Episode 408: Expect Corporate Bankruptcies and a Recession This Year
On this week's Stansberry Investor Hour, Dan and Corey welcome their colleague Mike DiBiase back to the show. Mike is the editor of Stansberry's Credit Opportunities and senior analyst for Stansberry's Investment Advisory.
Mike kicks off the episode by discussing the rampant fear in the stock market today. He notes that this fear is not yet reflected in the credit market, which is a "mistake," as credit investors should be more concerned. Mike then talks about the lack of good high-yield bonds out there, corporate bankruptcies being on the rise, the worrying number of zombie companies, the Starbucks recession indicator, consumer confidence hitting a 12-year low, and why he believes things are "not going to end well" for the economy. He says...
It's the case of haves and have-nots, right? The big companies in the S&P 500 make up the bulk of corporate profits in the U.S. They're doing great, right? But the rest of the companies aren't doing so well. And we're seeing the same thing on Main Street. I think the top 10% of earners in the U.S. make up something like 50% of all consumer spending... If you're in the other 90%, you're really struggling. And most folks are living paycheck to paycheck and just choking on debt.
Next, Mike examines the budget-deficit problem and the market's expectation that the government will always bail it out. He highlights the fact that the U.S. has been printing money at an above-average rate the past year and says he believes inflation will spike once more as a result. All of this is part of the "new world" that investors will need to learn to navigate, including permanently higher interest rates, bonds being a better choice than stocks, and an inevitable credit crisis...
Interest rates are going to have to go up again. And I think that's the moment of real fear. I think that's when we'll see the next credit crisis – when everyone realizes that what the [Federal Reserve] did didn't save anything. It just simply made the problem worse and delayed the inevitable. So I think that's where we're going to see the next credit crisis like we saw back in 2008.
Finally, Mike explains the economic difference between tariffs and inflation, how investors can "make a killing" from what's about to happen, and the many advantages corporate bonds have over stocks – such as it being easier to spot a bottom with bonds. He says he's waiting until credit spreads surpass 1,000 basis points, and then he will deploy his strategy of finding the best bonds out there with the lowest risk of defaulting...
When the credit crisis occurs, bonds go on sale. They actually get safer the cheaper they get. And you can make returns of 20% [to] 30% per year holding these safe instruments... You can make unbelievable returns – equity-like returns – with these bonds.
Click here or on the image below to watch the video interview with Mike right now. For the full audio episode, click here.
(Additional past episodes are located here.)
This Week's Guest
Mike DiBiase is the editor of Stansberry's Credit Opportunities – Stansberry Research's bond-investment advisory. He's also a senior analyst and contributor to our flagship research newsletter, Stansberry’s Investment Advisory, including doing the number crunching for its Stansberry Data service.
Mike joined Stansberry Research in 2014. He has 28 years of experience in the world of finance and accounting, most recently serving as vice president of finance and planning for a large publicly traded software company. During his tenure, the company grew from $40 million in revenue to more than $1 billion. Prior to that, Mike spent five years in public accounting, auditing companies for one of the "Big Four" international accounting firms. He holds bachelor's and master's degrees in accounting.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris, I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today we talk with our colleague Mike DiBiase, editor of Stansberry's Credit Opportunities.
Dan Ferris: Mike is our longtime friend and colleague here. We value his opinions greatly, and this is a perfect time to check in with him. So, let's talk with Mike DiBiase. Let's do it right now.
Corey McLaughlin: For the last 25 years, Dan Ferris has predicted nearly every financial and political crisis in America, including the collapse of Lehman Brothers in 2008 and the peak of the Nasdaq in 2021. Now he has a new major announcement about a crisis that could soon threaten the U.S. economy and can soon bankrupt millions of citizens. As he puts it, "There is something happening in this country, something much bigger than you may yet realize, and millions are about to be blindsided unless they take the right steps now." Find out what's coming and how to protect your portfolio by going to www.americandarkday.com and sign up for his free report.
The last time the U.S. economy looked like this, stocks didn't move for 16 years and many investors lost 80% of their wealth. Learn the steps you can take right away to protect and potentially grow your holdings many times over at www.americandarkday.com.
Dan Ferris: Mike, welcome back to the show. Nice to see you, as always.
Mike DiBiase: Nice to see you guys. Thank you for inviting me.
Dan Ferris: You bet. I think we need to have you on these days, because it's turbulent times. There's a lot of uncertainty, nobody knows how the federal government's spade of new policies, which seem to change every day, will ultimately work out. Are tariffs real? Are they a bargaining chip? Are we going to go through with it? And that's just one sort of issue.
And then, you know, the fact that the market has soared and soared and it's been at its most expensive valuations, by some measures, ever, and by all of them, one of the top two or three most expensive moments in history. So there's that, you know, on top of everything else. And then, in your bailiwick, tight credit spreads – this seems like an uncertain moment, a perilous moment, it seems like a "we need to talk to Mike DiBiase" moment, to me.
Mike DiBiase: Well, I agree, Dan. I think you're right. We've seen some recent fear creeping into the markets. We had correction in the S&P and the Nasdaq stock indexes recently, so, we've seen the [CBOE Volatility Index ("VIX")] spike. So there are some people that are starting to question, and I think everyone's blaming Trump and the tariffs on this, but I think there's been a lot of underlying angst, as the markets have reached these kind of frothy levels. My world is analyzing credit, and I pay close attention to the credit markets, and what you see with the high-yield spread, which is, I think, the best measure of the credit markets, the corporate credit markets –
And by the way, for those who don't know what that is, that's basically the difference in yield, average yield, between so-called risk-free Treasurys and high-yield bonds, or what are called "junk" bonds. Basically, companies that issue bonds, they borrow by issuing bonds, and these companies are sort of lower on the credit rating scale, they're noninvestment-grade companies. So, the average yield on high-yield bonds, these days, is around 7%, 10-year Treasurys are around 4%. So that's 3 percentage points' difference between high-yield bonds and treasuries, so that's 300 basis points.
And that's very low, historically. So that high-yield spread of 300 basis points, if you look back 30 years or so, for as long as we've been tracking this, the average is somewhere between 500 and 600, closer to 600. So, we're quite a ways away from just the average. So the credit markets are not really reacting the same way the stock market has, recently, and it's not quite as jittery, and I think that's a mistake. And I've been waiting for the high-yield spread to spike for the last year, and we just haven't seen it, yet.
Dan Ferris: I wonder why that might be. We've certainly seen auto-loan delinquencies go up, among a couple others, credit cards –
Mike DiBiase: There's lots of reasons to think that it would, right? And I've been monitoring all these things in my newsletter Stansberry's Credit Opportunities, which is our corporate-bond newsletter where we recommend corporate bonds and high-yield corporate bonds, mostly. Although, recently, we've been kind of – my colleague Bill McGilton and I have been recommending investment-grade bonds, because there's really nothing worthy of recommending in the high-yield space. The spreads are so tight that the yields are too low for the risk in the high-yield space.
But we look at are things like delinquency rates like you talked about, on credit-card loans, auto loans, but corporate delinquency rates, too. Like, last year, we saw more bankruptcies, corporate bankruptcies, in the U.S. than any year since 2010, in the aftermath of the last financial crisis. So you look at these things and there clearly are reasons to worry. So I wonder why the spread is as low as it is. People used to say, or still say, that the bond market is smarter than the stock market, but lately, that's kind of flipped. I think the stock market's – [crosstalk]
Dan Ferris: I know. Yeah, when Treasurys went to whatever it was, 40 basis-point yield in the pandemic, and banks hoovered them up anyway, I was like, "Well, maybe it's not the smart money, after all." And then, of course, SBV and, whatever, Signature and the other ones, banks that failed, meh. "OK, so that part of the bond market is not the smart money." But maybe there's other parts that have maintained their brain cells, I'm not sure. [Laughs] But, yeah, yeah, it's been a weird three years. The rules of thumb have not performed as well over the last three years. Or the last decade, actually, in general.
But when you say corporate bankruptcies, do most of those wind up being, really, smaller companies? [Crosstalk] No?
Mike DiBiase: Well, I don't think there's been any headline-grabbing names. There have certainly been some bigger ones, maybe bigger companies that most folks haven't heard of. But a lot of restaurants going under, Red Lobster and – and I think Big Lots and retailers, low-end retailers, are struggling. I know Tupperware – but I would say most of them are sort of in the small- to midrange. We haven't seen any of the giants fall yet. I think once those happen, that's when people start to wake up a little bit.
And there are ones that are teetering on that. You know this concept, Corey – I know you write a lot about it in the Digest, of "zombie companies," right? Zombies are companies that can't even afford the interest on their debt, right? So forget about paying back the debt itself, the principal, right? They can't even pay the interest on the debt, so they have to constantly refinance, refinance, refinance. And interest rates have crept up and up and up over the last few years, so when rates were like you were saying, Dan, five years ago when they were next to nothing, it was easy for them to afford that.
Well, now rates have gone up, they've had to refinance their debt, and now they're just, more and more companies are choking on their debt. There's estimates anywhere from 30% to 40% of companies, U.S. companies, are zombies, just kind of barely making it. And that's a recipe for disaster. You're relying on banks and debt investors to continue to roll that debt over, and they're just taking on more and more risk that they're going to get repaid. And if the economy starts to slow down a little bit, their profits can shrink, their revenue will shrink, and those companies are going to join the ranks of those that have gone under.
So, I'm looking for bankruptcies having an even bigger year this year. I think we're going to see the biggest year yet, in 2025.
Dan Ferris: So, I'm not saying the world behaves logically, but logically speaking, we probably should expect the equity market to react before the debt market, right? Because the equity market, that's the riskiest slice, in the capital structure, and then, the high-yield debt is sort of the next one up. So, maybe there's a whiff in the equity market of some debt distress on the way, maybe not here yet, but on the way. But, wow, that's, your 2025 prediction, there, that's big. I mean, we're three months in, here –
Mike DiBiase: Well, you know, I've been writing about a recession for the last year, predicting a recession for the last year, and in our December issue, we said we're going to see a recession in the first half of 2025, and I think we're on track for that. In fact, the Fed's latest forecast in GDP growth is something like negative-1.8% in the first quarter, so this quarter that's just ending in a couple of days. So the classic definition of a recession is two consecutive quarters of GDP decline, so we're already going to be halfway through.
And you don't really know you're in recession until you're through it, right? So, they're always backward-looking, economists tell us, after we've been in a recession, that we were in a recession. So, I believe that we are already in a recession today, we just – many people don't even know it.
Dan Ferris: Yeah, I think you could be right about that, if you look at just all kinds of businesses, airlines, Macy's is one that just came out recently, and others that are, FedEx, you know, all these people are saying, "Well, we're seeing declines of various types in our customers," and they're not small businesses, you know? And they're the kind of thing that's nationwide, they're bellwethers, in other words, so.
Mike DiBiase: Well, Dan, Walmart – [crosstalk].
Corey McLaughlin: Walmart comes to mind, recently, talking about the difference between lower-income, middle-income customers, and saying that higher-income customers are not going to Walmart, the dollar stores are having trouble, so...
Mike DiBiase: Well, yeah, Dollar General's CEO just said that their customers can't even afford the bare necessities, right? So that's scary when you can't even afford the basic necessities of life. Costco, there's a higher-income customer base – even Costco's CEO is seeing customers being more choiceful I think is the word that he used. And I like to look at Starbucks. I call it the Starbucks Indicator, it's a great recession indicator that Bill and I came up with. Starbucks' same-store sales have fallen four consecutive quarters, and a lot of people might know that.
An entire year of fallen same-store sales, that's only happened one other time. That happened during the last financial crisis. So, that's why we've been warning about a recession. And by the way, every single reliable recession indicator that's ever been concocted and proven to be reliable has issued a warning over the past year or year and a half, two years, so... And people are saying there's going to be no soft landing, there's no hard landing, it's going to be a soft landing or no landing at all. It just doesn't make sense to me.
We know that economy moves in cycles and it's like people are saying that we're never going to have, you know, that these cycles don't matter anymore, like, "This time is different," type thinking, right? And I just don't buy that.
Dan Ferris: So, before we hit the record button on this episode, we were talking a little bit about, I was talking about the next issue of The Ferris Report, so you'll probably see it by the time you're hearing this. And I didn't even use the term, but basically, in 1927, Benjamin Strong at the Fed tried to engineer a soft landing, blew up the system. 1995, Greenspan tried to engineer a soft landing – everybody says he did it, by the way, if you just read all the historic, everybody said, "Yep, he did it." [Laughs] Sort of, I guess, before he blew up the system a few years later.
But at that moment, that's a risky moment. When everybody's talking about the soft landing, you know you're at a risky moment. And you can be damned sure that whatever the Fed does, it will use its backward-looking data and screw the pooch. It will not do the right thing. What it'll do and how fast and for how long will help determine the outcome, but, yeah, we could very well be in a recession, couldn't we? And that's – the stock market is beginning to behave as though we're in one, isn't it.
Mike DiBiase: Well, the average drawdown in the stock market during the past I think five recessions is something like 37%, right. So 10% correction, it's not much when you think about it in those terms. And [crosstalk] we saw, what, nearly 50% or more than 50% drawdown. So, not saying it's going to be as bad as last time. Every cycle is different than the next, but I think, certainly, there's lots of reasons to believe that there's going to be a lot more volatility ahead in both the stock and the bond market.
Dan Ferris: Yeah, I'll say it, I think it's going to be worse. [Laughs]
Corey McLaughlin: Yeah, on that point, with the high-yield spread and stocks – I know the high-yield spread's still relatively low, historically speaking. But in this recent correction, I think it jumped 60 basis points or something like that, so, I think you can see some correlation, there.
Mike DiBiase: Yeah, but it's still historically low. It was around, I don't know, 270, 260, something like that, and then it jumped up to like, 320. You know, 320, like I said, in relation to the long-term average is something like 550 to 600, so it's still a standard deviation below its average. The one thing that I've been telling my subscribers to look at is to pay attention to the high-yield spread. Because when you see that spread get up to about 550 – which is around its long-term average – and kind of stay there, right, not just bounce there for a day or two and come back down.
But once it gets to that average and kind of creeps up a little bit, that's when you should start getting really nervous, because the spread can go quickly to 1,000 basis points. Last financial crisis, it peeked at over 2,000 basis points, so it can happen very quickly. It looks like, if you look at the chart, it almost looks like a heart attack on the screen. So, when fear creeps in, fear just breeds on itself and banks start tightening lending, and then all of a sudden, it's just that downward spiral of fear, and things can get ugly very fast.
Dan Ferris: So, Mike, I know you and I both kind of liked Dollar General at one point. We recommended it in Extreme Value, and we just had to stop out and admit we were wrong or something. But it's been a very good-quality, well-run business. It peaked in October of 2022, just looking at a Bloomberg chart here, and right now it's down 67% below that high. Wow, I'm not saying it was worth what it was trading for then, but wow. [laughs] That is something, man.
Mike DiBiase: Yeah, I'm not sure I would agree that it's a well-run company. I think they had some mistakes and missteps that they made. They started trying to go into some higher-end products at the wrong time and the inventory management problems, but it's not a poorly-run company, for sure. I think what surprised me is how much the lower-income folks are struggling. Like I said earlier, they're not even able to afford bare necessities. But what I thought was going to happen was more middle-income folks were going to move down and start shopping at those dollar stores, and I don't know that we've really seen that yet.
I still think we will see that. We know that consumers are struggling. You know, the consumer makes up 60% to 70% of the economy, right, and consumer confidence, I think I just saw the headline yesterday, is the lowest it's been in 12 years. So, and people, again, are blaming the tariffs, because everyone's worried about – but it's more than just the tariffs. They've been battered by inflation for the last two years. It's come down some, but it's still high. Three percent inflation is still very high, when you're talking about 3% on top of a number that's been going up and up and up over the last three years.
Interest rates are higher, mortgage rates have gone up, credit-card rates are almost 25%, so... And meanwhile, credit-card balances are the highest they've ever been. So, those stimulus checks have been spent, people are putting more and more of the basic expenditures on credit cards, and that can only last for so long. You can only play that game for so long. With interest rates at 25% on some of these credit cards, that's just not something that can be sustained, and you can't just reverse that easily.
There's going to be a lot of debt in this cycle that's going to need to be written off for both consumers and for businesses. We're seeing the same thing in corporate America. Corporate debt today is more than double what it was at the peak of the last financial crisis. So, everyone has taken on more debt and now those days of zero-percent interest rates are gone. And so, it's not surprising when you see figures of rising default rates, rising delinquencies on auto loans, on credit-card loans – it's not going to end well, I think is the only way you can say it.
And just when that happens and when there's enough momentum for people to wake up to it. What I will say, Dan, is that this is kind of the case we're seeing in the stock market, too, it's the case of haves and have-nots, right? The big companies in the S&P 500 make up the bulk of corporate profits in the U.S. They're doing great, right? But the rest of the companies aren't doing so well. And we're seeing the same thing on Main Street, right, which I think the top 10% of earners in the U.S. make up now something like 50% of all consumer spending.
So, that's great for the top 10% if you're one of them, but if you're in the other 90%, you're really struggling. And most folks are living paycheck-to-paycheck, and just choking on debt and just struggling to make those payments. So, when you've got the top 10% masking the problems in the other 90%, it's not a healthy economy and it's not something that can be sustained.
Dan Ferris: No, and it's got sort of other implications, too, beyond mere economics.
Mike DiBiase: Yeah.
Dan Ferris: And I worry about that at least as much as I worry about the financial situation that many people are in. Lots and lots of people who don't have a lot of political power get into a bad situation, and that's when bad things happen in society, violence in the streets and increased crime and so forth. So nobody wants to see any of this and, you'd think, somehow, we'd all see this, or that media would be desperate to report it and desperate to say, "Hey, let's all get together and do the right thing and take it on the chin and whatever we have to do." I personally think one of our great problems in this country is that our government is way, way, way too big and way too costly.
And it does all kinds of things that it shouldn't be doing. And it should stop doing most of what it does and stick to just defending property rights and maybe national defense or something like that. But instead, the military is flung all over the world and we're flung all over the world meddling in everyone's economy. It's one of those moments when you can feel – you can feel the anxiety when you talk to your friends and you go to the grocery store and people – you just run into people and you talk to them and they're kind of shaking their heads going, "Wow, what is going on in the world?"
I hear that type of question more and more. "What in the world is going on?" And people know what business we're in, so we get those questions probably more than any other people. I realize this is kind of self-selecting, but it's tough to answer it. When people say, "What is going on in the world?" I say, "Well, just make sure you take care of you. Just make sure you and your family are OK." And that's the best I can do.
Mike DiBiase: Yeah, I agree with almost everything you said, Dan. Government is way too big. The budget deficit last year I think was $1.8 trillion – it's supposed to be close to $2 trillion this year. Even with all these DOGE cuts that are making headlines, $2 trillion is something like 6% of GDP. And the interest on – I think U.S. debt is, like, $36 trillion and growing, so the interest on all that debt is, like, the third-largest item in the U.S. budget. And so, how are we going to close that gap, $2 trillion a year? Basically, you have to print new money to paper it over.
And I think this is why – I think the markets expect the government to bail us out every time, and that's part of why you don't see as much volatility as you would think, or at least that I would think, is that they've bailed us out before, they'll do it again. And the problem with that thinking, in my opinion, is that there's not an unlimited supply of bail-out money. The number that I pay attention to the most when it comes to inflation is the money supply. And I don't hear enough people talking about the money supply, which is the M2 money supply, to be more specific.
Which is basically all of the money that's in the system, in checking accounts and bank accounts and money-market funds. And the money supply grew something like 40% after the pandemic. In other words, our government printed 40% more dollars than existed before. And so, what that does is it drives up the prices of everything, right? If you cut 40% more dollars, everything's going to rise 40% eventually, as it makes its way through the economy.
And that's what we've seen over the last three years. And if you look at the money supply, Dan, you'll see that it spiked after the pandemic and started coming down, but in the last year, it's been reversing that downward trend and it's once again increasing. And it's now increasing at faster and faster paces every month. And so, the money supply is way above – and the money supply has always increased, the government's always been printing money at a rate of about 6% per year. We're way above that 6% trendline.
So, in other words, to me, that tells me that there's still way more money in the system that supports higher prices and inflation not coming down. And it takes about something like 18 months for increases in the money supply to make their way through the economy. So, that's why I believe we're going to see inflation start to increase again. I know everybody expects it to go back down to the Fed's 2% target, but I believe, if you're looking at the money supply, you're going to see inflation start to tick up again. And that will be a moment, I think, when people start to believe, "Wait a minute, the Fed really doesn't have this under control and we're in trouble here." So that's a key inflection point.
Dan Ferris: I'm glad you brought this up, because –
Corey McLaughlin: Yeah, I'm so glad you brought it up, too, because to me, the – sorry, Dan, but the –
Dan Ferris: No, go ahead.
Corey McLaughlin: I think we all know that the basement of the dollar and the currency, I think that drives everything that we see, right? And I think that anxiety, Dan, that you're talking about, I don't think a lot of people understand that, still, as much as they should [crosstalk] what's really driving this. And they talk about tariffs affecting the stock market and everything else, but whether they do or not, I don't know. It would be a temporary thing, if anything, in my view. But the longer-term thing is the debasement of the dollar, which, again, I think we all know it, but somehow, it's still not fully understood by most people. And I'm not sure it ever will be, which is part of the problem.
Dan Ferris: Well, yeah, I think what needs to be understood is, and the problem with it, too, is it's a layer more complicated than that. Because the dollar remains the cleanest dirty shirt in the laundry and there is lots of demand for dollars, especially outside the United States. I think the latest [Bureau of Industry and Security ("BIS")] number I saw was around 12 trillion of dollar-denominated debt outside the U.S. And what I don't think most folks understand is that what's highly likely to occur is that all the other currencies get distressed first.
Have you seen the interventions in the yen and the pound, over the past, what, two years or something? That will get worse. And the dollar becomes stressed, I think, and it stresses the world when it gets strong. If you look at the long-term dollar chart, it's strengthened. And people are worried about it weakening, and it will, it'll weaken relative to gold. Gold and dollars will keep going up, even as the dollar strengthens versus other currencies. That's the thing I've been trying to tell people in The Ferris Report, price gold in dollars, price dollars in euros and yen and pounds, and you will see the dynamic playing out around the world, right?
So, this situation, it just becomes more and more perilous as time goes by. If the yen were 200, it won't shock me for the yen to hit 200, right? Before you see any real crisis in the dollar. Which, if you just use the [Consumer Price Index ("CPI")], the CPI's up, what, 22%, 23% in the last couple years here? And that's a price level, that's not going down, it's just going up a little more slowly than it was before, right? And that's what those 90% of folks are struggling with that you're talking about.
So the stress is just, they build in a slightly more complex way that befuddles everyone, including me, and I think that, ultimately, something like gold becomes last man standing. And when we get there, oof, we don't want to get there. We don't want to get there. By the time the U.S. dollar is failing and gold is the last man standing, There's probably major wars going on somewhere around the world. It could get really ugly. This is one of those moments. I guess I keep saying that, but it's true, and it worries me.
Mike DiBiase: Yeah, it worries me, too, Dan. I think the way I net all of that down into what that could mean for investors is that interest rates aren't going down to where they were before, right? So the dollar weakens, it means less faith in the U.S. dollar, central banks are hoarding gold, they're not buying Treasurys at the rate they were before. So demand for dollars is going down, interest rates are going up, and it doesn't matter what the Fed does with the short-term federal-funds rate, the one rate that it controls, right.
In fact, we saw this over the past six months or so, the Fed lowered the fed-funds rate by, what, 100 basis points, now, right, a whole percentage point. But what happened to the 10-year Treasurys? They've gone up. The 10-year Treasurys have gone up almost a full basis point, right? So it's like the Fed, it wants to lower rates, but it hasn't. Rates have actually gone up – it doesn't believe the Fed's story. And the 10-year Treasury rate is really the rate that matters in the economy, it's what credit-card rates are based on, it's what mortgage rates are based on, it's what corporate bond rates are based on.
So that's what affects people, and so, the Fed hasn't really given any relief to consumers or businesses with that. And so, I think what most investors haven't really fully woken up to yet, is that we're in a new world now – it's a new paradigm. We're in a world now of forget about the last 15 years, postfinancial crisis where rates were close to 0 and everybody was just happy to take on debt because it was so cheap. We're now in a world where rates have gone up and they're not going back down, so we're looking at 4% or 5% Treasury rates or higher going forward.
That means higher rates that companies are going to have to pay. And we have all this debt that we've accumulated and what are we going to do with all this debt, when rates have more than doubled since that time? It's a whole new world and the system has to readjust to that, and we're going to see a lot of that debt written off over the next few years, I believe. Which, by the way, brings me back to corporate bonds is – you're going to have corporate bonds, high-yield corporate bonds, yielding 8%, 9%, safe bonds, and you can find some really good ones that they'll be yielding that.
Why would you want to invest in stocks when you can buy – what's the average annual return on stocks over the last 100 years, 60 years? It's something like 8% or 9%. Why would you invest in stocks when you get an 8% or 9% return on much safer corporate bonds? It doesn't make sense anymore. So the whole asset allocation and thinking will have to change, and I think we're going to see many more people start to shift their thinking toward bonds.
And a lot of retail investors don't even think about corporate bonds. They think bonds are just Treasurys. Well, there's a whole class of securities that most people never thought about that can provide equity-like returns for much less risk.
Dan Ferris: Yep, that is very sensible and I agree. I made some recommendations, in The Ferris Report, of Treasurys and newly minted mortgage-backed securities, just because they're the safest thing in the world, and they're yielding 5%, 6%, 7%, some of them. So, hey, that's what you ought to do when the S&P 500 is whatever it is, 25 times earnings or 35 times [cyclically adjusted price to earnings ("CAPE")] or 37 times CAPE. So, yeah, we're on the same page, there, and I think it's important for folks to understand what you just said. That old way of thinking, you need to invert it. You need to get rid of it and invert it.
And everyone said, "Well, if they just lowered interest rates, everything will be just fine." But as you pointed out, the part of the bond market that the market controls doesn't like lower interest rates – it doesn't like the attempt to ease and create looser monetary conditions and looser financial conditions. And I caught that, too, a lot of us did, and that was the moment when you saw what folks like us have been saying, that you need to invert the last 15 years, that was the moment when the market said, "Yep, you really do." Because this isn't – low interest rates, the Fed shoving interest rates down, the Greenspan put or whatever, all that stuff, it isn't what it used to be.
It was novel once upon a time and, OK, so it shocked the world, in a good way, and we all fell in love with it. And ultimately, though, it couldn't work out, and it won't, over the long term. Somebody said a really good comment the other day. They were talking about getting rich and they said, "Money solves everything," or something like that. And it was, like, "You're kidding me, right? Money doesn't solve anything."
Mike DiBiase: That is not true. [Laughs]
Dan Ferris: Yeah, that's effectively saying if we just print more money, we'll all be fine. But real wealth is the only thing that matters, and relative to the amount of money, well, that's the thing, isn't it, the amount of real wealth being created versus the amount of money. And these attempts by the Fed to ease and soft-land and all that stuff, they resulted in a lot more speculation in the late-'20s and a lot more speculation in the late-'80s, right? They eased in the wake of the [Long-Term Capital Management ("LTCM")] fiasco, and just took forever to start reversing.
And we've been there already in the past few years, right? We've already had the speculative insane moment. We could get another one, as far as I'm concerned. I don't pretend to know how this will work out, and what's logical, ugh, I've given up on that. I've just got to prepare for anything, now.
Mike DiBiase: Well, I'll tell you how I think it's going to work out, Dan, and I've written about this. I'm calling for twin peaks of inflation, and what that means, so, here's how I think it's going to play out. I think that we're going to see a recession in the first half of 2025, and the Fed's response to that is going to be very predictable. It's going to ease, right? It's going to throw stimulus money at the problem, I don't know when it's going to be, but it's going to be resulting in more money printing, they're going to lower interest rates even further, we're going to see interest rates come down, that'll help people, everybody will start to feel good about things.
So we'll see a spike in the bond market from that. There'll be some fear as everyone realizes we're in a recession, so that'll create some good bond-buying opportunities for my subscribers. But it'll be short-lived, because I think the Fed will come in and everyone's going to say, "All right, the Fed's here again to the rescue." But what's going to happen is that easing and that money printing is going to cause the money supply to go up again and increase, and we're going to see a delayed effect and we're going to see inflation start to pick up again, I think in 2026.
And when inflation starts to pick up again, I think that's going to really be the moment that investors say, "What is going on, here? We can't afford this." So interest rates are going to have to go up again, and I think that's the moment of real fear. I think that's when we'll see the next credit crisis, when everyone realizes that what the Fed did didn't save anything – it just simply made the problem worse and delayed the inevitable. And so, I think that's when where we're going to see the next credit crisis like we saw back in 2008 and [crosstalk]
Dan Ferris: And spike in what?
Mike DiBiase: In inflation, again, inflation and interest rates going back up again, just like we saw in the 1970s. This has happened before
Dan Ferris: Yeah, that's right, I wrote about that, the Arthur Burns mistake. And on top of all that, DOGE will wind up not having nearly as much teeth as people want it to, the spending will stay high, the bonds will keep dropping, and the debt will keep rising, is my way to sum that up. And the more they spend over and above what they actually bring in, of course, that's all debt, and it inflates [crosstalk]
Mike DiBiase: And the debt and how that debt is funded by newly printed money, most of it, Dan. So you're talking about, again, the money supply, it comes back to the money supply, increasing, increasing, increasing. That's just an insatiable demand for more printed dollars, which means inflation's not going back down the way the Fed hopes.
Dan Ferris: Right, so what was the quote by J. Powell at the last press conference, about – I forget how he put it, but they just did some housekeeping, "Oh, we're going to slow the pace of shrinking the balance sheet." So he just kind of throws that stuff in there. [Laughs]
Mike DiBiase: [Crosstalk] can talk about it, but they're not doing it.
Dan Ferris: Right. Yeah, you look at the Fed assets or whatever, it's a mountain, and then there's this little teeny shrinkage right at the top which doesn't really amount to anything, and now they're going to slow that down. So, yeah, you really have to be prepared, I think, here. You have to be prepared for a lot of stuff, for a variety of outcomes. But in the end, as you pointed out, in the end, it's always the same, isn't it? They always sacrifice the currency for the banks and the bond market, always, right?
You can't have the system blowing up in that way, so we blow it up this way, with more money printing. A lot of folks that we talk to say, "Well, the Fed, they print money, but it's really just an asset swap, because they buy bonds and it goes into bank reserves." How do you answer that?
Mike DiBiase: Oh, it's not an asset swap at all. They're buying bonds with money that's created at the push of a button, and this money is flowing into the economy, eventually making its way from the bank reserves, banks lend it out, makes its way into the economy. So, there's no asset swap here. People talk about tariffs causing inflation. A tariff is just a tax. It's paying the government instead of paying for a good. It's increasing the cost of a good that's been taxed.
Well, demand for that good will naturally go down and those dollars will be spent somewhere else, right? So, I don't believe that tariffs are anything more than a temporary rise in the price of certain goods. I think eventually the market reaches equilibrium and those prices will come back down as demand falls as that money goes into alternative products. Even the price of eggs, which has, what, more than doubled, recently, right? That's one good.
There's supply and demand in every commodity, in everything in the economy, but inflation isn't that – inflation isn't eggs doubling. Inflation is the general rise in all prices across the economy. It's very difficult to measure, that's why CPI and [Personal Consumption Expenditures ("PCE"] and all those measures, the Fed uses a broad basket of goods, including shelter and oil and gas and eggs and bread, but it's trying to measure everything. And the only thing that, in economics, causes a general rise in all prices is an increase in the money supply. Milton Friedman, who's a Nobel Prize-winning economist that I write about a lot, who, by the way, [crosstalk] likes to quote and talk about, Friedman knew this back in the '70s and predicted that second rise, that twin peak of inflation.
He's the only guy in the 1970s that saw the twin peaks coming. And Friedman tells us when the money supply rises faster than the output of the economy, you're going to see inflation, and that's what we saw after the pandemic. And so, you have to pay attention to the money supply. I don't know why more people don't talk about it. It followed the exact path that I expected. I predicted inflation was going to spike before most people did – I'll give myself a pat on the back, there.
And when Powell was talking about transitory, I wrote a couple of Digests, I think, about it saying, "This is not going to be transitory. This is going to stick around for a while." So –
Dan Ferris: Yeah, you know, Mike, all the big brains now are saying, "See? It was transitory." I see that all over the place. And they're saying, "Well, the global economy is slowing."
Corey McLaughlin: I remember Mike writing about that in 2021 before everything went to crap in 2022. And so, yeah, so I will pat you on the back for that, as well. But, yeah, it was –
Mike DiBiase: I guess it depends on your definition of "transitory," Dan, right?
Dan Ferris: Yeah. [Laughs]
Corey McLaughlin: Yeah, which, by the way, Powell evoked, or a reporter, at least, at the press conference, transitory came up again, about [laughs], which they might be right this time, about inflation being tied to tariffs being transitory. But I thought that word might've been banned from all Fed discussions.
Mike DiBiase: Yeah, you'd think they wouldn't let them use that word anymore. And I would agree with him on that, if he's talking about it in relation to tariffs, I believe that is transitory, yes.
Corey McLaughlin: But I think the important point I think we're all talking about here is, and me and Dan used to talk about this a lot more, but that inversion of everything from the past 40 years, we're really into probably just Year 4 or 5 of this what could be just a general higher interest-rate environment for I don't know how long. Bonds are – yields were going down for, what, 40, 50 years, so, I think it's reasonable to think that, 2020, everything that we saw happen there was an ultimate bottom.
And that we're just really in this early stage of everybody just figuring out that, "Oh, what happened the last 40 or 50 years will not be – " All those different allocations, the typical 60-40 stock bond portfolio, all those things, when things don't go well, the response is different. What works in this environment will be different – I hate to say this time it's different, but I'm talking about, like, an era being different than the previous one.
Mike DiBiase: Yeah, I agree, it's a financial reset that we're going to have to see, in that I don't think most people have wrapped their brains around that, yet. [Crosstalk]
Corey McLaughlin: Yeah, it's easy to forget it, too. Even myself, when you get into these shorter-term cycles of what's going on with stock market, economy, all the mainstream talk, it's easy to forget what the heck did we just all go through the last four or five years. And there will be consequences of it. I think we're seeing it right now. When we talk about the Fed getting back to just that inclination to, for investors, too, to want to see rates lower, to want to see rates lower. And then when they do happen, then the longer-term rates spike. I don't think that was the intention.
Mike DiBiase: It's a confidence game. And people still have faith in the Fed. And I think once they begin to lose that faith that "the Fed can save us," then that's when you're going to see real turmoil. And then that's when the mindset will change of investors and they'll sort of rethink, "Well, stocks maybe don't make sense at these valuations, anymore," and bonds start to look a lot more attractive.
Dan Ferris: It's funny, because the analogue exists from the 1920s and '30s for that, as well. Because throughout the '20s, it was starting to be thought that monetary policy was more important, but then, the view in the wake of the '29 crash and Great Depression was, "Well, I guess monetary policy just isn't that great and that important and that effective, at all." Which is an interesting take. And then we came to see, especially during the maestro's tenure, Alan Greenspan, we all came to believe, "Monetary policy, well, that's everything."
And then, Bernanke hammered that message home, right? He said at Milton Friedman's 90th birthday, "Yes, the Great Depression, we did it. We're sorry. Thanks to you, Milton, we're not going to do it again." Because Friedman wrote, in the Monetary History of the United States, his famous work, that that was the problem that caused the Great Depression, was monetary policy was wrong. So, now, here we are – I think we are probably coming out of the period of believing, as you say, Mike, that we have this faith that the Fed can save us.
So it's flipping, right? It's flipping. It's going from, "We have total faith that monetary policy can save us," to, "We have less faith." And when we see that, 100 basis points of cuts, 100 basis-point increase in the 10-year, I think that's the fuse. The fuse was lit on that sentiment change. Big stuff, man, big historical stuff. Yeah.
Mike DiBiase: Yeah, these things have happened before, and I think you have to learn from history and really pay attention. And I love Milton Friedman. I think he was a brilliant economist – like I said, he won the Nobel Prize, and it was amazing. It amazes me that so few people listened to him in the '70s, and so few people are paying attention to what he wrote and said today.
Dan Ferris: Yeah, Mike, I swear to you, as you were talking, before you mentioned Friedman, I was creating a question in my mind based on Friedman's famous sentence when he said, "Inflation is always and everywhere a monetary phenomenon." I'll never forget those words. And you actually have spelled it out quite well, haven't you, because you've said, "Well, inflation is not tariffs making prices go up. It's money supply going up." Money and credit increasing, thereby causing a general price level rise.
And that price level rise has been, like I said, in the order of 22%, 23%, over the last couple years in the CPI, if you measure if that way. Much higher, if you just look at some individual components, rent, and stuff. So, the stress is there and it's not abating and it actually – so, it's not increasing at 9% a year, but it's increasing at roughly 3% a year. And that's bad enough. Having gone up 23% and increasing it another 3%, that's bad for that 90% that's doing the other half of consumer spending.
Boy, we're just full of sunny optimism here on the show today, aren't we? [Laughs] Have a great day, folks.
Corey McLaughlin: [Crosstalk] on that point, about, Mike, what are you doing in Credit Opportunities? You talked about it a little bit, but just going after I guess the highest-quality stuff you could find [crosstalk]
Mike DiBiase: Yeah, I think the good news for investors is that, if you're prepared, Dan, as you always like to say, you can really make a killing form what's about to happen. Right now, predicting when these things are going to happen is very difficult, so you don't want to run to the hills and get completely out of the market, I'm not suggesting that. But you should have a greater percentage of your portfolio in cash these days, and maybe gold than you would normally, right?
We know that the markets move in cycles and there are times when you don't have to worry about these cycles. But when we get towards the peaks and towards the bottoms, you have to worry and change your strategy. And so, we're telling our subscribers to have a good portion of your portfolio in cash ready to deploy, when those credit spreads spike – so when spreads spike, bonds get cheaper, right, bonds go on sale. And that's when you can make a killing with corporate bonds. And again, corporate bonds are much safer than stocks.
They're legally protected debt instruments, so the companies are required to pay you all of the interest and all of the principal of your bond when it matures, interest along the way and principal when it matures, they're legally required. If they don't, they go bankrupt, right? Stocks have no legal promise attached to them. And even when companies go bankrupt, by the way, if you're a bond holder, a lot of times, you'll recover some portion of your principal. You would've collected some interest along the way and maybe you get 50% of your principal back.
Stockholders get zero. They get wiped out in bankruptcy, so corporate bonds are much, much safer than stocks in general. So, when the credit crisis occurs, bonds go on sale, they actually get safer the cheaper they get, and you can make returns of 20%, 30% per year, holding these safe instruments, debt instruments and equity-like returns. And that's really the whole strategy behind our newsletters. We're waiting for these moments of volatility when everybody is scared, that's when you make your biggest allocations to corporate bonds. And I think that time is fast approaching.
But to your point, Corey, you can still do very well buying corporate bonds. There's always a few bonds in the market that sell off for various reasons, the company has a bad quarter or you lose the key customer. And the bond market's not as liquid as the stock market, so, when investors dump, a lot of these are institutional investors that own corporate bonds, they might dump the bonds because the credit rating goes below investment grade and the bond will sell off. And that's when there might be an opportunity for us to swoop in there and buy it when it's cheap.
But, yeah, lately, with spreads so low, we've been recommending more investment-grade bonds, so the lower end of the spectrum, with long-dated maturities. So that when interest rates do come down, which I think they will temporarily, meaning, during the recession, the prices of those bonds, because they're so long-dated, will tend to go up more. And so that's what we've been doing recently. But what our strategy is, is waiting for these moments of crisis, right, when spreads go over 1,000 basis points and higher, and that's when you want to be ready to deploy capital and go in and buy these.
We only buy bonds that we think have no chance of defaulting. Of course, we can't see the future. Some will default, but that's why you want to buy a basket of at least 10 bonds, and you can make unbelievable returns, equity-like returns, with these bonds, much safer investments than stocks. And that's what I think we'll see in the very near term.
Dan Ferris: Yeah, I'd like to make some of those returns from bonds, because, man, when they're good, they're fantastic – they can be absolutely fantastic.
Mike DiBiase: And by the way, Dan, I'll say this, I want to say this, too. A lot of people will say no one can see the bottom. When you're buying stocks, the market's 10 %, well, it can go down 20%, it can go down 30%. We saw it go down 50 in the last crisis. With bonds, though, once that spread gets over 1,000 basis points, you can feel really good about going in and buying corporate bonds. Yeah, it might go to 2,000 basis points, but you're going to get great deals at 1,000 basis points, you're going to get even better deals when it's 1,500 basis points.
So the point is, with bonds, it's much easier to know that you're at a bottom than it is with stocks. And again, the cheaper the bond becomes, the safer of an investment it is, as long as you believe you're going to get repaid. And that's where Bill and I do the work of figuring out with of the bonds that you can feel comfortable buying when they go on sale. And one more thing I want to say, for retail investors, the average retail investor has probably never thought about buying a corporate bond, didn't even know they could, probably.
But you can buy bonds in your brokerage account just like you can buy a stock. It's a little more difficult to buy a corporate bond – you might have to actually call your broker and get on the phone. They don't have short little two-, three-letter tickers – they have these things called CUSIPs, which are longer alpha-numeric digit numbers that identify the bond. But a lot of times, you can just, with the click of a mouse, buy a corporate bond. And your broker may try to discourage you from buying corporate bonds.
If you call him up and say, "Hey, I want to start buying corporate bonds," they'll probably tell you, "Hey, that's not such a great idea. Why do you want to do that?" And they'll probably just try to talk you out of it. And they'll say, like, "Well, we just think it's too risky for the average investor." When they'll let you buy stocks all day long of the riskiest companies there are that are making no profits, you know, that have no hope of making profit. It just boggles my mind that brokers will try to talk investors out of buying corporate bonds when it's a much safer investment and it's higher on the capital structure than stock.
And like I said, in a bankruptcy, you can actually recover some of your value, whereas stocks are always wiped out. So, don't believe your broker when you call them up and they tell you that corporate bonds are risky. It's just insane.
Dan Ferris: Yup, in fact, the more urgency they have in their voice about trying to get you to avoid it, that's when you know you're doing the right thing. [Laughs]
Mike DiBiase: [Crosstalk]
Dan Ferris: [Laughs] Yeah, that's right. All right, Mike, it's time for our final question. It's been great talking with you, but we're going to ask you to do one more thing for our listeners. Same final question for every guest no matter what the topic, even if it's a nonfinancial topic. If you have already said the answer, feel free to repeat it. And the question is simply, for the benefit of our listeners, if you could just leave them with one thought, one takeaway for today, what would you like that to be?
Mike DiBiase: I think it's kind of what we've just talked about, it's to consider buying corporate bonds, and forget about Treasurys. I'm talking about corporate bonds that pay you a much higher yield than Treasurys. And we talked about how I think we're in a new paradigm where interest rates are going to be higher for longer, so corporate bonds are going to offer you meaningful returns that can equal the returns you should be expecting from stocks over the next 10 years.
So, and again, they're much safer instruments, much safer investments than stocks are. The downside is much less and you can potentially make the same types of returns you can make with equities. So, people need to really consider, if you've never thought about buying a corporate bond before, if you didn't even know you could buy a corporate bond, think about it, do your research, call your broker. But again, be prepared for them to try to talk you out of it, but don't let them talk you out of it, because it can be a really nice part of your portfolio.
And I think it should be a much more meaningful part of the average investor's portfolio going forward. And I'm talking about the next 10, potentially 20 years, even. So, consider corporate bonds. Retail investors can buy them, anybody can buy them in your brokerage account. You may have to apply and fill out a special application that just says, "I acknowledge there's risks," but you should be able to buy corporate bonds. And I think more investors really need to consider that as a part of their asset-allocation strategy.
Dan Ferris: Amen to that. Totally agree. I hope folks take you up on it. Listen, Mike, it's always a pleasure. Thanks for being here and thanks for your good insights and ideas.
Mike DiBiase: Thanks, Dan. Thanks, Corey. I always enjoy talking to you guys.
[Music playing]
Dan Ferris: Well, I always enjoy talking with our friend and colleague, Mike DiBiase, and like I said when we started out, it's a Mike DiBiase moment. We need to check in with him at moments like this, don't we?
Corey McLaughlin: I think so. We haven't, yeah, it occurred to me, during that conversation, we haven't talked about a lot of these themes in a long time, which are really important in terms of money supply, the dollar, credit spreads. So, yeah, it was, it is a great moment to have him on, especially when people are talking slightly more about recession now and what that may look like. He's been talking about it for a while. And then, how to actually navigate through that, or one of the ways you can actually navigate through that with his corporate bond strategy.
Which I know probably scares people when they hear the words "corporate bonds," but if there's anybody you're going to follow to do it easily, it should be Mike and Bill McGilton, that he works with him on Credit Opportunities, too. We hear from a lot of subscribers that have had success with it, so, if you're interested at all, [crosstalk]
Dan Ferris: Absolutely. And like he said, you can get these, if you buy them right, equity-like returns with much more safety than equities. And right now, if you can find them, it's difficult with spreads tight, but they're finding some things that are attractive, that are going to definitely outperform stocks, if we get the kind of market that Mike and I suspect lies ahead. If we get a bigger correction, or an actual full-blown bear market, or an extended one. And if that happens and the corporate spreads blow out, Mike and Bill McGilton will be having a field day in Stansberry Credit Opportunities.
That's when I will be reading the thing, every word, every month, saying, "What do I buy next?" Because those moments, like he said, you buy at those moments, at 20%, 30% a year, for the next however many five years or so. It's amazing. It's something that people –
Corey McLaughlin: Yeah, it is. It's literally, when everybody's panicking, when everyone is – like, literally, when everyone's panicking, like during Covid, you know, March 2020, that's when Mike and Bill were backing up the truck and buying stuff. Now, unfortunately, the rescue from the Fed and government came a little, for their purposes, too quickly and too big, because then the credit spread just dropped, again, quickly. But for a couple weeks, there, yeah, they were issuing a lot of buy recommendations, and the returns on those, I don't remember them exactly off the top of my head, but they were all pretty good, double digits, and I think a super higher percentage were winners.
So I don't want to even hazard a guess, because I'm probably underestimating it, but, yeah, those are the moments where the strategy really thrives. But at the same time, in the meantime, they're recommending high-quality ones as well. So, yeah, it's a good time to get into it and get used to the whole strategy, for when that panic moment happens and you're comfortable with – [crosstalk]
Dan Ferris: Right, value-oriented stock investors, they say, "Man, I can't wait till there's a bear market and everything goes on sale." But those times, they're like Christmas for a guy like Mike in the credit space. Because like he said, it's a different animal. It's inherently safer because of the contractual protections, and you can just clean up. It's amazing. Whereas with stocks, you have to pick the right ones, don't you? But with corporate bonds, as long as you're sure you're going to get paid back, [laughs] if you're getting a 50% discount, you're going to double your money and then some on the interest, right?
So, yeah, pay attention, folks, pay attention to Stansberry Credit Opportunities. When things go bad, you will want to know what Mike and Bill have to say. And, you know, it's always great to hear from him on his views about other things, as you said, money supply, inflation, et cetera. And you can hear him chomping at the bit for that moment when the credit spreads blow out. I hope he gets it. Wow, so, lots to talk about with Mike and always an enjoyable conversation.
That's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we really truly did.
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For my co-host, Corey McLaughlin, till next week. I'm Dan Ferris. Thanks for listening.
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