An Economic Winter Is Coming

Editor's note: Regular Empire Financial Daily readers will remember our friend and colleague Mike DiBiase from our corporate affiliate Stansberry Research... Before joining Stansberry, Mike spent nearly two decades in finance and accounting, most recently serving as a VP of finance and planning for a large, publicly traded software company. He also worked as an […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Editor's note: Regular Empire Financial Daily readers will remember our friend and colleague Mike DiBiase from our corporate affiliate Stansberry Research... Before joining Stansberry, Mike spent nearly two decades in finance and accounting, most recently serving as a VP of finance and planning for a large, publicly traded software company. He also worked as an auditor for one of the "Big Four" accounting firms. As Mike explains in today's essay, he thinks an "economic winter" is on its way. Here at Empire, we're more optimistic about the future of the economy... But we're always interested in hearing what smart folks like Mike are saying. That's why today and tomorrow, we're sharing insights from Mike explaining why he believes we're headed toward a recession... --------------------------------------------------------------- An Economic Winter Is Coming By Mike DiBiase --------------------------------------------------------------- [John 9:25 '...whereas I was blind, now I see.']( One tiny technology company is aiming to grant the gift of sight to the blind. But NOT in the way you may think. Because instead of granting sight to people... The tiny company you'll see here is granting sight to cars. Leading to a massive technology breakthrough that could save over 1.2 million lives worldwide... And hand its earliest investors potential gains as high as 5,934%. [Click here now for all the details](. --------------------------------------------------------------- We are living in strange times... Investors celebrate when the latest inflation number comes in a few tenths of a percentage below expectations. The stock market roars. On the other hand, a couple tenths of a percent in the wrong direction sends the markets plunging. Investors cannot see the forest for the trees. What investors are missing is that inflation is still sky high. In the latest reading of the Consumer Price Index, prices rose 7.1% from a year ago.[] That's still a faster pace than any time in 40 years. What difference does a few percentage points make? The bigger picture investors seem to be missing is that inflation north of 6% is still incredibly high... not even in the stratosphere of the U.S. Federal Reserve's 2% target. It's a punishing tax on consumers. Bulls are looking for any small hope to cling to as a reason to pile back into stocks. Today, I'll explain why it doesn't matter whether inflation falls a few tenths of a percentage from one month to the next... What matters to your portfolio's future returns is what's coming next. If you think we're getting close to the time when it's wise to go "all in" on stocks again, I urge you to keep reading. Our economy grew in the third quarter. And it's likely to grow again in the fourth quarter. Some might think the worst is behind us. But when I look into the near future, one thing is clear to me... Things are about to get much worse... There are dark economic clouds on the horizon. I believe we're about to enter a deep, prolonged period of slowing economic growth. And things are going to get worse before they get better. As more folks wake up to this economic reality, it will trigger an even deeper sell-off in the stock market... and set off the next credit crisis. Let me be clear... this isn't something I want to happen. But if it is going to happen, it's better to be prepared for it. And it's even better if there's a way to profit from it. Fortunately, there is. Even though my outlook for the economy is gloomy, my outlook for informed investors is very rosy. To be an informed investor, you must understand credit cycles... Credit cycles are a "normal" part of the economy. A full-blown credit crisis occurs about once a decade. The last one was in 2008 to 2009. The one before that was in 2001. So we're overdue. --------------------------------------------------------------- Recommended Link: [Could 'VLEO' Be Jeff Bezos' NEXT Amazon?!]( Fact: $1,000 in Amazon.com at its IPO would be over $2 million today. And with Jeff Bezos moving on as CEO... Could THIS be his next Amazon? [Click here to find out](. --------------------------------------------------------------- Here's what's important... There's no need to fear recessions or credit crises. Once you accept this, you can prepare your portfolio so it doesn't have to suffer through them. Credit cycles are easy to understand... When times are good, lenders (like banks, private equity firms, and institutional investors) begin loosening their underwriting standards. That leads to a period of "easy" credit. As the credit pool expands, lenders eventually run out of people with good credit to lend to. Chasing profits, they target borrowers lower and lower on the credit ladder. Eventually, some of the low-quality loans begin to go bad. People or companies can't afford to make their loan payments... for whatever reasons. (Today, for example, it might be the effects of high inflation and rising interest rates.) That's when creditors start to "tighten" their lending standards. That means loans are harder to get, the loan sizes are smaller, and the terms of the loans are more favorable to lenders. This slows the economy, making it harder for other borrowers to repay their loans. Delinquencies lead to defaults, which lead to bankruptcies – both at the corporate and individual levels. Credit dries up. The result is a credit crisis. It clears out the bad debt and poor underwriting practices... and then the cycle starts again. Today, we're at the end of the 'easy credit' point in the cycle where low-quality loans are just beginning to go bad... According to the Fed's latest loan-officer surveys, credit is once again tightening for the first time since the immediate aftermath of the pandemic. Take a look... Banks are becoming more cautious with all types of loans, including loans to both large and small companies, as well as on credit-card loans to consumers. As credit continues to tighten, I predict we'll read more and more stories in the coming months about rising delinquencies (late payments), defaults (loans going bad), and bankruptcies (companies going bad). The Fed stepped in after the pandemic with unprecedented stimulus the last time credit tightened. But it's powerless to stop the credit crisis this time. The main reason the Fed can't save the economy this time is persistent inflation... I've been banging the drum since []April 2021 warning about inflation. Back then, inflation was less than 3% and no one was taking it that seriously. That's right around the time Fed Chairman Jerome Powell began calling it "transitory."[] I called it the biggest threat to the markets. Then in December 2021, as the stock market was hitting all-time highs, I explained why inflation would cause the markets to crash in 2022. Of course, as you know, inflation has since soared. And the markets crashed in 2022. Unfortunately, the worst is not behind us. Things are going to get much worse before they get better. I believe an economic winter is coming. The stock market and the even bigger corporate bond market are headed much lower. The main reason is inflation. Inflation is much tougher to get rid of than most folks understand... A bout of inflation is not like catching a cold where you can be back up on your feet feeling great again after a week. It's more []like contracting severe pneumonia. You're going to be sick for a while. And if you don't take it seriously and do what it takes to fight it off, it's going to stick around even longer. The biggest mistake many investors are making today is not understanding how sticky inflation is. To them, if inflation drops a tiny bit from one month to the next, we'll be cured of it soon – allowing the Fed to begin loosening its policies. That's a foolish bet. Even Powell, "Mr. Transitory," seems to have finally learned the lesson. His summer reading list must have been filled with economics textbooks. In his speech in December, Powell was very clear and direct. As he said... Reducing inflation is likely to require a sustained period of below-trend growth. This historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done. I'm impressed at how far Powell has come since early 2021. Powell now knows the mistakes the central bank made in the 1970s in loosening policy too fast, which led to two rounds of inflation rising above 10% and high inflation lingering through the decade. Powell is finally saying all the right things. And yet many investors are ignoring his warnings. Ironically, when Powell was wrong about inflation being transitory, investors believed him. Now that he's finally right about inflation, investors are ignoring him. It's going to be another painful lesson for those investors. Don't fall into that trap of thinking inflation is under control just because the headline number falls from one month to the next... In the 84 months from 1973 to 1979, when inflation averaged more than 8%, the inflation rate decreased from one month to the next 36 times. And remember, there's a lot of "noise" in today's inflation numbers from supply shocks and the effect on energy prices caused by the war in Ukraine. The biggest part of the decline in the inflation numbers in recent months is from energy prices easing a bit thanks to the government tapping our strategic oil reserves. But that's not going to last. The reality is that interest rates still have to go much higher in order to get inflation under control. That leaves the difficult choice... high inflation or high interest rates. In tomorrow's essay, I'll explain why these conditions will lead to the next recession – and more important, what you can do to profit from it. Regards, Mike DiBiase January 4, 2023 Editor's note: One of Mike's Stansberry's Credit Opportunities subscribers went on camera to explain how the investing strategy in the newsletter helped him retire early at age 52... and why he doesn't have to worry about his money in any market environment. And looking ahead to the new year, Mike believes that distressed-debt investors who are prepared for the looming crisis will be poised for massive gains... [Learn more here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 380 Lexington Ave., 4th Floor, New York, NY 10168 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](