Stansberry senior analyst and editor Bryan Beach joins Porter and Buck to talk about his recent speaking engagement at the Grant's Interest Rate Observer Conference in New York. Bryan's presentation revealed his new system for spotting stocks that are poised for triple-digit gains by studying their counterpart in the bond markets. Bryan explains the distinct difference between stock buyers and bond investors. Which market does the smart money follow?
Porter asks Buck to explain why America keeps meddling in the Middle East. "It's not our war." Is there an imminent threat to the US from rouge nations, psycho-dictators, or Al-Qaeda? Porter is thinking more and more about gold and reveals his favorite precious metal company to own before all others. A listener writes in with a question about what would happen to insurance companies and policies in a debt jubilee scenario.
Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour.
Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at Investor Hour.com. Here are the hosts of your show – Buck Sexton and Porter Stansberry.
Buck Sexton: Hey everyone. Welcome back to the Stansberry Investor Hour. I'm nationally syndicated radio host and semi-professional bacon chef, Buck Sexton. With me here today is the founder of Stansberry research and some time barbecue master, there we go. Mr. Porter Stansberry, sir.
Porter Stansberry: Buck, that reminds me. I had something for breakfast this morning I've never had before. We butchered these Berkshire pigs. And our butcher who we took the pigs to made these things that he calls "bacon ends." I don't really know what they are, except that it is bacon. I know that. And it looks like – have you ever had like lamb tenderloin? They looked like little lamb tenderloins but they were bacon. I'm going to text you a picture right now.
Buck Sexton: Sounds amazing. I'm in.
Porter Stansberry: It was like eating a little tiny bacon tenderloin, it was fantastic. So if I have any fellow farmers out there, you guys have ever had these things please tell me where they came from, because I didn't butcher the pig so maybe someone knows.
Buck Sexton: Important thing too, people think that bacon is just bacon and it tastes the same at IHOP as it tastes if you make it at home, as anywhere else. There is tremendous variation in the quality of bacon, the thickness of bacon makes a tremendous difference. So get thick cut, everybody. You'll thank us later.
Porter Stansberry: This was like – this was something else.
Buck Sexton: This is some other next level, yeah.
Porter Stansberry: I don't know. I've never seen anything like this in a store or restaurant and somehow it came off of one of my pigs and it was spectacular. I mean I had to like stop and have a little prayer and thank God for how delicious that bacon was this morning. I just texted it to you so you can take a peek.
Buck Sexton: Oh wow. You are a ninth-degree bacon ninja, so that's good. Oh my gosh, that looks amazing. I'm into it.
Porter Stansberry: All right, let's get onto something besides all the foods that make me fat.
Announcer: Joining us in just a little bit will be Bryan Beach, lead analyst of the Stansberry Venture Value service and contributing member of Porter's Investment Advisory research team. Just last week Bryan represented Stansberry Research in New York City and had the honor of speaking at the Grant's Interest Rate Observer Conference. Bryan is here today to talk with us all about how to use the bond markets to find hidden opportunities in stocks.
Porter Stansberry: Before the show we were talking about this Showtime television show – Billions. I think a lot of people in the company here like watching it, I wonder if our listeners watch it because it's sort of pulled from the headlines drama, of these Wall Street characters. And I was at this Grant's investment conference – we're going to get to some of the details about that in a second, but the best speaker by far at Grant's in my mind – no offense to our own Bryan Beach – the best speaker was this guy Boaz Weinstein.
And I don't know if you guys have ever heard of him but if you google him you'll see, he's kind of the new wunderkind of Wall Street. He runs this hedge fund for Saba Capital. And he was a trader for Deutsche Bank and he made a lot of money in the mortgage run up and then he lost a lot of money for Deutsche in the crisis, almost $2 billion. Ouch. And so he was asked to leave.
He was suddenly "un-busy," as they say, and he started Saba Capital in 2009 and one of the biggest trades that has ever happened in the history of capitalism was the JPMorgan "whale trade." So there was this guy at JPMorgan who had accumulated all these derivatives that were based on corporate debt in Europe and Saba was the other side of the trade. And JPMorgan lost $6 or $8 billion, which means that Boaz Weinstein made a ton of money, in fact he made so much money he was able to buy the old – Huguette Clark's apartment - $25 million apartment.
Huguette Clark was the daughter of the – America's greatest copper baron. Clark County, Nevada – where Las Vegas is built today – his family owned the entire county. That was one of his fueling stops for his train that took copper from Montana to the LA ports. Anyways, this guy – very, very smart guy, and he had a very clever presentation showing the enormous current risk of U.S. corporate bonds. And I'm not going to give away any of his names because that's for the people who attended the conference. He showed a number of examples where you had American corporate bonds that were still trading at par and represented hundreds of millions of dollars – and I'm sure there's cases out there where it's billions of dollars and each individual issuance, where the underlying equity value is almost zero.
So you had companies that have market caps of less than $100 million and they have bonds that are worth billions. And this obviously doesn't make much sense, because either the equity is worth a lot more or those bonds are massively mispriced. And as we saw recently with the Toys "R" Us bonds – and there's been a couple of other big blow ups, the volatility in the bond market is something that we have never seen before. I have never seen a major traded bond like Toys "R" Us go from par to $0.20 on the dollar in a day.
What Boaz was warning about was this is going to happen more and more and more, and the way to find these things is to use the equity valuation as an indicator for a bond that's about to blow up. So definitely a great area of study for those who are interested in bonds, as I think you all should be. And you'll certainly see some of that research, we're going to take that idea that Boaz gave us and we're going to run with it, so you'll be seeing that coverage in our Stansberry's Credit Opportunities letter.
But anyway, longer story about this – in the TV show Billions, the DA prosecutor's office plays a big role in the story lines. And one of the interesting things about Boaz is he married one of the most beautiful women that anyone has any seen, and she just happens to be the assistant district attorney for the Southern District of New York. So one way of making sure that your hedge fund stays on the right side of the law, apparently, is to now marry the prosecutors. And I'm joking, of course. I'm not trying to allege that Boaz has ever done anything illegal or even unethical.
I just think it's an interesting thing, because a lot of the storylines in Billions come right from the true-life experiences of people like Boaz. So it's a fun show for us to watch and to laugh about. And I was really impressed with Boaz.
In fact, he reminded me so much of a guy – a polymath, brilliant guy I went to high school with named Reed Arnus, they have the same appearance, the same body language, the same rapid-fire mind. Just a brilliant guy. It was nice to see him present and he had a great idea.
A similar idea we're going to get to in a second for you and that is our own Bryan Beach has done a lot of research in using bonds that have not broken below par or have traded only slightly below par to find stocks that have fallen a lot. So Boaz was talking about using stocks that have fallen 90% where the bonds haven't moved yet as an example of a bond that might collapse and our research was looking for situations where the stock has fallen a lot – 60%, 70% – and the bonds never moved at all as an indicator of maybe where the stocks can rebound.
So it's looking at the same situations but form the other side, in other words, high quality companies with good cash flows where probably the stock is mispriced not the bond. And I don't know when Bryan is going to join us exactly, but we'll get to that in a minute. First though, Buck – can you tell me what in the world is going on when what has obviously become a highly compromised and partisan FBI raids the private attorney of a sitting U.S. president? If that's not as close to civil war as we've been in our country in a long time, I don't know what is.
Buck Sexton: Attorney-client privilege doesn't matter very much in the era of "get Trump at all costs," Porter, that's what we found out. You know, it's been really disappointing. I don't expect much from groups like the ACLU but I think we're all quite clear that if this wasn't something that hurt Trump you'd see a lot of people screaming about the civil rights violation here. Look, we have spent about a year now figuring out that the FBI was at a minimum abusing their authority and playing – FBI/DoJ – can use them kind of interchangeably – to use FISA which is among the most sensitive surveillance techniques in existence, they abused that to get at Trump campaign information, Trump's people.
They've leaked classified information to take down Trump people including the former National Security Advisor Mike Flynn, who is now facing a five-year felony and we're supposed to believe that they will set up – and this is the real answer, Porter – a "taint team," that's what they call it, I'm just saying – a taint team that will separate out what is truly privileged from Trump's lawyer from what is not.
Oh, so now we're just going to trust the Department of Justice and the Mueller probe and the Southern District of New York to play totally fair and square and not either use that information for the purposes of directing the rest of their investigatory efforts or just leak some of it. It's crazy.
Porter Stansberry: I don't get it. I really don't get it. I don't have any idea why people are so exorcised about Trump. He's clearly in my mind capable of destroying his own presidency. He doesn't need any help in that regard. But you know, a lot of things don't make any sense to me. Here is an example...
Can anybody explain to me what essential U.S. interests are put at risk by a Syrian dictator gassing his own people?
Buck Sexton: I'm with you on this one, people who think that just lobbing a bunch of missiles into a country with which we're not at war without Congressional authorization, that has multiple other countries including one with a lot of nukes – Russia – with their troops in harm's way – you know, people forget this. We blew up over 100 Russians on the ground in Syria just a few weeks ago and the only reason everyone let it slide was because they are Russian paramilitaries and we were like, whoopsie – big mistake.
But that's how wars actually start. This is dangerous stuff.
Porter Stansberry: People also forget that we used the Bosnian intervention as an excuse to destroy the Russian embassy in Belgrade – whoops, we didn't mean to do that.
Buck Sexton: Stuff happens.
Porter Stansberry: I cannot figure out this mental leap. Is it terrible that the Syrian dictator gassed his own people? Possibly. Sure. Of course, you also don't' know where those bombs came from, who authorized them. There's a million conspiracy theories about all of this stuff. I'm saying sitting here in Baltimore, we have no idea what actually happened. Some people got gassed. Maybe Assad was behind it, maybe not. But in any case – in either case – it's a terrible thing.
We absolutely condemn it. we can cut ties with Syrian companies. We can keep them out of the banking system. We can uninvite them to the world cup. Right? You can make them a pariah nation. Here's where I totally part ways with a lot of people who are Republicans and who are conservative in fiscal matters and therefore think I'm conservative, too.
There is no way in hell I am going to approve or endorse my children going to war in Syria. Sorry, it's not worth it to me. And everybody who says we should do something, great. Let their children be the first to volunteer.
And that is the – for me, that's the litmus test. Is this important enough to our country to put your children at risk? Not the poor people from Kentucky and Tennessee who end up fighting all of our wars for us, your children. Let the progressives, let the limousine liberals pull their kids out of Harvard and Yale and send them for special forces training and let them lead the battle against the Russians in Syria. But until then, publicize what happens, condemn it and stay out of it. it's not our war.
Buck Sexton: Can I tell you what troubles me about this, Porter, as well is we already did this a year ago. It was almost exactly a year ago. It was the same storyline. Same situation. Dozens killed, chemical weapons, they believe it's saran gas. Do we know? No, we don't know. We're relying on intermediaries on the ground, all of whom are interested parties in this, none of whom could be said, you've got the rebels on one side, you got the Assad government on the other, a lot of different players in Syria right now and we fired a bunch of missiles and we said, okay, we're showing them that there is a red line they can't cross.
They – we hit their air fields – Assad's airfields. Porter, they fixed those air fields that had planes flying off them within a matter of hours. So and that – but see, people might say to that –
Porter Stansberry: But we did something, Buck.
Buck Sexton: Right, but we did something.
Porter Stansberry: We didn't just stand by.
Buck Sexton: People might say to that oh – Lindsey Graham who is one of the dumbest people on foreign policy that has a national platform out there was saying we should make Assad himself a legitimate military target. Like if we knew where his palace was at any given time we should just take it out, is the implication of what he said on TV two days ago. I'm sitting here and I'm saying this guy, one, is not very smart, two, has learned nothing about what's gone on in Iraq, Afghanistan, which by the way, we still haven't figured out how to make those places not cess pools and hell holes.
Porter Stansberry: But what business is it of ours? That's what I cannot figure out. The reason why we went to war in Iraq I think everybody realizes is that the Bush administration was very concerned about losing access to oil. And wanted to make sure we would always have big oil supplies available to the American economy. The dummies didn't even know there was more oil in Texas than in the entire Persian Gulf combined and as soon as they got out of the way, American companies went out and found it. now there's no problem with oil supplies. So why are we still in Iraq or Afghanistan or Syria?
These places have no history of rule of law. They have no culture of individual rights. They are never going to be the same kind of civilizations that we are. they have no 2000-year history of common law like we do. We are never going to see eye-to-eye, and by the way, the dominant religion in our country being Christianity has been at odds with their dominant religion for all of recorded time. They are never going to agree to our hedge money or our overlordship, so what the hell are we doing?
What do we care who collects taxes in Jerusalem? Who cares? I don't understand any of the focus in the Middle East, I never have, it's not our problem. What the hell is going on?
Buck Sexton: You know, we figured out that there are separate problems in Syria, one of them was that the Islamic State – this group of radicals was setting up training camps and cells to come after us, to come after Europe, right? So we figure out a way, all right, without landing U.S. troops in Syria, we can find some guys to basically go kill those bad guys and this has been what empire have been doing for as long as there have bene empires.
Porter Stansberry: But listen this is all nonsense. The reason why they're setting up those terrorists, the reason why they blew up the towers is because they don't want our troops in their countries. It's that simple. You know? Our allies – Britain, invaded the Middle East in 1948 and set up Israel and they're still pissed off about it.
Buck Sexton: They're pissed off about a lot more than that.
Porter Stansberry: And on and on and on. And we overthrow the Shah of Iran – or no, Mossadegh.
Buck Sexton: Remember, we have a very American-centric view of all this. Jihadism is actually – this is actually kind of a separate but it's an interesting digression, but the ideology that Al-Qaeda and all these different groups really shares, which people used to refer to as fundamentalist Islam, which is true, but now we go away from that because well if they're the fundamentalists what are the rest of the Muslims who don't believe in this? But the truth of Al-Qaeda is that it's actually an imperialistic ideology. They want to conquer the entire world.
This is why they're at war with Hindus in South Asia –
Porter Stansberry: I don't believe any of it – it's just completely ridiculous that – you're saying we have to have troops in the Middle East to protect ourselves from becoming invaded by the Taliban.
Buck Sexton: I'm not saying that.
Porter Stansberry: Give me a fucking break. How many aircraft carriers do they have? How many amphibious landing units? It's just completely absurd. It's completely ridiculous. We can blow up the entire world seven times over with the nuclear arms that we have right now. There is no legitimate national security threat to our country at all and there hasn't been since the end of World War II.
But we still spend as much money on our military as the rest of the world combined so we have to create a threat. There has to be a new threat. I think we got to have a whole different idea. Here's what we got to do. Here's my plan okay? It's really simple...
You tell everybody, we're tired of fucking with you idiots. Okay? So just stop. And if you don't then we're going to just blow the shit out of you. We're going to use real bombs – sorry, not the little fake ones, the big bad ones. North Korea, threaten us one more time, try it. We'll turn you into a black obsidian peninsula. Fine by me. I don't care about any of those people. I care about Americans. And the flipside and in return, we're going to leave you alone. But here's what we're going to do, America first. We're going to sell whatever arms you want to both sides, open bazaar. Who wants some F-16s?
Who wants 'em? Who wants some Stinger missiles? Who wants 'em? Who wants some grenades, some mines some M-16s. Instead of having to sell assault weapons to high school students in America we're going to sell assault weapons to all the crazy Shia and Muslims out there and they will then kill each other. Yes! Then we can sell them hospital ships, medical supplies, we can sell them prosthetic limbs. This is how we dominate the world. Not with our army, with our arms salesmen dummies.
Buck Sexton: You can open up Silk Road again, and everything is on sale. With bitcoin.
Porter Stansberry: Whatever you want, we will sell it to you, enjoy killing your neighbors for all time. That is the morass that we are now a part of. Why? This country what? How long was it from 1776 until we got involved in Middle East foreign policy, had to be a couple hundred years. Surely we can go back to that state. It's none of our business. I don't care how many people you're gassing or murdering or flogging, do whatever you want to do, just stay in your country and do it there. Everybody agree with that?
Buck Sexton: I'm in.
Porter Stansberry: All right, let's go.
All right, let's bring in Bryan Beach and let's do something that is a little more useful than arguing about foreign policy that is never going to be adopted. Bryan, are you there?
Bryan Beach: Hey, I just got patched in for that final rant. Sounds like I'm coming in here right at the exciting time.
Porter Stansberry: Listen, Bryan, I'm going to lean on you here to be concise. Can you give me a 100-word explanation for the hypothesis that you presented at Grant's?
Bryan Beach: Sure. Stansberry folks are probably familiar with it, but we think that when you compare the reactions of the bond market and stock market, for a given company, and you find situations where the two markets disagree, we think and the bond market is not worried and the stock market is worried. We've back-tested hundreds of situations that suggest that that is a good population to look at when identifying stock speculation.
Porter Stansberry: So give me an example of this... So obviously in the capital structure of an existing business there are bonds that have been sold to the public and of course equity that's been sold to the public and the bonds trade around par – which is $100 for those of you who don't know, and that represents $1,000 face value of the bond. So the bond comes due, the company has to pay the holder back $1,000 and bonds trade – instead of saying $1,000 the traders say $100 and the bonds typically trade between $90 and $110, and they can trade over par because the interest rate can be attractive and relative to other coupons that are being paid, people will pay more for it, which will drive the yield of that investment back to normal interest rates. So that's what happens with bonds. With stocks, everybody knows, stocks trade at whatever price they trade and they're typically trading at some multiple of earnings, but not always, sometimes they trade on the expectation that earnings are going to grow very rapidly. So they can trade at a very high price.
Other times people are very pessimistic about the future value of the company, and the stock trades at pennies. So what you're looking for are situations where the stock has been beaten up, has declined more than 50%, more than 60%, and the bonds are still trading at or around par and tell me what happens next.
Bryan Beach: What we found time and again or on average, though there are exceptions, is that the stock generally pops all the way back to where it came from. So if it sells from $100 down to $45 – which is, you know, a 65% drop – then it gets back to where it was trading, back to $100, that's more than a double. So we've started looking for these situations where the stocks drop 50% or more, but we have reason to believe there's nothing wrong with the companies because the bond investors aren't all that worried and what tends to happen, Porter, is that the stock drifts back up where it came, which is mathematically a double. And doubles are hard to find.
Porter Stansberry: What is the time frame? How long after the stock had fallen by more than 50% for it to rebound back to where it was trading originally?
Bryan Beach: We followed them over the next 24 months, and on average they had come back to within about 10% decline from where they had started – which if the stock drops 60% and gets back to only 10% down that's actually a gain of more than 120%. So we followed this group of 100 stocks we looked at for 24 months and on average they came all the way back. I have to point out this was from 2010 to 2014 that we did this study.
Porter Stansberry: I know you're looking at another similar study with updated market conditions. But the question I have for you is not whether or not this is repeatable, because it may have just been an extreme time in the markets. But the question I do have for you is how could the markets be this inefficient, what is it about these situations when you look into them, why are the equity investors making such bad decisions about the futures of these companies? What are they missing that the bond investors clearly understand?
Bryan Beach: Well one of the things you find with stock investors and equity investors in general is they love stories and they love headlines and they read headlines. They don't want to be left holding the bag and they're very emotional. I think your average equity investor is more emotional than your average bond investor. I'll talk more about that in a sec, but they sell on stories. They're not necessarily looking at the fundamentals of the business. The bond market is a lot more, I should say, professional. Most people buying and selling bonds – they're doing it for their banks or their insurance companies or their pension funds or whatever.
It's professional investors that maybe don't have that emotional attachment to the capital. And these guys are focused on free cash flow and whether the companies are making money, so what you'll find often is a company that has a whole lot of horrible stories lined up against it and the equity investors get panicked and sell off, but the bond investors notice, "Gosh, this business is still generating a ton of cash flow and they're willing to hang onto the bonds because they trust the company's ability to generate those interest payments and ultimately repay the principle." The quick answer is the stock investors are looking at stories, and bond investors are looking at numbers.
I think that's why you find sometimes, not all the time, such different reactions to the same company.
Porter Stansberry: Interestingly, at the Grant's Conference – the wunderkind of Wall Street – Boaz Weinstein, who by the way was the national chess champion of the United States at the age of 16 and once won an Italian sports car at a poker game with Warren Buffett, he's got a little bit of pizazz behind him and has a several billion-dollar hedge fund and beat JPMorgan in the whale trade. He's no dummy.
He had an almost identical presentation, but it had the exact opposite hypothesis. His hypothesis was that when you see stocks falling apart and the bonds still trading at par, that means the bond market is wrong, and the bonds are about to be crushed. You're saying exactly the opposite. What was so different about the two cohorts? What was different about the situations that you studied, versus the situations that maybe Boaz was looking at and I'm saying we have to guess because he didn't give any kind of data like you did.
Bryan Beach: Well I actually talked to him afterwards. I don't think our theses are exactly opposite but a couple of things that were different. For one thing, he would wholeheartedly – and I'm putting words in his mouth – he hadn't seen my presentation when we spoke, but he did allude to the fact that from 2010 to 2014, the stock market was – the bond market was smarter than the stock market. His point is nowadays, so from 2015 to 2018 or even 2017 to 2018, some things that are happening in the bond market – government manipulation of rates is making the bond market dumber.
So nowadays he doesn't trust the bond market anymore, as I think he said, as a leading indicator. So he thinks now the stock market is getting smarter than the bond market. So I presented my data as of in the past and I also presented my data from the current situation and my data did show that the bond market is getting a little bit losing its predictive power, it is getting a little bit dumber, to use the less finance term.
So that was one difference, was just the time period we were talking about. The other difference was he was focused solely on energy companies – and energy companies are a totally different beast for various reasons I won't get into – but I mention that in my study too you probably get even better results if you ignored oil and gas companies in general.
Porter Stansberry: I think the reason why that is, Bryan, I'm guessing – you'll have to tell me if you think this is right or not – the equity value of energy companies is almost wholly predicated on the expectations of future oil and gas prices, so if the expectation of future oil and gas prices is lower, the equity prices are going to be very discounted.
Bryan Beach: Mm-hmm. Another thing is – another aspect of it is balance sheets for these kinds of energy companies tend to have a lot of valuable tangible assets on it – real estate, equipment, whatnot, so bond investors might be happy to buy an unsecured bond knowing that they'll control the company in bankruptcy, in other words, bond investors might buy the bond even if they think it is going bankrupt.
Porter Stansberry: Yeah, because they want the reserves, that's true. Okay, interesting.
Bryan Beach: So we've found that you know, my results were still very good, even with oil and gas companies in the mix. But that is a particularly volatile sector in the study and he picked out the worst sector of the study. Another thing he did – we always as part of our back-testing, but when we're recommending companies based on this strategy, look for companies that the equity is back in an uptrend. In other words, the stock market is starting to realize, we were probably over-reacted and the stock is starting to climb back 10%, 20%, or 30% or more, and the chart too was presenting the stock was heading straight down.
Porter Stansberry: The other thing I noticed was that in his study, he was looking at say a two-year period where stocks and bonds were moving. And in his study, the bonds originally did sell off. So in the stuff I was looking at with Boaz's stuff, you'd see a situation where the stock fell 50% and the bonds fell 40% and then the bonds rebounded over the last two years and the stocks kept going lower. Where in your study, you were looking for specific narrower examples – less examples – where the bonds never moved at all.
Bryan Beach: Right, yeah.
Porter Stansberry: I bet you the major underlying difference between your two universes is, I guarantee you, that his companies had far worse cash flows.
Bryan Beach: Definitely. We showed in our – when I say the stocks doubled on average, there were some really bad disasters baked into there if you look at individual companies. You can avoid those companies by focusing on free cash flow, which is what a lot of these companies he singled out don't have, and also focus on companies we believe where the stock is in an uptrend.
Again, as you've mentioned, this is a really smart guy. This is why I love going to Grant's, that's how the market works, there's buyers and sellers, people think one thing, and others think the opposite. But in our brief conversation he was intrigued about what we were going to present and I think that you know, his presentation reconciled just fine with ours.
It doesn't contradict it, we singled out the same sector he did as being a poor performer. And we also pointed out that this strategy is getting a little less effective these days. But the other thing, Porter, he can pick two or three stocks, and I was talking about hundreds in aggregate. You can tell whatever story you want if you want to just single out a handful.
Porter Stansberry: What was the disaster rate in the study you originally did with 100 companies?
Bryan Beach: It depends on how you define "disaster." But if you had bought after that initial draw down of 50% to 60% and the stock kind of looked like it bottomed and was bouncing around that 50% to 60% draw down level and you bought there, about 4% or 5% of the time the stock kept going down. Like 80% to 100%.
So I define that as a disaster. You have to draw the line somewhere, I guess 70% is a disaster as well. That happened about 4% of the time in the first group that we studied. The most recent cohort we studied, it doubled. It was about 8% of disasters. Which is still low enough of a disaster rate that I'm still interested in the overall strategy. So we're still following it.
Porter Stansberry: Yeah, and I'd say as long as the disaster rate is below 10%, those things are not going to be hard to avoid. I'm not saying that you will be able to avoid them every single time. If you end up buying 20 or 30 of these things, one or two of them will be a disaster, it's just going to happen. But you can generally avoid them very efficiently. In other words, it's still profitable to do these trades. Great, one last thing, Bryan, for folks that are interested in these kinds of unique turnaround situations where the bonds haven't moved, the stocks have sold off and now are bouncing back, where would they find those recommendations at Stansberry Research?
Bryan Beach: We actually have them in our Stansberry's Credit Opportunities letter, which is the letter that historically has been where we put our distressed bond recommendation and actually that's a very good fit for it. it seems counter intuitive because this is a stock-picking strategy, but these are stocks that are really a lot of them are behaving like bonds. They end up with high dividend yields after these huge drawdowns and you have some potential for capital appreciation as the shares come back towards where they had been trading, which is kind of like a discount to par if you will.
Porter Stansberry: Yeah and they often typically have really good yields, too. The one you recommended recently – I want to tease everyone about this one – this is a world-class telecommunications company. It has one of the most important telecom networks ever been built. It owns it outright. The bonds haven't moved and the stock is yielding over 10%. So it's –
Bryan Beach: 13%.
Porter Stansberry: It's actually providing a higher rate of income than virtually any other corporate bond than we can find, and we think it's more valuable by far than a lot of corporate bonds that are yielding less.
Bryan Beach: When you think about what you were looking for Porter, when you launched Stansberry's Credit Opportunities, you wanted us to go out and find bonds trading for a discount to par that had a coupon that was paying or interest rate that was paying 8% to 9%. So you get paid 8% to 9% and then at the end of the holding period you'll get the full par value back as well.
That's the kind of situations that this letter was designed to find. And there's a bond bubble right now, so we don't have those kinds of opportunities coming up these days in the bond market. But the example you just teased, we've got two or three of those. They're stocks but they actually look like the types of bonds you originally tasked us to find. Big high yields and trading at, you don't call it par, but a discount to where their historical stock market valuations.
Porter Stansberry: Big discounts. And this guy currently is yielding over 12%. So if you're worried, like I am about the level of the stock market, this strategy is a great place for you to hide. In other words, these returns are not going to be highly correlated to the overall level of the market and with yields like this even if stocks go down for six months, you're still going to do very well. Bryan, thank you very much for joining us. I would encourage our subscribers to make sure they read all of Bryan Beach's work and Stansberry's Credit Opportunities.
Bryan Beach: It's a great letter and it's a great place to learn more about the strategy I've been talking about.
Porter Stansberry: Thanks very much, Bryan.
Bryan Beach: Thank you.
Buck Sexton: I'm very interested in credit by the way. I've been reading Credit Opportunities. I have my favorites among the Stansberry publications, but I've been trying to learn. And I'm just excited to finally get into the process of buying bonds, because as you point out – you guys walk people through, I actually went through the whole bonds for first-timers. It's different. You can't just sit there on your phone and be like, "I'm buying, whatever – General Motors."
Porter Stansberry: Let me just tell you this, this is a fantastic example of why bonds are not commonly discussed, why they're a little bit more difficult to buy and sell, and why that would be. So if you call up your broker, if you are Ameritrade guy or an E-Trade guy, or name a firm, any discount brokerage firm, you call up the firm and you ask them for help finding a quote on a bond that is not currently rated investment grade. So some people call these things junk bonds, some people call them high-yield bonds.
They are not investment grade, and what that means is they have the possibility of default. If you're investment grade, then the likelihood of default is less than 1% and those things – those investment-grade bonds sort of trade like guaranteed securities, there's not much analysis being done on them, they're almost like a commodity. Like you're buying, it doesn't matter if you're buying an investment-grade bond from one company or the other. You're buying the same thing, it's a bond.
On the non-investment grade side, it's much more like buying a stock – the quality of the company matters enormously and your capital is not safeguarded in the same way. So as a result, most brokerage firms will not even sell you a non-investment grade bond unless you know the ticker symbol and tell them directly that you want to buy it.
They will not even help you find the CUSIP number. They do not want to be accused of falsely representing to you the quality of the bond. But let me just tell you something, here's what is so strange about that. The company that we're just teasing about – it's paying 12%. That's the stock. If you call up and you tell them that you want to buy that company's bond, the broker won't help you buy it.
You have to know exactly what to do. They will not give you any assistance. But they will happily sell you the equity in the same exact capital structure and everybody knows the equity is way riskier than the bond. My point is how strange is it that they will help you buy stocks all day long, but they will not help you buy bonds. There is ostensibly a reason for that.
But the real reason is the bonds represent tremendously more and better value and brokers do not want individual investors in there screwing up their trades. The bond market is dominated by professionals and they don't want anybody else in the game. So they deliberately, you never see bonds – you never see anybody on television saying, "You should buy bonds," ever.
So what I tell people is if you have had any trouble in the past making money in stocks, your first step is stop buying stocks and only buy corporate bonds. That's going to eliminate more than half of your risk and it's going to get your income way up and so you have a much better chance with making money with a diversified portfolio of corporate bonds than you do with buying stocks.
And if you learn how to buy corporate bonds the right way, you can make more money than stock investors – and that sounds like a bunch of bull, I know. But look at our track record at Stansberry's Credit Opportunities, we've recommended something like 30 corporate bonds over the last three or four years, our average annualized return is over 20%.
That's way more money than people have made in stocks in the same period and our win rate is about 80%.
And that of course, is much higher than anybody who's been picking stocks. So you get a higher win rate, you get great income, and you get higher returns than in stocks. Trust me, if you've never made an investment before or you've had trouble making money routinely with stocks, focus on bonds for a while, you're going to find they're way less volatile, they pay way higher rates of income and you can make just as much money. The other thing is people had better be careful what they wish for in regards to China.
Most people really don't understand how the fiat currency and the trading system work and the two are intimately related. The reason why interest rates are so low – or certainly one of the major reasons the interest rates are so low – is that our trade deficit with China is enormous. So China gets all this paper – gets all these dollars from us and in return we get valuable services and products. China, what are they going to do with that paper? They turn it around immediately and they buy our Treasury bonds with it. They recycle it through our financial system.
And that is what enables all kinds of things like low-interest rate mortgages and all the financing that the government uses. So if you start a trade war with China, there is going to be a big hiccup in the bond market. And for the government that's a big problem. Half of the government's debt – which, publicly held, is over $10 trillion, half of it matures in three years. So you're looking at a really big problem that the idea that we're going to win a trade war with China is bonkers.
It's just absolutely bonkers. Do I think there's problems with trade with China? Yes, I do. Do I know it's been a problem for manufacturing? Yes, I do. What I'm saying is the tradeoff for having more manufacturing jobs is to have an absolute catastrophe in the sovereign bond market. That may be a tradeoff. That might be something that our president wants to do anyways. But I don't know how you're going to finance tax cuts, crazy ongoing spending in Medicare and Medicaid, all the stuff that you want to do for the social stuff the government does if you don't have the Chinese buying our bonds. It doesn't make any sense.
If that really were to fall apart – the reason why the market has been so volatile lately, is if the international trading system breaks down, that would be – could be – the end of the financial system that we have had. The end of the paper currency itself. The end of the financialization of the world economy, and I personally think in the long run it's going to have to happen someday. We can't continue to print tons of money and expect our trading partners to swallow it. sooner or later, it's going to blow up.
Think about this for a second. There are something like 80 million people in Switzerland – is that right? No, maybe not that many. 8 million or something. I've got the numbers totally wrong. I can't do it off the top of my head. Country Club Guy, google how many people live in Switzerland. And over the last three or four years, the Swiss National Bank has printed up money and has bought foreign assets to the tune of almost a trillion dollars. What do you got? 8 million people. So a country of 8 million people has acquired almost a trillion dollars in financial assets over the last three years.
What – it doesn't make any sense. So sooner or later this madness all has to stop but I would hate to see it stop in a way where the music really stops immediately like there is a big trade blow up and bond markets all around the world just explode. Okay, that's my soap box about bonds.
Buck Sexton: There's not going to be a trade war. No way. Because look – you saw Paul Ryan is not going to run again for House Speaker. They're going to be in batten-down-the-hatches mode, doing everything they can to make sure they hold the House come this fall, which we're basically already getting caught up in that part of the cycle, right? People are going to start thinking about this and nothing but this.
Can you imagine, Porter, what it looks like if all of a sudden you have real economic volatility? The market starts – not just going up and down in a day to day way, but it's way down from when the year started? That looks terrible for Trump going into the midterms. And if he loses the house, we're just going to sit there and talk about the impeachment proceedings against him until they lionize either Kemala Harris or Elizabeth Warren in 2020.
They're going to back off. It's a lot of rhetoric right now but they're not going to push this thing to the max.
Porter Stansberry: Kemala. Kemala 2010 – is that her name? "Kemala"?
Buck Sexton: Kemala... I think it's "Kamala" actually. Or maybe it's "Kemala."
Porter Stansberry: "Kemala"? That sounds wrong. You should know this stuff, Buck, you're the politics guy.
Buck Sexton: I don't know. Yeah – I know, but it's an unusual name.
Porter Stansberry: "Kamala." You know, we're writing a promo for our newsletter business right now. It's called "Worse Than Oprah." Guess who it's about?
Buck Sexton: Arianna?
Porter Stansberry: No, Kamala. She's like Obama and the Warren woman wrapped up into one. She's a giant progressive nightmare.
Buck Sexton: Thanks everybody, for writing into the mailbox this week, filling our inbox with useful feedback. We got folks out there like Art P., Dennis H., Joe V., Rose M., Matt V., Paul W. and Phil J. – your comments and questions are an important part of the show here, keep them coming, write them to us at [email protected]. First up, we got Will H., who is a paid-up Alliance member, thank you very much, William.
"Dear Investor Hour team, I've been following Porter for years and recently started tuning into the Investor Hour. I was happy to hear Porter give well deserved praise for Lacy Hunt. Lacy is certainly a scholar and a highly intelligent leader who has earned every accolade. Lacy also definitely shot down Porter's jubilee concept of debt forgiveness. My question is simply, 'Has Lacy's rationale on why a Debt Jubilee will never happen in the U.S. changed Porter's view?'" From William. Big thanks.
Porter Stansberry: No, it hasn't. I certainly agree with Lacy Hunt that a Jubilee would not be a positive for our economy. I think that's one of the things that it's hard for me to represent in the written word that just because I think something is going to happen doesn't mean that I'm an advocate for it. I really think if you listen to the interview that was certainly Lacy's opinion as well. I don't think he has a particular view on whether or not it will happen, just like I can't say for sure whether it will or it won't.
I just think there's going to be a radical amount of political pressure that comes out in about 2020 perhaps when Kemala or Kamala – I'm not quite sure – is elected.
Buck Sexton: It's "Kamala," I'm pretty sure.
Porter Stansberry: People just don't understand how powerful the millennial group is going to be and they don't understand how poor those people are and we've never had a generation like that that is a trillion dollars in debt from the start. And yeah, certainly there is going to be aspects of a Jubilee. Certainly politically there has to be.
Buck Sexton: All right next up here No. 2, we got Steve W. in Illinois who writes, "Hey Porter and Buck. I've become a regular listener these past few months and really enjoy hearing about how General Electric became a financial shell game and how Berkshire Hathaway has made wrong turns of late. So here's the question, why has the annual worker's salary in the U.S. not kept up with increases in productivity?
"Is it due to the U.S. falling off the gold standard? I'm not sharp enough to debate the economic theory behind this, but it seems to me that the primary reason for stagnating wages in the U.S. is due to a combination of increased competition from low wage countries – China, Mexico, Vietnam, etc. and automation. It's not about the value of my skills, it's about the value of my skills relative to my competition. More competition means I make less. Also, I'm disappointed in Buck for slacking off on the Arianna Huffington impersonations. It's the cherry on top of the giant chocolate Sunday that is the podcast." From Steve in Illinois.
Porter Stansberry: That's a great point though, the only thing I think you're missing though is the unleashing of global competitive trade with America's economy is also tied to the fact that we are no longer on the gold standard. Why is it that we can afford to buy so many goods from China? Well, if we had a gold standard there is no way we could, because we wouldn't be able to repay China in gold, all the gold would have long since disappeared. So by – the point of the gold system, a lot of people don't understand this – it is a permanent limit to the amount of credit that is available.
Because the banking system has to be backed by gold. So the only way to increase total outstanding credit is by increasing gold and when you lose gold in trade, thanks to trade deficits, then the money supply of your banking system declines and your economy slows and that slows demand for foreign goods, and then eventually you import stuff less and you export stuff more and the gold comes back. And it's self-regulating. So it regulates credit globally.
And without that barrier there is no limit to credit, there is no limit to money, therefore there is no limit to trade. And so that is all related, we're saying the exact same thing but we're looking at it from a different angle. With the gold standard not only would your money be safe, but competition with foreign economies would be far more limited and that's a plus for us.
Buck Sexton: All right, we got another one here from Doug. Oh and just real quickly, Steve, a chocolate sundae has very high sugar so stay away from it. You don't want the diabetes, you don't want the heart disease. Yoga. So there you go, Steve. Now we'll get into Doug. "Greetings, I have a comment and a question. Regarding the show with Mr. Lacy I heard him say that the current debt scenario in the U.S. is bad but not necessarily the worse in the world and also not a death spiral. He seemed to suggest that the outcome would be inflationary, not necessarily catastrophic.
"And the No. 2 here – regarding something I read from Porter, in terms of a future troubled times, the Debt Jubilee, he mentioned that insurance customers would be hit hard. I have significant cash value in a whole life policy, is this the type of vehicle that could be in trouble should the Jubilee occur." Thanks, Doug. It's all you, P.
Porter Stansberry: Yeah, I don't know. I don't recall what Lacy said at all regarding the unwinding of various excessive amounts of credit. I would be shocked in Lacy didn't agree that the unwind of the corporate credit bubble is going to be very painful. I don't recall what he said about it. I doubt that he is not very concerned about the overall level of corporate credit in the U.S. It's very, very unsettling. It's an all-time record high compared to GDP. And the debt itself is an all-time record low quality, meaning in the investment-grade world, almost half of all the debt outstanding is Triple B. Triple B is the lowest category of investment-grade debt.
So one downgrade of the corporate credit universe would mean an increase in the size of the junk bond market by three or four times. There is no capacity to absorb that. So there is certainly going to be a hiccup in corporate credit. I don't know when it's going to start, but my bet is and has been since 2016 it'll start sometime between 2017 and 2019. I still expect that to occur. I don't know what Lacy would say about that. We'd have to ask him next time he's on the show.
I'm sorry, Buck what was the second part of the question? Something about the Jubilee?
Buck Sexton: Yeah, in terms of the Jubilee he mentioned insurance customers would be hit hard and he has a whole life policy, could that get hit?
Porter Stansberry: It's not likely, but it certainly isn't impossible. Whole life policies and insurance in general are very tax-favored and one of the things I can imagine occurring and efforts to fund Jubilee efforts would be changes in the various status of various tax-deferment schemes, whether it's 401(k)s or whole life policies. I think that assets of all minds are going to come under threat. It's very easy for me to imagine after 2020 with the election of a radically progressive socialist president that there could be a call for a wealth tax, that wouldn't surprise me at all. And the value of your insurance policy, the value of your 401(k) would all be subject to that tax.
Buck Sexton: Wealth tax is actually more progressive than an income tax for sure. That's why you get a lot of rich people – like the John Kerrys of the world – rich because of other people's earnings by the way – who don't care what the income tax rate is because of the way they structured their wealth to begin with.
Porter Stansberry: Of course, people don't understand that though. They don't understand that rich people don't have income.
Buck Sexton: Well that's going to be it for this week. Porter, any closing thoughts before we let everyone get back to all the rest of the things they've got going on?
Porter Stansberry: No, I'm more and more interested in gold, Buck. I'm more and more unsettled by the way politics in our country are going. I'm more concerned. I'm getting more and more on the fear side of my matrix.
Buck Sexton: You still think Franco-Nevada could be a good play this year?
Porter Stansberry: Oh, it's always a good play. Franco-Nevada is by far the best run gold company in this world. I think it's a stalwart on our modern portfolios, something we always own. But I think that the price of gold actually is set for a surprising run higher, maybe even a better performer than the equities, which doesn't happen very often. There hasn't been any expiration or new mines built for five or six years now because capital has flowed out of the gold sector. And so when there is demand, you know, I know you're saying there's not going to be a trade war, that's fine. In the next 18 to 24 months, we should put this on the record, there are going to be a number of very big and bad economic surprises.
There's going to be a huge economic surprise about the size of the federal deficit. There's going to be a huge economic surprise about the changes to trade policy and the impact of interest rates and credit in the United States as a result. And again, nobody sees this coming. But if you restrict trade or you increase tariffs you're going to restrict demand and the sales of U.S. Treasury bonds, so higher interest rates, because of that and higher interest rates because of wildly growing fiscal deficit in America.
And then the wild card is the growing radicalization of the left in America. Whether it's demands for racial quotas or whether it's demands for the equalization of income in our country – the wealth gap. There are just big progressive things that are getting more and more mainstream and more and more popular that's very concerning to people like me who believe in economics. And then the last thing of course is there all kinds of debts that under any legitimate financial regime could not be financed. Let me just make sure you understand what I'm saying. If rates are normalized, if we have really come to the end of quantitative easing globally, there are entire countries and there are entire sectors of the private economy that cannot possibly afford their debt service.
And that we are tapering off of quantitative easing means that those problems are going to come out. So as the tide recedes, you finally get to see who is not wearing a bathing suit – and you've seen it happen already at GE, but trust me that will not be the last time it happens – and it'll be shocking and painful and surprising. And all those things put together lead me to expert that demand for gold is going to grow and we haven't had a good gold bull market here since 2012 so I think we're getting closer. Maybe between now and 2020 – 2021 you could see gold double or triple. And I think the other asset classes are not going to do as well. So there's more and more on the gold side.
Buck Sexton: All right, we're going to close it up there this week everyone. Write to us, please. If you've got a question, just send us an e-mail to [email protected]. If we use your question on the show we will send you some wonderful Stansberry Research goodies. Love us or hate us, just don't ignore us. Mr. Porter, thank you, sir.
Porter Stansberry: Thanks, Buck. We'll see everybody next week.
Buck Sexton: Thanks, everyone.
Announcer: Thank you for listening to the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Porter and Buck? Send them an e-mail at [email protected]. If we use your question on air, we'll send you one of our studio mugs. This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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