These Former 'Zeros' Are Soaring
Another sign that deflation is ending... And inflation is stirring... 100% chance of recession next year?... These former 'zeros' are soaring... Get your free summary of Porter's Big Trade research...
Editor's note: The Stansberry Research offices will be closed on Thursday and Friday for Thanksgiving. We'll resume our usual business hours on Monday, November 28. Enjoy the holiday.
These charts say deflation is ending...
Over the last couple months, something important has happened.
As you may know, the Producer Price Index ("PPI") is an economic indicator used by the United States and most of the world's developed economies. Previously known as the Wholesale Price Index, this indicator measures the average changes in prices received by producers for their output.
Because rising producer prices often lead to rising consumer prices (which are how most economies measure inflation today), the PPI is considered a "leading" indicator of inflation.
For the past several years, producer prices in the most of the world's largest manufacturing and exporting countries have been stagnant or falling. This "deflation" (falling prices) helped keep a lid on consumer prices here in the U.S. and elsewhere.
But suddenly, that could be changing...
As you can see in the following charts, the PPIs of the world's five most important production economies – China, the U.S., Japan, Germany, and South Korea – have been moving sharply higher.
These measures have already turned positive in China and the U.S...
They are about to turn positive in Germany and South Korea...
And even Japan's PPI – which has been relatively weak of late – appears to have bottomed...
If this trend continues, it's likely only a matter of time before consumer prices – what most people recognize as "inflation" – begin shooting higher, too.
Of course, higher price inflation doesn't necessarily mean economic growth will improve...
According to mainstream economic thinking, rising prices should lead to higher wages and a tightening job market.
But as we mentioned on Monday, the 1970s experience with "stagflation" showed that isn't always the case. Instead, rising prices could be just another drag on an already weak global economy.
Inflation or not, history suggests trouble is ahead...
According to Raoul Pal – a Goldman Sachs alum and current editor of the Global Macro Investor newsletter, which is followed by many of the world's top hedge funds – history says there is a 100% chance of recession in the next year...
Pal looked at every U.S. recession in the last 100 years and discovered something unusual... As he wrote in his November issue (courtesy of Yahoo Finance)...
I recently noted that since 1910, the U.S. economy is either in recession or enters a recession within twelve months in every single instance at the end of a two-term presidency... effecting a 100% chance of recession for the new President...
I then spent some time looking at U.S. recessions in general and found that every single one occurred during, or just after, an election, without exception.
Every single U.S. recession bar one (with explainable circumstances) occurred around an election. Only two Presidents in history did not see a recession, and they were inaugurated after single-term Presidents.
In other words, every U.S. recession has occurred during or right after a presidential election following a two-term presidency... exactly the situation we have today.
Regular Digest readers know Pal isn't alone in predicting a recession next year. As Porter wrote in the October 7 Digest...
I'm 100% certain we're going to enter another recession next year...
I've been writing about the warning signs for a long time – falling industrial production, declining trade, falling corporate profits, and rising corporate defaults. And I told you that employment would roll over next. It has... That's the last nail in the coffin. Next year is going to be ugly for stocks. But it will be even worse for corporate bonds...
The fact is, most of these loans should have never been made. These companies are vastly overleveraged. And their financial condition, as a group, hasn't improved since 2010... It has gotten worse. The huge bubble we've seen in junk bonds has financed massive overcapacity, where these companies simply can't generate enough income to pay back their loans. A reckoning is coming – and it's long overdue.
These former 'zeros' are soaring...
Speaking of Porter's controversial calls, shares of Stansberry's Investment Advisory holdings Fannie Mae (FNMA) and Freddie Mac (FMCC) are each up around 100% this month.
Longtime readers will recall Porter famously (and correctly) predicted their demise in 2008 – which is why many readers were surprised when he said they were "zeros" no longer... and recommended buying shares in May.
Now that shares have taken off, the mainstream press has caught on to the bullish case Porter and his analysts discovered earlier this year. As Bloomberg reported on Monday...
Fannie Mae and Freddie Mac were taken over by the government in 2008, at an eventual cost of $187.5 billion. The Obama administration later changed the terms of the bailout, so that the government received most of the companies' profits, and it's more than recouped the bailout costs.
Shareholders have been seeking redress in court ever since – and also working furiously to change the policy and allow the companies to keep more of their earnings.
Investment Advisory subscribers were well aware of these dynamics. Here's how Porter and his team put it back in May...
Today, both companies have more than repaid all of their debts to the U.S. Treasury. Even so, the government has simply stolen all of these earnings and now refuses to give the private owners any of their normal rights.
How did the government get away with it? It lied again.
The first time the government lied to investors, it told us Fannie and Freddie wouldn't go bust. (They did.) Now, the government is lying again... about whether Fannie and Freddie will ever be profitable again. This time, it's lying about how valuable Fannie and Freddie have become. This time, the government is lying to maintain control over the financial world's biggest golden goose.
What irony!
Much of the May 2016 issue of Stansberry's Investment Advisory was dedicated to the legal intricacies of the companies' various cases around the country. Porter's team felt it was a unique opportunity...
In short, if the plaintiffs won, shares of the two government-sponsored enterprises ("GSEs") would be worth nearly $20 apiece. This represents nearly a tenfold increase over the share price back in May. On the other hand, if the government prevailed, shares would go to zero. As Porter's team explained at the time...
Let's get one thing straight: This is the mother of all speculations. It is not for your rent money...
While we think the plaintiffs (shareholders) will prevail, you need to understand this fact: Under the third amendment that currently governs the GSE bailouts, there will be no profits left over to ever pay common-equity holders...
However, the plaintiffs have a great case and a great shot of overturning the amendment that blatantly stole their property. Herein lies our opportunity. Fannie and Freddie shares currently trade around $1.75. That's less than one times earnings – a valuation typically reserved for companies in grave danger of bankruptcy. In other words, the market has priced these shares as if the plaintiffs have almost no chance of winning.
Two weeks ago, when Donald Trump was elected president, the market suddenly realized that its "dead man walking" assessment of the GSEs was unnecessarily harsh... which has led to the recent meteoric rise in shares.
Our colleague Bill McGilton – the resident lawyer on the Investment Advisory team – shared his latest thoughts on these developments in a private e-mail...
We're still waiting for a decision from the D.C. Circuit Court... The result of that decision will still drive the stock. But, a negative decision now is not necessarily fatal...
Porter always said that this was going to play out in the court of public opinion. And he's been absolutely right. The move higher in the stocks is an acknowledgment of a new administration's power to take a different course in terms of the net worth sweep agreement. Perhaps a new administration will breathe new life into the GSEs, or at least treat shareholders fairly.
That would be highly beneficial to shareholders... The potential is for hundreds of billions of dollars to be disgorged from the U.S. Treasury and returned all or in part to shareholders. For now, it's a wait-and-see situation. But definitely a positive development for the stocks.
Stansberry's Investment Advisory readers are up 83.2% so far. Congrats to Porter and his team on another bold call.
Get your free summary of Porter's Big Trade research...
One last note before we sign off tonight...
Some folks have asked if we could give them a concise summary of all of Porter's Big Trade research in one place. We're happy to report we now can...
We've compiled all of Porter's critical writings from the past couple of months on this idea into a single PDF document you can access at your leisure. You can even print it out to read offline.
Click here to view it now.
New 52-week highs (as of 11/22/16): Automatic Data Processing (ADP), American Financial (AFG), WisdomTree SmallCap Dividend Fund (DES), ProShares Ultra Oil & Gas Fund (DIG), iShares Core S&P Small-Cap Fund (IJR), Microsoft (MSFT), PowerShares S&P 500 BuyWrite Portfolio Fund (PBP), PowerShares High Yield Equity Dividend Achievers Fund (PEY), iShares MSCI Global Metals & Mining Producers Fund (PICK), Ritchie Bros. Auctioneers (RBA), Gibraltar Industries (ROCK), VanEck Vectors Russia Fund (RSX), and W.R. Berkley (WRB).
Lots of praise and several questions in the mailbag today. Let us know what's on your mind at feedback@stansberryresearch.com... and have a wonderful Thanksgiving holiday.
"P.J. O'Rourke on giving thanks... Once again, a very enjoyable read.
"As far as getting old goes, I agree I wouldn't want to be young again and make the same mistakes and go through the same painful experiences again. However, age and looks of 20 with the knowledge and experience of my life to date (well past 18) would be great.
"And here's one to add to the list: Thankful for P.J. O'Rourke's insightful and entertaining columns." – Paid-up subscriber B. Ellis
"Thank you for all of your great investment ideas. I have profited handsomely from many of them. Keep up the good work!
"Thank you also for putting P.J. O'Rourke in your Digest, he makes many interesting comments on where we have been and where we are going..." – Paid-up subscriber Gregory H.
"With the coming crisis & defaults, won't the bonds in Credit Opportunities be at risk?" – Paid-up subscriber Ed Fisk
Brill comment: The short answer is no... As Porter has explained many times, bonds are binary: You either get paid in full or the company defaults.
Porter and his analysts only recommend bonds they're confident will not default. And they only recommend those bonds when their prices and yields are worthy of investment.
If you know the company can pay you back, what happens to a bond's market price simply doesn't matter.
"First, thanks for the education. Now, a little confused here. I'm getting mixed signals – on the phone with one of your people, I was told I can buy puts in my IRA with only a level 2 options account. In your missive about options, I believe you stated most brokers would only allow those trades with level 4 clearance. My Scottrade guy says I'm not approved for that action.
"How can I utilize my meager account to buy long dated puts as per The Big Trade?
"Thanks again, investor in training." – Paid-up subscriber Michael R.
Brill comment: Unfortunately, the answer depends on your broker. But our research suggests most brokers will allow you to make these trades in retirement accounts. However, more advanced options trades – such as selling naked options – typically require margin approval, which is often prohibited in these accounts.
Regards,
Justin Brill
Baltimore, Maryland
November 23, 2016