When the Crash Comes, Will You Be Ready?

Prem Watsa stood at the podium and delivered the most prescient warning the crowd would hear…
There's a one-in-50- or a one-in-100-year storm coming… When the music stops, it stops very quickly.
It was April 2007, just six months before the S&P 500 hit its peak. Watsa reminded the audience at the Richard Ivey School of Business what really happens when a specific trade gets too hot… Generally, that trade collapses.
And he was right.
Two years later, just a few months after the market bottomed in mid-2009… Watsa had booked a 489% profit from a bet on the great recession… Essentially, he'd gone short on real estate. It was a $2.1 billion payday.
It wasn't his first correct call on a bubble… nor the first time he'd profited massively. But it was probably his biggest success.
Today, we're going to show you how Watsa pulled off one of the most profitable bets we've ever seen… and how we can do the same thing
As early as 2005, Watsa was targeting big American banks and bond insurers exposed to the housing boom.
He had been buying large amounts of credit default swaps (CDSs). These swaps are effectively insurance. The buyer (Watsa, in this case) pays to transfer the risk of default for a bond to someone else… who provides "insurance" against a default. Then, when the underlying security suffers a default, the CDS buyer profits.
At one point in 2006, Watsa was down $87 million on his position – or 74%. But he knew the crisis was just around the corner. So he kept buying.
When the global financial crisis hit in 2008, Bear Stearns, Lehman Brothers, and AIG all failed. Within the year, the $433 million bet Watsa had placed was worth more than $2.5 billion… He made $2.1 billion on the deal – almost five times his original investment.
Watsa saw the bubble forming and knew that it must eventually collapse. So he made his bet by buying insurance on the companies he knew would suffer the most.
And that's exactly what we aim to do…
First, and most important, we also see a storm coming – only this one will be far more damaging than the credit crisis in 2008-2009.
If you've read any of our recent essays on the looming crisis (you can find them here, here, and here), then you know… We're seven years into a bull market… one that has been driven by artificially low interest rates and debt. Corporate debt issuance has grown over the past five years at a pace we've never experienced before. More than $9.5 trillion in global corporate debt is coming due over the next five years. About $1.6 trillion of that debt is below investment grade, or "junk."
Yet the market is pricing little risk into the equities that hold it. The market's "fear gauge" – the Volatility Index (or "VIX") – remains near near-record lows. No one is paying attention.
It won't last. It never does.
This credit cycle is nearing an end. When it finally rolls over, many investors holding the shares of weaker credits – aka "junk" rated companies – are going to see the value of their stocks plummet. Some will go to zero.
Here's where the second important point of Watsa's story comes in: Instead of simply shorting stocks, he used CDSs to take the trade even further. He wasn't just betting that these companies would go down… He was betting that they wouldn't be able to pay their debts at all.
We think the same thing will happen this time. And we plan to profit in a similar way.
We've identified key sectors that face many of the problems that we saw back in 2007… These sectors have increasing debts and a wall of maturities coming due.
We've also compiled a list of 30 names from that universe of distressed companies into what we call "The Dirty Thirty."
The only difference between Watsa's strategy and ours is the instrument we'll use. We want to protect our portfolios and speculate on the pending collapse. But it's not easy for small retail investors to buy CDSs. So instead, we're using long-dated put options. The mechanics are different. But the outcome will be the same.
Don't let the idea of trading options intimidate you. Put options are simply contracts you hold with your broker that allow you to sell a stock at a specified price at a specified time. And we've created our new service, Stansberry's Big Trade, to walk you through each trade step by step.
Like Watsa, we stand to make huge 500% gains. But remember… like he did, we could also face some stress in our positions. These are speculations, not safe bets to buy and hold forever. That's why we'll exercise patience and build out a diversified portfolio over the next 12-36 months. These factors are critical to our success with this strategy.
Investors remain complacent about the underlying problems in the credit markets today… just like in 2007. No one listened to Watsa when he said the collapse was coming. They believed that the results would be different.
Our bet is that this time, nothing's changed. And this is our chance to set ourselves up for massive profits.
Porter Stansberry
Editor's note: Porter has dedicated countless hours to helping you understand what's about to happen… and how it affects your life's financial plan. But tonight at midnight, our charter offer for Porter's newest research service – Stansberry's Big Trade – closes. We can't guarantee we'll ever offer this service at this price ever again. Watch Porter's free video presentation while you still can by clicking here.

Source: DailyWealth

You Didn't Believe Me, but It's Here – NOW

"Did you see what Steve wrote last week about how no one will use cash or carry a wallet five years from now?" my Mom's friend said to her over Thanksgiving. "That will NEVER happen!"
Oh, really?
Well, how about this piece of news…
On Black Friday, shoppers spent $3.3 billion online… and $1.2 billion of those purchases were made through their mobile phones.
That's unbelievable… when you consider that just a couple years ago basically nobody in America was buying anything with their phones.
When you buy something on your phone, you are not using cash and you don't need a wallet.
Last week, in an essay called "Profiting From What Will Replace Cash and Credit Cards," I wrote…
In less than five years, your kids won't carry wallets. They won't carry cash… In place of all of this, they will carry just one thing: their mobile phones.
It won't just be your kids, by the way… In less than five years, you will use your phone to pay for almost everything.

It will be the greatest transformation of how people pay for stuff since… well, since people started paying for stuff.

Here's another shocking piece of Black Friday shopping news: 55% of visits to websites were from mobile devices.
And one more for you: Shopper traffic at traditional "brick and mortar" stores was actually DOWN for this Black Friday compared with last year… This tells us that the trend is toward people sitting on their couches while getting a Black Friday deal as opposed to going out and fighting the crowds.
And this is just the latest piece of news to support my point.
The story is so important that I wrote the November issue of my True Wealth newsletter about it. But if you're like most people, you're probably not on board… yet.
You might think paying with your phone can't possibly be safe. You might think it sounds complicated, or inconvenient.
In my True Wealth issue, I wrote…
Paying with your phone is safer because you avoid the current problem of revealing your name or credit-card number to whomever you are paying.
The secret is called "tokenization." When you pay with your phone, a one-time-use number – a "token" – is all that's created. Your name and credit card number are never seen, and therefore, they can't be stolen.
Every time you swipe your credit card, or type it in online, you risk getting hacked… You give up your name and your credit-card number.

You're telling me that you prefer having a much higher chance of getting your credit card hacked? And that you prefer the inconvenience of fumbling around in your pockets and your wallet with cash and change at the counter when you don't have to?

With "tokenization," using your phone is much safer than pulling out your credit card. And it's more convenient, too. As I described in that issue, I've even tried it myself…
There's no digging in your purse, no fumbling for cash and credit cards, no card swiping, no signing, and no fumbling to put everything away. Instead… nothing happens. You hold your phone… and then… you're done.
Shopping on your phone is just the first step toward eliminating using cash and credit cards in the traditional way.
What comes next? And how can you profit?
I really want you to see this whole story. So I have "unlocked" the main part of this month's True Wealth issue for you.
You can see my full story of what will replace cash and credit cards – and how to profit from it – by clicking right here.
Good investing,

Source: DailyWealth

The Potential 'Gold Trigger' That Probably Isn't on Your Radar

On May 6, President Obama passed a historically important milestone for which there was no fanfare or jubilation…
He has now been at war longer than any other American president.
With the end of his second term just weeks away, Obama will become the first U.S. president to have been at war for the entirety of his administration.
I see no reason to expect anything different for President-elect Donald Trump.
War is the most destructive and expensive thing that humans have ever devised. The consequences can be devastating to the individuals who fight and their families. It's also true, however, that war is big business. Military contractors, like Lockheed Martin (LMT) and Raytheon (RTN), have thrived during the Obama administration. But war also has another beneficiary…
In the table below, notice how gold prices responded to increased war spending and federal budget deficits between 2001 and 2012 – and to the slowed growth between 2013 and 2016. (All figures are estimates.)
War Spending
$209 billion
$1.1 trillion
$333 billion
Additions to Deficit
$1.1 trillion
$6.0 trillion
$2.2 trillion
Change in Gold Price
Sources: The Balance; USgovernmentspending.com; StockCharts
Between 2001 and 2016, war-related appropriations totaled $1.7 trillion. Around 65% of this was spent during the height of operations in Iraq and Afghanistan, between 2006 and 2012.
Two months ago, the Watson Institute for International and Public Affairs prepared a comprehensive analysis of war-related spending through 2016. Funds spent on battlefield operations are just a fraction of total war-related expenditures once medical-related costs, homeland security, and interest are included.
According to the institute, these additional expenses bring total war-related spending in Iraq and Afghanistan closer to a mind-boggling $4.8 trillion. That's more than half of the $9 trillion added to the deficit since 2001.
The explosion in deficit spending triggered by these war costs absolutely pounded the U.S. dollar from 2001 to 2012. But it was also a powerful tailwind for gold.
It wasn't until the federal budget sequestration went into effect in 2013, forcing across-the-board reductions in government spending (including the military), that the dollar began to stabilize. Gold, in turn, began to weaken.
Here's the part of the story most investors don't yet appreciate: The budget sequester has been a disaster for our military.
Four years after the sequester began, it's now becoming increasingly clear the sequester has compromised the preparedness of our troops and their equipment. Here are some quotes from U.S. commanders earlier this year:
"The strains on our personnel and equipment are showing in many areas, particularly in aviation, in communications, and intelligence." – Marine Gen. John M. Paxton, Jr.
"The ripple effect of that goes through the years. You not only lose the maintenance time, but you lose qualification time for people, and that experience set can never be bought back." – Navy Adm. Michelle Howard

"We made difficult trades between readiness today and the critical investment required to modernize for the future against potential adversaries who continue to close the technological gap." – Air Force Gen. David L. Goldfein

Two months ago, Bloomberg also published an investigative piece on the topic. It learned our dedicated service men and women are literally dying because of the corners being cut to keep aged equipment in service. Since January 2015, for instance, 24 people have died in six noncombat Marine accidents – a five-year high for such fatalities.
And another important problem is boiling below the surface: The battlefield is quickly leveling as our adversaries around the globe obtain precision-strike capabilities that were once exclusively America's. Parity on the battlefield means future confrontations are likely to last longer… and cost even more.
Escalating military spending and federal budget deficits in the years ahead look like low-risk bets. As it plays out, I fully expect gold and other precious metals to rise, just like they did before the sequester went into effect.
Take this opportunity now to construct a portfolio you'll be comfortable holding for the balance of gold's next uptrend.
Good investing,
Mike Barrett

Source: DailyWealth

New Highs, Time to Sell? My Shocking Answer…

It was all over the news…
"For the first time since 1999, all four major stock indexes hit all-time highs on the same day."
I got calls from coworkers, family members, and good friends. They were all worried.
"This feels like a bubble," they all said. "Is it time to sell?"
NO. It's not.
Two reasons why:
1.   This is not 1999… People are fearful today, not wildly optimistic. And more importantly,
2.   Stocks actually perform better going forward after hitting new highs, not worse.
Let's look at both of these answers a little closer…
For the first one… Look, we've had two weeks of optimism in the stock market after the election. But that's about it. Big deal.
Market peaks take years to get here… not two weeks.
Think about housing prices during our last bubble. It took years of wild optimism in real estate before the peak arrived. I don't feel that wild optimism in stocks today. Investors are generally still fearful. The phone calls I got are a perfect example of it.
My second point today is the shocking one: Stocks perform fantastically after hitting new 12-month highs.
We crunched the numbers. And the results were amazing.
You REALLY want to own stocks after a new 12-month high… And you really DON'T want to buy stocks after a new 12-month low.
This table sums it up best. It shows the return 12 months after a new 12-month high or low. Take a look…
Since 1928
12-Month Return
% of Time
After 12-month high
After 12-month low
Not a new high or low
All periods
S&P 500 compounded annual gains
Based on monthly data, not including dividends
Most people don't want to believe these results…
They think a new low is an opportunity to buy and a new high is a time to sell.
But listen, my friend, the numbers aren't lying…
The future could be different than the past, of course. But we're talking about 88 years of history here.
So tell me, do you think that 88 years of history is wrong? Do you think that the way stocks have behaved over the last 88 years is going to change – starting today?
If you believe that buying stocks at new highs is bad and buying at new lows is good, then I urge you to look at that table again.
Did you study it?
Now let me ask you again, do you still believe buying at new highs is bad and buying at new lows is good?
It might take a while for you to finally see the light. But once you believe me, a great sense of calm should come over you…
You are "one up" on the world. You now know that new highs are more than OK. You know that new highs are actually good.
You know that new highs are not a reason to panic… They're far from being a reason to panic. They are (shockingly) the best time to own stocks.
So yes, my friend, the stock market hit a new all-time high. Yes, the four major stock indexes all hit all-time highs on the same day – something that hasn't happened since 1999. And yes, 1999 was near the end of the great stock market boom. That's all true.
But just because stocks are at an all-time high doesn't mean you need to panic. Remember… stocks deliver their best 12-month performance after new 12-month highs.
Good investing,

Source: DailyWealth

Two Strategies to Avoid a 'Flash Crash' and Sleep Well at Night

Editor's note: Our offices are closed tomorrow for Thanksgiving. Look for the next edition of DailyWealth on Friday. Enjoy the holiday.
Last month, I awoke to the following dramatic headline:
U.K. Pound Plunges More Than 6% in Mysterious Flash Crash
It was a good reminder of how important it is to tune out the day-to-day noise of the markets. But it also served as another valuable lesson for investors.
Let me explain…
Entering a stop loss with your broker is one of the most dangerous things you can do as an investor.
When you enter a stop, your broker places it in the market. At that point, market makers – the people who match buyers with sellers – can tell exactly where you're willing to sell.
That means market makers can temporarily drop the price and pick off your stop – even if the price immediately rebounds.
Think of it like playing poker with your hand showing. It tells other market participants exactly when you'll "fold." If you don't enter stops in the market, that can't happen.
Plus, intraday prices are much more volatile than closing prices. If you enter your stops in the market, you open yourself up to stopping out on a "flash crash" type of move, just like we saw with the pound in the newspaper headline above.
Here's what the chart of the British pound looked like before, during, and after its intraday plunge…
The "volatility quotient" on the pound is about 7%. In layman's terms, that means it's reasonable to expect the pound to move up or down in a range of about 7% over the course of a year or more. Instead, investors saw a 6% correction in the pound in a matter of minutes.
And that isn't the only time a "flash crash" has happened. On May 6, 2010, nearly $1 trillion of market capitalization disappeared from the market and reappeared in the span of just 30 minutes.
Big blue-chip companies crashed for a few minutes. Cigarette giant Philip Morris (PM) fell 9%… iPhone maker Apple (AAPL) fell 22%… and consumer-products behemoth Procter & Gamble (PG) fell an incredible 36%. All three recovered most of their losses by the end of the trading day.
Such "unexplained" events happen in the markets far too often these days.
Earlier this year, semiconductor company Axcelis Technologies (ACLS) opened at $9.64 per share before suddenly dropping 26% to a low of $7.16. It closed the day at $9.36… down less than 3%. You can see the spike lower in the chart below…
If you had entered a stop loss with your broker, you would have stopped out and missed out on huge gains. The stock recovered almost all of its gains later that day and marched straight higher to $14 a share in the months to come.
That's why my TradeStops software always uses end-of-day closing prices for stop losses. That way, a "flash crash" or a knee-jerk reaction to an earnings announcement won't necessarily kick you out of a winning trade.
Keep your stops out of the market and use end-of-day closing prices as the basis for evaluating your stops. Using these two strategies will help you sleep a lot better at night knowing that the market makers can't pick you off.
Dr. Richard Smith
Editor's note: TradeStops does more than simply track your trailing stops. It can also help you stay in your winning trades longer, cut your losers faster, and manage risk like the world's greatest investors. Right now, you can get started on a 100% risk-free, 60-day trial. Even Steve says TradeStops will improve his results "over the coming years with nearly zero effort." Get started here.

Source: DailyWealth

Hell Just Froze Over… France Just Rejected Socialism

Don't these campaign promises sound like the words of a candidate destined to lose?
"I promise to lengthen the workweek by four hours!"
"I promise to raise the retirement age needed to receive pensions!"
•   "I promise to cut half a million jobs!"
A candidate with these promises would never get elected in America. But I have some shocking news for you…
Chances are GREAT the new leader of France will come into power based on these promises.
France, of all places!
France is known for embracing socialism… But it appears the French have figured out that working less than anywhere else – and getting more from your government than just about anywhere else – simply doesn't work out over the long run.
It sure looks nice on paper…
The law in France enforces a 35-hour workweek. Ultimately, the average French worker works about 300 hours less per year than the average American worker, according to the Organization for Economic Cooperation and Development (OECD). At seven hours a day, that means the average French citizen works 43 fewer days a year than the average American.
The benefits are great, too… French workers get more vacation than just about anyone. They get six weeks of paid vacation, on average.
•   The retirement age in France is 62. In the U.S., for people like me (born in 1960 or later), the retirement age is 67.
Sounds like a great life in France, right? The problem is, it doesn't work
To help pay for all these benefits, France instituted a 75% "supertax" on incomes of more than 1 million euros. As a result, rich people fled France – and businesses fled, too. (France dropped the supertax two years ago.)
Today, the unemployment rate in France is in the double-digits, versus 5% for the U.S. The youth unemployment rate is even worse… about 24%.
It appears the people of France are finally tired of it…
François Fillon just became the new front-runner in France's 2017 presidential election – campaigning on promises to do away with many of France's socialist policies. When he took office as premier in 2007, he called France "a bankrupt state." As Bloomberg reported…
Fillon, 62, vaulted from third position in most polls to win the first round of the Republican primary by 15 percentage points from the veteran Alain Juppe on Sunday with the most free-market platform among the seven candidates. They'll face each other again in next Sunday's runoff and the winner will be favorite to become president in May 2017.
Fillon's shocking win reminds me of two things…
1.   The people of Britain shocking everyone, voting to get OUT of the European Union (the so-called "Brexit").
2.   The people of America shocking everyone by electing Donald Trump as president.
These three events are probably not isolated… It's the voice of the people rising up and taking back power from the political elites.
In some cases, it should be good. In other cases, well, it's not so good…
For example, more economic freedom and less government intervention is almost always a good thing… It creates economic growth.
On the flip side, restricting international trade and immigration is typically a bad thing. New restrictions on international trade arguably kicked off the Great Depression in the 1930s.
Trump's victory in the U.S. was surprising… but France rejecting socialism? I think Hell just froze over…
Good investing,

Source: DailyWealth

Profiting From What Will Replace Cash and Credit Cards

In less than five years, your kids won't carry wallets. They won't carry cash. They won't carry credit cards.
In place of all of this, they will carry just one thing: their mobile phones.
It won't just be your kids, by the way… In less than five years, you will use your phone to pay for almost everything.
This sounds preposterous, I realize… It's crazy to even consider when NOBODY here in the U.S. does this – yet. But it's coming. Without a doubt…
Surprisingly, nobody's talking about it.
This is exactly what I want to see as an investor… It's an unstoppable trend that nobody is talking about.
It will be the greatest transformation of how people pay for stuff since… well, since people started paying for stuff.
Who will be the winners and losers in this trend? And how can we profit?
I met with a guy last week in New York who offers us the best way to safely capitalize on this trend.
His name is Andrew Chanin. Last summer, Bloomberg wrote a story about him called "The One-Man, $1.2 Billion ETF Shop."
Chanin's company, PureFunds, launched "HACK" – a unique exchange-traded fund focused on investing in cybersecurity – in November 2014. Twelve days later, Sony was hacked… And the assets started flowing in.
Chanin also had a big hit this year with "SILJ" – the PureFunds ISE Junior Silver Fund… Gold and silver stocks surged in the first half of this year, and SILJ's assets soared more than twentyfold.
But I think Chanin's biggest success could be in the fund he came up with to profit from what will replace your cash and credit cards…
This story is so important that I wrote the November issue of my True Wealth newsletter about it.
I don't normally do this… But I really want you to see this whole story. So I have "unlocked" the main part of this month's True Wealth issue for you.
You can see my full story of what will replace cash and credit cards – and how to profit from it – by clicking right here.
Good investing,
P.S. Saving My Life update: 227.5 pounds, down 4.5 pounds since I started. 25.7% body fat, down from 27.0%. Some folks have asked what my goal is… It's to drop below 20% body fat on my scale. I'm embarrassed to say that I was at 34% last summer – so 25.7% today is good! How are you doing? I'm going to push hard until Christmas… Being that much healthier will be the best Christmas present of all!

Source: DailyWealth

Health Care Stocks Are on the Verge of a Double-Digit Bounce

U.S. stocks are only a few points away from new all-time highs… But not every part of the U.S. market has been thriving.
Health care stocks recently fell 12% from their August highs to their pre-election lows… hitting an eight-month low in the process.
Have they bottomed? Is it time to buy? Or is this the beginning of a major downtrend?
Let's take a closer look and find out…
Health care stocks were falling before the election, when Hillary Clinton was expected to win.
The stock market expected things would stay "status quo" with Obamacare, and it didn't think that would be good for health care companies' profits.
Then, the election result surprised the markets. Trump was elected, and the sector soared.
So where do we go from here?
History says more gains are likely. Specifically, double-digit gains are possible over the next year.
Let me explain…
Two weeks ago, the Health Care Select Sector SPDR Fund (XLV) fell to an eight-month low. Take a look…
New eight-month lows don't happen often. But look at what came next. After hitting their low, health care stocks turned upward… And they jumped nearly 4% the day after Trump was elected.
This upward trend isn't surprising. It's what tends to happen after a new eight-month low in health care stocks.
We've only seen new eight-month lows in XLV 10 other times going back to 2000. And they often end with a big reversal like we're already seeing. Take a look…
After Extreme
All Periods
Since 2000, we tracked the gains that you would have seen if you used a "buy and hold" strategy. Health care stocks were typically up 1.2% over three months and 4.8% over the course of a year. But after an eight-month low, the typical returns were much higher.
XLV gained 4.2% over three months and 10% the year after similar multi-month lows in the past. This might not sound like much, but it's actually a huge outperformance versus the sector's typical returns.
Health care stocks were one of the market's worst performers going into the election. But now, after an eight-month low, they could be one of the best…
Good investing,

Brett Eversole


Source: DailyWealth

Copper Has 40%-Plus Upside… Starting Now

Copper just finished one of its largest short-term spikes ever…
The metal is up 18% since late October. And it soared more than 9% in just three days last week.
That has only happened a handful times since 2000. Based on that history, gains of 40%-plus are possible over the next year.
Let me explain…
Gold and silver got the headlines for most of 2016. And for good reason… Both metals have performed well this year.
That hasn't been the case with copper. At least, not until recently.
The metal has moved sideways for much of 2016. But over the past few weeks, it has staged a massive breakout. Take a look…
Copper went nowhere for the first 10 months of the year. Now, the metal is up 18% since October 25… and most of those gains came in a flurry last week.
This kind of 9%-plus gain in three days is rare. It has only happened 17 other times since 2000. But history says these extremes tend to happen at the beginning of a major move higher.
The numbers here are a bit crazy. Copper doesn't just outperform after these extremes… It absolutely soars. Take a look…
3 Months
6 Months
1 Year
After Extreme
Normal Return
Simply buying copper would have led to 3.3% six-month gains and 6.7% single-year gains since 2000. But buying after these extremes led to results that were more than six times better…
These 17 extremes led to typical returns of 14.3% in three months… 24.8% in six months… and an incredible 41.9% over the next year.
Even more impressive is that 15 out of the 17 previous extremes led to a positive return over the next year. So copper almost always moves higher a year after these quick spikes.
You could trade this extreme by buying the metal. But we prefer to buy the companies that produce the copper instead…
We own the iShares MSCI Global Metals & Mining Producers Fund (PICK) in our True Wealth newsletter. Shares of PICK are up more than 30% since July… But it's still early in this trade. The shares are still down 50% from their 2012 levels.
Copper – and PICK – deserve a serious look today.
Good investing,
Brett Eversole

Source: DailyWealth

You Don't Have to Be a Victim

Don't ignore this warning…
What you'll learn today could rescue you financially over the next 12 to 36 months.
Investors who don't know the facts, the history, the financial concepts, and the trading strategy I outline in today's essay have absolutely no chance of surviving the next few years without taking huge losses.
This is the absolute best way to hedge your financial assets. This isn't just a speculation… It's also the best strategy to avoid big losses from what's about to happen. Even better – it's a chance to make between 10 to 20 times your money in the next year or two.
But let's start with the bad news…
This is the real Obama Legacy…
Between 2005 and 2015, U.S. corporations exploited artificially low interest rates to borrow unprecedented amounts of money…
Before the mid-2000s, U.S. corporations had never borrowed more than $1 trillion in a year. They did so twice, in 2006 and 2007 – the "boom" years. Maybe you'll remember what happened next – a huge bust, the worst recession since the Great Depression.
So what did Obama do to heal our economy from these wounds? He engineered an even bigger debt bubble…
First, he doubled the amount of outstanding, freely trading U.S. Treasury debt (from $7 trillion to $14 trillion). He directly borrowed more money than all the other U.S. presidents ever borrowed before, combined. Worse, his economic team led the Federal Reserve to hold down interest rates to essentially zero.
What happened next will scar our economy for a decade, at least. Every year between 2010 and 2015, U.S. corporations borrowed more than $1 trillion. In 2014 and 2015, they borrowed nearly $1.5 trillion.
Junk bonds had almost never made up more than 20% of corporate-bond issuance. But during the six-year "Obama debt boom" of 2010-2015, high-yield bonds made up more than 20% of issuance in every year except the last (2015).
% Junk
Source: Securities Industry and Financial Markets Association (SIFMA)
But it's not just that record amounts of debt have been underwritten. It's the quality of that debt that's the real problem.
You see, most big banks and insurance companies aren't allowed to buy "junk" bonds. Therefore, most investors don't worry too much about the junk-bond default rate.
But… what if investment-grade debt has suffered the same kind of quality impairment?
Over the past decade, the lowest-quality tranche of investment-grade debt, debt rated "BBB," has grown from around 10% of total investment-grade issuance to more than 30%.
While I don't think BBB debt will default at anything like junk-bond rates, I'm certain that during the next credit-default cycle, the annual default rate on the lowest rung of investment-grade debt will be at least triple its former peak (1% in 2002).
If we see three or four years of default rates at this level (say 3%), you're going to see big losses at major financial institutions. These losses will be more than enough to cause the collapse of at least one or two big firms. (We're talking about $200 billion-$500 billion in investment-grade-bond defaults.) This will send a wave of panic through the markets. Combined with junk-bond losses, all this will dwarf the losses caused by bad mortgages.
This big change in the underlying soundness of the corporate-bond market guarantees that during the next credit-default cycle, losses are going to be far bigger and hit far more companies and investors than ever before… and much more severely.
And the bad news is, it has already begun…
Artificially low interest rates didn't just cause the corporate bond market to grow and decrease in quality. It also promoted a huge boom in subprime auto lending.
We've covered this topic in incredible detail in our flagship newsletter, Stansberry's Investment Advisory… first during the boom in 2014 (when we warned about General Motor's lending practices) and then again in 2015 (when we profitably recommended shorting auto-lender Santander Consumer USA). As we wrote…
Normally… less than 5% of noninvestment-grade, U.S. corporate debt defaults in a year. But when the rate breaks above that threshold, it goes through a three- to four-year period of rising, peaking, and then normalizing defaults. This is the normal credit cycle… At the end of 2014, only 1.42% of speculative corporate debt had gone into default for the year – near a record low.
We went on to predict that a new 2014 low for defaults pointed to 2016 as the year when corporate debt would begin a new default cycle.
As you may know, the default rate on high-yield U.S. corporate bonds broke through the critical 5% threshold in August… just as we predicted it would. That kicked off a new credit-default cycle. We believe default rates will come close to 10% next year before rising to more than 15% in 2018.
The impact of these rising defaults will be widespread and impossible to totally predict. But at least two things are sure to happen. First, you can count on volatility rising in the stock market as bankruptcy becomes more than a remote possibility for hundreds of companies. And second, the issuance of subprime debts – mortgages, cars, and junk bonds – will completely shut down.
So… how can you trade this likely outcome?
To profit from the collapse in subprime lending, I'd rather target the auto makers whose big debts and razor-thin margins put them at big risk from any decrease in sales value. We've already seen sales volumes falling (down about 8%) and moves to further reduce supplies. (General Motors is closing two plants and laying off 2,000 employees.) I'm certain we'll see more of both moves over the next year.
Both Ford Motor (F) and General Motors (GM) have long-dated, out-of-the-money put options that trade frequently and have lots of volume. In plain English, that means you have a highly leveraged and liquid way to bet against the share prices of these companies.
The details on how we'll trade these puts are beyond the scope of this essay. But for example… say you bought long-dated, out-of-the-money puts on Ford, using our strategy.
For you to make money with this position, you'd have to expect that Ford's shares would fall 38% between now and 2018. Given Santander's enormous reduction in lending, that's a safe bet.
But if panic spreads as defaults increase, and investors begin to doubt Ford's ability to refinance half of its $137 billion in outstanding debt over the next five years… Ford's share price could fall sharply, back down to its 2009 lows.
Depending on which puts you buy, you could make almost 18 times your money on this trade.
I'd like to leave you with one thought…
A lot of investors sit in the market, and they're terrified about what might happen next. They can't afford not to be invested. They need income. They need growth. They can't afford to miss what remains of this bull market. Most of these people don't think they can do anything about the risk of big drawdowns or even outright losses, like they suffered in 2002 and 2008. But that's just not the case.
In 2002, we were up about 20% because we successfully shorted a bunch of stocks, including an airline that went to zero. We broke even in 2008, thanks to our shorts of Fannie Mae, Freddie Mac, and Capital One, among others. And we booked huge gains on the rebound in 2009.
My point is, you don't have to be a victim of the market. You really don't. And you don't have to do anything radical like sell all of your stocks, or short the entire market.
But you do have to do something.
With Obama's debt legacy, you cannot afford to do nothing this time. Trust me, you can't.
Porter Stansberry
Editor's note: Tonight at 8 p.m. Eastern time, Porter is hosting a FREE live event to explain all the details of the debt bubble that we see collapsing… and how to make 10… 20… even 30 times your money off it. Reserve your spot right here.

Source: DailyWealth