In This Episode

What in the world is going on in the bond markets? This is the question Porter asks Marty Fridson, a bond market visionary whose 40-year career has been accurate enough for him to be labeled the “Dean of High-Yield Debt.”

Featured Guests

Marty Fridson
Marty Fridson
Marty Fridson is the chief investment officer at Lehmann, Livian, Fridson Advisors (a SEC registered investment adviser) and a widely respected fixed-income analyst. He is one of Wall Street’s most thoughtful and perceptive analysts. In 2000, Marty became the youngest person ever inducted into the Fixed Income Analysts Society Hall of Fame. The Financial Management Association named him its Financial Executive of the Year in 2002. He has been dubbed “The Dean of The High Yield Bond Market” in conjunction with being voted on to the Institutional Investor’s All-America research team.


Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour.


Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at Here are the hosts of your show, Buck Sexton and Porter Stansberry.

Buck Sexton: Welcome, everybody, to the Stansberry Investor Hour. I'm nationally syndicated radio host Buck Sexton and, of course, your fearless leader and CEO, Porter Stansberry himself is with us now.

Porter Stansberry: You know, Buck, I think I should start just by saying I'm not actually the CEO of Stansberry Research any longer. On August 1st we hired a new CEO to run the company for us – Mark Arnold is his name – and that's gonna allow me to do what I do best, which is write newsletters and make podcasts with you.

Buck Sexton: Oh, that's awesome.

Porter Stansberry: Yeah. So I think now you can just refer to me as the founder of Stansberry Research.

Buck Sexton: Founder of Stansberry Research. I like it, all right.

Porter Stansberry: The founder is the title that everyone should want because you get all the credit and you have none of the responsibility.

Buck Sexton: I am looking forward to the day.

Porter Stansberry: [Laughs]

Buck Sexton: I'd like to be founder of something.

Porter Stansberry: But, heck, you know, you're a nationally syndicated radio host and that's not nothing.

Buck Sexton: Why thank you, sir.

Porter Stansberry: There's very–

Buck Sexton: Over 100 stations.

Porter Stansberry: There's very few of you left.

Buck Sexton: There are very few of us left.

Porter Stansberry: [Laughs]

Buck Sexton: And there are very few under age 50. I think I'm actually the youngest nationally syndicated radio host. Some people are syndicated, you find out they're on, like, three stations or something, but, uh, I think I'm the youngest in the country that's truly nationally syndicated at this point, so that's kind of cool.

Porter Stansberry: You know, if this was 100 years ago and we were talking about this – you know, if today was 1917 instead of 2017, it'd be like if you said I'm the leading buggy whip maker in the country. I'm going into an industry with a bright future. [Laughs]

Buck Sexton: Damn, that's cold. You see that's why we're on the digital audio – or if we want – if we want a little industry insider – spoken word porter – we like to go – we like to say spoken word now instead of just saying audio 'cause, you know, audio could be music, right? So what we're doing here –

Porter Stansberry: Yeah.

Buck Sexton: – in podcast format what they say is spoken word.

Porter Stansberry: [Laughs] I thought spoken word was people who can't sing in front of an audience trying to sing.

Buck Sexton: Uh, I don't know. I think that's slam poetry. [Laughs]

Porter Stansberry: Slam poetry?

Buck Sexton: I'm not sure what that is – I'm not – no, I don't know what that is. Oh, by the way, this week joining us is Marty Fridson. He is Chief Investment Officer of Lehmann, Livian, Fridson Advisors. Marty's perhaps the most well-known figure in the high yield bond world according to Investment Dealers Digest. He'll be presenting at the Annual Stansberry Conference in Las Vegas next month and is also the author of books such as How to be a Billionaire and Financial Statement Analysis and, uh, he's also the dean of high yield debt, right? That's a term that'll get you some numbers at a bar.

Porter Stansberry: Don't miss his book on financial statement analysis. That's gotta be a [laughs] page-turner. [Laughs] But sincerely, Marty is everyone's top source in high yield debt markets. He's an encyclopedia of knowledge about corporate debt, and if you care about timing the market cycles you should really understand the credit cycle and the default cycle and he truly does, and we're glad to have him on and I'm sure you're gonna learn something important from Marty about how to manage your portfolio, which Buck, in addition to being entertaining, is why we are here.

Buck Sexton: Indeed it is. And speaking of entertaining, you can join Porter, Buck, and the whole Stansberry family in Las Vegas this September 27th and 28th for the Annual Stansberry Conference. The event is very close to its capacity of 500, but there's still a way for all of you podcast listeners to get in. Just go register at When you join us in Vegas you'll see new ideas from Porter, Steve, Doc, Marty Fridson and other special guest investment experts like Kevin O'Leary, one of the star investors from ABC's hit show Shark Tank.

You'll also hear P. J. O'Rourke, well-known political observer, editor of American Consequences and your sometimes guest host on the Stansberry Investor Hour, and you'll witness inspiring presentations from experts like Kenneth Cukier, Senior Technology Editor The Economist; Danielle DiMartino Booth, author of Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America; cryptocurrency block chain expert and cofounder of Blockchain Capital, Brock Pierce; and many more investment experts, entertainers and surprises. Just go to for the full speaker lineup and all the details on how to register and join us in Las Vegas this September 27th and 28th. Whatever you do, just don't wait. There are only a handful of seats left. That's

Porter Stansberry: Buck, I've got to get to the fun stuff. Can we – can we talk about what a threat statues are to our-our nation's safety and security?

Buck Sexton: Which statues are you talking about, because the one that really keeps me up at night is Christopher Columbus. You know, they've gone out – they've gone after that one now. It's not even just – it's not even just confederate soldiers and generals. It's now Christopher Columbus.

Porter Stansberry: That one bothers me a lot more than, uh, Robert E. Lee stuff, and [laughs] let me get – let me get all of the deplorable people out there to hate me as well, because I think we should not have any statues to Robert E. Lee or any of the other confederate generals. You want to know why?

Buck Sexton: 'Cause they lost?

Porter Stansberry: Exactly. I don't believe in trophies for second place. Sorry, guys.

Buck Sexton: Wow. Wow, you have Southern subscribers right now –

Porter Stansberry: [Makes raspberry noise]

Buck Sexton: – that are throwing things at the wall.

Porter Stansberry: [Laughs] I completely stand with the Rebels of the Confederacy in regard to their political goals. I think that the North's actions are tyranny and I think that the states had a right to secede. They created the Union, they should have the right to leave the Union. I completely agree with all of that, and by the way, I think it still applies today. If California wants to leave, sayonara.

If Texas wants to leave, fine by me. I think that the core idea of America was the idea that the governed have the right to decide who governs. That's the core idea of our country, and I think the North trampled on that idea and I think the South went to war because they were invaded. I think all that makes sense, and this whole stuff about slavery is completely a nonissue. The North did not fight the South to free the slaves. In fact, the slaves, as you know, weren't emancipated until long after the war began, and in fact, they were emancipated because Lincoln was losing the war and needed something to threaten the South's security and safety.

So let's stop pretending that the Civil War was about slavery 'cause it wasn't, and let's also stop pretending that the South was particularly evil because they had slaves and the North didn't. That's just nonsense. Slavery at the time was a global institution and it wasn't replaced globally until mechanization and other things came along. I mean slavery had existed for thousands of years. It doesn't make the South bad – particularly bad. And we're talking about –

Buck Sexton: America's first –

Porter Stansberry: Hold on, let me finish.

Buck Sexton: – foreign – oh yes, sir.

Porter Stansberry: If you're talking about –

Buck Sexton: No, you're – got for it.

Porter Stansberry: If you're talking about racism, OK, go spend some time in Boston. I mean I've been lots of places in the North that are hell of a lot more racist than where I grew up in Atlanta or Orlando, Florida. So I think that there's a bunch of stuff that's been mischaracterized, but I'm on the side of taking down the Confederate monuments, because let's face it. We shouldn't – we shouldn't support trophies for second place.

Buck Sexton: I just thought it's interesting that it's never taught in school these days that our first foreign war was, in fact, a war largely fought to end slavery, but it was slavery of white Christian Americans. We were fighting against the Barbary States because – Barbary States of North Africa, what's now Tripoli, Algeria, Morocco – we were fighting against them. That's why we had to send over a navy. It's actually why we commissioned a navy. This was a big deal early on.

A navy was ruinously expensive. We had six frigates that went over there to fight. We were a country – a fledgling country, still worried about Britain deciding that they were gonna roll over and squash us. I know everyone thinks now that after the Revolution is was all fine, but it was actually quite scary. The point here being that there was a Muslim slave trade that existed for centuries that is not talked about in school anymore that involved the continuous enslavement of Europeans, of Americans.

Our women were taken off of ships and sold into the harems of North Africa and of the Ottoman Empire. Our sailors were taken and put into bondage and worked to death in mines in North Africa. This happened for centuries, actually, and it was finally so egregious and so much that Jefferson and Adams were like we gotta drop the hammer on these guys and to the shores of Tripoli we went and portages – do any kids in school learn about this?

Porter Stansberry: Let's face it; the Marines won.

Buck Sexton: Yes they did.

Porter Stansberry: So the statues should be for those guys, not for the Confederates, sorry. If you want statues, let's win a battle and then let's win a war. I mean, you know, Pickett-Pickett's Charge. If that at all changed – if that had all happened differently, who knows? Maybe then we could have Confederate statues 'cause maybe we would've won and maybe the South would look a little bit different today.

Buck Sexton: I just don't know where this ends. People have been saying for a while once you start pulling down – once you start pulling down statues, you start renaming stuff, you're gonna walk down a pathway that no one knows where it ends. As I said, Christopher Columbus –

Porter Stansberry: It's all politics.

Buck Sexton: – they've all – there's a whole video about genocide and everything but you look at a place like Yale – I-I think this is one of the best examples –

Porter Stansberry: Oh, it's hysterical, yeah.

Buck Sexton: – of how this all falls apart. So they have to rename the dormitory for Calhoun, John Calhoun, because of his support for slavery, right? So they're like, "We're gonna get rid of that." But then some people did a little digging.

Porter Stansberry: [Laughs] Whoops.

Buck Sexton: And the founder, uh, the founder of Yale University was not just somebody involved with slavery, it's not just that he had a slave or – no, he was a slave trader. Elihu Yale was, in fact, a slave trader. Interestingly enough, one of the original benefactors of Yale had the last name Dummer, but Newhaven College, which is what Yale initially was, uh, was looking for a name and they didn't want to call it Dummer College for obvious reasons –

Porter Stansberry: [Laughs]

Buck Sexton: – so they went with Yale from Elihu Yale and now you just see that's – if Yale really believes in social justice and wants to put its multibillion dollar endowment where its mouth is, it's gonna change the name, which is, in fact, the value of the university. People go to Yale – I mean Porter, I know you know this – do you have kids who are college age yet, by the way? 'Cause this is a whole other discussion we'll have to have.

Porter Stansberry: No, not quite yet. My oldest is only 10.

Buck Sexton: Oh OK, 'cause the – it's all – it's branding. I mean people are paying $55,000, $60,000 a year now for the brand name that their kids get to use on their resume and for their rest of the life. It has nothing to do with the education.

Porter Stansberry: I agree.

Buck Sexton: But Yale won't change the name because that's where the value is.

Porter Stansberry: Of course, but they're happy to get rid of Calhoun. But listen, I want to interject here something, which is that this has really nothing to do with slavery or ethics and has everything to do with power and politics and the people – there are – there are a group of people who want to prove that they are in charge, and so what they're going to do is they're going to threaten the other side's ideology, ideas, freedoms and statues. It's that simple. They're doing this because they can. It's an exercise in power and that's it.

There's no real justification for it beyond that, and once you understand that I think that's why it becomes a little more meaningful and even a little bit more scary because if they're willing to take down our statues – and when I say our statues, I mean the people in this country who own the Capitol and whose history is depicted in those statues the white capitalist, culturally dominant western civilization that, Buck, you and I are clearly a part of. [Laughs] And if they – meaning the progressives, the multiculturalists, in some cases the communists, the liberal left are in control they're going to take on these things. And you saw miniature versions of this take place before. Remember when Obama moved the statue, the bust of Churchill that had been in the White House for a very long time? And he said it was a – he said he did so because he thought the bust of Churchill was a celebration of colonialism, and again, the dominance of a predominantly white western civilization around the world.

Of course, the funny thing about that is Churchill, more so than any other person, destroyed [laughs] the British Empire. He made terrible choices his entire career and left – left the country bankrupt and the colonies in tatters. But that's – I'm just saying that this idea is part of that kind of progressive, totalitarian ideology just like the idea that people who espouse a conservative worldview don't have the right to speech. And, listen, as you know, I do not – I do not stand up [laughs] for the KKK or the Klan or any racism. It's – I think it's nonsensical. It's idiotic.

It's just a bunch of stupid, uneducated morons, but I do firmly believe in their right to speech, and I think the proper behavior is just to ignore them, just like you ignore anyone whose ideas that you abhor or you don't agree with. And the more that you call attention to them the more you're falling into their strategies. So these are my ideas about all the things that have been going on, and as you know, Buck, I am wearing a state of Florida trucker ball cap today. The state of Florida has a red X behind the seal on its flag, and the red X – the red X is a nod to both Florida's Spanish heritage and its role in the Confederacy, and I don't think celebrating that means I'm a racist or necessarily a Trump voter, because I did not vote for Trump. I just think that it's OK to recognize the heritage of my state.

Buck Sexton: And there we go.

Porter Stansberry: There you go.

Buck Sexton: Just don't celebrate Columbus Day too much.

Porter Stansberry: [Laughs]

Buck Sexton: You celebrate Columbus Day, that's big R racism. I mean how far back do we go, by the way? 'Cause at some point people realize that once you go to pre-colonial America, you go back even further –

Porter Stansberry: Look, look –

Buck Sexton: – there's slavery everywhere.

Porter Stansberry: Hey, hey, hey.

Buck Sexton: Everyone's enslaving everybody all the time, so everyone's gonna be off limits.

Porter Stansberry: Hey, no, no.

Buck Sexton: Plato is gonna be toast.

Porter Stansberry: The Africans started all this, OK? Remember Hannibal and the elephants invading Rome, crossing the Alps? That was – that was where it all started, so we're just retaliating.

Buck Sexton: Wow, you're really picking an interesting historical point – for history to begin there.

Porter Stansberry: [Laughs] No, my point –

Buck Sexton: That was really specific.

Porter Stansberry: My point is people have been fighting each other, they've been enslaving each other for centuries. There's nothing unique about any of this.

Buck Sexton: Yeah, people forget that the – even in the Mediterranean for-for centuries, you had galley warfare, which was the way that-that naval warfare was conducted, which was intensely manpower – or was deeply manpower intensive. You had to have people that were actually pulling oars. They didn't tend to last very long. That was – it was largely driven by slavery. I mean you – meaning people – you know, people – the Genoese would enslave somebody from Venice, would enslave somebody from, you know, you name the next port, they would impress them in the sense of impressment, they'd force them to become slaves.

So I mean – and then when you go back – I mean in Rome you had slaves. You – slavery's been around forever, and instead of celebrating the eradication of slavery based upon universal, human rights, natural law and the conceptual rejection of slavery – not that slavery's gone because one group overthrew another group or it's temporary, but it was based in morality and political philosophy – instead of celebrating that, now we have to abandon.

Porter Stansberry: I disagree, Buck.

Buck Sexton: Disagree on what?

Porter Stansberry: That – I do not think that has any – that has no – the whole idea of morality playing a role in the end of slavery I think is completely wrong. Slavery –

Buck Sexton: I don't – I don't know.

Porter Stansberry: Slavery ended for one reason and one reason only, and that was the Industrial Revolution and mechanization. It was no longer economically beneficial to enslave people. Enslaving people takes a lot of – takes a lot of capital, takes a lot of time, takes a lot of manpower, and when you have a cotton gin, you don't need slaves anymore, so taking care of them becomes an expense. It's that simple. People have not changed –

Buck Sexton: You still have slavery, though.

Porter Stansberry: People don't change.

Buck Sexton: There's still slavery.

Porter Stansberry: If there was no mechanization, if we had one of those neutron bombs and every machine broke around the world, if it was a – if there was a zombie apocalypse, we would [laughs] – people would go right back to enslaving one another, trust me.

Buck Sexton: You have the slave trade right now in Sudan. You've got Arab Muslims in what's – well now Sudan is two countries, South Sudan and the Sudan – but you have Arab Muslims enslaving black Christians and black animist Africans in the Sudan, so I mean it – but that's obviously a less advanced economy, so your point about mechanization at some level still stands but there is still slavery and there's obviously – there's obviously also the sex slavery that exists all over the world.

Porter Stansberry: Right. Look, I'm not saying that – I'm not saying that people were only enslaved for economic reasons, right? There's – there are tons of examples of people being enslaved during warfare, right? So there's – there is a punishment aspect to some of the slavery that goes on. There's a – there's the sexual slavery that has nothing to do with the economy, right? There are other kinds of slavery out there.

I'm not arguing that there is no other slavery, but global, economy-wide slavery was driven by economics, not by morality, and its end was driven by economics, not by morality. Look, people justify their behavior in all kinds of ways, morality being one of them, and the ethos of Christianity was enshrined in the Bible and that's been largely unchanged for two centuries. But, Christians have held slaves for far longer than they haven't, so this idea that we're all God's children and that we should treat each other with love, that all fell by the wayside when people needed to make a buck. That's what drives human beings. It's the economic choices that matter.

Buck Sexton: You want to speak a little bit about Afghanistan, by the way, before – I know we've gotta get to Marty Fridson and some financial analysis coming up in a few minutes –

Porter Stansberry: Let's do that, Buck, because you certainly know way more about Afghanistan than anyone else I know. So you've been to Afghanistan.

Buck Sexton: I have, I have.

Porter Stansberry: What do you think – uh, Four Seasons expanding any time soon? Maybe some vineyards?

Buck Sexton: Developmentally, it is – it was explained to me by one of the smartest Afghanistan analysts I know. He said, "Just first start with it's 100 years developmentally behind Pakistan and then you'll start to understand what we're dealing with in Afghanistan," and if you've spent any time in Pakistan it is not exactly lighting the world on fire with its progressive ways, incredible infrastructure, and economy. Uh, anyway, Afghanistan is a fascinating place. It's actually physically, in some parts, incredibly beautiful, for those who are curious. It used to be a place where you could go and even back in like the '60s – I know of – I have friends – I've spoken to them – they said they've had family members, parents, who would go hiking in the mountains, they're incredible.

Obviously, it's been a third world hell hole in a series of continuous wars, warring – it's really almost feudal in the sense that there are all these warlords who have their own little factions and they've been fighting each other, fighting – getting outside assistance. It's – look, it's a total mess. What's happening now though is unfortunate because the Trump administration I think would've had the opening to say that this is not gonna work, what we're doing is not gonna work. I have worked in Afghanistan. I worked the issue in the CIA, I've spent time in Afghanistan.

What they've announced this week is that 4,000 more troops are going. That's not gonna work. If by work you mean accomplish the goal of a self-sustaining, self-defensible Afghanistan that's not gonna be continuously eaten alive by the Taliban – which is what's happening right now, by the way – so this is – this is disappointing. I think it's interesting. I can tell from a lot of your audience and from some of the feedback that we get – which by the way, we love getting, just go to

You can send us your e-mails, [email protected] A little plug there for this 'cause I'm sure a lot of people have their own sense of whether our intervention in Afghanistan is something that can come to an end or not. From a libertarian perspective, I even think from a conservative perspective, if you're just gonna be reality-based, there is no way, Porter, there is no way that we are gonna turn this thing around and no one wants to be the politician, no one wants to be the president who says it's done, it didn't happen, it's not gonna work, we're leaving, but that's what should happen now because I've seen – I've been to this dance before. Go – people can go and read Obama's speech in 2009; Afghanistan doesn't have a blank check, we're gonna put pressure on Pakistan. Do I think Trump will do a better job as commander in chief than Obama on this issue? Yes. Is that gonna be enough? No.

Porter Stansberry: I just don't understand it. What is our strategic national interest in Afghanistan?

Buck Sexton: Not allowing jihadists to look like they beat us, because the storyline that we –

Porter Stansberry: Who cares? That's not a strategic national interesting.

Buck Sexton: I agree with you. The storyline is that –

Porter Stansberry: We're not – we are [laughs] not any safer by having troops on the ground in Afghanistan.

Buck Sexton: Uh, let me just say that this notion that, Porter, that we need to stop Afghanistan from providing a safe haven for jihadists, OK, let's go over a little safe haven list, shall we?

Porter Stansberry: Yeah, ridiculous. There's dozens of them. The –

Buck Sexton: Yeah.

Porter Stansberry: Indonesia, Sudan –

Buck Sexton: The Southern Philippines, Sudan, Sinai Peninsula, Syria –

Porter Stansberry: Right.

Buck Sexton: – Libya, I mean we go down –

Porter Stansberry: Somalia, yeah. [Laughs] But remember –

Buck Sexton: Parts of Somalia.

Porter Stansberry: Remember that – remember Colin –

Buck Sexton: Nigeria.

Porter Stansberry: Remember Colin Powell?

Buck Sexton: I do.

Porter Stansberry: And remember the Powell Doctrine, which is that we should not –

Buck Sexton: You break it, you own it? Yeah.

Porter Stansberry: No. The Powell Doctrine was that we should not commit our armed forces to any conflict –

Buck Sexton: Oh, yeah.

Porter Stansberry: – where we do not have overwhelming superiority and where a clear victory cannot be achieved. That doctrine was in response to Vietnam. Well, Afghanistan is a way bigger quagmire than Vietnam will – could be. [Laughs] I mean there is no way to win in Afghanistan.

Buck Sexton: Not only is there no pathway to victory, it's in fact, right now the case that the Taliban is in a more powerful position, a better position in that country than they have been at any point – and again, I follow this very closely and, look, I was in the agency working this issue so I have a very good – I have very strong familiarity with how things have been going and the metrics and the numbers and, Porter, it is worse than it's been since 2001 and it's getting worse with each passing day, so we're gonna do what? I mean what – this is just a delaying action. Trump doesn't want – he doesn't want to make a real decision on this yet so this is gonna hold in place what we've got.

Porter Stansberry: But Buck, why? So, things don't happen in a vacuum. Is there – you know, cui bono? Someone benefits from this. Who is it in the – in the American power apparatus that benefits from a never-ending war?

Buck Sexton: People who – in political office in – really in both parties, 'cause you'll notice that the antiwar movement while Obama was in office and fighting two wars, by the way – and actually expanding in wars in other places, undeclared wars – they were very quiet, but nonetheless, generally speaking, politicians get a lot of – well, they get a lot of power, they get a lot of support from giving all different versions of the same speech, which is we're America, we're number one, we kick butt, we're gonna kill the bad guys. All you have to do is get up and say that and people will – and that will be more popular than the alternative, and that's true for both political parties. It's certainly true I this country right now when it comes to fighting the war on terrorism, and I look at what's going on in Afghanistan right now and it's honestly heartbreaking because we're gonna – I mean this is – this is where it gets real.

We are going to lose guys. We're gonna lose guys over there because politicians don't have the spine to say, "You know what, this is their fight and we're not gonna..." By the way, once you start looking at a map of other players that are really involved here, then the picture becomes even – in a sense, it's clearer and it's clearer because it's even messier. You got the Iranians backing favorite factions, including the Taliban now having contact with them they didn't have before, you got the Russians that have a big interest in it. Obviously, Pakistan is the single most important player.

Pakistan and India hate each other. There's the prospect of the war of annihilation between those two nuclear states and Afghanistan is a proxy battleground for Pakistan and India. You've got all these different countries that are – and even China wants to get in on the action at some level. So it's not like we're the only player in the space. Why we think that we're gonna be able to turn this thing around – I don't even know what turning it around looks like, by the way. I mean Afghanistan's peaceful? You've got a – you've got an insurgency in, like, half the country. Well how is it gonna be peaceful?

Porter Stansberry: It's complete madness and I feel – I feel very, very sorry for anyone in our armed forces that has to deal with this issue because it's complete political football. It's – it has nothing to do with our national security, it has nothing to do with the reason why people joined our armed forces and why they put their life on the line to protect their country. This has nothing to do with any of that, and the longer it goes on, the more it's gonna destroy the morale of our armed forces and the hardest it's gonna be to maintain readiness for an actual battle.

Buck Sexton: Here's a mistake – the Obama administration came in and with these – with these foreign wars looked at Iraq, looked at Afghanistan and here's what the – the politics of the time were Iraq was Bush's war, the bad war, Afghanistan was the good war, so we're gonna bail on Iraq as quickly as – this is Obama – we're gonna bail on Iraq as quickly as possible and go hard in Afghanistan 'cause there's this good war/bad war, which is just based on politics, actually. It's not really based on the national security threats, it's not based on the – on the realities on the ground. OK, so Obama does that.

Now Trump comes into office and sees that once Obama pulled out of Iraq you had the Islamic States rise, they come in, they seize Mosul, they take the northern part of that country in a – in a jihadi blitzkrieg, and he doesn't want that to happen in Afghanistan so he's doing – he's pulling the not – the same way that Obama pulled not Bush or that Obama was trying to be not Bush with his foreign policy, Trump is trying to be not Obama in making this decision to pull out of Afghanistan and then having the possibility of a vacuum, but that just means it's continuous – now you've got the John McCain Doctrine which is just troops fighting continuous war going on forever. That's what's happening.

Porter Stansberry: So we originally went into Iraq because there was a false belief in the Bush administration that the United States was running out of oil. That's never mentioned anymore. The reason why we invaded Iraq was to make sure we could guarantee supplies of oil from the Persian Gulf.

Buck Sexton: I mean that's definitely not the conventional narrative, but yeah.

Porter Stansberry: And since then, of course, we've discovered about 20 Persian Gulfs in Texas, so we don't need oil anymore. There's no reason for us to have a military presence in the Middle East. We do not have to guarantee supplies of oil from the Persian Gulf ever again. We don't need any of it. That how crazy all of this is. But I want to move on to something I don't know if you've seen or not, and if you haven't, then we can just forget it, we'll talk about it another time. But I saw a 60 Minutes piece on Sunday where they showed, how the FBI was involved with the shooting that happened in Texas. There was a cartoon contest to draw a picture of Mohammed and it was in support of the –

Buck Sexton: This was in Garland.

Porter Stansberry: In Garland, yeah.

Buck Sexton: Yeah, I know. Yeah.

Porter Stansberry: So it was the most amazing thing. The FBI – the FBI agent was following the two shooters. He was in the car directly behind them. In fact, he has pictures of the event on his cellphone [laughs] that 60 Minutes got a hold of. And the FBI won't identify who the agent was, they won't tell why the agent was right there when this event happened. It's a very unusual thing. Are you familiar with the facts and the story, 'cause I haven't seen it –

Buck Sexton: I'm familiar with the Garland shootout. I'm not familiar with the 60 Minutes piece on this FBI guy following them.

Porter Stansberry: So the Garland shooter had been under investigation by the FBI for a decade and there was a lot of evidence that the FBI was encouraging him to violence –

Buck Sexton: Oh, gosh.

Porter Stansberry: – in order to build – to build a case around him, including the fact that they were tailing him when he went to this big stadium and shot a couple people.

Buck Sexton: I will tell you something, Porter. I am as rageful – I don't know. I'm as anti-jihadist as I think any person could possibly be, both in theory and in practice, but having worked a little bit on the domestic terrorism front – you know, I spent some time at the NYPD Intelligence Division and they do very – they run very similar operations, 'cause New York is the biggest terrorist target. The only argument you can make is that D.C. is the same level.

But even still, I think New York is – in terms of plots, numerically speaking New York is number one. New York's the biggest terrorist target in the country. So you've got a pretty serious – not just FBI but also local police, counterterrorism presence and that involves the standard – if you've seen The Wire, which I'm assuming – you live in Baltimore, you've seen The Wire

Porter Stansberry: I've heard of it.

Buck Sexton: Counter terror – right? I mean, yeah, that's the only – by the way, that's –

Porter Stansberry: I don't have to watch the show. I can just look out my office window. [Laughs]

Buck Sexton: OK. [Laughs] 'Cause all I know about the – about Baltimore actually comes from The Wire so –

Porter Stansberry: [Laughs]

Buck Sexton: – uh, I'm sure there – I'm sure there are nicer places in it, but a lot of the – the tactics and techniques you see in that show, which for your listeners, is an HBO show. You can watch all of it if you want. I mean it's got, like, five seasons. It's actually a great show, I think, but the tactics, the things that they do very similar – narcotics work and terrorism work is very similar. Why I'm bringing this is up is because it – a lot of it is informant-based –

Porter Stansberry: Mm-hmm.

Buck Sexton: – and once you start using informants you have people who are motivated to get to a result on a case, and once you put an undercover in place somewhere, from a law enforcement perspective you're devoting resources, someone's taking risks. Law enforcement is just like a lot of other entities in that there are resources deployed and a result expected, and when you're talking about a counterterrorism investigation that goes on for a while you will sometimes have what in other circumstances would certainly sound like entrapment, but here's what law enforcement also knows: if you can be entrapped to – no matter how much of a loser, how stupid, how crazy you are – if you can be entrapped to put a dummy bomb in front of, you know, a church, a synagogue, a school, nobody cares what was said to you beforehand. Nobody cares how much entrapment was going on.

You're going away forever and they're gonna throw away the key and no one cares. But it sets a troubling precedent when law enforcement starts to blur those lines a little bit, and I'm somebody who from the inside saw some of this. So with the Garland thing, I don't know the specifics of that case but I can tell you there have been other cases where the guy – you know, an informant, let's say, would all of a sudden in the – you know, in the conversation he's having with the subject of the investigation, the terrorist, the possible terrorist, would say, you know, "Don't you really hate these guys? I mean really, don't you think you should do something about them?"

I mean instigating a, uh, what would be considered radicalization process in them and people don't care, because if you fall for the radicalization they're like, you know, screw that guy. Throw him away. That's just the way the politics goes. But if law enforcement can do that with terrorism, Porter, they can do it with other stuff, too. That's what everyone always has to remember.

Porter Stansberry: Yeah. I just thought it was a very interesting case and I hadn't seen anything about it before in the mainstream, uh, news, and I think it was – it's very troubling. What was more troubling was that the FBI agent fled the scene. [Laughs] He didn't – he didn't stop his car, pull out his weapon and help to defend the local police from, uh, this – these shooters, uh, which was very, very troubling. Uh, so there's – there's a lot of issues there that I hope will eventually be explored. I wondered if you had any knowledge about it. I'm just –

Buck Sexton: I will watch –

Porter Stansberry: You've just heard it –

Buck Sexton: I haven't seen the 60 Minutes piece but I will definitely – I'll definitely check it out. Hey, Porter, why don't we take a pause on all this and get into some financial analysis and insight?

Porter Stansberry: That's good with me. We have Marty Fridson today, and unlike a lot of [laughs] our guests, Buck, Marty actually knows what he's talking about.


Everybody, we're joined today with a, uh, uniquely qualified guest. Some of our guests really don't really know what they're talking about, but our next guest actually does. Marty Fridson is the dean of the high yield credit markets globally. He has worked for half a dozen different major investment banks, he's been in the business for I would assume close to 40 years. Marty, I hope I'm not –

Marty Fridson: Yeah, well, yeah, just a little over 40 now.

Porter Stansberry: I hope I'm not dating but, uh –

Marty Fridson: [Laughs] No, no, not at all.

Porter Stansberry: His career is so important to the bond market that we actually date the beginnings of bull and bear markets from when Marty and his team would be ejected routinely from investment banks at the bottom of the cycle.

Marty Fridson: [Laughs]

Porter Stansberry: So you'd always know it was time to buy when Marty Fridson was back on the street.

Marty Fridson: [Laughs]

Porter Stansberry: Marty, thanks for joining us here, and, I want to start out right at the – right at the crux of the issue. You began warning that the next credit cycle, the next default cycle, would be the biggest one we've had yet and you're predicting over a trillion dollars in corporate bond defaults. That's a pretty scary thing to tell people. Do you still believe that's likely to happen? When would it start and what do you think the losses will be?

Marty Fridson: Well yeah, it – the story's still the same. To put it in perspective, the over-a-trillion-dollar figure – that is globally and it not only includes high yield bonds but also speculative grade private debt, and it's hard to get really definitive figures on the totals of all that –but the basis for projecting that is simply to say, well, let's look at what has happened in past cycles and what has happened is that about 30% of the debt – speculative grade debt that rated below triple B that was outstanding at the beginning of a default rate surge – defaulted during that typically four to five-year period, and by default rate surge, what I mean is that the average default rate on speculative grade bonds per year is right about 4.5%. Now, you rarely have an average year.

Usually it's much lower or much higher than that, but that's the average. So what I mean by default rate surge is when you get, uh, to that period moving up from a lower default rate such as we're at currently to the average default rate, typically – so around 4.5% – then typically peaking a year or two later at around 10% or more and then generally taking a couple of years to come back down to, again, below that average. Forget about 2008, 2009. That was – that didn't fit this pattern at all, but what I've just described is the typical pattern, and in that four or five-year period about 30% of the debt that was there at the beginning defaults, which is a pretty staggering figure and it – but if you simply project that on to the amount of debt that's outstanding at this point, which of course has grown over time, you get to the figure of over a trillion going into default.

In terms of, you know, when it'll start, the-these default rate peaks are associated with recessions, and it doesn't look like we're on the brink of a recession. Now, the market – the high yield markets certainly not indicating that, and even the Consensus of Economic Forecasters has recently been putting only about a 15% probability on a recession beginning within the next 12 months. So the average would start – you'd probably escalate to an average a little before that recession got going, but I think we're talking about somewhere out in really 2019 of the beginning of this cycle at this point. You know, unless something really major shock, you know, might have something in the hopper that could be a geopolitical shock that would accelerate that cycle. But otherwise we're probably still a ways off from that default rate surge.

Porter Stansberry: Marty, I've seen some things in the junk bond market lately that are sort of mindboggling. Can you talk about the – you have to forgive me 'cause I don't know the terminology but –

Marty Fridson: OK.

Porter Stansberry: – the option-adjusted yields between junk bonds and investment grade bonds in early August – the pricing on junk bonds, if you assumed normal default rates and normal losses and you projected that against their yields, then the junk bonds were actually more valuable or paying a lower yield, trading at a higher adjust – option-adjusted price than investment grade bonds were. I read you were quoted in Jim Grant's wonderful newsletter about this, and I wondered had you ever seen that happen before?

Marty Fridson: I think if you go back far enough you can find precedence for most things, but yeah, it had to have been an unusual circumstance, but what I – what I would say right now is that the yields in general are obviously low. You know, treasury rates are very low by historical standards, and so yields on risky bonds are low as well. So what I focus on primarily is the yield differential or the spread between high yield bonds – and I use a Merrill Lynch index in that work, the BofA Merrill Lynch High Yield Index – and that is, as of yesterday, exactly at 4%. So in other words, the yield on an index of high yield bonds is 4% higher than on comparable maturity treasuries.

My fair value analysis says that that should be more like 6% currently, so that is a huge gap by historical standards. There's really only one earlier period where you got to a discrepancy as great as that, and –

Porter Stansberry: Well, hang on, hang on, let me interrupt you.

Marty Fridson: Yep.

Porter Stansberry: When was that earlier period? [Laughs]

Marty Fridson: Well, it was sort of in the lead up to the global financial crisis –

Porter Stansberry: Aha.

Marty Fridson: – the Great Recession, yeah. So that – on the face of it it's kind of worrisome, but there does have to be a trigger. You wouldn't be owning high yield bonds now because you think they're a great value and you're expecting terrific total returns because, you know, these undervalued and unwanted securities are suddenly gonna become more valuable. They're over-wanted, I guess would be a fair way to put it, just 'cause there's such a starvation for yield. But year-to-date, I mean you could – even at the beginning of 2017 high yield bonds were expensive, not as expensive as they are currently – but what has happened, well, that index I spoke about has had a return of 5.4% year-to-date, you know, way over the return on treasuries of 2.92% but not a lot more than on investment grade corporate bonds at 5.13% and triple B corporate bonds year-to-date have actually had a higher return.

That's kind of unusual and it shouldn't really happen. You know, you should have a higher return if you're in a generally favorable environment as we have been this year – you'd expect the lower-rated bonds to have a higher return than the higher-rated bonds, but if you compare triple Bs to speculative grade, actually the opposite has happened.

Porter Stansberry: Hmm. I… [Laughs] I'm afraid you got so detailed there [laughs] you –

Marty Fridson: I'm sorry, I didn't –

Porter Stansberry: You kind of lost me. But I did want to – I did want to draw attention to our listeners to what I think are two pretty important points. The first was that you have rarely seen junk bonds be more overvalued relative to treasuries than they are now. In fact, you said only – it's only happened once before. And then the second thing I wanted to bring up – which we haven't talked about yet – was this issue of the terms, and during a big bull market in bonds the terms on borrowed money can be become very loose. In fact, some bonds are being written today where the borrower can pay or he can choose not to pay. And I wondered if you had any objective measure of those terms that you follow or is it anecdotal, and even if it's anecdotal have you ever seen the terms be as loose as they are today?

Marty Fridson: Well, the best measure, what you can quantify, is the covenants – and there are certain basic covenants in all high yield bonds – which say, well, you know, a company can't sell out all the assets and leave you with an empty bag. You know, they can't change the ownership and set – potentially set – the company in a completely different direction without giving you an option to get out and take a fresh look at the company. So they can't secure a lot of assets ahead of – you know, to – ahead of you to your disadvantage in the event of a bankruptcy of the company. And so Moody's rates the strength of each covenant in each speculative grade bond and then gives the issue an overall score and then – I said to them when they were starting to do this, "Well, if you're gonna do that, why don't you create an index of all of the issues that come each month and each quarter and then we can track the quality of those protective covenants?" and this was a major step forward because prior to that it was entirely anecdotal and it was really hard – you know, people would say, "Well, this particular deal had lousy covenants and this shows how things have really gone downhill," but you didn't really have a good aggregate measure.

Now you do, and the trend since 2011 – when Moody's began this series – has been steadily downward. One is the strongest covenant quality and five is the weakest. Five is basically what they call covenant life. I mean it's no meaningful covenant protection at all and, I do a version – an adjusted version – of this that takes out some of the distortion that results from the changing mix of ratings from month to month. But in any case, by my measure that was found – the quality was all the way down to four – you know, four-and-a-half, which is horrible.

I mean that – that's close to the weakest that you can get and it's – again, it's been moving steadily downward. July actually was a little bit of a breath of relief. By my measure, it rebounded to 3.86, – again, the lower this number the stronger the covenant strength – but it's a bit – it's very – this series is very volatile from month to month, so I wouldn't necessarily say we turned that corner or anything. So I think – to your point – yes, we can quantify it.

The issuers have taken full advantage of the fact that there is an excess of demand relative to the available supply of new issues of high yield bonds and at some point they say, "Well, a few more basis points, you know, a hundredth of a percentage point of a reduction in the yield don't matter that much to me but if – boy, if I can get a reduction in the stringency of these covenants that's worth a lot to me," and the investment banks and the bond lawyers are only too happy to abet that effort.

Porter Stansberry: And Marty, in your experience, is there a relationship between future losses and the stringency of these covenants?

Marty Fridson: Well, that's a very interesting question, 'cause the deterioration really got into sway in the period leading up to the Great Recession and what people were predicting in a lot of cases was that the recoveries – how much you would have left in value of the bond after it defaulted, that has typically been about 65% of face value on average at the low points in the default rate and the high points in the default rate – when you have a recession going on and asset values in general are low, uh, typically you've, uh, recovered only an average of, uh, about 20 or 25%. So people were saying, "Oh, because of these covenants – these weak covenants – what'll happen is that the companies, instead of defaulting right away, they'll be able to drag it out longer because the investors won't be able to move against them and the recoveries on those defaulted bonds during those low points in the economy and high points in the default rate will go down to 10%." And that didn't happen.

They did fall a little bit, but the question remains unresolved because instead of dragging it on and then eventually defaulting, the companies were rescued by the Fed, which came in and just flooded the system with massive amounts of credit and that prevented a lot of defaults that should've occurred at that time. And so had those companies again dragged it out, survived for another couple of years, dissipated a lot of the asset value they had and then defaulted, perhaps those average recovery rates would've fallen as much as people feared. So unfortunately, Porter, I have to say that we don't know the answer. I mean logically, you'd say – you could say this is not a positive development [laughs] for investors that the covenants are weaker, but in terms of directly relating it to the performance we're gonna have to go through a normal default rate cycle lasting four or five years before we'll really be able to say for certain.

Porter Stansberry: All right, Marty. That was a very [laughs] thorough answer. Thank you very much. I've only got time for one more question for you, and it's a very general question, which is given your long experience in this market, if you were going to rate the current environment against other periods that you have experienced would you say – let's say on a scale of one to 10, with the spring of 2009 being a 10, meaning the most attractive market for junk bonds that you have probably ever seen – correct me if that's not true –

Marty Fridson: Right, yeah. Oh, yeah.

Porter Stansberry: – and a one being, you know, hours before the last peak in 2007, where would you put is in general market conditions today? And I want to be really clear: I'm not asking you to make a prediction about when or if this market will turn.

Marty Fridson: Mm-hmm.

Porter Stansberry: I'm just asking you about the current general conditions. Are they extremely favorable for investors or do you think that they're extremely unfavorable or somewhere in between?

Marty Fridson: Well, I would it at about a three currently. I think you could point to periods where just the nature of the financing was more worrisome. I mean you had in the late '90s: the early-stage telecom companies which, you know, defaulted in massive numbers and these were companies that had a territory and they had an organization structure but they didn't have any revenues, much less cash flows. So, you know, just the nature of the deals that are getting done were very, very worrisome, and there've been some ones that are problematic but I wouldn't call it as bad as in that period, so certainly not favorable, unbalanced, but not the worst we've ever seen.

Porter Stansberry: Marty, thank you very much for your time and your excellent perspective. It was a great pleasure to have you and I hope to see you soon at our upcoming conference.

Marty Fridson: Yeah, looking forward to that.

Porter Stansberry: OK, very good. Thank you very much, Marty.

Marty Fridson: You're welcome.


Porter Stansberry: Well, Buck, is it time to get to the mailbag?

Buck Sexton: It is indeed mailbag time, so let's jump into it by – and for those of you who want to let us know what you think of the show – and please do – you can go to [email protected] Love us or hate us, as Porter says, just don't ignore us.

Porter Stansberry: Don't ignore us.

Buck Sexton: But let's get into some mail for the last show. We'll talk about it this time. We have here – as I pull it up – all right. This is from Gerald. "Porter, good to hear your podcast. It's been a while since we met at the Alliance Conference in Santa Barbara several years ago. I joked with you that I was a federal regulator. You have–"


Buck Sexton: Here's the question: "You have spoken often about quantitative easing and the damage it will do to the dollar; however, the U.S. is not the only one printing money. Everybody is doing it or has done it. For example, many people love to compare the Weimar and Venezuela financial disasters. How would Weimar, or [different pronunciation] Weimar, have turned out if everybody was acting –" wait – the question's a little confused here. He says, "How would Weimar have turned out if everybody was acting like Weimar?" I don't really know what he means. "If everyone behaves poorly, then wouldn't the entire sea of funny money rise together and dampen the effect of the worst actors? How to play it today if you can stay with the better actors – who are they – by market sectors –

Porter Stansberry: [Laughs]

Buck Sexton: – that own, make or sell commodities, short market sectors that consume commodities? Your thoughts?" Quite a question. I will hand it to you, Porter.

Porter Stansberry: Yeah. I can't make heads or tails of that. I'll just tell you that my [laughs] my views on the likely impact of quantitative easing have evolved since Santa Barbara, which I believe was four years ago, maybe five. But I've become more and more persuaded by a guy named Lacy Hunt – and I would encourage you to Google him and read his idea – and Lacy Hunt is an economist who works out of Texas and manages a couple billion dollars and has been long 30-year treasury bonds forever, and he has a really interesting theory about the impact of our debt load versus the impact of our monetary policy.

And the short version of it is that there's so much public and private debt in America that it's gonna be very difficult for the Fed to jumpstart the economy or to trigger a monetary inflation, because relative to the size of our debts the quantitative easing has still been pretty small, and so that's a fact that I wasn't as cognizant of back in 2012 that I have become more and more persuaded by. And so I would just tell all my readers, check out Lacy Hunt, which I started writing about this about a year ago in the Digest and in my newsletters and we have changed some of our forecasts and some of our strategies based on the work of Lacy Hunt, which I found very persuasive.

Buck Sexton: All right. Number two. "Buck and Porter, is Buck related to John McCain? It seems to me Buck is very neoconservative-ish. He's always cheering for Team USA and supports any U.S. overseas effort in the spread of democracy no matter how many bombs need to be dropped. Kind of makes me want to puke."


I… [Laughs] Ah, this guy is charming. "I remember when I was little, about Buck's age –" [laughs] wow – "I believe USA was always the good guy. After all, my grandfather was a World War II vet and he told me story after story after story about how the good old USA saved the world from Hitler. We know after listening to Richard Maybury, U.S. propaganda was and still is total freaking baloney. Hitler was doomed whether or not the U.S. got involved. So is Buck like the little kid who still thinks the USA is gonna save the world from Putin or from Assad or from Rouhani?" Uh, Matt, Rouhani doesn't really run anything, but that's a whole separate discussion. He's really a figurehead. It's OK.

We'll talk – Matt, if you want a lesson on Iran I'll give it to you another time. It's the Guardian Council that actually has the power in Iran – not Rouhani. But I don't know – I mean it's funny because we're having this question – I actually – I didn't see that this question was in our mailbag until just now for our listeners. So over the course of the show I've said that Afghanistan is a bad idea, we should stop, and entrapment by law enforcement of terrorism suspects is troubling, but other than that, I'm just rah-rah USA, we always are the good guys in everything at all times, so I don't know.

Porter Stansberry: [Laughs] All right. Well, listen, I only – as far as I could tell, I like our differences on, uh, foreign policy and, you know, different – a little bit different philosophies, a little different worldview. I think it makes for more interesting conversation, and I don't think I'm gonna change your mind and I don't think you're gonna change my mind, but I will tell you that I feel like when we talk about these things we're actually so – we're so close to being on the same page that that makes it very hard to find agreement. If we were further apart, you know, then eventually one of us would win an argument because the facts would be so much on our – one side or the other. But it's because we're so close together – like for example, we both agree completely on Afghanistan.

It's hopeless. There is no rah-rah America's always right, send the troops. I mean so on Afghanistan we're on completely the same page, but I be there's plenty of other places where we intervene militarily where we wouldn't have agreement and it's because – it's not because we're so far apart, it's because we're so close together that the facts are not overwhelming for one side or the other. And of course, my view ultimately is far more radical and my view is that having our troops overseas makes us less safe, not more safe, and being involved in other people's internal affairs is always going to be a mistake, and Buck I'm sure does not agree with that view at all.

Buck Sexton: I think that it depends on the situation. Sometimes involvement gets us what we want, sometimes it doesn't. You know, it's a big world, a lot of complicated stuff going on, but I did think that's interesting. I don't know where the neoconservative – I suppose that's, in this context, supposed to be kind of a foreign policy slur. I'm not really sure that that's where – I've been opposed to U.S. intervention in Syria, I've been opposed to a continued U.S. presence in Afghanistan, I've been opposed to accelerating – or increasing – our military footprint in Iraq.

I also think that all this talk about, you know, Kim Jong Un better watch himself or else, is not helpful because there is no situation where we deal with Kim Jong Un militarily where a whole lot of people don't die – hundreds of thousands probably, maybe millions – so that's not something to be taken lightly at all. But you know, I take these things as they come. I mean, yeah, sometimes you gotta gotta blow up a car full of terrorists in a foreign country that we're not at war and I do think that that does have to happen sometimes, so me and the Ron Paul folks separate on that one.

Porter Stansberry: All right. Is there anymore mailbag for us?

Buck Sexton: That's it for this week, but if anyone's got a question they can write to [email protected] That's [email protected] If we use your question on the show we will send some Stansberry research swag and, Porter, your tagline, sir.

Porter Stansberry: Love us or hate us, just don't ignore us. And by the way, we do send swag even if you send hate because we deal –

Buck Sexton: That's right.

Porter Stansberry: We deal only in love.

Buck Sexton: Yeah. So Matt, we're gonna send you a t-shirt or a hat even though you're mean and say that I'm related to John McCain for some reason. All right. Next week we'll be hosting perma-bear David Tice. Tice has been warning investors about the dangers of investing near the end of a secular bull market and has debated nearly every bullish Wall Street strategist on CNBC and Nightly Business Report and in his writings for Barron's.

Tice is also famous for his 1999 credit bubble symposium in New York created to alert investors and policymakers of the credit excesses in the U.S. financial system, so it should be a great interview filled with useful information for all our listeners out there on how to prepare for the eventual bear market. David Tice next week.


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