The Next Panic Is About to
Begin, reprint from April 2016. The next
panic is about to begin... 'The beginning of the end'... Three facts you need
to know right now... The next dominoes to fall...
This isn't a typical Friday Digest.
This is the most detailed and timely
warning I (Porter) have ever written. I hope you'll take it seriously...I know
most of you won't. Later, you'll claim that you didn't see it, or you didn't
take the time to read it. But the truth is... you just won't be able to process
the facts I outline below.
And let me be clear: These are facts.
What you'll find below aren't views
or opinions. Or the ramblings of some mumbling oracle. I'm not talking about
"Kondratieff waves"... or George Soros' aching back. These aren't
hunches or guesses. I'm going to show you, in real time, how the entire system
of modern, paper-based finance is coming unraveled. It's happening right now.
And I believe the panic will start in May. In fact, I believe for decades to
come, the summer of 2016 will be recalled as the beginning of the end... a period of grand financial catastrophe.
So I hope you'll read carefully. But I'm so afraid you won't. When
I began my career in finance 20 years ago, the world (defined as the G20 – the
world's major economies) had about $40 trillion of debt. Today, the global
economy has more than $230 trillion worth of debt.
These obligations were not funded by
patient saving, careful capital investments, a resulting gain to productivity,
and increases to real wages and wealth. These credits were created, almost
completely, by politicians and central bankers.
The world's elite allocated this
paper to achieve policy goals. The "invisible hand" of the market
didn't distribute it. And it has resulted in massive, mind-blowing excess
capacity in nearly every industry that's heavily financed, such as Chinese real
estate development, the global automobile industry, U.S. higher education, and
of course the oil business, which saw a massive ($500 billion-plus) injection
of credit in just the last six years.
What's important to grasp now is
that these bubbles are not isolated – they are all connected, enabled, and
continued through the coordinated actions of central banks. And these policies
have reached their final "end game." The 20-year super-cycle of more
debt, lower interest rates, and one financial bubble after another has finally
reached its climax.
How do I know?
Because the same policies that for
20-plus years have driven finance-related profits higher have now inverted.
Lower interest rates, additional debt, and more manipulation have finally led
to lower earnings for the
world's biggest companies and banks.
The volatility these policies have
caused, the leverage that they created, and the resulting economic uncertainty
are now all acting as a tax against prosperity. Every action in economics
contains elements of diminishing returns. Economic stimulus is no exception. At
some point, additional credit and lower interest rates can no longer propel an
economy forward because the resulting overcapacity and overleverage cause more
problems than they solve. Growth inevitably slows. Defaults inevitably rise. And
sooner or later we'll see a panic. I believe that's happening now. Let me show
you why.
I've been writing about the
relationship between gold and the U.S. long-term Treasury bond since around
2010.
Think about these two financial
instruments in these terms. On one hand, the U.S. Treasury bond is the monetary
"brand" that stands for inflation, easy credit, and manipulation. Its
value has increased, almost every year, in an almost linear fashion since the
early 1980s. Gold, on the other hand, is an ancient monetary brand. The modern
bankers say it's a "barbarous" relic. Gold stands for hard money,
sound banking, and market-based interest rates. It is the bane of politicians
and bankers.
Since the peak of the last major
banking crisis (the 2011 European "PIIGS" affair), gold has gone down
32%. An exchange-traded fund (ETF) that tracks "constant maturity"
long-dated U.S. Treasury bonds (TLT) has gone up 13%. Tracked next to each
other, the "spread" between the rising value of "banker's
money" and the falling value of "real money" has widened
significantly, and all in favor of the bankers...
As long as belief in the central
bank's ability to manipulate the markets and inflate financial assets remains
intact, the value of the U.S. long bonds will rise and the relative value of
gold will fall. But... when the turn comes... faith in the dollar will crumble.
Faith in central bankers will evaporate. And the relationship between gold and
the long bond will completely reverse. Here's that relationship over the last
three months...
That's
my first reason. The huge move in gold can't be explained unless you realize
that the same people who have been manipulating the system for 20 years know
the system is crumbling... and they're trying to get out. The huge move in gold
is your most obvious sign. But it's not the only one...
America's biggest corporations are a
good way to judge the health of the global economy. When our best companies
can't increase their earnings, we have a problem.
For the last 115 years (for as long
as we have reliable records), two consecutive quarters of falling U.S.
corporate earnings led to a recession 81% of the time, according to investment
bank JPMorgan. The only occasions that a recession was avoided were when there
was a significant central-bank action to boost monetary stimulus. So how are
our corporate profits doing now?
The first quarter of this year marks
the third consecutive quarter that
saw a decline in U.S. corporate profits. And no, the problem isn't only a
collapse in energy prices.
This decline in sales and profits
might have been contained with aggressive central-bank action... but interest
rates can't go any lower, not unless you want to start paying people to live in
houses (through negative interest rates) and taxing people to use banks. If
that happens, there's a good chance of sparking a global run on the banks.
That's why I don't think you'll see negative interest rates much longer.
And there's a little-noticed bit of
information about corporate earnings that I hope you'll recognize as being
extremely unusual: Corporate revenues
have now declined for five straight quarters. That's a longer downturn in corporate sales than during the 2008/2009
crisis. What's different now?
The central banks have run out of
bullets. They can't push any more money or credit into the system without
causing bigger problems than they solve.
In summary... the gig is up. The
debt burden can't be carried any longer, not without causing overcapacity that
destroys corporate profits.
The wealthiest and most experienced
investors in the world have long known this day would come. That's why they're
expecting a collapse in the paper-money system. They're working on a way to
bolster the U.S. banking system with a gold-backed dollar (see the "Metropolitan
Plan"). The last month – with gold up
big and Treasury bonds down – is a tiny prelude for what's coming. It's a
sign... a sign few have noticed...
I first began warning about the
likelihood of a severe bear market in May 2014. I focused on the problems (the
vast overvaluation) of the junk-bond market. I've been predicting a true
catastrophe in the corporate-bond market ever since... and it has gone straight
down almost the entire time. (And we've taken advantage of my prediction: All
of our distressed-debt recommendations in Stansberry's Credit Opportunities have been profitable so far.)
I still believe we're heading into a period of vast credit defaults, what I
call "the
greatest legal transfer of wealth in history."
Likewise, I've been warning for a
long time about the "lions" that I believed would lead to a bear market in stocks
and the "deviants" that showed just how bad some of our debt problems
had become. I'd like to add three more categories of stocks for you to begin
tracking, to see if my fears about a massive bear market and monetary collapse
are coming to pass.
I want you to keep your eye on
commercial real estate – as tracked by the Vanguard REIT Fund (VNQ)... the
automobile industry – as tracked by General Motors (GM)... and the U.S. retail
sector – as tracked by the SPDR S&P Retail Fund (XRT). The first two
(commercial real estate and cars) are completely at the mercy of the credit
markets. If we see a material reduction in the availability of credit, both of
these industries will simply roll over... and the destruction will be immense.
OK... but why now? Here's one
reason: The price of used cars has begun to decline. Automotive sources
indicate they expect used-car prices to decline by 5% or 6% this year – the
first declines since 2008. Used-car prices are key to leasing rates and thus to
the availability of credit in the sector. The amount of subprime lending that
has happened in autos since 2014 means that price declines will be larger than
folks expect and that credit losses will be much worse. At some point soon, the
gaudy "earnings" that GM has been boasting about will be revealed to
have been nothing but stupid lending and leasing to folks who can't afford new
cars and trucks.
Likewise, the U.S. consumer has been
powering the global economy (thanks to a strong dollar and strong credit
growth). Those trends are going to reverse, significantly, as our economy goes
into recession. That will hurt the retail sector and, indirectly, commercial
real estate, which always gets hammered during recessions and will get hammered
doubly hard this time.
Think about the amount of empty mall
space. It's great that Amazon's (AMZN) earnings are soaring, but what that also
means is malls are dying. Sooner or later, all of this empty commercial space
will begin to hurt commercial real estate in general. Those malls are going to
end up as office complexes and apartments... something nobody has figured out
yet.
Over the last five years (during the
most recent boom), XRT shares are up 67% (compared to the Dow Jones Industrial
Average's 39% gain). That outperformance is purely a function of credit
expansion. Commercial real estate, despite the drag of mall space, is up 34%
over the last five years. Only GM is down... because despite the massive credit
expansion, there's simply far too much global overcapacity for automotive firms
to make any genuine profit. These sectors are going to completely fall apart
this summer. And you'll know why.
So,
what should you do with this information? Should you just go to bed scared
tonight, but not change anything in your portfolio? After all, everyone knows
you can't time the markets...
As I've
been telling you (for years), what's happening in our markets right now isn't
normal. This isn't just going to be a "correction" or even a regular
bear market. What's happening right now is the end of a massive credit
expansion and a global experiment in paper money that is unlike anything we've
ever seen before.
Talking about these events as being
an exercise in "market timing" is like folks on the deck of the
Titanic talking about global warming. It completely misses the point. There
have been periods in history – always after incredible credit inflations – when
the markets themselves were destabilized to the point that there was nothing
"efficient" about them. It's not that I object to the prices of
stocks in the market. It's the global
market itself that's broken. And if you don't think negative interest
rates are the most "broken" thing you've ever seen in your financial
life, you just aren't paying attention.
By the way, it's not just some
raving newsletter lunatic in Baltimore who sees a calamity approaching. David
Stockman, the former vice chairman of private-equity firm Blackstone Group
(BX), sees
the same thing in the markets today. So does Carl Icahn,
one of the greatest investors of the last 50 years.
So what should you do? Please do
something. Don't wait any longer. If you want to see if I'm right, wait until
the end of next month. Stocks will be down big. Volatility will be up. And you
will have lost a lot of money sitting on your hands. The essence of what you
should do is simple: Raise cash, buy gold, establish some short positions, and
ease into distressed bonds when they're trading at safe prices. (Warning: The
last one isn't easy to do by yourself. Please consult our distressed-debt
research in Stansberry's Credit
Opportunities before you try this at home.)
Even if all you do is simply raise
cash in your portfolio to 30% or 40%, I'm confident you'll beat the market this
year. But... there's no reason you have to lose money at all. What's going to
happen is a huge exchange of value... a legal transfer of wealth. And for our
subscribers – who know what's happening, why it's happening, and how to profit
from the situation – this year should be the best you've ever had as an investor. See link for charts.
http://secure.stansberryresearch.com/the-next-panic-is-about-to-begin/#2
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