Editor's note: You probably haven't considered investing in corporate bonds... But now is the perfect time to start. According to our colleague Mike DiBiase, we're already in the early innings of a credit crisis. And that pain is setting the stage for the kinds of opportunities that only come around once in a decade. So today, in our Weekend Edition, we're taking a look at the credit landscape...
In this piece, adapted and updated from the May issue of Stansberry's Credit Opportunities, Mike explains why the bank crisis that shook the markets earlier this year isn't over yet... and how to protect yourself (and even profit) with one proven bond strategy.
F. Augustus Heinze was about to set off one of the worst financial panics in U.S. history...
In the spring of 1906, Heinze strolled onto Wall Street with $25 million burning a hole in his pockets. The copper miner from Montana had received the money in a windfall legal settlement with a rival miner.
Heinze went to Wall Street with one purpose in mind... to gamble.
In the three years before he arrived in New York, the stock market had more than doubled. He wanted in on the action.
As a miner, Heinze knew little about banking. He began aggressively buying interests in New York banks and brokerage firms. At first, he seemed incapable of making a bad bet. But several successful banking deals weren't enough... Heinze wanted more.
He turned to an industry he knew well. Heinze began buying shares of copper miner United Copper. His aim was to "corner" the market – or fix the price of the company's stock and drive shares higher.
But Heinze stretched too far, too fast. It all caught up with him on October 14, 1907. That's when he was overwhelmed by short sellers. He could no longer hold up the price of the stock.
Shares of United Copper plummeted 76% in a two-day span. Heinze lost $50 million on his bet... and triggered the first bank crisis of the 20th century.
We're still suffering the consequences to this day.
Had Heinze been just a copper speculator, the markets might have been able to shake off the collapse. But several of Heinze's business associates – who were in turn related to several other New York banks – also took speculative positions based on his copper bet. And the fast, massive moves caught investors' attention.
One of Heinze's associates was Charles T. Barney, president of the Knickerbocker Trust. Trusts were known to take speculative positions and keep only 5% of their deposits as cash. National banks' cash-to-deposit ratios were much higher, around 25%. This made trusts much more vulnerable to failures and bank runs.
Barney had invested his own money in Heinze's copper scheme... not Knickerbocker's. But the market didn't know that. Word quickly spread that Knickerbocker had tons of cash in the scheme.
Depositors rushed to get their money out of the bank. On October 22, Knickerbocker's tellers paid out more than $8 million before running out of cash. They had to shut the doors shortly after noon.
Depositors at other trusts wanted their money back, too. It triggered a series of bank runs that led to full-fledged panic.
These events are now known as the Panic of 1907...
Banks hoarded cash. Loans to other banks, trusts, and brokerages dried up. The clearing process – how banks exchanged checks with one another – started to break down. The City of New York couldn't meet payroll or pay contractors.
Bank runs soon spread to other parts of the country. If not for the actions of legendary financier J.P. Morgan, it could have ended much worse...
Morgan knew the market needed liquidity. He gathered the nation's largest bankers and financiers into his private library on Madison Avenue... and locked the door. He wouldn't let them leave until they found a solution.
The meeting dragged on well through the night and into the next morning. By 4:30 a.m., Morgan had bullied the trusts into pooling their reserves and spreading the risk across the banks. And he had raised tens of millions of dollars in liquidity for the market.
Morgan's efforts ended the panic. It still resulted in the depression of 1907 and 1908. But if it weren't for his behind-the-scenes dealmaking, the panic would have played out far worse.
Politicians immediately got to work, hoping to prevent further crises. They began pushing for the creation of a central bank to be the "lender of last resort." That's how the Federal Reserve came into being in 1913.
Congress gave the Fed the power to issue Federal Reserve Notes – paper currency redeemable in gold – to make the money supply more "elastic."
You can guess what happened next. The newly established Fed more than doubled the nation's money supply within a decade, leading to the massive stock market bubble of 1929. During the Great Depression in 1933, another banking crisis hit. Never one to waste a crisis, the U.S. government used it as an excuse to go off the gold standard.
But all of this government intervention still hasn't fixed the underlying problem. Banking is a confidence game... a system based on trust. Break the trust, and the system no longer works.
The bank panics of 1907 and 1933 were caused by periods of easy money that led to highly leveraged speculative investments. When the investments collapsed, it broke that critical trust.
History is repeating itself today...
A decade of easy money has finally come to an end. Thanks to the Fed's massive money-printing binge following the pandemic, we now have a sticky inflation problem. As a result, interest rates have soared to levels we haven't seen in more than 20 years.
Our financial system can't handle these higher rates. The weakest banks that took on the most risk have already failed, just like they did in 1907. Ironically, J.P. Morgan's namesake bank – JPMorgan Chase (JPM) – had to step in to bail out one of the failures, First Republic Bank.
The bank crisis is not over.
Banks are sitting on hundreds of billions of dollars of unrealized losses on their Treasury and commercial real estate portfolios. On paper, many are insolvent. A new bank run would wipe them out.
No one really knows whether this is the start of the next panic... or if the market can avert a full-scale crisis again.
What we do know is that the Fed will do everything in its power to prevent bank failures from getting out of hand and to maintain trust. We know how this is going to end. Every bank crisis in U.S. history has resulted in more liquidity and currency devaluation.
These moves will only stoke inflation further. The economy is already slowing. A recession is unavoidable. At some point, after enough economic pain, inflation will fall closer to the Fed's 2% target. That's when the U.S. Treasury Department and the Fed will unleash a new tidal wave of printed dollars to juice the economy.
That's why today is the perfect time to consider investing in corporate bonds.
You see, during crises, bonds go on sale. You'll be able to buy safe bonds for pennies on the dollar... at deep discounts to their legally guaranteed par value.
And the next credit crisis is already underway...
More than 500 companies have gone bankrupt this year through September, according to S&P Global. That's the most since 2020, when the entire economy was shut down. Before that, you'd have to go all the way back to 2010 – during the aftermath of the last financial crisis – to find a year with so many companies going under.
This is the period we've been anticipating since launching Stansberry's Credit Opportunities. True credit crises happen only about once a decade. The last one was in 2008, so we're long overdue.
What we're seeing now is only the beginning. The economy is worsening. Credit continues to tighten. Folks are falling behind on their credit-card payments and car loans at alarming rates.
Things are about to get much worse for our economy.
These conditions always lead to a recession. And it's going to happen in 2024.
Investors have not woken up to this reality yet.
Corporate bonds are still expensive today. As downgrades and defaults continue to rise, fear will eventually grip the credit market. That's when we'll see the best deals on corporate bonds in more than a decade.
We'll be ready.
Good investing,
Mike DiBiase
Editor's note: Bankruptcies, downgrades, and market turmoil will scare most investors... But these events are like rocket fuel for Mike's investment strategy. This little-understood approach to the credit markets offers the chance to earn stock-like gains, with legal protections... and without worrying about the market's ups and downs.
It's such a powerful strategy, one of our Stansberry Research subscribers has gone public over the years with the story of how it allowed him to retire early at age 52. And now, you can hear his latest update on how he did it... Get the details here.
