Why Volatility Is Soaring Today

Porter's closed-door meeting in London... This hasn't happened since October 2008... A critical update from Stansberry's Big Trade... Why volatility is soaring today... A 'sea change' is starting... 'A huge selloff must soon occur'...

Porter note: I met privately with Julian Assange today at the Ecuadorian embassy in London.

It's just across the street from Harrods. When I say we met privately, I mean we sat in a highly secure room, encased in various types of anti-bugging equipment. There were also sophisticated ambient-noise machines designed to foil long-distance microphones that can "listen" through glass. The huge metal doors that guard the front of the embassy can only be opened by a highly trained guard, who searched me for any electronic devices. He also took my passport... which I found curious.

In addition to being extremely cautious about his personal safety, Julian was also full of very insightful views about the upcoming U.S. election. The most interesting thing he told me was that Hillary has quietly garnered the support of the U.S. war party – the so-called "neocons."

These are folks, like Paul Wolfowitz, who desire to expand the projection of America's power abroad.

We also spent a lot of time discussing the WikiLeaks revelations that Saudi Arabia, Qatar, and the United Arab Emirates have all been major supporters of the Clinton Foundation. The Saudis, for example, have apparently given $25 million. Even more unusual, Assange explained that John Podesta's brother, Tony, is the Saudi Kingdom's top lobbyist, earning $150,000 per month.

As you all know, I don't vote. And I'm not trying to influence anyone else to vote, either. It's hard to imagine that the Clintons are so greedy and corrupt that they could believe they would get away with these things. But if it's true... this kind of corruption... from people at the very highest levels of the U.S. government... it's hard to fathom that any of this is legal or should be permitted.

We know a lot of subscribers may be troubled by our friendship with Assange, who spoke at one of our conferences in 2014. Assange is controversial, and we recognize that. But we think having access to the immense amount of information he and WikiLeaks can process gives our business an important advantage. And... we believe that Assange's goal of exposing government corruption all around the world is fundamentally a noble endeavor.

It's a strange world... and it's getting stranger and stranger. I'm grateful that WikiLeaks is out there shining a light on what's happening behind the scenes in U.S. politics. Support it if you can right here.

This hasn't happened since the financial crisis...

U.S. stocks just achieved a rare feat. Yesterday, the benchmark S&P 500 Index closed lower for the eighth consecutive day. This is its longest streak of declines since stocks fell eight straight days in October 2008, during the worst of the financial crisis.

Despite matching this record, the magnitude of the recent declines has been far different... In 2008, stocks lost a massive 23% over those eight days. This time, the S&P 500 has fallen just 2.9%... And none of those days included a decline of more than 1%.

But while stocks have been falling slowly, volatility has spiked higher. As you can see in the chart below, the Volatility Index (or "VIX") – commonly called the market's "fear gauge" – has soared from near its lowest levels of the year to well above 20...

What accounts for this unusual move? According to Porter and his analysts, it's a big sign of trouble ahead...

A critical update from Stansberry's Big Trade...

As we noted yesterday, a number of early Stansberry's Big Trade subscribers have been receiving "beta" issues of the service before we officially launch later this month.

The latest issue – which hit inboxes tonight – discusses this critical development in the markets this week.

Unfortunately, all available beta subscriptions have sold out, so we can no longer offer complete access to this research today. But Porter and his analysts believe this move is so important, they've agreed to share a portion of today's issue with all Stansberry Research subscribers. From the issue...

The first signs of trouble are here...

We're now seeing concrete signs of the trends that we've been expecting in the credit markets.

These trends are also igniting stock market volatility.

In the last five days, the CBOE Volatility Index (the "VIX") – a key gauge of put option premiums, often used as a measure of fear in the market – has moved from around 14 to almost 22. That's roughly a 50% move. That's unusual. Volatility doesn't normally move so much, so fast.

This is the first large spike we've seen in "fear" in a long, long time.

Why volatility is soaring today...

Typically, when volatility spikes, it's in response to some obvious event. For example, Porter's team notes volatility made a big jump back in June following the "Brexit" vote. Stocks plunged sharply and then bounced back. But again, that hasn't been the case this time...

Stocks have been drifting lower for three months. But there was no particular reason for such a huge move higher in volatility.

Over the past five days, the Dow is only down about 1.5%. The S&P 500 is down about 2%. Those are very minor drawdowns. They wouldn't normally cause a virtual panic in the options markets and send the VIX soaring.

So... what happened this week?

The bond market woke up.

As regular Digest readers know, investors pulled a record amount of money out of corporate-bond funds and exchange-traded funds in recent days. But Porter's team doesn't think this was a result of an uptick in inflation alone. Instead, they believe it's a response to a much more important change that has quietly been taking shape around the world. More from the issue...

Central bankers from around the world have begun to explain why they can't continue supporting the global bond markets. Even the Bank of Japan's Governor Haruhiko Kuroda, who had been the most aggressive asset buyer among the central bankers, has apparently changed his mind about the utility of negative interest rates. As he explained to a group of fellow central bankers in Washington, D.C. last month:

It is becoming increasingly evident that an excessively lowered and flattened yield curve could weaken the transmission mechanism... The expected rates of returns of insurance and pension products may have an adverse impact on consumer's confidence... These aspects... need to be examined.

In plain English, central bankers around the world have begun to realize that negative interest rates are nuts. And these rates will destroy the world's financial system.

A "sea change" is starting...

What does this mean? Porter's team believes we're about to witness a dramatic shift in interest rates going forward...

As a result, there's going to be a sea change in interest rates going forward – rates are going to go higher. And that means it's going to be difficult for a lot of companies with weaker credits (aka junk bonds) to refinance – especially since default rates and downgrades are rising.

There's another, even simpler way to look at what's happening. The world's central banks have printed up $15 trillion in the past ten years and wrecked the world's markets – buying securities until prices no longer had any relationship with earnings or credit risk. Now all of that is poised to be unwound.

It's not going to be pretty.

And yet, despite this virtual certainty, they note corporate bonds – and high-yield (or "junk") bonds, in particular – are still not pricing in these risks...

The current yield on HYG is still around 5.5%.

But the current default rate on high yield bonds is 5.1%, according to Moody's. It's expected to reach 6.4% by the end of the year. Thus, anyone buying a broad basket of high yield bonds is very likely to suffer a capital loss, as the yield does not compensate investors for the risk of defaults.

If Moody's is correct and the default rate reaches something greater than 6% by the end of the year, we'd expect to see investors demanding 10%-12% yields, on average... That implies a huge sell off must soon occur in high-yield corporate debt.

It wouldn't be fair to early subscribers to share the full issue here today. But Porter will be covering these developments and much, much more – including what happens next and exactly how we plan to profit – in his live, online presentation on Wednesday, November 16 at 8 p.m. Eastern time.

Again, attendance is absolutely free, and there is no obligation to purchase our new service. But space is filling up quickly, and we can't guarantee we can accommodate all interested readers. Click here to reserve your spot now.

New 52-week highs (as of 11/3/16): AXIS Capital (AXS), CONE Midstream Partners (CNNX), and short position in Fossil Group (FOSL).

In today's mailbag, the early praise for Stansberry's Big Trade continues to roll in... But one subscriber has a concern about our new service. Send your notes to feedback@stansberryresearch.com.

"Hello Porter, I sampled the Dirty Thirty by investing in 12 of the positions for a total of $8959.00. Only one position is down ($112) and overall I am up $3570.00. Pretty impressive return for such a short time span and so little attention by the market... Great organization." – Paid-up subscriber Andy S.

"As an Alliance member, I took advantage of the beta offering on Stansberry's Big Trade. I initially purchased 10 of the Dirty Thirty recommendations on October 10, 2016. I did not cherry pick, I purchased the first 9 stocks listed plus a stock that I already owned in my portfolio. Today all are in the green, best gainer is showing a 90% gain. Great so far, and it really hasn't officially begun." – Paid-up subscriber Kim B.

"The VIX has been rising, as has of course put prices. So if 'Big Trade' success requires low put prices, perhaps the hour is late?" – Paid-up subscriber Jim J.

Brill comment: Great question, Jim. In fact, Porter and his team addressed it in detail in today's beta issue. While several put options have already seen significant gains, it's important to keep these moves in perspective...

It took years and years to inflate the massive bubble in credit markets... which means it will take a long time for it to unravel. And despite the moves in options prices, the total equity value of "The Dirty Thirty" has only declined by 4% since they began tracking these companies. In other words, the Big Trade still has a long way to go.

It's also important to remember markets don't move in a straight line for long. While we expect volatility to trend much higher over the next several years (and eventually challenge the all-time highs set in 2008), it will ebb and flow along the way... meaning we will have plenty of buying opportunities before the crisis peaks.

Regards,

Justin Brill
Baltimore, Maryland
November 4, 2016