Welcome to Debtors' Prison
The dead get checks and the living get screwed... Politics, as always... Welcome to debtors' prison... The banks raise cash... The cloud prints money, too... How to survive the Battle for America... Your 'screams from the heart'...
First, the dead received $1.4 billion in stimulus checks...
We've mentioned this fact in brief before. But the absurd and disconcerting details – which keep popping up on our radar – will never lose their significance...
Back in April – in a rush to get the Congress-approved "stimulus" package out the door – the IRS sent out 1.1 million checks to dead people... totaling $1.4 billion.
It took about six weeks for any decision-maker to put a stop to what was happening, once word started getting out. The Government Accountability Office ("GAO"), a watchdog group that first reported the size and scope of the errors, said last month...
The mixup happened because the Treasury Department and its Bureau of the Fiscal Service – which distributed the payments – do not have full access to the death records maintained by the Social Security Administration and used by the IRS.
Stimulus payments were also determined based on 2018 and 2019 tax returns, meaning Americans who died after filing those returns could have still been included.
On top of all this, the IRS then had the gall to ask for the money back, even though the agency had no way of enforcing – or even giving any directions – to next of kin or anyone else to mail back a return...
Those who have passed away certainly can't do it themselves.
You won't find a brighter example of government waste than mailing direct cash payments to dead folks. But, of course, it's not the only example we can cite...
Today, the living are getting screwed...
The government is about to slice a week off millions of Americans' unemployment payments.
You've probably heard a lot by now about July 31. That's the date when the $600-per-week federal unemployment benefit is supposedly set to run out. The government instituted the extra benefit back in April as a way to kick-start the economy in the midst of the COVID-19 shutdowns.
Will Congress extend the benefits? What will it do to the country and economy if it does or doesn't?
Whatever the stance, everyone with a stake and interest in America's economy – from well-paid Congress members to poor people trying to make ends meet – had circled that date as an important one.
Except July 31 is not actually the date...
You see, it seems no one in Congress cared to look at a calendar – or actually knows how real people live – when they made the $2.4 trillion CARES Act official. Stansberry Venture Technology editor Dave Lashmet sent along an article from Slate with the details...
It turns out everybody circled the wrong day. The problem is that July 31 is a Friday, and states pay unemployment benefits based on weeks that end on a Saturday or Sunday.
As a result, the last week of this month won't actually be covered by the $600 top off. The extra cash will disappear after July 26 in every single state.
Even if the benefit is extended beyond the end of this month, checks may take weeks to arrive given the cumbersome logistics of the unemployment system. (Hello, blockchain, where are you when we need you?)
We don't know precisely how roughly 20 million unemployed people getting $600 less will hurt the economy...
Some people, of course, have been making more money by not working and taking unemployment payments rather than looking for work. In those cases, the expiration date may actually spur some job-seeking.
But for many others, it may simply mean more pain... And the flub certainly doesn't help anyone trust our elected officials more.
Even worse, the people who put these policies together should have been aware of the issue for weeks and months...
Several media outlets reported on the situation weeks ago, and the Department of Labor actually spelled it out very clearly in a document issued all the way back on April 4.
So, on balance, the message to us from the government is this... We're not really thinking of you.
They're instead thinking about appearances and politics, as always...
Most Democrats and Republicans have not agreed on much lately. But in the past few months, they've aligned on these big points (in addition to going on vacation)...
More "fake money," meaning more Federal Reserve-created debt that gooses stocks in the short term, yet sticks on the central bank's balance sheet for generations to come...
And now, they're talking about more, more, more. (Maybe this time government officials can at least get some details right... like citizens who are still alive and the correct dates.)
More money to be created from nothing... More likely administrative gaffes that no one cares about until it's too late... More nonsense.
Now, the market may be signaling its concern about our path toward a debtors' prison...
The government leads the way. And many public companies and people follow... for better or worse.
Credit-card debt... college debt... auto debt... Paycheck Protection Program ("PPP") debt (a new one) for the banks... home debt... debt on debt. It's all at record levels.
Meanwhile, a lot of folks are wondering about the direction of the economy and stocks in the second half of the year should COVID-19 persist and a recovery not be as strong as once thought.
We'll take a look at two different sectors to make a point today about the dangers of relying on borrowed money... and the benefits of not doing so. Maybe someone at the U.S. Treasury or the Fed might read this and remember simpler times.
One is a business – the banks – that relies on all debt. The second is a sector of business – cloud-based Software as a Service ("SaaS") – whose model includes no debt.
The Nasdaq Bank Index, for instance, is down nearly 40% this year. It hasn't recovered from March's initial panic drop. In the meantime, the leading SaaS companies are making gobs of cash and have outperformed the benchmark S&P 500 Index by five times since the start of the year.
This narrative says something.
As noted macro investor and RealVision founder Raoul Pal – who regular Digest readers and listeners to Dan Ferris' Stansberry Investor Hour podcast may recognize – put it recently in an interview...
One is zero debt, massive cash flows. That's the SaaS business model. The other side is the opposite side, it's all debt. Maybe that's the signal [the market] is giving. We don't want anything to do with debt.
Let's first look at the big banks, the nation's biggest lenders...
We can watch what they're doing for clues on how the economy is doing.
The banks reported second-quarter earnings recently. And as Dr. David "Doc" Eifrig wrote in his July issue of Income Intelligence, sent to subscribers last week, "the results have been mixed."
JPMorgan Chase (JPM) had a good quarter... with revenue 9% higher than expected, mostly from a surge in trading revenue. But the bank also set aside $8.9 billion for expected losses ahead.
Goldman Sachs (GS), where Doc used to work as a trader, posted fantastic results... with trading revenue again driving results. Bond-trading revenue surged almost 150%, and equities-trading revenue rose 46%.
But as Doc wrote, Wells Fargo (WFC) is on the other end of the spectrum...
The third-largest bank in the U.S. posted a net loss of $2.4 billion for the quarter, its first quarterly loss since the Great Recession. Wells Fargo set aside $8.4 billion in loan loss reserves because of the coronavirus pandemic, which was more than expected.
CEO Charlie Scharf said, "Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter."
The takeaway here is that we're not out of the woods yet. Banks are preparing for losses, which could mean continued volatility in the months to come.
And the expected losses are tied directly to bad debt that the banks don't expect will be paid back. As Doc wrote last week in his free daily Health & Wealth Bulletin...
With millions out of work, it was expected that some of the banks' loans would go bad... But with Wells Fargo setting much more money aside than analysts expected, it looks like the losses could be much worse than anticipated.
Wells Fargo even told investors it would slash its dividend.
And beneath the individual headlines about banks raising cash is a concerning collective number...
The five largest lenders in the U.S. – JPMorgan Chase, Wells Fargo, Bank of America (BAC), Citigroup (C), and U.S. Bancorp (USB) – say the financial stress caused by the pandemic could cause borrowers to default on a total of $104 billion in debt.
JPMorgan Chase, for one, is predicting the bank could have to cover $32.1 billion in bad loans. That's nearly triple the $13.2 billion that it was predicting a year ago.
In other words, that $600 extra benefit, even for one week, counts big-time in the grand scheme of things when it leads to folks defaulting on their debts.
While a lot of stocks have recovered significantly from their March lows, banks have not. That reflects the concern for prolonged economic impact from the COVID-19 pandemic... or at least that the recovery won't be as strong as a lot of people envisioned a few months ago.
As you can see in this chart from Doc's latest Income Intelligence issue, Wells Fargo is down more than 50% this year, JPM is down almost 30%, and Goldman Sachs is down around 5%...
And financial stocks in general remain down more than 20% for the year.
On the other hand, the companies with loads of incoming cash are doing quite well...
These are the companies that have little to no chance of heading to debtors' prison.
We're thinking specifically about the cloud-based systems and SaaS companies that have experienced about five years of growth in five months...
For example, we're referring to software platforms like DocuSign (DOCU) or Zoom Video Communications (ZM) and cloud giants Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL), which provide the physical systems for this software to run on.
These companies are allowing business to happen and people to connect... without exposing anyone to virus-filled micro-droplets that can linger in the air.
And not only are these "future of work" companies, but they're also incredibly capital-efficient, which Digest readers know we love. Their products can be used at scale, with largely fixed costs...
It's not like they're spending money to build a new car to turn a profit, or make a loan and hope the interest and principal is returned like the banks.
As we wrote in the June 17 Digest, these companies just need to sell their products once to make a ton of money from recurring revenue...
The costs are largely fixed, profits tend to be spread out across months or years... and revenues tend to be extremely "sticky," with renewal rates of more than 90%.
The share prices of cloud-based companies have absolutely outperformed the market and taken off this year.
The Bessemer Venture Partners Emerging Cloud Index tracks the performance of public companies that rely heavily on cloud-based software.
Adobe (ADBE), Salesforce (CRM), PayPal (PYPL), and Shopify (SHOP) are the heaviest-weighted companies in the index. We were tipped off to the index by the anonymous and incredibly smart and insightful blogger John Street Capital.
The chart looks a bit different than the one of the banks...
The companies in the basket of stocks are up almost 50% year-to-date... compared to up 15% for the Nasdaq Composite Index, down about 1% for the S&P 500, and down 8% for the Dow Jones Industrial Average.
More on this from our June 17 Digest and research from our colleague Mike DiBiase...
Software is nothing more than computer code. The "cost" of producing another copy of a software program is next to nothing. It's virtually the same cost to produce 1 million copies as the cost to produce one copy.
You can see this in their gross margins – the profit after subtracting all direct costs of generating sales. The average gross margins of all software companies in the S&P 500 last year was 81%. That's almost double the 44% average for all other industries.
This is important. Producing high gross margins means more is left over to go to the bottom line. It translates into high profits. And because software companies' capital needs are low, most generate lots of cash.
No matter what's done with the cash, it benefits shareholders. In virtually any period you look at, software companies produce market-beating returns.
Stansberry's Investment Advisory editor Alan Gula explained why this business model is so important in last Monday's Digest, when he detailed three ways that investors can gain an "edge" in today's market. He noted that our first SaaS recommendation, made in October 2019, is up roughly 200%, and explained that...
The market still doesn't fully understand or appreciate capital efficiency. So the outperformance of the stocks of these special businesses is an anomaly that persists.
This idea lies at the heart of so much that we believe at Stansberry Research...
As we wrote in the June 3 Digest, a Battle for America is playing out before our very eyes today.
A virus is still swirling around the country... We've recently seen riots in the streets with police brutality as the flash point... The wealth gap between the rich and the poor has never been greater...
And the astronomical rising debt levels in our country – which have only ballooned since COVID-19 hit our shores – have a lot to do with the angst we see today, as well as the anger people are feeling.
At the same time, the government continues to believe that printing money – even for dead people – is the solution to our problems. In 10 days in March, the Fed created and added more money to its balance sheet than it did in the previous 30 years before the financial crisis of 2008 and 2009.
Trillions today compared to "only" $700 billion, pre-financial crisis.
It all reminds us that our founder Porter Stansberry wrote a book years ago by the very name, Battle for America, that predicted a lot of what's happening now. If you haven't read the book yet, you can grab an updated electronic copy here for just $4.95.
We urge you to check it out. The advice in it is as valuable today, if not more, than when he first wrote it.
In the book, recently updated in its fourth edition, Porter details how we've arrived at the world we're living in today – with unrest, bankruptcies, and loud calls for debts to be wiped clean – and why we'll reach a breaking point this November with the presidential election.
More important, Porter also shares how individual investors can prepare their own portfolios accordingly for the crisis and the fallout. The strategy has a lot to do with what we've talked about today...
Cash-generating companies that you can buy and own in the long term that won't put themselves, or you, into debtors' prison.
Again, you can get an electronic edition of Porter's book right here for $4.95. And Stansberry Alliance members and subscribers to our flagship Stansberry's Investment Advisory can find the latest edition right here.
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Our mailbag is overflowing with feedback on Dan Ferris' must-read Friday Digest. We'll begin with some of your replies today and will share more throughout the week. In the meantime, as always, e-mail us your comments and questions at feedback@stansberryresearch.com.
"One of the best written Friday Digests ever. Well done, Dan." – Paid-up subscriber Donald L.
"Hi Dan, You have outdone yourself. What a riveting Digest – Porter could not have done any better. Well done. I've always been a fan but you continue to grow in your financial writing – getting better and better." – Paid-up subscriber David R.
"Fantastic piece of writing! Perhaps the best ever in such a format, and far too kind to those you targeted." – Paid-up subscriber Bruno W.
"Dan and all at SR: Timely and spot-on essay today. We find ourselves screaming inside our hearts daily, wondering what our republic, culture and lives will look like next as this insanity takes root. How did our world change so much for the worse? At first, slowly, then all of a sudden! Thanks for the voice of reason amid the unreasonable." – Paid-up subscriber Dave S.
"Dan, you are an insightful writer and enjoyed so much your Stansberry article about our world, the utter craziness of Tesla trading, the wonderful movie Princess Bride, which I've watched many times and always enjoy. I have been a Stansberry client for many years... faithfully reading a variety of interesting, informative articles by several contributors, and love American Consequences as well.
"At 82, survived a devastating divorce two years ago, and trying to stay afloat and rebuild what is left of my life is a major challenge. I need all the wisdom and perspective Stansberry provides. I will remain a faithful and loyal subscriber until the day I die, which I pray is not any time soon." – Paid-up subscriber Helen S.
"Dan, When nobody talks about the 10,000 pound gorilla in the room, the Federal Reserve's enormous privilege of creating money and distributing it unequally, I want to scream out loud. Thanks for writing." – Paid-up subscriber Joseph R.
"Congress and the U.S. government are reactive, not proactive. They wait until there is a crisis before doing anything about it. Right now we need to worry about the postal service. They are tightening their belts, but it's just delaying the inevitable, the closing of the service. No voting, packages, bills, checks or any correspondence coming through.
"We won't have voting fraud, just election fraud! Wake up people! Write or call your representatives. The protests get their attention because of the sheer number of people voicing their opinions. There are no easy answers for the postal service. But does anyone have any suggestions on how to make it better?" – Paid-up subscriber Frank T.
"Dan: Great line, and one I'll steal for my own use. So, what's my scream? My scream is having worked hard all my life, saved much more that I could have, gotten very lucky with my business sale and achieved financial success by it all, and, yet, have as much worry over having a secure retirement life as do others who did the exact opposite." – Paid-up subscriber Dan C.
"Dan, I am 'screaming in my heart,' but cheering aloud for the BEST DIGEST EVER. Thank you for the antidote to the 'iocane' powder of socialism – a straight shot of Truth." – Paid-up subscriber Brian R.
All the best,