We Can Already Hear the Hate Mail Coming

We can already hear the hate mail coming... A real 'trade war' could be days away... More on the breakdown in high-yield bonds... A huge opportunity you don't want to miss... In the mailbag: Porter clears up some confusion...

Editor's note: Our offices are closed tomorrow in observance of Independence Day. We'll return to our normal publishing schedule on Thursday. We hope you enjoy the holiday.

We reluctantly begin today with a topic that has led to more angry feedback than any other of late...

The rising risk of a "trade war" with China.

While we've seen plenty of rhetoric from both sides, the fight has been mostly symbolic so far.

President Donald Trump's tariffs on steel and aluminum imports earlier this year weren't directed specifically at China. And China "retaliated" with tariffs on just $3 billion of U.S. imports in response.

But that could be about to change...

This Friday, the White House is set to roll out 25% tariffs on up to $50 billion of Chinese imports. China has already said it plans to respond in kind, to which President Trump has already promised to levy additional tariffs in return.

In short, we could be just days away from the start of a full-blown, "tit for tat" trade war from which there is no easy return.

This is concerning...

You see, even if you support the president's hard stance on trade – and believe he will ultimately succeed in balancing the U.S. trade deficit and bringing jobs back to America – it could be years before any of these potential benefits are seen. But the immediate implications are overwhelmingly negative.

Many consumer prices will rise, perhaps substantially. The U.S. economy will slow. Jobs will disappear.

This isn't fearmongering. It simply can't be any other way...

Trade restrictions raise the cost of goods and services. Producers and consumers must spend more for the same items. The additional money spent on these items is money that otherwise would have been saved, invested, or spent on something else. Some industries and workers may benefit at the expense of others, but we all end up worse off overall.

And if you believe any of this will be good for the stock and bond markets, you're likely to be extremely disappointed.

In the meantime, we're already seeing some warning signs for the markets...

Last week, the widely followed Dow Jones Industrial Average broke below its 200-day moving average ("DMA") for the first time in nearly two years.

Despite rising back above this level briefly on Friday, it has closed below its 200-DMA every day since. As our colleagues Ben Morris and Drew McConnell explained to readers on Tuesday, this is a potentially bearish sign.

Yesterday, we noted another potential warning sign: High-yield corporate debt – or "junk" bonds – just broke down to a new yearly low. In today's edition of DailyWealth Trader, Ben and Drew took a closer look at this warning sign as well. As they wrote...

Junk bonds are interest-bearing loans issued by companies with weak financial positions. Because the risk of these companies not paying investors back is relatively high, these bonds pay higher interest rates than the bonds of financially strong companies.

Investors are attracted to junk bonds because of their yields... but only when they're confident in the health of the economy. After all, a high yield isn't worth much if the company can't repay your principal (the amount you paid for the bond).

In this way, junk bonds are a good gauge of investors' appetite for risk. When folks are confident in the economy, they buy more junk bonds and prices rise. But when folks are worried about the economy, they often sell these risky assets first.

One of the simplest ways to track junk bonds is with the $14 billion iShares iBoxx High Yield Corporate Bond Fund (HYG). The fund holds a basket of more than 1,000 corporate bonds with Standard & Poor's ratings of "BB" or lower. That's the cutoff that qualifies them as "junk."

Like us, Ben and Drew have been keeping a close eye on HYG for months...

Back in March, they noted that HYG had been "diverging" from stocks since last summer.

In May, they showed readers that HYG had been consolidating, and they shared a specific "trading plan" based on its next big move. As they explained this morning...

Back then, HYG was stuck trading in a sideways range. Here's the chart we showed you at the time...

Our trading plan was simple...

If HYG broke out to the upside, it would have been likely that the pullback in junk bonds was over. And we would have expected the stock market to rally.

If HYG broke down, we would be more cautious in stocks. And we'd consider adding more short positions as insurance.

It now appears that the latter scenario is unfolding...

HYG closed at a fresh low yesterday. While they're not yet ready to turn bearish, they believe risk is rising...

Yesterday was the first day HYG closed at a new low. Shares could still "snap back" and move higher in the coming days. These fake-out breakdowns have gotten a lot more common in recent years. So we're not making dramatic changes to our trading plan just yet.

Here's what we'll do... If HYG continues to fall, it will be a big warning sign for stocks. As always, we'll stick with our stop losses on current positions. We'll recommend fewer bullish trades. And we'll likely add more short positions, which can benefit as stocks fall.

If HYG snaps higher, we'll continue to watch for another breakdown to a new low. That would confirm yesterday's warning... And in that case, we'll follow the above plan.

If it turns higher and breaks out of its trading range to the upside, we'll turn more optimistic toward stocks. We'll continue trading as usual, both selling options and buying stocks.

In short, they believe the odds are now in favor of the bears. The risk of a larger correction is rising. But like us, they don't recommend getting too bearish just yet...

A bigger drop in the market may not be far off. But you don't need to sell all of your stocks and hold only cash.

Instead, stick to your stops. Err on the side of caution with new trades. And keep an eye on junk bonds for confirmation (or a reversal) of the breakdown.

Of course, a big decline in HYG wouldn't just be a bearish sign for stocks...

It would also be a strong indication that the massive credit-default cycle we've been warning about is now underway.

We believe this cycle will create the biggest wave of corporate bankruptcies in American history... and many investors in high-yield corporate debt – and even some investment-grade debt – are likely to suffer massive losses as it does.

But again, as we've told Digest readers again and again over the past couple years, this crisis doesn't need to be a crisis for you personally.

Instead, it could be the single best opportunity you'll ever have to make a literal fortune in the markets. And we believe the absolute best and safest way to take advantage of this opportunity will be buying discounted corporate bonds for pennies on the dollar.

This is exactly why we launched Stansberry's Credit Opportunities... and there has never been a better time to join us. Click here to learn more about a subscription.

New 52-week highs (as of 7/2/18): none.

Another busy day in the mailbag: Thoughts on stock buybacks... confusion about the risks and opportunities in high-yield bonds... and more on America's savings crisis. As always, send your notes to feedback@stansberryresearch.com.

"[Regarding the] June 27th Stansberry Digest, on executive selling after buyback announcements: Excellent work. I find it extremely interesting that you guys have chosen to do this type of work. It characterizes the executive mindset for your readers. Not to say that there isn't always greed but it is interesting for your customers to evaluate and get some specific insight into the current American mindset. I feel it gives me a chance to make this evaluation of leadership mindset and that helps me prepare for the future ramifications of such. It just might be one of the most valuable pieces of information you have found.

"I commented above on greed as I started that comment but on the other side these executives like to make money and undoubtedly they are some of the best at that within the corporate environment. So there certainly is nothing wrong with them playing the game to the best of their abilities and that ability also would be demonstrated with respect to timing of selling of assets. Of course in selling they could be wrong, things could go higher. On the other hand I would strongly suspect that these guys watching and guiding their companies to compete might just be the best possible insight into where the market is going. Thanks again." – Paid-up subscriber Al M.

"Hello, your DailyWealth Trader email today warned of a breakdown in high yield (junk) bonds. What does this mean for the bonds recommended in Stansberry's Credit Opportunities? I recently added that service and have purchased a few of the bonds recommended in the portfolio. It gets a bit confusing when you are touting the lower risk/higher reward of junk bonds but then warn everyone that the junk bonds market is in trouble. Please clarify. Thanks." – Paid-up subscriber Eric M.

Brill comment: Stansberry's Credit Opportunities editor Mike DiBiase answered this question in detail in the May 2 Digest. In short, while we expect many high-yield bonds will default over the next several years, not all of them will... And the Stansberry's Credit Opportunities team only recommends those bonds that their extensive research shows are safe.

If you missed Mike's response, be sure to check it out here. We'd also encourage you to go back and read the Stansberry's Credit Opportunities Primer you received as a new subscriber, which explains more about the intricacies of the bond market.

And again, those readers who aren't yet Stansberry's Credit Opportunities subscribers can learn more about a subscription right here.

"How often do I need to repeat this... if you were born poor, or an immigrant or a minority, do you really, honestly feel that your opportunities would really be the same as those you possess now? Of course they wouldn't but since this doesn't affect you now, it is easy to condemn others for wanting to help those less fortunate.

"Let's get this straight from the beginning. I was born to middle or lower middle class, was given nothing extra by the government, worked my way through school (multiple degrees), constantly and forever lived beneath my means and today, a many times over multimillionaire, living in a seven figure house, with no worries for the future and able and willing to give nice inheritances to my two children. And yet, I have no issue with paying more taxes, nor do I feel that the few who cheat the system and are self-called victims, should color my perspective on how we the fortunate think about how all (including the government) can be helped by our aid.

"Your own individual luck (and purely luck) that you didn't end up in poverty from childhood only exists because of your lucky sperm and has almost nothing to do with your 'hard work' or 'going without'. You had and have much greater opportunities than those below you and for the life of me, I can't figure out why so many of you are so stingy, and hard- hearted, and fear that you just might have to help those who weren't so lucky.

"Don't tell me what it takes, I have been to the wall and did the things I needed to do to succeed. And yet I still have great empathy for those who did not have the fortune I had in life. I say, learn to share some of your goodwill and stop being so cheap and high handed. I am living proof that one can greatly succeed in our country and still have enough compassion to give lots to the classes that didn't have my good fortune.

"There is nothing special about your money, believe me. And all the governments that have existed over time that made that the centerpiece of their values, have failed and failed miserably. Most you claim to live in the greatest country in the world, ever stop to ask yourself how we got there? Read a little history and see what the immigrants (probably your ancestors) did to make our country what it is; read a neutral history (not right wing) on the impact social security, on the WPA, and on the tons of generosity put forth not only by private citizens (think the public library system: Morgan philanthropy) but also the government in times of need. You disparage all the 'help' lower classes get but I find it strange and somewhat stupid you never mention the incredible agricultural subsidies that keep the ag business afloat. Those subsidies were originally intended ONLY for small, privately owned farms but sure enough, the upper classes found the loopholes (e.g., buy up thousands of small private farms, form a cooperative and then, as a major corporation, apply for the water rights and the subsidies that follow fallow years) and are today the beneficiaries of this government [largesse]. How come you don't bring this up?? That's government spending supporting the upper class... how come this didn't qualify to be looked at for a hand out? I suspect you feel that you don't bite the hand that feeds you. And if you wish, I could go on with pages of similar examples but I know you wouldn't want to hear that.

"So don't be so sure of your 'facts'. And get out of your system that money determines value. And for heavens sake, don't write back and eviscerate me for my values. I am the president of a multi- million dollar company (been president of several additional companies), have tons of money in the bank, no worries for the future, 5 degrees from three colleges. I highly doubt most of you have had more success financially. But my claim to fame is I care about those less fortunate. Why are you unwilling to see the bigger picture?" – Paid-up subscriber David A.

Porter comment: David, I think there's been a significant misunderstanding.

I doubt any of our subscribers object to private charity. And I would wager that on a combined basis, we collectively contribute millions – or hundreds of millions – to charity every year. I don't publicize any of my charitable gifts. Nor do I imagine do most of our subscribers. But I certainly recognize how lucky I've been in my life. Simply to have two parents who loved me has made all of the difference in the world. (My father adopted me.) And I've made substantial donations to charities I believe will produce measurable and material benefits to our society, without creating any moral hazard or dependency.

However, there's a vast difference between supporting the select private charities of your own choice and being forced by law to hand over significant financial resources to the government – especially when the real goals of those gifts are inevitably political.

But I don't want to bother trying to argue with you about the efficacy of government-led charity. Rather than list the hundreds of examples of government ineptitude and the obvious negative, unintended consequences (generations of dependency), I'd simply urge you and anyone else to consider the morality of using force to organize charity.

There's no way to square that circle.

As everyone should know, few things that are truly a net positive for society begin with the threat of force.

Regards,

Justin Brill
Baltimore, Maryland
July 3, 2018