In this week's Stansberry Investor Hour, Dan welcomes fellow Stansberry Research analyst Mike DiBiase to the show. Mike came to Stansberry in 2014 after spending nearly two decades in finance and accounting. He now serves as our bond-investment expert.
To kick the episode off, Dan and Corey discuss the latest home-sales data, how these numbers compare with the previous year's, and what this means for the economy going forward. Dan emphasizes that the housing market is a crucial indicator of a looming recession, and he questions the potential impact of inflation when the market collapses...
Yes, we're going to cry uncle at some point. And when the market [does], where will inflation be?
Mike then joins the conversation, and the three delve deeper into recessionary trends and post-pandemic inflation. Mike explains why the current inflationary period reminds him of a famous quote by economist Milton Friedman – "Money-printing is like alcoholism" – and that the bad effects have to come first to cure inflation.
Mike also points out that corporate earnings have fallen short of expectations for two consecutive quarters, and this may lead to further declines in earnings expectations. Additionally, he highlights the significant problems facing the commercial real estate sector and how these issues could be yet another signal of a coming recession.
The conversation then shifts toward credit cycles and the likelihood that we could be entering a period of credit tightening. Although credit cycles are normal, Mike says...
We're headed toward another credit-cycle event. We're going to see the credit bubble pop, and I think it's going to start this year.
However, Mike also suggests that investors can still make money during these tumultuous times. Tune in to hear exactly what he says and his advice for purchasing corporate bonds.
Editor, Stansberry's Credit Opportunities
Mike DiBiase is the editor of Stansberry's Credit Opportunities - Stansberry's bond investment advisory.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm also 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're going to interview Stansberry's Credit Opportunities editor, Mike DiBiase.
Dan Ferris: Before we do that, Corey and I will talk about home sales, mortgage applications, the Beige Book, and this crazy new generation of investors.
Corey McLaughlin: And remember, if you want to get in touch with us, send us a note at [email protected] and tell us what's on your mind.
Dan Ferris: That and more right now on the Stansberry Investor Hour. So lots of data. We're watching data of course. More numbers than we know what to do with. And this morning what I'm looking at is home sales from the National Association of Realtors, and they're saying that home sales fell 2.4% in March versus February, OK? And that March sales fell – are you ready for this – 22% from a year earlier? So that just sounds like a lot to me.
Corey McLaughlin: Sounds like a slowdown, a recession, no?
Dan Ferris: Yeah. It really does. It sounds like the housing market is saying, whoa, whoa, you know. Rates are up too fast. We can't handle this. And of course, a couple months ago the mortgage applications hit a 28-year low. So people aren't borrowing for houses, and they're just not buying them. They're not bidding on them, and the sales are slowing. Mortgage applications slowing, and the prices are actually falling as well. So housing is like one of the, you know, big, important, leading indicators and it's not looking so good.
Corey McLaughlin: No, it's certainly a long way away from when people were 30 people deep for putting offers on houses in the middle of the pandemic, right? Or the zero-rate era. It's a long way from that. It's at the point where it's – well, to me if you look at this housing data and we could talk about some more, it just looks like the economy is just stalling out right now which is what the Federal Reserve wanted to curb inflation. So they're getting what they wanted at this point. It's just how long do they let it happen or what kind of influence do their previous rate hikes already have and how long do they last. We're in that point where they're watching like everybody else, I think, and just seeing what happens.
Dan Ferris: Yeah, that's right. How far, like when do they cry uncle? When do they say enough? Because like in early 2019, the stock market had just fallen like almost 20% from September to December. And the Fed overall, they were like, OK, that's it, we're out of here. And then they had gotten up to like 2.25 on the fed funds... and when COVID hit, they were down to 1.5 and then, boom, went to zero... and it didn't feel to me like to go to zero took a lot but to get back to 1.5% it was just like oh whoa, first sign of trouble we're out of here and after several hikes to get up to 2.25. And I don't know. At some point I have to stop – I will stop saying, "No, you don't understand, the Fed's really serious. They're going to hike more." And so far what I'm seeing is that like this morning, I'm seeing various folks saying, you know, the Fed does want to raise rates in May and the market is discounting that, etc. So that's still technically in place... but I feel like this mortgage thing and the housing and everything, it's starting to telegraph that, yes, we're going to cry uncle at some point, maybe later this year, early next year, something like that.
Corey McLaughlin: It looks that way to me, too. You know, you look at some of the other data with consumer spending which is tied to two-thirds of the economy in one way or the other, it's at a point now where it's flat or going down slightly according to, you know, the Fed puts out this Beige Book eight times a year which is kind of anecdotal evidence from around the economy from people that they actually talk to who are not in the Federal Reserve system which is actually nice... and it's all showing, you know, the economy just slowing down.
And so with consumer spending, I mean that's a big part of, you know, we're talking about real estate and consumer spending going to zero, growth-wise, what do we have to expect once all that shows up in companies' books and earnings and employment decisions and on and on. And so, yeah, it does look like the Fed will at least be on their track to what they say, pause rate hikes maybe – they're still saying, you know, indicating if you read the tea leaves of the various Fed people talking that another 25-basis-point hike at their next meeting in May, which I think they mainly want to do is because they've put that goal out there of like that 5% range. I don't think they want to not do that for whatever reasons you can make arguments for.
But I just don't think they want to change at this point, and then they'll get to that 5% and the question after that is do they hold it there or do they cut which is what a lot of the – it seems like the stock market is – Mr. Market is expecting or hoping for in one way or another. So based on the tech stocks rallying, based off this rally to start the year so and the fed-funds futures are showing that as well so. It looks like we're on that path, but again, we don't know what's going to happen between now and then.
Dan Ferris: Yep, there's no predicting any of it. We can just sort of look at what conditions are now and flap our jaws about it, I guess. I note that the terminal rate when all this is going to be complete just discussed is above 5% now, just a little bit. Twelve bps above 5%. But been above there looks like for several days. It's hard to read the chart but several days anyway. So people are starting to feel like, OK, OK, OK, we're not really done. You know, we haven't hit the uncle point yet. My sense is that, you know, I keep saying this thing about Jerome Powell wanting to be like Paul Volcker. I still think it's true. My sense is that he probably, you know, will tough it out a little bit more before he gives in. Like I don't think it will be a repeat of 2019. I think he'll let the pain get really bad before pivoting.
Corey McLaughlin: Yeah, I can see that, too, because you know, something "breaks" again, you know, in the banking system, then he could just say, OK, but this was the consequence of the inflation problem and – I'm sorry. I should go back and say with Silicon Valley Bank and Signature Bank, that was kind of turns out maybe it hasn't spread, you know, as much, right? And so you can look at where the economy is right now and stick it out and say I'm fighting inflation and then if something shall break again, he can say, well, this was because of inflation and now we can maybe, you know, lighten up a little bit. So depending on where inflation is then, which is another question, you know, it's not when they cry uncle, where will inflation be at that point is another big question. I think it will still be higher than 2%, the erstwhile 2% goal. So I think that's important for people that people should keep in mind as well just that this inflation is not, and everything associated with the last two years is not, there's not a simple easy way out of this, I don't think.
Dan Ferris: Nope. No. None of this is going to be easy. One kind of potentially good sign for inflation is that economists in a Wall Street Journal article that I'm looking at from, I don't know, maybe a few days ago but I just saw today are forecasting higher inflation and I always go the other way when a group of economists, you know, in a survey. So they're more pessimistic now, it says, you know. So hey –
Corey McLaughlin: Great.
Dan Ferris: – I can offer you that.
Corey McLaughlin: No, I was thinking that too also in the – I was looking at the with the Beige Book news, I was looking at the minutes of the Fed March meeting, too. Their staff is now projecting a mild recession later in the year with a recovery over the following two years. And so to me, I'm like, oh, they're finally indicating a mild recession so maybe that means it won't happen. That's the –
Dan Ferris: Right. Right. So either it won't be a recession at all or it will be really horrendous, but we know the one thing it won't be is a mild recession, right, because that's what they're predicting.
Corey McLaughlin: Or maybe later this year. It will be some other time, you know.
Dan Ferris: Yeah, some other time, that's right. So I'm with you. The economists are out saying there's going to be a recession and inflation is going to be higher now. It's like what we've been saying 18 months ago. So we're slightly joking about the contrarian view of the economists and the Fed. But I will say that if we do get a recession later this year, I mean talk about the most forecasted recession. Like people have been talking about this and talking about it and talking about it... and I don't know, one thing I feel like I've learned over the years is that it's hard to schedule a disaster, you know. People see things coming and they adjust. Now, adjusting for a recession might actually lead to it or it might become a self-fulfilling prophecy because people "Oh, a recession, I'm going to pull back spending." And guess what? Then we get the recession so. So I'm not saying I know how it will all work, but I think, I don't know, skepticism about all the expectation about such a powerful narrative is probably healthy.
Corey McLaughlin: Yeah, of course, I think. I was hearing about what do you think, when do you think the recession is going to be from people who are not in stocks or in the market for a year ago. And so you kind of, you know this is on people's mind who are paying attention to it. I do think there's something to that self-fulfilling prophecy and that's part of the Fed's messaging too. Like, you know, is having that out there, and let's not pretend like they're not trying to influence decisions that people are making. I mean that's what they're trying to do. And so will the recession happen? Maybe. There's plenty of recessions that have happened. I think that difference is that like between recessions that are like tied to severe financial disasters, those ones tend to be pretty bad and worse than your average, naturally occurring, so-called recessions and cycles. So I think that's, you know, where the weaknesses – how big are the weaknesses going to be and that are uncovered at any point, like these bank runs that we saw which we talked about are some of the worst managed banks around? What happens to like the banks that were doing things right just because of what happens to the economy?
Dan Ferris: Yeah, you know, I was thinking about this and I thought, well, let's see. We have folks who've never really suffered as adults through a big recession, folks who've never been through a bear market and now they're going through their first one. The speculative impulse is still strong. I feel like that is not a good sign. I feel like when they get beat up it's going to be horrendous and the selling will be brutal and then we're finally going to get – then my annual prediction of a single day with the S&P 500 down nearly 20% or more, even though people say that's impossible, that's when that could happen. I don't think this year, but within the next couple of years I think it's going to be a brutal couple of years. Maybe I just sound like the same old Dan, but I feel like I'm shifting actually into a higher gear. I thought I was in my highest bearish gear before. I'm shifting higher here.
Corey McLaughlin: All right, I like it.
Dan Ferris: This is just one way – yeah, this is just one way that I think about it is that the just absolutely powerful speculative impulse in this new generation of investors, and when they get wiped out, they're not going to come back for a decade or more. Anyway.
Corey McLaughlin: Yeah, I could see that. And I mean you look at the market as we speak, you know, it's been flat since you can go back to May of 2022 now or February of this year or August of last year. Like it's not like things are going great, that spec like or terribly wrong with stocks and so that speculation, it's not completely gone yet, I don't think. I've heard people anecdotally, you know, the same kind of people that were getting into the market in spring 2020, like oh, we're back. We're getting back into it. I'm like, all right, there's something to that speculation still being there.
Dan Ferris: Yep. So the worst it's gotten for the S&P 500 in this episode was – what was it – October 12? S&P 500 closed 3,577. It looks like something like November 2020. You know, like the dotcom bust and the financial crisis, they took prices back like to 1996 or something. You know the financial crisis did anyway. I mean that was a huge, horrendous drawdown wiping out years and years of gains. Great opportunity of course but, wow, getting to the opportunity is like walking on fire and nails. I just feel like so far it hasn't been that bad. It hasn't been nearly bad. I don't think the biggest financial bubble in all recorded history ends with a little drawdown and then we're off to the races again. We'll see. We'll find out, won't we?
Corey McLaughlin: We shall see.
Dan Ferris: I hope we all live a long, healthy life and find out what's on the other side of that, too. There's got to be a good thought to have in there so long, healthy life is the best thought I can conjure right now. Maybe we'll talk to somebody else who is probably going to be just about as bearish as us, our colleague and friend Mike DiBiase. He watches credit markets very closely so we have to talk to him about that, and let's talk with him right now. Let's do it right now.
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All right, it's time for another interview. Today's guest is my Stansberry colleague and friend, Mike DiBiase. He is the editor of Stansberry's Credit Opportunities. He's our high-yield bond guy. Actually, I think of him as our bond guy, period. But welcome to the show, Mike.
Mike DiBiase: Hey, thanks, Dan, I appreciate you having me. I've been a fan of yours for a lot of years so it's great to be with you.
Dan Ferris: Right back at you, buddy. And of course, I have my co-host Corey McLaughlin. Corey.
Corey McLaughlin: Good to talk to you, Mike. Look forward to it.
Mike DiBiase: Yeah, good seeing you, Corey.
Dan Ferris: So let's start with like kind of big picture-y stuff and partly I'm excited about this because I think we're kind of on the same page with some of this. Where do you think we are? Are we still in a bear market? Is it as bad as I say it is? You know.
Mike DiBiase: Well, you know, Dan, following you for years. I was actually a subscriber to Stansberry Research for many years before joining the firm back in 2014, and I followed your work all through those years, and I know you tend to be one of the more bearish analysts at Stansberry, and I'm happy to report – maybe not happy but here to tell you today that I'm just as bearish as you are today. I'm not always that way. I didn't always agree with you in the past but today I'm absolutely bearish. I think we're in for a deep, long recession. I think we're not through the toughest part of this yet. So yes, we are still in a bear market and I think it's only going to get worse from here.
Dan Ferris: What makes you say such a thing?
Mike DiBiase: Well, there's a lot of things. I think the biggest thing – and I've been writing about this in the daily Stansberry Digest since early 2021 – inflation. That's the big issue, right? So what has changed, right, is inflation. Post-pandemic, the Fed, as you know, Dan, Corey, it's printed a record amount of money, new money. The money supply has never increased by as much as it has and as fast as it has following the pandemic in our history, OK? So it's something like a 40% increase in the money supply in a span of two years or less than two years.
If you don't know anything about inflation, what causes inflation, contrary to what you might hear in the mainstream financial press, is an increase in the money supply. When the money supply increases faster than the rate of our country's output, you get inflation. It's as simple as that. And so we've seen, and I was warning about this in early 2021, we're going to see record inflation. This is when Jerome Powell, the Fed chairman, was talking about, "Oh, this is just transitory. It's not going to go much higher," I said, "No, this is going to get a lot worse" and it's exactly what's happening. So what that has done is cause the Fed to raise interest rates.
So we have the Fed raising interest rates from essentially nothing to what, 4 or 5% almost now? What does that do? I mean if you look at the debt of our country, and I mean government debt, I mean corporate debt and household debt, we've got record amounts of debt in each three of those categories. And in most cases, in almost every case it's double what it was during the last financial crisis. So when you combine interest rates going from zero to close to 5% with record debt at the corporate, federal, and household levels, you're going to have things that break. And so we're just starting to see that now, as you saw with the bank failures and the bailouts, that the government had to come in and insure depositors. And so that's the key is paying attention to what happens with inflation. I don't think inflation is going back down to 2% any time soon. So that's my thesis.
Dan Ferris: Inflation. I think obviously that is counter to the current narrative which is that inflation has peaked, we're headed back to 2%, etc., the Fed's gone too far, too fast.
Mike DiBiase: Exactly. And well, think about the narrative... how wrong it's been since the pandemic. I mean inflation is transitory. Inflation is not going to soar. Inflation has peaked. I mean how many times did I hear that in 2022 when it was at 5% and 6%, 7%? You know what I mean? It's like I kept hearing that every month and I was like I just laughed like, no, it hasn't peaked yet. You know our inflation numbers are not the same way we used to report them back in the '70s and early '80s. Inflation at 9% was probably more like 14%. And I know you've talked about that before, but –
Dan Ferris: Right, _____, yeah.
Mike DiBiase: So the mainstream narrative has been wrong over and over again and yet people still continue to believe it. I think we have a market based on hope, and you can't invest based on hope. I think you have to invest based on reality. I'm not saying it's going to go back to 8 or 9% again, but I don't think it's going to go down to 2% anytime soon. I think it's going to stay in the 4% to 6% range for a long time.
Corey McLaughlin: Hey, Mike and Dan, to that point, you know, just a couple days ago we had the Atlanta Fed president basically say that he doesn't think inflation will go down to 2%. He thinks at best it will be in the 3% range at some point this year. And I don't know who these people are who think inflation is going back down to 2%. I just don't know.
Mike DiBiase: Well, I think the only thing that's going to allow that to happen is if we have a deep prolonged recession. I mean that's the way you get it back down. I'm not an inflation expert, but I started reading a lot about inflation following the pandemic. I came upon a gentleman by the name of Milton Friedman. Milton Friedman was an economist in the fifties, sixties, and seventies. He won the Nobel Prize, and he has since passed away.
But he, to me after studying this, knew more about inflation than anyone else. This guy spent his career studying it, and I'm not just talking about in the U.S. He studied it in, you know, Russia, in Europe, in Japan, and not just this century. He went back centuries studying inflation. So this guy really knew what he was talking about. And Friedman said that look, it's the money supply that causes inflation. It's the more rapid increase in the money supply than in economic output that causes inflation. That's exactly what we had post-pandemic. It was worse than after World War II. It was worse than the 1970s.
And so why is it a surprise that we're dealing with inflation? And I think we're, you know, more looking at a more similar scenario to the 1970s than anything else right now. And I'm not saying inflation is going to go to 20%, but what I'm saying is that it's going to be persistent. It's going to be difficult to get back down. And the thing that Friedman said that I love is he compared it to alcoholism. He said money printing is like alcoholism. When you start doing it, the good effects come first, the bad effects come later, right? And we saw that after the pandemic. Everybody was making money. Everything was going up. All assets. It didn't matter what it was. Everybody felt great. Bad effects came later in the form of inflation.
But he said to cure inflation, it's the exact opposite. The bad effects have to come first and the good effects come later. So what are the bad effects? The bad effects are not a 15% decline in the stock market. The bad effects are a deep recession, a slowing economy, painful things that we have to go through. Demand falling off a cliff, earnings falling. That type of thing will bring inflation down. It's the only thing that's going to bring inflation down. We can't expect the Fed to fix it this time. What can the Fed do? They can lower interest rates, and they can print more money. And that's worked in the past, but that bullet doesn't work anymore because that's just going to make inflation worse. You can't fix inflation with what they've been doing in the past. They're out of bullets.
Dan Ferris: Yeah, and my problem with the – I mean it's been widely discussed that the tools the Fed has are just ill suited for the purpose. OK? They don't work. They don't do this job right. And like the 1970s are just burned into my brain. I was a teenager then and it's just I remember specific things sitting in gas lines on my way to high school and stuff. And what's burned into my brain about that is this thing where, you know, Fed talks about basically what they're trying to do is crush demand, right? Because the Fed can't affect supply, so they try to crush demand. So what if they're successful? What if they're successful and they create a recession? It does nothing to address the initial supply/demand imbalance.
So we came out of that, you know, mid-'70s recession and then inflation really took off and got crazy. And then of course Volcker took the Fed funds to 20% four times and just beat the living daylights out of it and created a brutal recession, just brutal early eighties. And so even if we do get, you know, let's say we get back to 3% or something and CPI year over year increases, first of all, you know, the price level isn't dropping at that point, it's rising at 3% annualized and the purchasing power is not coming back. And then on top of that, you've done nothing to address the supply-demand imbalance.
Mike DiBiase: That's right. And you know, the 1970s are a very valuable lesson, and I think to Jerome Powell's credit, I think he's studied the 1970s and he's following the playbook trying to avoid the errors of the '70s because what happened in the '70s if you look at is we had a big increase in the money supply in the early seventies. Of course inflation rose, and then inflation started to come down as the economy slowed and demand came down. But then what happened is the Fed started printing money again and they thought it was over. OK, we're done with inflation so they turned the printing presses back on. Lo and behold, what happened? Inflation came back again, and it came back worse than the first time.
That's the real danger here that Powell is facing. If he starts easing too fast, too much, and the Fed starts printing money again and expanding the money supply, then we can have worse inflation than we had already... and then that inflation mentality takes over, right? Then people are really scared like, oh crap, it's really serious this time and, you know, that is a, you know, circular logic that creates even more inflation. When people are afraid of it, it can create more inflation... and that's what happened in the late seventies. I think Powell knows that, so he's being very careful here. And so far, I admire what he's done. There's so much pressure building on him to ease that I'm just worried that he's going to give in and start inking again.
Dan Ferris: Yeah. And the expectation that appears to be kind of baked into markets is that that will happen. That's the thing that gets me. What if he doesn't, you know, follow through? Which I don't know that he will. I believe that you're correct. I believe he's like the high school quarterback looking at the picture of the hero on the wall, and the picture of the hero is Paul Volcker, and he's saying I want to be like Paul. I think the narrative has changed.
Mike DiBiase: Yeah. I think he's going to as the year goes on, as things get worse, as the economy slows, I think you're going to see him, the pressure mount, and he's going to have to ease. I think he'll do that, but that's just going to delay the pain like Friedman said. You can't get away from the pain. There's no escaping. You can either choose to deal with it now or you're going to deal with it later. When you deal with it later, it's going to be worse so he's in a bad spot.
Dan Ferris: I wish I had – well, I won't say a dime, probably a million bucks for all of the kind of smarter, more cautious, even bearish folks that we've had on talking about inflation who sight Milton Friedman. It's becoming a theme now.
Mike DiBiase: Yeah, he was fantastic. If anyone wants to just Google him and watch some of his old videos, he had a swagger about him because he knew. He had the data. He just knew more about it than anyone else. You know, it's funny, like you mentioned inflation the way people are thinking about it today. The latest reading in March was like what, 5% CPI, I think, headline number?
Dan Ferris: Yeah.
Mike DiBiase: President Biden said he's pleased with the number and he believes that gives hardworking Americans more breathing room. I just laughed when I heard that.
Dan Ferris: Geez.
Mike DiBiase: Like how is 5% inflation, more than double their target, on top of the last two years of massive inflation, how is that giving anyone more breathing room? And you want to talk about my bearish view, I mean look at household debt, consumer debt. It's at a record, and credit-card debt is at a record high. Credit-card interest rates now average 20%, a record. You've got record household debt, record credit-card interest rates. What do you think is going to happen with that? And consumers have been dealing with inflation, 6% or 7% inflation for the last two years. This pressure in the system has been building on the consumer, and I believe the American consumer is really going to be the kick starter for the coming recession. The demand will fall this year. You're already starting to see with housing prices. It's going to be ugly this year, and it's just getting started.
Dan Ferris: Yeah, I think you're singing Corey's song there.
Corey McLaughlin: Yeah, I mean I just wrote about that the other day about consumer spending, retail spending is already at a level. Last month it didn't grow at all for the first time since the start of the pandemic. So you're seeing that now. You're going to get the lag effects from that. And to your point, the credit card, the amount, like the nominal amount of debt that people have is rising and the interest rates are rising, have been rising. So it's like a bad combo.
Mike DiBiase: And even if the interest rates don't continue to rise, Corey, even if the Fed backs off and they stay, they're at 20%. You know, they're not going to go back down to, you know, 14%. They're at 20%. They're going to stay there for a year or two. What's that going to do to people's budgets. I mean we're already seeing cracks appear in terms of rising delinquencies on auto loans. These trends are going to continue. You're going to see more delinquencies. You're going to see more bad debt right off with the big banks and credit-card loans and auto loans, student loans. I think those are the stories that I'm going to be keeping an eye on this year because I think we're only starting to see the very beginnings of it right now. As the year progresses, it's going to get worse and worse. Consumer sentiment is going to get worse and worse.
And then, Dan, if you want to talk about the stock market, corporate earnings, right? Going into this year I was writing – I wrote about this at the beginning of this year. You know, the market was pricing an earnings increase this year of 8 or 9%... and I said, how in the world with all the inflation and demand slowing and record consumer debt are corporate earnings going to grow 8 or 9% on top of what they grew last year? It just didn't make any sense. And we're finally starting to see after the first quarter earnings period come to a close now. We've seen two consecutive quarters of earnings declines in the S&P 500. I think it's, again, we're just getting started with that. We're going to see earnings expectations every quarter get lower and lower and lower. I think that's going to drag the stock market down with it.
Dan Ferris: OK, so we've already seen, you talked earlier about till something breaks. So we've already seen some breakage in banking, Silicon Valley, Silvergate, Signature, etc. There's a lot of – well, a few anyway – articles and research and things coming out about commercial real estate as being the next shoe to drop, the next credit-oriented problem. Let's talk about that, but generally, I want to get to, you know, what the heck does a bond investor do in this environment? Let's talk about commercial real estate. I've seen different numbers for the total outstanding, like between maybe what is it – $2.9, $4.5 trillion. There's like trillions of this stuff outstanding with close to $300 billion maybe rolling over in the coming 12 months. I have to believe some of it can't roll over and that there will be serious problems with office buildings 50% occupied, etc.
Mike DiBiase: Yeah, I mean in fact we just wrote about this. Bill McGilton is my colleague and co-editor on Stansberry's Credit Opportunities. We just wrote about this in the issue that was published yesterday. You know, everybody talks about the banking crisis and it being contained, the banking crisis is over. Don't believe that. This is just getting started. I mean this is kind of like, you know, a dam. A hole appearing in a damn, right? And the Fed comes in and sticks their fingers in one of the holes. OK, everything is great, right? And then another hole appears. The holes are going to keep getting bigger and bigger.
Commercial real estate, according to Bloomberg, at least $1.5 trillion in commercial real estate in the U.S. loans are going to come due by the end of 2025. So $1.5 trillion and most of those, about three-quarters of commercial loans outstanding are held by regional banks. OK? So these are the same banks that are having the trouble, the depositors' flight to the bigger banks, right? So they're already losing their deposits. Now you've got commercial loans that are probably one of the biggest assets on their books that are in danger.
And so what's happened, right? You mentioned vacancies have gone up. The vacancy rate is something like 20% in big cities now. It was 10% prior to the pandemic, so it's doubled. In some cities like San Francisco, it's even higher. It's like closer to 30%. And you've got interest rates that are much higher. So these loans, they're coming due. They're going to have to refinance these loans. Well, they may have gotten a loan five years ago at 2% interest. Well, now they're going to have to refinance it at 5, 6, or 7%, right? All of a sudden the economics of that building doesn't make any sense anymore, right? Because these buildings are valued based on their earnings.
So now you've got interest payments at double or triple. You've got vacancies that have more than doubled. You know, a lot of these buildings are going to get turned back over to the lenders and the lenders are going to be looking at credit losses on these loans. We're just already starting to see some cracks appear in some of the riskier properties.
Dan Ferris: Yeah, I mean, you know, it's not just like some hedge fund that doesn't know what it's doing. It's like PIMCO and I think another one was somebody like BlackRock or something, like defaulting on pretty massive commercial real estate loans. To me, maybe I'm reading too much in there, but it's like, wow, really? These people, these people are better at this than most. They're in default.
Mike DiBiase: Yeah. It's just getting started, Dan. I mean this is only going to get worse. I mean you're right. No one could've foreseen the pandemic, right? I mean to be fair to them.
Dan Ferris: OK, sure.
Mike DiBiase: These banks get stress tested, right? you're not going to stress test a global pandemic. Now you should stress test rising interest rates. It blows my mind that Silicon Valley Bank and even the bigger banks, you know, the stress test that they do, the Fed's stress tests don't incorporate rising interest rates. It boggles my mind. If they had done that, they would have known that this could happen, right? That you would be sitting on $20 billion of unrealized losses on your Treasury holdings. So yeah, I think we're just seeing the beginning of this and there are going to be some big names involved. I think the regional banks are really going to be in trouble. I think we're going to see a lot of consolidation in the banking sector – fewer regional banks, more big banks.
Dan Ferris: Even more, yeah, that's a one-way bet. Consolidation in banking's been going on for a while... but, yeah, one of the things that kills me is the widespread lack of interest-rate hedging. I'm like, you went through 2020 and you didn't want to hedge your interest? I mean that was all-time 5,000-year lows of interest rates as far as anyone can tell, you know, according to Sidney Homer, right? And you didn't hedge? I'm just like, you knew there was money printing, right? I mean you know how this goes, right? It's your job to know this, right? Nope, none of it.
Mike DiBiase: I think they believed the narrative. They believed Powell when he was saying this is transitory, right? They were so used to it, a decade or more of interest rates near zero. How could you possibly think they could go up, right?
Dan Ferris: Yeah.
Mike DiBiase: This is that, you know, people get locked into their thinking and they can't imagine another scenario. And yeah, Silicon Valley Bank didn't even have a chief risk officer in place for almost a year, right? So that was just a recipe for disaster. But yeah, I mean for them to be buying treasuries with, you know, an average duration maturity of four or five years out instead of being invested in more shorter-term Treasurys which would have prevented the problem.
It's some of the worst management of a financial institution I've ever seen. It's pretty unbelievable. Of course, you know, you can't predict half of your depositors wanting to withdraw their money, you know, in a couple afternoons either... but you got to be aware of interest-rate risk. I mean for a bank not to be aware of interest-rate risk, right, I mean that's their job. What else should they be aware of if they're not aware of interest-rate risks?
Dan Ferris: I'm with you.
Mike DiBiase: It boggles the mind.
Dan Ferris: It does. And by the way, it was the two-day total that people were trying to take out – they wanted to take out even more the second day on March 10 from Silicon Valley Bank. The two-day total was close to like 81% of deposits.
Mike DiBiase: Oh boy.
Dan Ferris: $142 billion, I think it was that people wanted to take out. They got the $42 billion out the first day and before the door opened the second day, requests for $100 billion or more came in.
Mike DiBiase: Yeah, I mean, look, no bank is going to survive that. I don't care if you're the most financial –
Dan Ferris: No.
Mike DiBiase: Yeah, you can't survive that. But the reason there were so many people lined up to do that is because they saw the problems on their balance sheet. Some savvy investors and depositors were like, wait a minute. Like they just looked at their balance sheet and say, oh, wait a minute, there's unrealized losses on their investment portfolio of $20 billion. Their equity is only $18 billion or whatever it was. They're insolvent. Why do I want to keep my money insolvent. So they got their money out, called their buddies and said, "Hey, you better get your money out." They got their money out, called their buddies and said, "Hey, you better get your money out." And then that just kind of escalated and snowballed because they were all – it's a pretty tightknit, tech-focused community out there on the West Coast and there you go, bank run.
Dan Ferris: For me a very interesting thing happened with that episode. The rubber actually hit the road. They actually dumped all their available-for-sale securities, and so they had to post – you know, it was a real loss. It was $1.8 billion gone. Then they said, "Oh, it's OK. We're going to raise $1.8 billion." No. No, you're not.
Corey McLaughlin: Ironically pointing out that they were in a weak position is what doomed them in the end, you know, finally because they did it way too late. Yeah, that story is just I think indicative of what Mike's saying, right? Like I mean you were talking about commercial real estate, like where's the next shoe to drop there? Is it there?
Mike DiBiase: What's happened, you know, the regional banks, a lot of people moved their money out of the regional banks. They're putting them into bigger banks. And so regional banks are in trouble. They're having to borrow from the Fed. They're taking advantage of the Fed's lifeline, this new loan facility they set up. And those loans, I think the longest they go is a year. So what's going to happen in the interim, right? The banks are going to have to raise capital. They're going to have to reduce their risky holdings because they have to meet, you know, certain capital ratios. So they're going to be looking to raise capital, issue more stock. They're going to be looking to reduce their risky holdings of things like commercial real estate. What's that going to do to prices, right? And so all of those things are going to create more panic and more outflows.
And so there's going to be a – I guarantee you we haven't seen the last of the Fed's lifeline to these regional banks. They're going to force the bigger banks to take them over and you're going to see far fewer regional banks. And this is a big point that even Jerome Powell mentioned in the last meeting. The upshot of all of this banking crisis, whether you believe it's over or not, one thing is for certain, bank lending standards are getting tighter, OK?
Dan Ferris: Oh yeah.
Mike DiBiase: Because for these reasons, right? The banks don't want to hold risk loans anymore. They want to be in treasuries and safer things. I don't know if you know this, Dan, but bank – well, Corey, I think you've been writing about this – bank lending standards are already as tight now as they've been in a decade, more than a decade. They're tighter now than they were leading up to the last financial crisis. So you already have banks that have been tightening for at least the last three quarters. Now they're about to get even tighter at a time when credit is needed the most, when debt balances are rolling over, when interest costs are going up. I mean this is a recipe for disaster, and we are just getting started on this cycle. People need to understand, this is just getting started. We are not near the end. We're more near the beginning than the end.
Corey McLaughlin: As you're speaking I'm thinking, you know, who really gets screwed here? It's like the average, everyday American consumer on both ends. You know, the banks aren't going to be lending – and to corporations. Banks aren't going to be lending as freely as they have for the last 15 years, and you're paying more for that money that you are getting. So it's like, you know, what do you do?
Mike DiBiase: It's the riskiest borrowers, right? They're the ones that are going to suffer because these companies, these zombie companies – around a quarter of all U.S. companies are zombies. They can barely pay their interest on their debt today, the interest on their debt. So when their debt comes up to refinance, to roll it over, for the past decade they've just been rolling it forward. The banks will give them a new loan, they pay off the old loan. Everything is fine. Well, now they got to pay higher interest rates if the banks even give them a loan.
I mean what's going to happen is more and more companies are going to be seeing the door shut in their face. The banks are going to say no, we don't want to give you another loan. And so you've got the companies with the most debt, the riskiest debt, they're all of a sudden going to be cut off from credit and you're going to see a lot more companies go bankrupt. I think the next bankruptcy wave is just starting. Bankruptcies in the U.S. have increased the last three months. In fact, in the first quarter we've seen more bankruptcies in the first quarter of this year than we've seen at any time since 2010. So it's just getting started. The wave is just getting started.
Corey McLaughlin: Yeah, I think we've seen some lately with, what did I just see one with? David's Bridal, I think. They laid off. The point is and then they lay off all these people and unemployment rises and it's just this cycle of – I feel depressed just thinking about it but yeah.
Dan Ferris: Yeah, but the "employment is so tight" narrative is pfft. That's like the laggard. You know, that's like one of the main laggards, if not the "laggingest" of all, right? So saying that employment is super tight is like saying we're just about ready to crash.
Mike DiBiase: That's right.
Corey McLaughlin: Right. And when you look back at the last however many recessions you want to look at, it's right before it's officially called is unemployment is always at a low, like near an all-time low, every single time.
Dan Ferris: Oh yeah.
Corey McLaughlin: That's what it is. So I mean.
Dan Ferris: Right. And when people are screaming about how high it is, then you're like, OK, I'm buying equities now.
Corey McLaughlin: Right. Now it's over, yeah.
Dan Ferris: So.
Mike DiBiase: I mean it's crazy. Like there's so much optimism in the market, in the prices today, Dan. When we started this year saying, oh, there's going to be no landing, right? And then it was a soft landing, right? And then it was, oh, it might be a hard landing but there will be no recession, right? And now it's like, OK, it's a hard landing but a mild recession, right?
Dan Ferris: A mild recession.
Mike DiBiase: It just keeps getting worse and worse. And you know, there's so many signs that trouble's ahead. The yield curves, I know you've talked about this before. The yield curves are inverted. The difference between the two-year Treasury and the 10-year Treasury rate is now the most inverted it's been in more than 40 years. The three-month, 10-year Treasury yield curve is now inverted the most it's ever been. These are the things that predict recessions, right? So we haven't seen a recession yet. We've got these recession warning signals that are reliable and accurate screaming at us, telling us that a recession is coming and people just don't want to believe it. It boggles my mind.
Dan Ferris: Yeah, we had – who did we have? We had Colin Roche on the program talking about Cam Harvey's yield-curve-inversion paper, and we're just about there. The window is just about closed, and we're heading – if this indicator is working this time – you know, I can be wrong. Anything can be wrong. You won't hear me making a hardcore prediction. And even if I do, I can always be wrong. But if it works this time, like it's going to start working within the next couple of months, maybe as late as early 2024. So I don't know. For me right now, like prepare, prepare, prepare. This is like major preparation mode for tough times right now as far as I'm concerned.
Mike DiBiase: Yeah. I mean all the warning signs I'm seeing are telling me the same thing. You know, all the signals that I see are saying the same thing. A recession is coming. It's just a matter of how bad it's going to be, how long it's going to be. And you know, when you study credit cycles, this is normal, right? This is nothing unusual. I know it's been a long time and I think people just have very short-term memories, but credit cycles happen all the time.
You have periods of super-easy credit, everyone can get a loan. Then credit eventually tightens and you have people, you know, not able to afford their loans, massive bankruptcies, and write-offs. Then credit starts to ease and loosen again. This is just a natural normal cycle. Now, last time it happened was 2008/2009. And people seem to have forgotten about it. But we are headed, I feel like we're sitting here in 2007. We're headed toward another credit cycle event. We're going to see the credit market, the credit bubble pop very soon. I think it's going to start this year.
And what I look at in Stansberry's Credit Opportunities, we look at the high-yield credit spread, right? And that's the difference between the average yield on U.S. Treasurys, you know, supposedly risk-free investments, and the average yield on corporate bonds. If you look at a long-term graph of the high-yield credit spread, it looks like a wave almost over many decades. And it peaked, you know, the credit spread in credit crises blows out over 1,000 basis points. Lately, it's been around 200, 300, 400 basis points. I think we're on the verge of seeing that credit spread blowout to more than 1,000 basis points again. Actually, during the last credit crisis, it was almost 2,000 basis points it blew out to. So we could see something similar to that this time.
Dan Ferris: That makes your job hard, doesn't it, Mike? You're the credit guy.
Mike DiBiase: Yeah, it makes my job really easy actually, Dan, because when the credit spreads, you know, I hate to say this but in our newsletter we feast on credit crises, right? We do the best when there's trouble in the markets because when the spread blows out, what does that mean? It means that corporate bonds are yielding 10, 12, 15% because their prices go down. We can buy them for much cheaper than we would during calm times.
Dan Ferris: Let me restate. Until we get there, your job is hard for the –
Mike DiBiase: Well, listen, the spread tends to – it fluctuates. It goes up. It goes down but not by much, right? We've seen this since 2021, since the pandemic. It will go up. The market will get scared because the latest inflation reading comes out a little bit higher than they expected, and then almost immediately it goes back down again. And then, you know, something else happens. Maybe the bank crisis happens, and all of a sudden you see the spread blow out again a little bit. Maybe it goes from 300 to 450 basis points. Then it just kind of falls back down again.
The market always finds a way to talk itself out of being scared, but when the credit crisis hits, when we are in the midst of a recession, you know, you're going to see real fear where no one is going to be talking themselves out of it. The fear is just going to feed on itself and the spread's going to continue to get wider and wider and wider. Bond prices are going to get cheaper and cheaper. That's when we really make our money... It's when bonds get super cheap.
Dan Ferris: Yeah, it's almost lacking in taste and decorum or whatever to say it, but I can't wait for that.
Mike DiBiase: Look, we can't wait for it, Bill and I because this is what we created the newsletter for. You know, it's in moments of fear and during credit crisis that we can make equity-like returns of 30, 40% on a bond. A corporate bond is much safer than a stock. And so you're going to be able to make equity-like returns with an investment that's much safer than stocks. That's what I want the average investor to realize is that just because everything is falling apart in the world doesn't mean you still can't make money.
And here we have this tool investing in distressed corporate bonds that investors can add to their toolbox and make a lot of money over the next year or two because this for us is our Super Bowl. We're about to enter – when credit spreads blow out and when we have a real credit crisis, that's our Super Bowl. That's when we're like just picking up dollars off the street and this is what the world's richest investors do. You know, the billionaires, super billionaires. This is when they really back the truck up and make their money.
Dan Ferris: All right, so I'm going to ask you my final question, but I want to go to Corey and see if he's got a final question for you, too.
Corey McLaughlin: Dan, this just reminds me of what you say a lot, why you want to have cash on hand. It is when this crisis or whatever it may be, but in particular, if this credit cycle bursting or coming and the burst of it, this is what you want... cash, the option to have is to pick up these things that Mike recommends, Mike and Bill recommend. So that's just one thing I think. I know Mike has told me this before. You guys thought, you know, back in March 2020 had the Fed not stepped in with what they did, you know, we're headed here. So I think they were just kind of kicking the can down the road as you kind of said. To this point, and you guys made a lot of recommendations back then, too, that I think did pretty well so.
Mike DiBiase: Yeah, let me just give you a number because I have it in front of me here. So from March of 2020 through May of 2020 we recommended eight bonds. That was a very short window where the credit spreads blew out before the Fed came in and the spreads fell back down again. So eight bonds. The average annualized return of those bonds was 59%. OK? So we're talking about – and these were safe bonds. Some of them were investment-grade bonds. They weren't even high-yield bonds.
Dan Ferris: Wow.
Mike DiBiase: Fifty-nine percent. So we bought them and we sold them above par value, above their stated contractual legal value before the end of the year. So the annualized return on those eight bonds was 59% on super-safe bonds that had no chance of defaulting. And so yeah, I mean we want to do even better than that when the real credit bubble pops because this time the Fed can't save it, right? They can't be stimulating more, lowering interest rates, it's just going to make inflation worse. It's going to make things worse.
And so when this happens again, the Fed won't be able to save it. That's when we're going to really have a feast and I hope the average investor considers, if they haven't before, buying corporate bonds because for a lot of investors, especially retail investors, you know, they might not even know you can buy corporate bonds, right? You hear the word bond, you think of boring 1 or 2% yields, U.S. treasuries, maybe municipal bonds, right, that pay a little bit more.
Dan Ferris: Yeah, TMT, yep.
Mike DiBiase: You can buy corporate bonds just like you can buy a stock of a company. A lot of companies, most companies issue corporate bonds, too, and you can buy them right through your broker. You just got to ask your broker to be able to do it and you can make a lot of money, like I said, equity like returns on very, very safe investments. The best time to do it is when we're in a credit crisis and I think one's coming very soon.
Dan Ferris: OK. So if I ask my final question which is the same for every guest, I wonder if you can top what you just said. If you can't, it's OK. It's OK. But final question is if you could leave our listeners with just one thought today, what would it be?
Mike DiBiase: Yeah, I think that's it, Dan. It's put another tool in your toolbox. OK? If you've never considered investing in corporate bonds before, consider it and do it soon because it's going to be too late once the credit crisis is over, right? You may have to wait another decade before another credit crisis hits. This is the time to look into it, to do it, to learn about corporate bonds. We have primers, you know, educational things on our website that can help investors learn about it.
But it's a little harder than buying a stock. You got to sometimes call your broker, get on the phone. Maybe you have to go – not every broker is going to have every bond we recommend. You might have to have a couple of brokerage accounts, but listen, it is going to be worth it because you're going to earn some of the safest high returns you've ever earned in your life. When everything else is falling apart, right, this is where you're going to make your money for the next year or two, I believe. It's not something I want to happen. Look, I want people to know I'm not cheering for the economy to crash or a deep recession. It's just where I think we are in the economic cycle in the credit cycle. You might as well make money from it if you can, right? I mean we're all going to go through it so at least if you're an investor and you have money in cash set aside, at least make some money from it.
Dan Ferris: Well said. Man, I always enjoy talking with you, Mike. Thanks for joining us.
Mike DiBiase: Yeah, listen, it's been a pleasure. I always enjoy talking to you guys, too. So hopefully, we'll catch up soon.
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Dan Ferris: Wow, that was a good talk. I always enjoy talking with Mike. I really do.
Corey McLaughlin: Yeah. Given the subject matter, it was a good talk, I think. Perspective and whatnot. You know, we talk about, honestly, we're like a lot aligned on the same page of things we're looking at but his point about what's coming and how these cycles – like you don't need to be scared about these things happening necessarily if you're able to prepare the right way. Credit cycles do happen. A lot of different cycles happen. This is one of them. If the world is falling apart and thousands of companies are in trouble, there's going to be some opportunity somewhere at that point. And so this is one of them.
Dan Ferris: I agree. And I don't know, it's such a pleasure to have a guy like Mike around and I think Stansberry was really smart to sort of get him onboard and finally offer a decent product for all investors, not just institutions, that covers this stuff. We've had people write in about that newsletter and say, God, you've done more for me than anybody else, etc. It's because they took his advice during some event where the spreads blew out and he found an incredible opportunity and they slept better and made more than ever. It's just great to get Mike's view on everything. I really can't wait to have him back though. I can't wait until the credit spreads are like 1,000 basis points and he's pounding the table because – he was excited this time. Wait until he comes back during that, you know.
Corey McLaughlin: Yeah, at that point there will be plenty to talk about and plenty to think about what's happening next. And as contrarian investors, that's the time to like – unfortunately for most people, but that's the time to get excited if you're looking to build stuff over the long run.
Dan Ferris: That's right. It's like Mike is in his element when everybody else is like super depressed, as he pointed out, you know, as all great investors are. All right, man, that was a great interview. Another great interview and 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.
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