Episodes

Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.  

Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today we'll talk with Mike DiBiase, editor of Stansberry's Credit Opportunities newsletter.

Dan Ferris: And Corey and I will talk about typos and decimal points and Volmageddon 2.0.

Corey McLaughlin: And remember, if you want to ask us a question or tell us what's on your mind, e-mail us at [email protected].

Dan Ferris: That and more right now on the Stansberry Investor Hour.

Actually, Corey, do you want to tell the Lyft story? I feel like it's your story because you reminded me of if this morning.

Corey McLaughlin: Sure, yes, ridesharing service Lyft had earnings last week on Tuesday and basically they sent out a press release that had a typo in it. One extra zero, not sure how it happened, fat finger or something else. But it was 500 basis points of margin expansion, which is an important metric compared to 50 basis points, which is a huge difference, as a lot of people know.

The algos apparently, algorithmic trading, you know, all the computers and everything, took this – and it was obvious that it was from the algo side – took this and ran with it. The stocks went up, shares went up after hours, like 60-something percent. And this was even as the earnings call was ongoing.

And one of the executives from Lyft was saying like, "No, it's a 50-basis-point change," without acknowledging like the error in the press release, which they had already fixed, but it shot the stock up anyway. It's one of those things where, you know, I don't know what you think about it, but like it just shows you how quickly things can move in the market, just by a, you know, a zero in this case, or a decimal point, or whatever it may be. Pretty wild to my eyes.

Dan Ferris: Yeah, I thought it was wild too because, you know, the stock shot way up after hours. And then they said, "Oh, sorry, typo," but then it didn't collapse all the way back down. And the next two days, it just went up and up. And on Friday, it was up 50%, you know, versus before, where it was before the typo. So the market's like, "I don't care. I don't care."

Corey McLaughlin: It's a good typo. And the CEO said this, you know, he went on TV and, you know, apologized for it, but also said it was one zero, and "I don't want it to overshadow that we actually had a good quarter." So if anything, it actually put attention on the fact that Lyft had a good quarter.

And so I don't think this is a violation of any laws or anything, but it shows you how easily stocks can move, which you've talked about before, like one of your things every year when we do the surprises episode is, what if, you know, what if the market drops through, or has a massive drop one day related to something like this or individual stocks. We've seen it, and this is another case. This is a good thing for their stock.

But, you know, what if it said five basis points, that would be – would have tanked it the other way. It probably wouldn't be where it is and wouldn't have recovered yet.

Dan Ferris: Right. That's right. It's crazy and of course, Tuesday, the hot CPI print took the usual direction we associate volatility with. We usually don't associate it with the up direction in equities. And you know, indexes were down across the board on Tuesday and I saw – I've seen a couple of things. One of them suggests that the action on Tuesday was reminiscent of the Volmageddon event of 2018. If you remember, the market fell in February 2018. Actually it wasn't a huge drop, but it was enough.

And the way it happened was enough to shut down one of the volatility funds, one of the VIX funds, right? Because people kept shorting and shorting and shorting and shorting and shorting. And then volatility went up and, and it just, the fund collapsed. And our past guest, fairly recent guest, Mike Green was... he warned us. One of his trades was shorting that whole business because he knew that that fund was structured that way.

So that became known as Volmageddon. And I saw an article this morning, somebody noted that price action on Tuesday and said, "Hey, maybe we're in for another, you know, maybe we're in for Volmageddon 2."

All I'm saying is, I think the likelihood of this stuff is growing, and I think it's greater now than any time in our lifetimes because of how passive investing has kind of taken over the market. You can go on Bloomberg and find this passive percent of all equity funds data, and it's 58% now. 58% of all exchange-traded funds and mutual funds are passive, meaning, you know, no reference to any fundamentals.

They're just like S&P 500 funds and Nasdaq funds and stuff like that where people are just, you know, they're just mindlessly buying with no opinion about value, no reference to fundamentals whatsoever. And I think when you do that, you sort of corner the market and you make it less stable.

Corey McLaughlin: Yeah. I'm reminded, you know, passive investing obviously – when everybody owns the same thing – it creates problems when things go bad. You see it over and over again. I think it's scary. That's why a lot of people end up getting scared out of the market. Just because they're like, "Oh, this should be a safe, diverse space." You think you're diversified and you're really not.

And I'm also thinking if there's more money in passive funds... We had Harley Bassman on recently, bond expert who knows more than I'll ever know, but talking about zero-day expiry options, like at the same time, like as being the part where risk is building up in the market, you know. That that's one place where there's a lot of risk in the market and these things just compound on themselves.

You know, when there's a sell-off... We've seen a lot of sharp, you know, quick sell-offs recently. I mean, it might not be 10%, 5%, but like 2%, 1%. The Russell 2000 the other day, it was 4%, just like that. These things happen quick because of all the leverage in the market and then if you're in a passive fund combined with that, you're like, what's going on? This doesn't make any sense to me. Why is Nvidia hitting new eyes but everything else in the market's selling off? It can confuse a lot of people.

So, yeah, it's just something that – it's market risk, you know, just generally.

Dan Ferris: Yeah. Market structure has evolved into something that frankly, like even Jack Bogle, the late Jack Bogle died in 2019 and founded Vanguard. And they started with the first index fund in like '75 or '76, something like that. And I mean, even he said at the Berkshire Hathaway meeting in 2018, you know, he said, if everybody does it, if everybody does indexing, the only words I can use to describe it were chaos and catastrophe. It would destroy the market. The market would fail.

And I think we're going to get bits of that. I don't think we're going to get overall complete market failure, but we're sort of there. Like David Einhorn was on a Bloomberg podcast recently saying that he views the markets as fundamentally broken because of passive investing. You know, people just have no reference to fundamentals.

And my Friday Digest was all about, you know... I started off, I found this old report by Leuthold Group, really good research group. And they were saying that in the year before an election, the market is likely to become what they called "favorably disconnected from the fundamentals."

And that amused me. It reminded me of the film Being There, you know, where the guy was like, he just was completely clueless and he didn't know anything. He hadn't, you know, as a middle-aged man, he had been completely sheltered his entire life and knew nothing. And he had a very pleasant personality and everybody loved him and thought he was brilliant when he was really just a total simpleton. And I thought, well, yeah, it's good, it can be good to be favorably disconnected from reality sometimes, but boy, you know, when the disconnection reconnects, you don't want to be in the way.

Corey McLaughlin: Yeah. Ignorance is bliss for a while. It's one of those things. I think a lot of people, when you get into, when you come across investing, you know, I mean, look at two years ago. Like if somebody was new to investing in, you know, say 2019 or 2021, last couple of years, like the standard advice you would hear most places is the 60/40 portfolios, stocks and bonds.

And then look what happened in 2022, like the worst year for bonds since, you know, people were writing in ink on papyrus back in the day. And, you know, it's because, well, you could think of a lot of different reasons why, but like, a lot of managers and fund managers, were either not prepared for the interest rates to rise as much as they could, or even if they were, had certain criteria that they needed to make, benchmarks and criteria that they need to make in their own funds that maybe they couldn't invest any differently.

Dan Ferris: Yeah, that's actually another market structure type of thing. People – like everybody thinks that Treasurys and stocks correlate negatively. Right? You own Treasurys, you own bonds, and you own stocks because your bonds will save you when your stocks aren't performing well. And the bonds got obliterated in 2022. And from 2020, the real peak was in 2020 and through 2022, it was just like, you know, you're down 50%. That's why we had three of the four biggest bank failures in U.S. history in March and May of 2023 because their Treasurys were down 50%.

Corey McLaughlin: Yeah. Which, by the way, they still are, you know, like 30% or whatever. And so we may see more bank problems coming up here this year, you know, when you get into more refinancings and all of that. So, you know, we're starting to see in commercial real estate where these I guess – and I read an article in Bloomberg this week that was pretty good about deals starting to be made in commercial real estate again, which is good on one hand. But the bad part or the risky part involved in that is that they're being made at much lower valuations than they were. And what does that mean for banks that are on the hook for loans?

Dan Ferris: Well, I'll tell you what it means. It means that they can't extend and pretend anymore. They can't say, "Well, we're pretty sure this loan is worth, you know, 90% of par or something." You know, when the property goes out at like 40%, and so that's when they, you know, they have to stop. If we get lots of market clearing in commercial real estate, lots of transactions because it's been slow, the gears are grinding, like there's no transactions. But if that really does continue to pick up, that's when you get the marks. That's when they can't fantasize anymore. And that's when we'll find out, you know, who's really kind of underwater already, really, in commercial real estate.

Corey McLaughlin: Right. Yeah.

Dan Ferris: And we know it's regional banks, but –

Corey McLaughlin: When the tide goes out.

Dan Ferris: It's hard to see inside that.

Corey McLaughlin: Who said the quote when the tide goes out, you see what everybody's wearing? I don't know. Something like that.

Dan Ferris: Yeah. Buffett said, "You don't find out who's swimming naked until the tide goes out."

Corey McLaughlin: There we go. I knew you'd know that.

Dan Ferris: Yeah. So I find this topic very interesting because nobody believes you until it happens. Like you could have said a week ago, you know, "We're ripe for the Russell 2000 to drop 4% or 5% in a day and for the markets to really have a really single bad day."

And people would say, "Oh, well, you know, it was only 2%, 3%, 4%. OK." And now, you know, it has come and gone and everything's fine. And, you know, the Russell's back up or whatever, the indexes are back up. And it doesn't register, you know. These risks don't register until they happen. And that bothers me.

That's why I always do that, that one, you know, one of my top 10 surprises that I'll keep doing is that I think the S&P 500 can fall more than 20% in a single day, despite the existence of so-called circuit breakers that prevent that from happening. And just because I think, you know, humans don't really control markets the way they think they do. They can shut down trading all they want to, but the bid and ask are what they are, you know, and they can't change that.

Corey McLaughlin: Right. Yeah. And I think like, if you're a person who's taking the time to, you know, listen to this podcast, right, like, I wouldn't be scared to think that you don't have the ability, you know, with the right guidance and following the right guides to take a more active approach with investing, trading even. We've had really good traders on here recently. And like they say, they all come back to the same fundamentals about managing risk. So how do you manage risk in a passive investing world? That's something big to think about that most people don't think about.

Dan Ferris: I actually addressed that in the current issue of The Ferris Report, and I found a really good fund that does a decent job of addressing it. Because what's happening is, like I said earlier, the prices, the valuations are disconnected from the fundamentals. They're favorably disconnected, you know, for now, favorably. So what David Einhorn did was he said, well, we're going to have to change. He had to change the way he invested. So instead of finding an undervalued company, doing all your work, and buying the stock and waiting for the market to figure it out, and then raise the valuation, you got to find other ways to make money, you've got to get paid by the company, not by the market.

And paid by the company means, you know, they're generating lots of cash and likely to buy back lots of stock, pay big dividends, et cetera. Well, really, not et cetera, just mostly those two things. There are other things you can do with cash, you can pay down debt, which can be very good for equity holders. And you can also, let's say you can do a really good acquisition that will raise the earnings per share or whatever over time. So you'll get paid more that way in terms of the buybacks and dividends.

So there are different ways to get paid. You don't have to have the market just make your stocks more expensive relative to their earnings. And so he's had to do that and I found a fund that I think kind of does that as well. Let's say it does an aversion of that and you get paid, basically, the idea is you get paid in cash by the companies rather than waiting for the market to reward you with a higher valuation because, you know, the –

Corey McLaughlin: Because those are high enough already.

Dan Ferris: Yeah, well they're high enough already, but they're not going to get higher for a lot of other companies, because passive investing concentrates the market. The market is more concentrated now, says asset-management firm GMO, the market is more concentrated now. It's never become this concentrated this quickly before in history. And when it was concentrated quickly before was 2000, 2007, 2008, and 2011, so like minus 50, minus 50, minus 20. I mean, these were important peaks.

So you get huge valuations on all the biggest stocks, and then a lot of really fantastic names that are gushing free cash flows, et cetera, et cetera, go begging, and they never get the valuation recognition. So, Einhorn's figured out a way to get around that and he's doing all right. He's had some good years.

Corey McLaughlin: Nice. Yeah. That sounds like a good one.

Dan Ferris: Yeah. Yeah. And I found a fund that basically, it's just outperformed from the peaks, you know, from the Nasdaq peak in November '21 and S&P 500 peak in January '22, this thing was down like 13%, 15% from those peaks. I mean, the fund's ultimate peak to its ultimate trough was like 20% or something, 21%. Still not as much as the S&P and Nasdaq. So I think it's really neat. There's a lot of power when you say, OK, what's the reality of this? The reality is companies get their value by generating lots of free cash flow, right? Cash profit in excess of all expenses, taxes, and investments to maintain and grow the business. And they can do wonderful things for shareholders with that excess. So focus on that as we have. I've been doing that for years in Extreme Value, and I also do it in The Ferris Report, and it works gangbusters, you know, other things being equal. So yeah, I'm excited about that much at least.

There is, in that way, like, that's real investing, right? When you're not counting on the stock market to take care of you, right?

Corey McLaughlin: Right. You're investing in a business and you're buying equity in that business, right? And what they do with it, they'll do with it. Will they make typos in press releases? Or will they, you know, I'm just kidding on that one, but well, they'll do, you know, the quality companies, we at Stansberry Research we say this all day, like high-quality companies – I get that can fall on deaf ears a lot of times, when you see the market make all-time highs and Nvidia's got a bigger market cap than countries and all of these different things.

So you're like, "Well, what am I missing with that?" You know? But on a day like, over the long term, that's what you want to be owning, these shares of high-quality companies as your core, I think. And like on a day like last week, Tuesday, or whatever day it was last week when the market was down overall based off of like one inflation report.

By the way, a decimal point in that inflation report, by the way, 0.2 was the expectation for the monthly growth number for January and it was reported at 0.3 and that sent enough people and traders going bonkers. On days like that, I looked at – I was looking at OK, is this like going to be the start of something bigger or not or whatnot and I'm looking at which stocks went up on that day. And it was quality companies that have been recommended in our publications before, and so that just shows you what you said, real investing versus all of these other things that we've been talking about today.

Dan Ferris: Yep, there's nothing to be a good equity investor over the long term like knowing what it means to own a good business, what a good business is, how to value it, how to understand it, and how to hang on to it for a long time. And our guest actually is good at that. He's good at something else, though, that is not equity investing, something you absolutely must do and now, as we will discuss, is an excellent time to do it.

So if you never did this before, and I'm not going to tell you what it is, we'll get into it, you'll figure it out quick enough, you should listen up, listen to our guest Mike DiBiase who is our friend and colleague here at Stansberry, and do what he's talking about, OK?

So let's find out what the heck Dan's talking about and talk with our guest Mike DiBiase. Let's do it right now.

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Dan Ferris: Mike, welcome back to the show. Always good to talk with you.

Mike DiBiase: Hey, thanks, Dan. Thanks, Corey. Thanks for having me. It's always great to talk to you guys.

Dan Ferris: Yeah. So, I always like to get your perspective on things. You and I, our views have overlapped a bit over the past few years. I think this is going to be a nice bit of confirmation-bias exercise for me. I like it when people who have more analytical bandwidth between their ears than me agree with me. It sort of makes me feel better.

The last time we talked with you, it wasn't actually that long ago. You and I had some e-mails before we hit record on this podcast. You're still really concerned about the bond market, aren't you? You're still really concerned that there's a major credit event ahead of us?

Mike DiBiase: I am. I am, Dan. Yes. My views haven't changed at all since the last time we spoke. For those who didn't listen to our first conversation, I am a credit analyst. I write our Stansberry Research's corporate-bond newsletter. I follow the credit markets very closely. I do believe that we are on the cusp or actually in the early stages of the next credit crisis.

What is a credit crisis? Well, that's when credit becomes very dear, when lending standards tighten, when people can no longer finance their loans when they come due, when we start to see defaults rise, we start to see bankruptcies rise, and when a lot of companies that took on too much debt during the good times go out of business.

The stock market doesn't typically fare too well when that happens as well, but essentially it's a clearing event. It's when all the excesses of the good times are sort of cleared away and we kind of start with a new fresh page again. Usually these types of things are very cyclical. They happen about once a decade. The last credit crisis, Dan, as you know, happened back in 2008, 2009. From a historical perspective, we're long overdue for the next credit crisis.

Dan Ferris: So I note that you said "early stages." You used the phrase "early stages." Do I take that to mean maybe the problems in the banking sector that we saw with the failure of three of the four biggest bank failures in U.S. history and then, of course, the substantial decline in commercial real estate valuations? That's hit a lot of debt. Is that what we're talking about here? What do you mean when you say we're in the early stages?

Mike DiBiase: Yeah, I think that's part of it. I look at a lot of different signs when assessing the market. The ones that I pay the closest attention to are things like the number of bankruptcies that we're seeing, the default rate among consumer borrowers on things like auto loans and credit card loans. Those are sort of the things that you typically see start to rise before a true credit crisis happens. And so we're seeing those things happen. It's not the type of thing that makes big headlines. So a lot of people that don't follow these things closely are not going to be that aware of them.

But the bankruptcies in 2023 were the highest levels since the last crisis, not counting 2020, which is a very unusual year. Actually, there were 561 corporate bankruptcies in 2023. There were 563 in 2020, which is when the whole world was essentially shut down. And of course, you're going to see a spike in bankruptcies that year. So excluding the pandemic year, it's the highest level of bankruptcies we've seen since the last financial crisis. So they're ticking up. They've been accelerating.

And then the corporate consumer borrowers as well. We're seeing, especially those on the lower end of the credit spectrum, subprime borrowers. That's where you're going to see it first, credit scores that are below 600 or so. And we're seeing default raises on auto loans being the highest since the last credit crisis. We're seeing... A bank that I follow closely is Capital One. They are the largest subprime lender in the country. I think something like half of their auto loans and 30% of their credit-card loans are to subprime borrowers. It comes to something like $80 billion worth of loans. And they're seeing their default rate, it has been steadily ticking up from like 3% to 4%. In the latest quarter in Q4, it was 4.61%, which is the highest since the last financial crisis.

And so their CEO will say things like, "Oh, this is just a return to normalization from abnormally low rates following the pandemic." But it's actually not. It's higher than their normal rates. And he said, it's funny because the CEO who's been at Capital One since the last financial crisis, he said the exact same remarks back in 2008 when it started picking up last time.

And so, it's kind of like a doctor. You've got a patient hooked up to a bunch of monitors and the doctor's looking at different vital signs. He may have some signs. The breathing looks great or the heart rate might look great. But there's a couple of signs that are ticking up. And that's what I'm seeing now. But that's why I'm saying it's in the early stages. These things are rising. Everything's looking exactly like it looked back in 2008, the summer of 2008. So, I think it already has started. And I don't think there's any turning back from here. I think it's an inexorable event that's coming. And I think it's going to start in 2024 and probably bleed into 2025.

Dan Ferris: Do you think if interest rates are down, if the 10-year, let's say, drops 100 basis points from where it is, let's say the Fed does go through with some cuts and the longer end of the curve actually does come down. That would delay some of that, would it not?

Mike DiBiase: Well, not necessarily. I mean, it's actually when you look at history, the real pain happens after the Fed starts cutting interest rates. So, it's kind of like if a patient drinks alcohol in excess and eats nothing but junk food and you know you're doing all these bad things to your body and you know you're eventually going to have to pay the price, right? You can stop doing those things and maybe start eating healthier. But eventually, the damage has already been done. You're going to see some negative health effects from your past actions.

So, I think what we know from history is that recessions typically don't start until after the Fed starts cutting rates, not when they stop or pause rate hiking. It's when they start cutting rates is when the real pain happens. And that's when you see the biggest declines in the stock market as well as the bond market.

Dan Ferris: Yeah, so I talk about this stuff too sometimes, usually from the perspective of equity markets, but when there's big problems in the debt market, that sets off all the rest of it.

Corey McLaughlin: Well, to that point, Dan and Mike, you were talking to me a little bit before we recorded here, you know, you're a debt guy, but you were looking at the stock market too and just in terms of what's happening with earnings right now. I think, you know, how does that factor into what you're seeing as well, the earnings of companies?

Mike DiBiase: Yeah, well, what I'm seeing when I look at the stock market is that everybody kind of knows about the Magnificent Seven and how it led the market last year. And that's all true. But when you look at the overall health of the market, you see a much different picture. We've seen corporate earnings decline in two of the last three quarters. I think that was actually slightly up in Q4, Corey.

But overall for the year for 2023, corporate earnings declined. Right? And I remember going into the year, I was expecting a recession in 2023. And I'll be the first one to admit I was wrong about that. And I think this credit crisis, guys, has been playing out more slowly than I expected. I mean, I kind of liken it to like a train wreck, a slow-motion train wreck. Right? We know the train is going to crash. I just don't know exactly when it's going to crash and hit the wall.

So it's happening a little bit more slowly than I expected. But beginning of 2023, I was kind of laughing because everyone expected corporate earnings to grow 7% or 8%. And I said, there's no way that's going to happen. And we didn't see a recession in 2023, but corporate earnings actually declined despite all these tech companies having fantastic years and posting incredible numbers. The overall earnings of the market declined.

Corey McLaughlin: There has been an earnings recession, right?

Mike DiBiase: There has been an earnings recession. And I'm seeing the same thing again. With all these negative signs I'm seeing, the recession indicators are all saying the same thing. There's going to be a recession. There's going to be a recession. It has never not happened when these indicators are going off. Everyone expects earnings to grow another 7%, 8% this year, and I just don't see that happening. I think we're going to see – I really do believe 2024 is going to be the year that it starts.

Dan Ferris: Yeah, that makes sense. You know – one of – go ahead.

Mike DiBiase: I was going to say, Dan, you have earnings that are contracting and yet the market's hitting all-time highs. And it was already expensive at the start of 2023. So it's like, how much longer can this disconnect go on and what's causing corporate earnings to go down? Well, we know interest rates are much higher, two or three times higher than they were a couple of years ago for corporations. We know that inflation has affected every household as well as every business. So these things are maybe subsiding a little bit and there may be some small relief on the horizon, but these things are still there. Interest rates are still high. Inflation is still high. Prices are 20% higher than they were pre-pandemic.

So, you know, the pain is still in the system and it's still being felt, and corporations are having to digest this. And while that's going on, consumers who are what, 60% or 70% of the economy, are really suffering when you look under the covers. Like most people, especially on the lower income scale, are really struggling to make ends meet. And that pressure in the system is continuing to build.

Dan Ferris: I see. So I find all this fascinating. We quote a lot of the same statistics and we look at a lot of the same things. But something happens when you start talking about this stuff. Quickly, an investor will say, well, they want you to be more specific. How does it start? You know, because they're looking back and they say, well, you know, the housing bubble really crashed the whole system back in 2008, right?

And some people saw that coming a long way off and blah, blah, blah. And it's a weird question. I always say I have no idea. I just know that under these conditions, you better be careful. What do you tell people when they say, all right, well, is it commercial real estate? Is that what's going to blow it all up? Or is it whatever you want? Just take your pick. You're talking about the consumer not doing so well. Auto loans, credit cards. What's the big bullet to the brain that's going to crash all this?

Mike DiBiase: Yeah, it's a great question, Dan. And I think just because we can't answer that directly doesn't mean it's not going to happen, right? We just know it's going to be something. I personally believe that it's going to be the consumer. And I've been saying that and writing that for a couple of years now.

You know, the consumer is, like I said, 60% or 70% of the economy, and we know that the household debt is now over $17 trillion, the highest it has ever been. It's up 40% from 2008. There's $1.1 trillion of credit-card debt out there today.

That's up 33% since the last financial crisis. It's a record amount. Credit-card interest rates are, what, 23% now? The highest they've ever been. So you've got record credit-card debt. You've got record credit-card interest rates. And, you know, you've got all this record inflation that has happened the past couple of years. So people are, households are digesting this. Yes, wages have gone up some to offset that. But, you know, like how much longer can the consumer take before they cry uncle?

And, well, what you look for is you look for things like default rates and delinquency rates on auto loans and credit-card loans. You expect to see them ticking up. And that's exactly what we're seeing right now. And I expect them to continue to tick up throughout 2024.

And, you know, the other things you mentioned will happen, too. Commercial real estate is a big problem, right? Higher interest rates and the pandemic hurt that. Who holds most of the commercial real estate debt? Well, it's regional banks. And what happens when regional banks are sitting on massive losses, not only from their treasuries, which we already knew about, which caused the bank failures you mentioned last year, Dan, but what's going to happen? Well, they're going to tighten credit, right? Credit are already as tight as it's been since the pandemic started.

The tightening has eased a little bit, but it's still tightening. And so as these banks have to write down their commercial real estate loans, they're going to do less lending, especially to riskier borrowers. And so I think that's going to just make things worse and exacerbate the problem.

You've got, you know, $2 trillion of corporate debt that has to be refinanced this year and next year. And so you've got lots of companies who have taken on a tremendous amount of debt when interest rates were near to zero, who have to refinance this debt. Like, there's no way they can pay this off with the profits they're making because they're not making that many profits. I'm not talking about Apple and Nvidia and those type of companies. I'm talking about your average companies, most companies.

And so, you know, they've got to now refinance this debt, not at 1% or 2%, you know, 2% or 3%, which is what they might have borrowed it before, but now 6%, 7%, 8%. Right? And they were barely making money when they're paying interest at 2% or 3%. How in the world are they going to make money when they're paying interest at 7% or 8% now? So there's a lot of different things that could set this off.

But I think my answer to that question would be, I think overall, I think it's going to be the weakening of the U.S. consumer. As that continues to sour, that's going to weigh on companies' top lines. And then inflation and interest rates are going to continue to damage companies just like they have throughout 2023.

So it's sort of, you know, coming from different sides. But, you know, the consumer, I think, is the biggest driver.

Dan Ferris: So it remains this sort of, it remains kind of out of the headlines and a more technical, analytical sort of an argument until, you know, the real bleeding starts and the headlines are filled with stories about this company that failed and that company that failed and the other one that failed. It fascinates me.

And of course, you can do, you know, work on individual names and individual companies and you can find out what looks like it's going to go bad. But it's just this, I guess maybe I'm a little bit too fascinated with this, but the fact that it remains this sort of thing where I'm looking at cycles and I'm looking at some of this sort of macro-type data that you're talking about. And I'm thinking, "Oh, boy, we're set for a big one here." And you sell that to people and they say, "Yeah, but, you know, I own Nvidia and I just like quadrupled my money in three years or something or whatever it was, two, I don't know."

And I don't know if it amuses me, but it fascinates me that you can get this sort of Thanksgiving Day turkey thing. Everything is just fine. And then wham, you get your head chopped off.

Mike DiBiase: Yeah. And, you know, it can happen quickly, right? I mean, for those of us who have been around long enough, we remember. I wrote an issue of Credit Opportunities recently where I compared where we are today to May, June time frame of 2008. So just to kind of remind people back in May and June of 2008, there were there were lots of negative headlines that preceded that time. You know, there were there was the subprime mortgage crisis. A lot of people were taking losses on those, borrowers were defaulting on their mortgages.

And the Fed stepped in and they bailed out a lot of companies and they started guaranteeing some of these loans. They started lowering interest rates and everybody kind of relaxed. It's kind of like what we're doing today. We kind of relaxed. We saw the bank failures in 2023. We saw all the problems and the bankruptcies, the increasing defaults. And everyone's just like, "No, we don't need to worry about that."

So the stock market ripped higher. The bond market ripped higher. And then the negative news kept kind of trickling in like the real underlying stress in the systems didn't go away. Like the Fed can't bail out everyone. And so other banks started to fail, like Lehman Brothers and Washington Mutual. And what we saw is, is that GDP growth, which was something like 2.5% in Q2 of 2008, suddenly sank the next quarter. And we entered a recession in the second half of 2008.

And, you know, all of a sudden the stock market in a very short period of time from that point fell something like 50%. And the bond market crashed as well. Right? So everybody sort of relaxed and said, "Oh, well, the Fed's got our backs. You know, they're lowering rates. Things are going to be great." And you know what? They can't stop it. They can only delay it. And we've already delayed it.

At some point, you have to pay the price for the excess. You know, it's like you can't blow up a balloon forever. At some point it's going to pop. It's just it's just the way it works, sort of the laws of financial nature.

Dan Ferris: Yes. Inevitable, but not necessarily imminent at any given moment, as our friend Rick Rule would say.

So what the hell do you do? You just sit here and wait? You know what I mean?

Mike DiBiase: Well, you know, you don't you don't just go completely to cash. And I'm not advising people to do that. I recommend corporate bonds. There are lots of corporate – you know, the good news is from the higher interest rates over the past couple of years, the corporate bonds now actually pay you a reasonable rate of return. Right? I mean, even investment-grade bonds are paying 5.5% now. Right? That's not a bad return. You know, in high-yield bonds, those corporations that issue debt that are lower on the credit spectrum, their bonds or some of those bonds are, you know, returning 7% or 8%, right? Which is, you know, riskier, but that's a real meaningful return.

Like when you're looking at all the risks in the economy today, you know, do you think you're going to get an almost guaranteed 6% or 7% return from the stock market over the next couple of years? You know, I wouldn't bet on that. So I think corporate bonds are a great place to be. And, you know, when the markets do crash, I mean, corporate bonds is really where you want to be. You're going to be able to buy some of these bonds that, you know, are trading, you know, bonds, par values of $1,000 per bond. And that's what the company has to repay you when the bond matures.

Some safe bonds that are trading around a $1,000 today will be trading for $600 or $700 when the credit crisis happens. And you're going to get paid all the interest along the way and the full $1,000 par value when that bond matures. You're going to be able to make, you know, fantastic returns, 25%, 30% annualized returns on some corporate bonds that are much, much safer than stocks.

And so, you know, my subscribers actually look forward to a credit crisis, you know, unlike most investors today. So, I'm recommending safer bonds today, more investment-grade-type bonds that are that are yielding 6% or 7%. But we're really waiting for the credit crisis to unfold because that's when we're really going to back the truck up and see the real bargains and see the real money. That's where the real money is made.

Dan Ferris: Corey –

Corey McLaughlin: I'm glad you brought that up, Mike.

Dan Ferris: Wait a minute, wait a minute, Corey. Corey, he reminds me of what we were talking about with like the bitcoin nuts. You know, they hope the whole world goes to hell in a handbasket because that's their big opportunity.

Corey McLaughlin: Yeah. Well, that's it. Yeah, I agree with that. But Mike's like, you know, that's the point here is you're kind of licking your chops for a moment when everybody else is freaking out and you actually have the research and the ability and the know-how to actually go ahead and buy these.

Dan Ferris: Mike, I'm just kidding. You know that, right?

Mike DiBiase: Yeah, I do. I do want to set the record straight though, Dan, because I'm not hoping for this. I'm really not. I think it's just as an investor, though, you need to be prepared for it. And, you know, you want to know – I want the average investor to know that you don't have to take significant losses. This is another tool that you can have in your toolbox so that when the whole world seems like, you know, everyone's losing money hand over fist, that there's a way to actually, you know, when those types of events happen, as much as I don't want them to happen, it's just the way the world works, these things move in cycles. And this is where we're headed, that there is a way for the average investor to make a lot of money very safely in an instrument, you know, securities that are much safer than stocks, corporate bonds, to make a tremendous amount of money.

That actually turns out to be the very best time to buy corporate bonds. And so I think the average investor needs to know that, that, you know, when these events do happen, as much as we don't want them to happen, it's not something that you always have to be afraid of and think that there's nothing else you can do except lick your wounds and sit on massive losses.

Dan Ferris: Well said. Yeah, absolutely.

Corey McLaughlin: And bitcoin, Dan.

Dan Ferris: Yeah. That's right.

Corey McLaughlin: There you go. Just kidding.

Dan Ferris: Yeah. Yes. Yes. We're just joking.

Mike DiBiase: Yeah, I won't say anything about bitcoin. I know nothing about it. And, you know, if people want to speculate on that. That's fine. I wouldn't put Bitcoin and corporate bonds in the same sentence. The risk profile of those two are so completely different.

Dan Ferris: They're a little bit different. Yes.

Mike DiBiase: A little bit.

Dan Ferris: OK. So, you know, in all seriousness, though, I know Mike to be a value-oriented guy. And so naturally, like myself, it's not that you look forward to the end of the world. It's just that you understand that at those moments, your opportunity is at its greatest, right? Those are the, while the rest of the world is really freaking out, if you can maintain and continue to do the basic work and place your bets, you know, buy some bonds, buy some stocks, those will be the biggest returns in your portfolio over time. So that's where you set yourself up for the greatest compounding, simply put.

So, yeah. Yeah. So we're not, we're not, none of us want the end of the world. Believe me, our business will thrive in a nice, steady, long bull market where people are confidently investing and they want more ideas to continue to do it. It hurts us when, you know, our readers are scared to death.

OK. So one thing about all this is that, you know, we acknowledge that you and I thrive in a really tough market where the valuation sinks so low. But as you point out, I just feel like you're saying with things the way they are right now, with yields the way they are, you could kind of do this all day. In other words, you're finding really good bonds out there that are trading at decent yields, with decent protections, et cetera, all the things you look for. And that you, in other words, at some point in the past few years, I know you've probably been like, "Man, there's nothing to do," because I know I have. And you're not saying that now, though.

Mike DiBiase: That's right, Dan. It's a whole new ballgame. The world has changed. And I think a lot of investors, especially, you know, average investors that don't do this for a living, they don't realize that. This is a sea change, as Howard Marks, who's probably the greatest distressed-debt investor of all time, wrote recently. A sea change, meaning it's kind of a generational change that you don't see, you know, you see once every, you know, two or three decades. Right? And what he means by that is, you know, we've been living through a world of declining interest rates for the past 40 years, essentially. Right? And for the past, you know, 10, 15 years, we've essentially been living in a world of near-zero interest rates. And that has all changed now. Now rates are, you know, 5%... 4%, 5%. And that's a huge difference. And it changes the calculus on how you value things. Right?

So when interest rates are near zero, that's terrible for debt investors, for bond investors. Right? You're not getting any return. You know, you're making nothing. Right? Because with a bond investor, the interest is essentially, you know, what's your guarantee, you know, your principal interest. You know what you're going to make when you buy the investment.

When interest rates are low, the valuations of stocks go up much higher. Right? Because of the, you know, the discounted cash flow models that people use to value stocks. So the lower the interest rates, the higher the value of stocks. So, you know, what the Fed did by keeping rates near zero is they really tilted the playing field in favor of equity investors and against bond investors.

And, you know, we've seen that play out for the last 40 years. That tilt has gotten gradually steeper and steeper in favor of equity investors. What has happened now post-pandemic with inflation unleashed to 40-year highs and interest rates finally having to go up to tame inflation is that now bonds are on a much more equal playing field with stocks. Right? Equity valuations have to come down. They haven't yet, by the way, but they will. And bond investments have gotten much more attractive.

So to your point, now you can, you know, the same bond that two or three years ago, safe bond, great company that may have issued the bond like an Apple or, you know, Coca-Cola, right, maybe that bond would pay you, you know, 2%. Well, now that bond is going to pay you closer to 5%. Right?

And the riskier the company, you know, the more, the higher the interest rates you're going to get paid. So, you know, we find, or my partner, Bill McGilton and I, we look for bonds that are, you know, a little bit higher on the risk spectrum because we want higher yields. But we look for companies that are still safe. They might be considered riskier, but they are still safe and they might be paying you 8% or 9% yields.

That's a very good return for a bond, for a security that's much safer than a stock. And, you know, so it's a new world now. So, yeah, who wouldn't want to make, you know, almost, it's not guaranteed, of course, but, you know, close to guaranteed 7% to 9% on a much safer investment than a stock? Which, you know, how many stocks are paying even a dividend yield close to 9%, with the opportunity that the value of that stock could plunge on any day, right?

So, times have changed and it's good to be a bond investor now. And I don't think we're going to ever go back to that world 0% interest rates again. I think with all the money that has been printed since the pandemic, the money supply increased by more than 40%. And it would, you know, just it's a staggering number, Dan.

We're not going back to that world again. And that's what Howard Marks wrote. That's what a lot of very smart people believe that, you know, yeah, interest rates may not be back to the, you know, teen and 20% that they were in the early '80s and late '70s, but they're not going back to zero either. And that's, that's a big change that most people haven't fully grasped yet.

Dan Ferris: Right. You know, we had a guest, my friend Vitaliy Katsenelson on a couple of times in the last few years. And, you know, at one point he said, "Just take the last 20 years and invert it." And, and then, you know, sometime later, maybe a year or so later, Marks came out with that sea change piece, which is pretty recent, actually. And, and I thought, yeah, yep, this is what everybody's paying attention to. Everybody knows that this is a massive, you know, kind of secular change in the market.

I just still feel like so many people are used to doing what they've been doing since, you know, for a decade, just say, or more. They're not prepared, you know, and you can see it. You can see it in the outperformance of the top, well, most people call it the Magnificent Seven, but really the top 10 names in the S&P 500. You know, it's whatever, 30% of the index and outperforming everything.

And you can, I think what you're seeing is that people just want to keep buying those big popular names, you know, and they want to buy them more now because, oh, well, you know, they bought a bunch of garbage and it all crashed. You know, they bought clean-energy stocks and cannabis and specs and meme stocks and everything in 2021. And that's all, that's all done. They're done with all that.

So now the sure thing is to buy Nvidia, you know, and I don't know, I think we're setting up for a big blindside and a big change in how a lot of people, a whole generation of people, look at the stock market. I've said that before and it hasn't come true. Just so you know, but yeah.

Mike DiBiase: Well, I agree with you, Dan, and you know, like Howard has been around doing this for a long time, a lot longer than you and I have, and he has been doing it at a level, incredible performance over that time. So this is the guy you should listen to. He doesn't write about sea changes, you know, every other month, you know. He knows what he's talking about. And when he says something, you should pay attention to it. And I'm paying attention to what Howard Marks says. I fully agree with what he's saying. I just hope that the average investor that's listening to this will begin to realize that, you know, things have changed and you need to start thinking about doing things differently moving forward than what was done in the past.

What worked over the last decade, even two decades, isn't necessarily going to work, you know, over the next decade, two decades going forward. So you've got to really be prepared to think differently, to act differently.

And, you know, corporate bonds is one of those ways to do it. It's another tool that every investor should have in his or her toolbox. And if you don't have that tool in your toolbox, I would say you're going to miss out on some of the biggest returns over the next, you know, five years, I believe.

And these are returns from securities that are safer than stocks. So like, why wouldn't you want that tool in your toolbox?

Dan Ferris: Can't emphasize that enough. You don't get, you know, you mentioned the yields on stocks before. If you ever did find yields this high on stocks, you probably wouldn't want to touch those stocks. They're probably pretty dangerous. And you don't, no matter what stock you're looking at, you know, common stock dividends, you just, you don't get the protections. They're just not there.

Mike DiBiase: That's right.

Dan Ferris: The bonds that Mike buys are senior to all those stocks. They get paid before the dividends get paid.

Mike DiBiase: That's right.

Dan Ferris: So, all right, let's do our, let's do our final question. You've answered it before, but I'll repeat it.

So if you could leave our listeners, oh, by the way, let me just say our final question is the same for every guest, no matter what the topic, even if it's a nonfinancial topic. And if the answer is something you've already said, by all means, feel free to repeat it. And the question is, if you could leave our listeners with a single thought today, what would it be?

Mike DiBiase: Oh, that's a good question. I should have been prepared for this because you always ask.

Dan Ferris: It works better when you're not. Take your time.

Mike DiBiase: I think, you know, it's, it's be prepared to do things differently and, you know, consider corporate bonds. You know, retail investors can buy corporate bonds just like you can buy stocks. You may have to ask your broker, you know, how to do it or to set you, to allow you in your account to do that. But in most cases, it's as simple as clicking on a security, just like a stock, and buying it.

And you know, companies, just to reiterate the safety aspect of it, when a company goes bankrupt, the stock always goes to zero. But the bond, if you're holding the bond at that same company, investors in the bonds often get a big portion of their investment back. Typically on average, it's about 40% of the capital.

So even in the absolute worst-case scenario with bonds, you're going to walk away with some portion of your investment back. And whereas a stock, you're going to, you know, you'll walk away with absolutely nothing. And in some cases, depending on the bond and the company and the type of assets it has, there may be no downside risk at all.

The company that we're recommending this month in Credit Opportunities, we've done the math on it. And we think even in a bankruptcy, you're going to recover something like 80% to 85% of the principal amount of your investment. And we don't think the bankruptcy is even possible for the next, say, five years.

So with the interest payments that you're going to collect in those five years up through bankruptcy, that more than covers your investment. So you're still actually going to have a gain on your investment, even if this company went bankrupt in the absolute worst case we could possibly think of for it.

So it's like, you know, the difference between investing in stocks and bonds is just completely different. If you've never considered it before, I would just ask your listeners to consider it. It's really not hard. It's actually pretty simple once you're set up and running and, you know, we walk you through all the mechanics of it and tell you why a bond is safe and we do all the work for you.

And I just think it's something that every investor should have in their toolbox, especially over the next five years.

Dan Ferris: I wish every investor could hear that. I wish every investor who bought either of the two newsletters that I buy could just get yours automatically. That's, that's the deal I always want to offer. You're right. I'm only going to recommend, I recommend some bond funds, but that's a totally different thing. And what you're doing is special and a lot more people should be doing it. You should have 10 times as many subscribers as far as I'm concerned.

But thanks, Mike. Thanks for being here. It's always a pleasure to talk with you.

Mike DiBiase: Thanks, Dan. Thanks, Corey. It's always a pleasure to talk to you guys. Hopefully, you know, we'll talk again soon.

Dan Ferris: Oh, we will. Bet on it.

Corey McLaughlin: Thanks, Mike.

Mike DiBiase: All right. Take care, guys.

Dan Ferris: All right. Thanks. 

Dan Ferris: The Fed wants you to believe they've got inflation under control, but I believe we've only seen the beginning of a devastating new crisis. And if you don't prepare now, you could see your savings evaporate as inflation and interest rates soar even higher over the next two years.

It all traces back to a golden thread that ties together the biggest financial calamities in America's history. But it seems the entire financial world is falling into this very same denial trap that led to massive devastation the last time this crisis played out. If you know your history, you know there will be winners and losers, and now is when you decide which one you'll be.

I've spelled it all out in an urgent new report. Go to www.bankrun2023.com to get your free copy. I'll also show you how to get my complete playbook for navigating this crisis, including the three critical steps to take immediately. Again that's www.bankrun2023.com for your free copy of my new report.

Always a pleasure to talk with our friend and colleague, Mike DiBiase. And I meant what I said. I wish everybody who got all my stock picks could get all his bond picks too, because that's a real portfolio. That's when you're really starting to get more diversified. The returns are safer. They can be just as big. It's pretty amazing. When it's working well, there's nothing like it.

But yeah, Mike's still worried. I mean, we made jokes about the bitcoin thing, but when Mike gets worried, he knows what he's talking about, and he knows how these cycles run better than anybody really around here.

Corey McLaughlin: Yeah. Like you said, he does know these cycles, I think, better than anybody around here. And the idea that – you know, from his investment approach, he's got to be licking his chops for a credit crisis because of everything he explained. Seemingly. But he's making recommendations along the way too. And as you said, this is like real diversification. If you've never considered buying a corporate bond before, which most individual investors haven't, it's different. But it's got different legal protections than stocks. It has legal protections at all. And you can get the type of bonds that he's doing or recommending, they're intended to get generous returns, so it's worth putting in the work and following his work.

I personally do wonder when the recession shows up or when the credit crisis shows up. However, there is an earnings recession happening. There is all these bankruptcies that are already happening. This isn't speculation. It's happening right now. And so, yeah, does the Fed come in and cut rates and this all goes away? I don't know. I think the problems are still there, even if they cut rates. And to your point, these things build up slowly, and then they're just like, boom, they're there and everybody's talking about it.

I think a lot of it seems to me like it's all leading toward the road of people losing their jobs and the unemployment rate going up. And that will be when most people in America are like, "OK, why are all these companies laying people off and going bankrupt? How did this happen?" And then you go back and explain like, "Oh, well, here's everything that happened the last four years."

Dan Ferris: Right. So when I asked Mike what he thought the catalyst or what would blow up, what would go wrong, he pointed to the stresses in the consumer, which is 60% of GDP. And he talked about the loan delinquencies, auto, credit cards, the record amounts of debt. And, you know, like I said, even that, it's just, it seems such an abstract exercise until it starts hitting the headlines. It's the weirdest thing because it's not like with, you know, we do bottom-up research on individual companies.

So we get, you know, pretty kind of nitty-gritty and very specific. And we try to always give a very good idea of what could go wrong here, what's wrong with this company, what's right with this one. It's very specific. And when we write up our recommendations, we tell very specific stories about individual people who have a big effect on an industry or a business.

I just don't feel like – I feel like that's harder to do with this sort of broad credit crisis that Mike is talking about. Certainly, you can look at individual companies that are deeply indebted and, you know, highly risky and might go bankrupt, likely to go bankrupt. And bankruptcies are up.

But we're still, you know, the S&P 500 is like bumping up on new all-time highs. And I get the, you know, the difference between that and like an equal-weighted version of it. But still, like, it just, it looks like it feels pretty good to a lot of people. If you've got your 401(k) in an S&P 500 fund, what do you care if it's going up because of the Magnificent Seven versus the rest? You don't. You just keep throwing it in the fund every two weeks and away you go. And you're feeling like, "Hey, I'm set for retirement."

Corey McLaughlin: And it's all good until it's not.

Dan Ferris: It's all good. Not only that, it's like you're brilliant and things are perfect until, whoa, until they're a disaster.

Corey McLaughlin: Until, whoa, there's a financial crisis.

Dan Ferris: Oh, darn. Yeah. Didn't see that coming.

Corey McLaughlin: We're still recovering from 15 years later.

Dan Ferris: Everything was great last year. And this year, everything's bad. You know, it's a strange thing. But as Mike points out, and as I pointed out and you point out, we all, you know, you can prepare for these things. And I think you can do it in a way without, you know, a huge opportunity cost. We're not talking about selling all your stocks or anything. We're talking about, hey, own some corporate bonds. Own some T-bills, I've been telling people. Own some corporate bonds and some T-bills. Get yourself a good solid 5%, 8%, whatever, you know, and you don't have to do nothing.

That's, maybe that's the lesson here. You don't have to do nothing. You can be really expecting something big and horrible to happen and you don't have to do nothing.

In fact, Mike mentioned Howard Marks, and there was a piece he wrote some time not too long ago called "It Is What It Is," I think. It was one of those pieces where he was saying, look, the interest rates were not up at that time when he wrote it, whenever it was. And he said, "You know, it is what it is. We do what we can. We're still investing. We're still finding things to do." They're not the greatest things to do. They're not as good as, you know, maybe today when you're getting 5% to 8% in corporates. But it is what it is.

Corey McLaughlin: Yep. Again, I feel like I say this all the time, but it really comes down to your goals and your ability to – what risks you want to take on, your timeline, those kinds of things. And then, you know, if something like corporate-bond investing fits that, check out Mike's work and Bill's.

You can't predict. I'm going to sound like you for a second – you can't predict exactly what's going to happen, but you can prepare for the outcomes.

Whether that's long-term trading or like we've had a couple, you know, trader-intensive guests recently, it's the same idea, but they're just doing it a different way. They're weighing the risk and reward.

Dan Ferris: Yeah. All right. Well, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.

We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word transcript and enjoy.

If you like this episode and know anybody else who might like it, tell them to check it out on their podcast app or at www.investorhour.com, please. And also do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review.

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For my co-host, Corey McLaughlin, until next week, I'm Dan Ferris. Thanks for listening.

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