Editor's note: The storm clouds aren't passing anytime soon... The Federal Reserve looks poised to continue boosting interest rates throughout 2023 in an effort to temper inflation to its 2% target. But even with the pace of the central bank's rate hikes cooling, this rampant inflation could drag on for much longer. That's why Stansberry's Credit Opportunities editor Mike DiBiase believes the Fed's inflation-fighting strategy will lead to a prolonged economic downturn... In today's Masters Series, adapted from the September 13 Digest, Mike discusses the ins and outs of credit cycles... explains why he believes we're headed toward a recession in 2023... and reveals how you can prepare your portfolio for this coming chaos...
An Economic Winter Is Coming By Mike DiBiase, editor, Stansberry's Credit Opportunities We are living in strange times... Investors celebrate when the latest inflation number comes in a few tenths of a percentage below expectations. The stock market roars. On the other hand, a couple tenths of a percent in the wrong direction sends the markets plunging. Investors cannot see the forest for the trees. What investors are missing is that inflation is still sky high. In the latest reading of the Consumer Price Index, prices rose 7.1% from a year ago. That's still a faster pace than any time in 40 years. What difference does a few percentage points make? The bigger picture investors seem to be missing is that inflation north of 6% is still incredibly high... not even in the stratosphere of the Federal Reserve's 2% target. It's a punishing tax on consumers. Bulls are looking for any small hope to cling to as a reason to pile back into stocks. Today, I (Mike DiBiase) will explain why it doesn't matter whether inflation falls a few tenths of a percentage from one month to the next. 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 "all in" on stocks again, I urge you to keep reading. Our economy grew in the third quarter. And it's likely to grow again in the fourth quarter. Some might think the worst is behind us. 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 about to enter a deep, prolonged period of slowing economic growth. And things are going to get worse before they get better. 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, 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, my outlook for informed investors is very rosy. To be an informed investor, you must understand credit cycles... 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 end of the "easy credit" point in the cycle where low-quality loans are just beginning to go bad. According to the Fed's latest loan-officer surveys, credit is once again tightening for the first time since the immediate aftermath of the pandemic. Take a look... Banks are becoming more cautious with all types of loans, including loans to both large and small companies, as well as on credit-card loans to consumers. As credit continues to tighten, I predict we'll read more and more stories in the coming months about rising delinquencies (late payments), defaults (loans going bad), and bankruptcies (companies going bad). 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. The main reason the Fed can't save the economy this time is persistent inflation... I've been banging the drum since April 2021 warning about inflation. Back then, inflation was less than 3% and no one was taking it that seriously. That's right around the time Fed Chairman Jerome Powell began calling it "transitory." I called it the biggest threat to the markets. Then in December 2021, as the stock market was hitting all-time highs, I explained why inflation would cause the markets to crash in 2022. Of course, as you know, inflation has since soared. And the markets crashed in 2022. Unfortunately, the worst is not behind us. Things are going to get much worse before they get better. I believe an economic winter is coming. The stock market and the even bigger corporate bond market are headed much lower. The main reason is inflation. Inflation is much tougher to get rid of than most folks understand... A bout of inflation is not like catching a cold where you can be back up on your feet feeling great again after a week. It's more like contracting severe pneumonia. You're going to be sick for a while. And if you don't take it seriously and do what it takes to fight it off, it's going to stick around even longer. The biggest mistake many investors are making today is not understanding how sticky inflation is. To them, if inflation drops a tiny bit from one month to the next, we'll be cured of it soon – allowing the Fed to begin loosening its policies later this year. That's a foolish bet. Even Powell, "Mr. Transitory," seems to have finally learned the lesson. His summer reading list must have been filled with economics textbooks. In his speech in December, Powell was very clear and direct. As he said... Reducing inflation is likely to require a sustained period of below-trend growth. This historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done. I'm impressed at how far Powell has come since early 2021. Powell now knows the mistakes the central bank made in the 1970s in loosening policy too fast, which led to two rounds of inflation rising above 10% and high inflation lingering through the decade. Powell is finally saying all the right things. And yet many investors are ignoring his warnings. Ironically, when Powell was wrong about inflation being transitory, investors believed him. Now that he's finally right about inflation, investors are ignoring him. It's going to be another painful lesson for those investors. Don't fall into that trap of thinking inflation is under control just because the headline number falls from one month to the next. In the 84 months from 1973 to 1979, when inflation averaged more than 8%, the inflation rate decreased from one month to the next 36 times. And remember, there's a lot of "noise" in today's inflation numbers from supply shocks and the effect on energy prices caused by the war in Ukraine. The biggest part of the decline in the inflation numbers in recent months is from energy prices easing a bit thanks to the government tapping our strategic oil reserves. But that's not going to last. The reality is that interest rates still have to go much higher in order to get inflation under control. That leaves the difficult choice... high inflation or high interest rates. In tomorrow's essay, I'll explain why these conditions will lead to the next recession. And more important, what you can do to profit from it. Good investing, Mike DiBiase
Editor's note: Since 2015, Mike and his colleague Bill McGilton have used their unique distressed-bond strategy in Stansberry's Credit Opportunities to deliver 16% annualized returns on more than 50 closed positions – all while taking on less risk than typical stock investments. But Mike says what he sees coming in the credit markets could blow their past gains out of the water... Put simply, Mike believes today's massively inflated credit bubble is going to pop in 2023 – plummeting us into a recession. And when that happens, distressed-debt investors who are prepared will make the biggest profits. As a special "Christmas gift," we're offering access to two full years of Mike and Bill's exclusive research – before the financial crisis hits – for our best price ever. Click here to learn more. | 
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