The Weekend Edition is pulled from the daily Stansberry Digest.
It doesn't matter whether you want to pretend we're not in a recession...
And it doesn't matter whether inflation falls a few tenths of a percentage from one month to another.
What matters to your portfolio's future returns is what's coming next.
If you think we're getting close to the time where it's wise to go "all in" on stocks again, I urge you to keep reading.
Investors are wildly overoptimistic these days. Sure, our economy managed to grow the past two quarters. Inflation is lower than it was six months ago, too. But when I look into the near future, one thing is clear to me...
Things are about to get much worse...
There are dark economic clouds on the horizon. I believe we're in the midst of a deep, prolonged period of slowing economic growth.
As more folks wake up to this economic reality, it will trigger an even deeper sell-off in the stock market... and set off the next credit crisis.
Let me be clear: This isn't something I want to happen.
But if it is going to happen, as my colleague Dan Ferris likes to point out, it's better to be prepared for it. And it's even better if there's a way to profit from it.
Fortunately, there is... Even though my outlook for the economy is gloomy, informed investors can still make money.
Successful long-term investors must understand credit cycles...
As the editor of Stansberry Research's corporate-bond newsletter, Stansberry's Credit Opportunities, it's my job to monitor what's going on in the credit market.
Credit cycles are a "normal" part of the economy. A full-blown credit crisis occurs about once a decade. The last one was in 2008 to 2009. The one before that was in 2001. So we're overdue.
Here's what's important...
There's no need to fear recessions or credit crises. Once you accept this, you can prepare your portfolio so it doesn't have to suffer through them.
Credit cycles are easy to understand...
When times are good, lenders (like banks, private-equity firms, and institutional investors) begin loosening their underwriting standards. That leads to a period of "easy" credit.
As the credit pool expands, lenders eventually run out of people with good credit to lend to. Chasing profits, they target borrowers lower and lower on the credit ladder.
Eventually, some of the low-quality loans begin to go bad. People or companies can't afford to make their loan payments... for whatever reasons. (Today, for example, it might be the effects of high inflation and rising interest rates.)
That's when creditors start to "tighten" their lending standards. That means loans are harder to get, the loan sizes are smaller, and the terms of the loans are more favorable to lenders.
This slows the economy, making it harder for other borrowers to repay their loans. Delinquencies lead to defaults, which lead to bankruptcies – both at the corporate and individual levels. Credit dries up.
The result is a credit crisis. It clears out the bad debt and poor underwriting practices... and then the cycle starts again.
Today, we're at the "easy credit" point in the cycle where low-quality loans are just beginning to go bad.
The poster child of this cycle's easy credit was Buy Now, Pay Later ("BNPL") loans...
These are short-term, zero-interest, or below-market-interest installment loans using limited credit checks. They are offered by firms like Affirm (AFRM), Afterpay, and Klarna.
I've been seeing a BNPL payment option on more and more websites. And folks are using it to buy merchandise in stores, too. According to consumer-financial-services firm Bankrate, more than 60% of people under the age of 45 have used BNPL.
Thanks to low interest rates and approval that takes just a few seconds, BNPL tends to lure folks into spending more than they do when using credit cards. A study from the Barclays bank and the nonprofit StepChange Debt Charity revealed that 1 in 3 BNPL borrowers say the lending has gotten them into unmanageable debt.
Of course, the people most likely to use BNPL financing are the ones who can't get credit elsewhere. Credit-reporting agency TransUnion reports that nearly 70% of BNPL users are subprime borrowers.
This is exactly the type of loose underwriting you see at the top of credit cycles.
Some folks are now using BNPL loans to pay for groceries... Car repossessions are rising... And more than 20 million American households are behind in paying their utility bills.
But the days of easy credit are over...
According to the Federal Reserve's bank loan-officer surveys, credit has progressively tightened in each of the past three quarters.
In other words, banks are becoming more cautious with all types of loans, including loans to both large and small companies, as well as with credit-card loans to consumers.
Credit is now "tighter" than at any time since right before the last financial crisis, excluding a brief period early in the pandemic. Take a look...
As credit continues to tighten, I predict we'll read more and more stories in the coming months about rising delinquencies, defaults, and bankruptcies.
The Fed stepped in after the pandemic with unprecedented stimulus the last time credit tightened. But it's powerless to stop the credit crisis this time due to persistent inflation...
Folks, an economic winter is coming. And when it arrives, the stock market and the even bigger corporate-bond market are headed much lower.
I hope you've prepared for the coming economic winter...
But if you haven't, it's not too late.
You see, a credit crisis would be a good thing for my subscribers.
The distressed corporate-bond strategy my colleague Bill McGilton and I employ in our Stansberry's Credit Opportunities newsletter performs best in times of crisis. That's when perfectly safe corporate bonds sell off to absurd, distressed levels. Savvy investors scoop them up for pennies on the dollar and make a killing.
These bonds pay a legally obligated return on a set schedule, meaning you know what your return will be when you buy them. That's why we call these bonds safer than stocks, whose returns are always uncertain outside of a dividend payment.
Now, we don't need bad economic times for our strategy to work. Since launching the newsletter in late 2015, we've done very well without a true credit crisis.
We've earned an average annualized return of 13% on 59 closed positions. That's double the return of the overall high-yield bond market.
Since the pandemic, we've done even better. We've earned an average annualized return of 36% on 22 closed positions, nearly three times better than the overall high-yield bond market. That even beats the return of the overall stock market. And we've done it with investments that are much safer than stocks.
We expect to do even better when the next credit crisis hits.
Some of the world's best investors use this strategy to make a fortune...
In a credit crisis, good companies' bonds often get beaten down by association with the bad ones. These falling prices drive yields (and potential returns) higher, making these investments incredibly attractive at a time when a lot of folks are panicking.
In the next crisis, even bonds of companies with little or no chance of going bankrupt will trade for pennies on the dollar. That's when you can earn massive, stock-like returns in this often-overlooked sector of the market...
If you're interested in profiting as the next credit crisis unfolds – with much safer investments than stocks – I'd love for you to join me in Stansberry's Credit Opportunities. Click here for additional details about the strategy and how to get started with a subscription.
Editor's note: If you're still skeptical about bonds, you don't have to take our word for it. One of Mike's paid-up subscribers went on camera to explain how this investing strategy helped him retire early at age 52... and why he never has to worry about his money in any market environment. What's more, you could potentially make triple-digit annualized returns through bonds alone as the next credit cycle unfolds. Click here to get all the details.