Editor's note: The high-inflation, high-interest-rate environment we've seen is unlike anything investors have faced for decades. But it won't affect all Americans equally... And the decisions you make now could make a big difference to your wealth. Today and tomorrow, we're sharing excerpts from the July 28 issue of The Big Secret on Wall Street at Porter & Co., with numbers updated. In this piece, our founder Porter Stansberry explains why the pain hitting the middle class today could get much worse down the road...
"They're probably the tip of the iceberg."
Stanley Druckenmiller – who famously earned 30% annualized returns for three decades without a single losing year – was explaining our country's incredibly dire economic situation to Bloomberg in June.
He wasn't describing a minor issue. He was talking about the largest bank failures since the Great Depression and the growing number of bankruptcies...
Our central case is there's more shoes to drop, particularly – in addition to the asset markets – economically. There's a lot of stuff under the hood when you go from this kind of environment – the biggest, broadest asset bubble ever – and then you jack interest rates up 500 basis points in a year. I think the probability is that Silicon Valley Bank, Bed Bath & Beyond – they're probably the tip of the iceberg.
Nobody seems to care that our economy is falling apart and that our government has completely lost control of its finances. Why? Because with endless fiscal deficits and a never-ending stream of Washington's free-money policies, nobody has lost their jobs yet.
What the poor saps haven't figured out is that all of that free money has destroyed our purchasing power and will soon completely wipe out the middle class.
Just look at the soaring cost of buying a car or buying a home. The average monthly payment for a new car is now $736, compared to just $562 in 2019, according to auto appraiser Edmunds. The average mortgage payment has doubled over the same period.
If you think our politics are toxic now, just wait another decade. By that point, no one but the very rich will be able to afford a home or a decent car. By that point, virtually every new neighborhood will be owned by a New York bank. The entire middle class will be transformed into lifetime renters... and car sharers.
The stage is being set for the largest legal transfer of wealth in history: from the middle class to the rich, all courtesy of politicians who wouldn't understand the first thing about economics if you wrote it on their foreheads...
Total federal debt has nearly tripled since the great financial crisis, from just over $11 trillion in early 2009 to more than $33 trillion today. And with annual deficits expected to exceed $1 trillion indefinitely, there is no end to this trend in sight.
At these levels, the U.S. government's debt burden represents roughly 120% of gross domestic product ("GDP") – down from a peak of 130% in 2020. That is a rare extreme seen only one other time in American history – in the immediate aftermath of World War II...
These debts will never be repaid.
According to a 2020 study from value-focused hedge fund Hirschmann Capital, since 1800, 51 out of 52 countries with similarly high debt-to-GDP ratios have ultimately defaulted, either through restructuring, devaluation, high inflation, or outright default.
Inflation was the "solution" in the U.S. in the early 1940s. The Federal Reserve held short- and long-term interest rates at 0.375% and 2.5%, respectively, for most of the next decade as consumer prices rose as much as 20% annually. This inflation – along with the post-war return to government fiscal restraint – helped cut the debt-to-GDP ratio in half by the mid-1950s.
Today, the government's vast – and growing – unfunded entitlement obligations make even modest cuts to spending politically impossible. And that means, when it comes to inflation, we ain't seen nothin' yet.
Over the past couple of years, we've seen consumer prices rise at the fastest pace since the 1970s. And while inflation has been slowing recently following the Fed's aggressive rate hikes (more on this in a moment), it will likely remain a persistent, recurring problem for the next decade or more, regardless of Fed policy.
History shows that any of these issues in isolation can potentially trigger a crisis. What is genuinely unprecedented (and scary) is that they are now occurring simultaneously.
Financial markets have never had to reckon with a speculative asset mania, unsustainable bubbles in consumer, corporate, and sovereign debt, and structurally high inflation – all at the same time.
And the Federal Reserve is compounding these risks with its most aggressive tightening cycle in history. The central bank has increased short-term rates from 0.25% last March to 5.50% as of this July – a 2,100% increase in just 16 months...
Sharply rising interest rates can cause problems in any economic environment. But the Fed's frenzied hikes are akin to dropping Mentos into a can of Diet Coke when debt levels are this high. And the series of rapid-fire explosions has only just begun.
A recession would only compound these risks further. In short, the potential for significant economic and market turmoil is arguably greater than at any time in memory – and that's the good news!
Given all of these facts, you've got a simple choice to make.
You can continue to hold your wealth in U.S. dollars. You can continue to try and earn enough money in wages. You can believe that Social Security is funded (lol) instead of realizing that it is a worthless Ponzi scheme. You can be among the millions of Americans who are going to see their standard of living evaporate over the next decade.
Just keep believing what you hear on CNN and read in the New York Times. Keep voting for more government. You'll get what you deserve, good and hard.
Or, you could make another choice – one that can allow you to hold on to your wealth and invest in some of the market's best opportunities, regardless of what happens in the macro environment. I'll explain the details tomorrow...
Editor's note: Markets hate uncertainty – and we may see plenty more of it ahead. Whatever comes next, you'll want to avoid the worst of the fallout... and grow your wealth while many investors are left in the dark. Most important, the best defense might not be what you expect...
That's because Porter says one type of asset can withstand inflationary environments far better than gold, or real estate – or even short-term government bonds. Last week, he returned after three years to give his unfiltered take on the economy... and to share this dead-simple way to protect yourself. Watch his message right here.
"America's spiraling debt and interest burden are approaching the event horizon," Porter says. If he's right, the biggest credit risk of all today lies with the U.S. government. The value of the U.S. dollar is at stake. And the consequences for working Americans could be disastrous... Get the full story here.
"The richest of the rich are the only group that has gotten richer in the past 30 or so years... while most everyone else has gotten relatively poorer," Corey McLaughlin writes. The "easy money" policies of past decades didn't reward everyone equally. Worse, today's wealth gap is a potential warning sign... Read more here.