democrats and Republicans alike, have seen our country replace one debt bubble with another for most of the last 40 years.

We've seen this happen in our economy on a regular basis for a long, long time...

In the early 1990s, the bubble was in savings and loan institutions. In the late 1990s, it was in telecom bonds and Internet stocks. In the mid-2000s, it was subprime mortgage debt. Today, it's "junk" bonds, subprime auto, student loans, and almost unbelievably, subprime online lending.

It's all unwinding, just like it always does. The only question left is... how many of these bubbles and busts will you have to live through before you learn how to take advantage of them?

Tonight, I'm going to show you how. It's not hard. It's nearly foolproof. And anyone with a regular brokerage account can participate.

I hope you'll tune in. Just go to www.StansberryLive.com. The event kicks off at 8 p.m. Eastern time.

One last thing...

I'm sure a lot of folks doubt that you can really make 10-20 times your money using our strategy. But it's not an exaggeration.

As I'm sure you know, a few subscribers have already made solid profits because of our warning about Hertz (HTZ). In the October issue of our flagship Stansberry's Investment Advisory newsletter, we explained in great detail why Hertz would be one of the first victims of the credit-default cycle. Several subscribers wrote in telling us they had shorted the stock and made close to 50%. Another subscriber told us he bought a put on Hertz and made a little more than 100%.

I asked my analysts to go back and see how much you could have made using our Big Trade strategy on Hertz. Keep in mind, we predicted Hertz to collapse before it happened. But we didn't actually recommend a Big Trade on the stock. So this example is partially hypothetical. What's important is that it demonstrates the potential of this strategy when paired with excellent fundamental research about companies at risk of a debt-fueled collapse.

If you had followed our strategy in Stansberry's Big Trade and bought out-of-the-money puts on Hertz when they were cheap, you could have bought the $22.50 strike puts expiring in January 2017 last September for about $0.10. Those puts were recently trading above $1.70 – a gain of more than 1,600%.

While I don't expect our average return to be that high, I'm certain more than a few of our new Big Trade recommendations will see gains like this. And that's why I strongly recommend you at least learn how to make these trades yourself.

Join us tonight to learn more.

It's free. Again, visit www.StansberryLive.com at 8 p.m. Eastern time.

New 52-week highs (as of 11/15/16): American Financial (AFG), American Express (AXP), WisdomTree SmallCap Dividend Fund (DES), Freddie Mac (FMCC), short position in Hertz Global (HTZ), iShares Core S&P Small-Cap Fund (IJR), PowerShares S&P 500 BuyWrite Fund (PBP), PowerShares High-Yield Equity Dividend Achievers Fund (PEY), PNC Financial Warrants (PNC-WT), Ritchie Bros. Auctioneers (RBA), and Gibraltar Industries (ROCK).

In the mailbag, the same two questions from our readers. The same two questions we've gotten again and again. What about the government? What about liquidity? Well, we know you can't be bothered to read our answers from last week. So we've taken another crack at these questions below. Enjoy.

And please, for those of you who get our new Stansberry's Big Trade materials tonight, please let me know what you think. We've worked hard to make this information unbelievably comprehensive. It's everything you need to know to trade successfully... in one place. Send your thoughts to feedback@stansberryresearch.com.

"When the credit crunch comes, a huge cry probably will arise for the government to act as a lender of last resort, and rescue the firms that need 'just a little more credit' to roll-over their debt, and thereby 'save the jobs' of all those who work at those firms. What happens to our puts when the when the government 'acts out of compassion,' and extends credit to the firms on whom we hold puts?" – Paid-up subscriber Carl C.

Porter comment: The government will act to save the banking system, especially from the fallout from the BBB, investment-grade defaults. It won't do anything to prevent junk-bond defaults. And it won't do anything to prevent the collapse in subprime auto.

There's too much "moral hazard" in bailing out bankers like Avant – folks making loans that should have never been made in the first place. But... the question is still completely irrelevant. By the time the government gets involved, the stocks in question will already be down 90% or more. The government only intervenes after the crisis has arrived, never before.

"I am very excited for your 'Dirty Thirty' – to be on the right side of an epic opportunity is well, epic! One question, if a lot of your subscribers all jump into the same put option by the thousands – at what point will liquidity dry up?" – Paid-up subscriber Jay C.

Porter comment: We're only covering huge companies that have tremendous amounts of liquidity in their options. As you'll see, we've picked companies that have thousands and thousands of outstanding options contracts. These are huge pools of liquidity.

As an example, the General Motors (GM) January 2018 $30 strike price put options have 44,000 contracts outstanding. The $28s have 19,000 more contracts outstanding and the $18s have more than 17,000 contracts outstanding.

That's the equivalent of 8 million shares of GM. Looking at the current share price (around $8), those options represent a notional value of $264 million – more than one-quarter of a billion dollars. And that's just in the out-of-the-money put options at one of the expiration dates.

A huge amount of capital is trading in these stocks' options. Everyone – every single subscriber – can get good "fills." There's plenty of liquidity.

Regards,

Porter Stansberry

Baltimore, Maryland

November 16, 2016