Editor's note: It's time to consider buying bonds... If you're like most folks, you've probably never thought about exploring the bond market – even in times of heightened volatility like we're experiencing today. But according to Stansberry's Credit Opportunities editor Mike DiBiase, we're already in the midst of a credit crisis... meaning corporate bonds will be cheap moving forward. That's why he believes it's crucial for investors to understand the current state of the credit markets in order to take advantage of this ongoing chaos. In today's Masters Series, adapted from the May issue of Stansberry's Credit Opportunities, Mike explains why the latest bank crisis is nothing new. If you study history, you'll know it's not over... and will be prepared for what's coming next. Mike details a proven strategy you can use to profit as the crisis plays out...
How to Prepare as the Credit Crisis Kicks Off By Mike DiBiase, editor, Stansberry's Credit Opportunities 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 of cash 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 of the fallout 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 only keep 5% of their deposits as cash. National banks' cash-to-deposit ratios were much higher, around 25%. This made trusts more susceptible 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...
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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 reached an agreement. 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 differently. 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. Congress nullified creditors' rights to demand bank payments in gold. This gave the government even more power to control the money supply. 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 with today's banking crisis... A decade of easy money has finally come to an end. The weakest banks that took on the most risk are starting to break, just like they did in 1907. Ironically, J.P. Morgan's namesake bank – JPMorgan Chase (JPM) – bailed out the latest failure, First Republic Bank. No one really knows whether this is the start of the "Panic of 2023"... 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. And these moves will only stoke inflation. The economy is already slowing. A recession is unavoidable. We know how this is going to end. Every bank crisis in U.S. history has resulted in more liquidity and currency devaluation. 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. Amid the latest bank crisis, it's 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. The next credit crisis is already underway... In mid-May, seven companies went belly-up over the course of just one weekend. That's the most bankruptcies in any two-day period since at least 2008, according to Bloomberg Law. The list includes medical group Envision Healthcare and private-equity-backed Vice Media. We saw another 54 corporate bankruptcies in April, according to Standard & Poor's. Beaten-down retailers Bed Bath & Beyond and David's Bridal were two of the most prominent names. 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. Credit downgrades are on the rise. In the Federal Reserve's first-quarter survey of bank-lending standards, credit continued to tighten across the board. That includes loans to big and small businesses, as well as consumer credit-card loans. When credit tightens at these levels, it always leads to a recession. Things are about to get much worse for our economy. Investors have been slow to wake up to this reality. We're not there yet. Bonds are still relatively expensive today. As we said, we're still in the early innings of the first true credit crisis since 2008. 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: This credit crisis will be brutal for most people, but you don't have to be a victim of this ongoing mayhem. Mike says we're still in the early stages of this cycle. And this crisis is the best setup he has seen in over a decade... Mike believes this crisis could create a slew of buying opportunities with massive upside potential – with gains that have legal protections – for investors who start preparing right now. Get the full story here... | 
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