Editor's note: You can still profit during times of pain... Investors have been fleeing the market in droves over the past year as out-of-control inflation and geopolitical tensions weigh on stocks and bonds. And with the Federal Reserve determined to continue hiking interest rates this year, a recession appears inevitable. But that doesn't mean there won't be opportunities to make money... That's why Stansberry's Credit Opportunities editor Mike DiBiase says it's critical for investors to start preparing now so that you're not blindsided when the next recession hits... In today's Masters Series, adapted from the September 13 Digest, Mike details why he thinks the economy is going to tank... and explains how informed investors can use the coming financial storm to make massive, safe profits...
How to Profit From the Coming Recession By Mike DiBiase, editor, Stansberry's Credit Opportunities Yesterday, I explained that investors today are missing the forest for the trees. They focus on minor changes to inflation numbers from one month to the next. They're missing the fact that inflation is still at 40-year highs and in a different stratosphere than the Federal Reserve's 2% target. They are also missing the fact that inflation is much more difficult to get rid of than most folks think. That leads me to the second reason I see big trouble ahead for the economy and the markets... The average American is in deep financial trouble... Inflation is a painful, regressive tax on hardworking Americans. It punishes both consumers and savers alike. But it isn't a problem for just the poor. Let me start with some simple math... The median U.S. household income was around $70,000 in 2020, the latest year surveyed by the U.S. Bureau of Labor Statistics ("BLS"). According to the BLS survey, households with incomes around $70,000 spent roughly $61,000 on living expenses that year... including housing, utilities, transportation, food, health care, taxes, and entertainment. That left $9,000 that they could use to build savings or pay down debt. Now consider that consumer prices rose 5% in 2021 and another 7% on average in 2022. (I'd argue the actual increases are a lot higher, but let's go with the government's official numbers.) And also consider that wages haven't kept up with rising expenses. Average wages were up only around 2.5% in 2021 and around 5% in 2022. That means a family with a salary of $70,000 in 2020 earns around $75,000 today, adjusting for the last two years' average raises. Meanwhile, that family's expenses have gone from $61,000 to around $69,000 using the government's Consumer Price Index numbers. Their financial "cushion" was $9,000 in 2020 ($70,000 salary less $61,000 in expenses). Today, it's $6,000. It has been cut by a third in a span of two years, all because of inflation. And remember, that's the median using the official inflation numbers. The problem is much more dire for most folks. By definition, half of all households fall below the median. Food, rent, and energy costs are a much bigger proportion of these families' budgets. And those costs are up far more than the government's official 7.1% inflation number. Even before today's high inflation, households with incomes below $40,000 weren't making ends meet. That was around 35 million families, or 25% of all U.S. households. Now, after more than a year of high inflation, that threshold is much higher. I expect that households with incomes below $50,000 will have expenses higher than their incomes. That's around 50 million households, or nearly 40% of all families. The harsh reality is that... Americans are getting poorer by the month... The problem is only going to get worse until inflation subsides. It will be a problem for more and more families as rising prices outpace wage increases in the months and years ahead. Inflation is systematically wiping out the middle class. The stimulus money Americans received following the pandemic has been spent. The U.S. savings rate recently dropped to 2.4%. That's near the record low of 2.1% set in 2005. Nearly one out of every three American families lack enough savings to cover three months of expenses. More than 60% of all Americans are now living paycheck to paycheck. That's a staggering number. Even among households earning $200,000 or more, nearly 30% report living paycheck to paycheck. Americans are turning to credit cards just to make ends meet. The New York Fed reported that credit-card debt rose by 15% in the third quarter, the fastest increase in 20 years. Total household debt – including mortgages, credit cards, and car and student loans – now stands at a record $16.5 trillion. That's 17% higher than before the pandemic. And it's 30% higher than it was at the peak of the last financial crisis. With interest rates on the rise, much of this debt is getting more expensive by the day. Credit-card interest rates just hit an all-time high this month... soaring to more than 19%, according to financial website Bankrate. Inflation and high interest rates are crushing most Americans. Consumers make up around 70% of our economy. If consumers aren't doing well, our economy isn't going to do well, either. That's why the U.S. is about to plunge into a recession... And this isn't even considering the fact that Europe is about to plunge into a recession of its own... or the geopolitical risk of the war in Ukraine intensifying or tensions between the U.S. and China escalating. Maybe you think I'm being too pessimistic. It's possible. I'll admit, I don't have a crystal ball. But as an investor, it helps to think in terms of probabilities. And as I look out over the horizon, I see far more things that can go wrong than can go right. Here's the big point, all of this leads me to one conclusion... Stocks and bonds are going to get much cheaper... If I've convinced you that we're about to enter a recession, then this next chart should scare you. It shows earnings of the companies in the S&P 500 Index. The black part of the line is actual earnings from 1980 to 2021. The red part of the line (indicated with arrows) is Wall Street's estimates of earnings for 2022 through 2024. Recessionary periods are shown in gray. The most important thing to notice is that in every recession over the past 40 years, corporate earnings always fell. Over the past five recessions (the gray areas on the chart), corporate earnings fell by an average of around 25%. And yet... as the red line shows, Wall Street is still forecasting earnings to grow 7% next year and another 9% in 2024. Either Wall Street is in recession denial or it's banking on this time being different. I'm not. This chart tells me the market has a big wake-up call ahead of it. I expect Wall Street to revise its corporate earnings estimates down for 2023 when companies report their fourth-quarter 2022 earnings in January and February. That's when many CEOs will release full-year sales and earnings guidance for 2023 for the first time. It will be a big disappointment for many investors. It will cause the stock market to be repriced, sending it reeling toward a new bottom. The pessimism will spread to the credit market, too. Credit spreads should widen above their long-term averages early next year. The stock market clearly hasn't priced this in. That means it has much further to fall. I hope you've prepared for the coming economic winter... If you're not prepared for what's coming next, it's not too late. You see, a credit crisis would be a good thing for corporate bond investors. 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. We've done very well without a true credit crisis. We've earned an average annualized return of nearly 16% on 56 closed positions since launching the newsletter in late 2015. That's not far off the 20% return of the overall stock market, and we've done it with investments that are much safer than stocks. And we've done even better more recently. Since the onset of the COVID-19 pandemic in March 2020, we've recommended and closed another 20 positions for an average annualized gain of 42%. But here's the thing... I believe our best moneymaking opportunities are still in front of us 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... Good investing, Mike DiBiase
Editor's note: In March 2020, while the rest of the market was in a frenzy, subscribers who followed Mike and his colleague Bill McGilton's advice were able to lock in eight winners in a short amount of time – for average gains of 59% annualized. And when the next recession hits, Mike believes the pandemic sell-off will look like nothing in comparison... According to Mike, the Federal Reserve's record stimulus has pushed the U.S. economy to a tipping point... And he says the credit bubble will finally pop in 2023, creating a wave of potentially massive opportunities in the corporate-bond market. For a limited time, subscribers can access two full years of Stansberry's Credit Opportunities for the lowest price we've ever offered... and likely ever will. Plus, you'll receive Mike and Bill's newly updated special report with everything you need to know to prepare for the credit collapse. Get the full details here. | 
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