Prepare Now for Our Slow-Burn Crash

Prepare now for our slow-burn crash... 'Minsky moments' are essential to capitalism... One investor's answer to prepare, don't predict... Even fast market crashes are long-term events... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Prepare now for our slow-burn crash... 'Minsky moments' are essential to capitalism... One investor's answer to prepare, don't predict... Even fast market crashes are long-term events... --------------------------------------------------------------- Don't let the 'Minsky moments' catch you by surprise... It's remarkable that for all the Friday Digests I've penned warning about unseen risks in the market and how they could devastate your portfolio... we've never discussed Hyman Minsky and his "moments." Minsky was an American economist who taught at American universities, most notably Bard College in Annandale-on-Hudson, New York from 1990 until his death in 1996. He's best known for his financial instability hypothesis, whose two fundamental propositions are: - Capitalist market mechanisms cannot lead to a sustained, stable-price, full-employment equilibrium. - Serious business cycles are due to financial attributes that are essential to capitalism. In other words, financial crises are a normal part of capitalism. As the Wall Street Journal reported in 2007: [Minsky] spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval. The term "Minsky moment" was coined by investor Paul McCulley in 1998 to explain the Asian financial crisis of 1997. A Minsky moment is a crash in the price of an asset after an excessive debt buildup. Our last major Minsky moment in the U.S. was the 2008 financial crisis. In August 2007, when subprime mortgage securities were blowing up, McCulley told the Journal: We are in the midst of a Minsky moment, bordering on a Minsky meltdown. I've been talking about the probability of another crisis for a couple years. While I was right to be bearish in 2021 and throughout 2022, the S&P 500 is higher today than it was when the Fed started hiking interest rates last year. So it looks for now as though the stock market has avoided a Minsky moment. Preparing for such an event seems to be the last thing on anybody's mind right now. But... I've probably said it a hundred times in previous Digests: Prepare, don't predict. It's my bedrock mantra for how investors ought to allocate their hard-earned capital. I often discuss what I believe will happen in the future based on what's happening today. I encourage you to do the same. Investors should learn to think about likely future events and trends. They should do their best to "see around corners" and anticipate risks others might not see. But when it's time to put money to work, you need to be humble before the market gods. Admit that you can't predict the future. Allocating capital based on predictions is a fool's errand. Instead, prepare your portfolio for a variety of scenarios. Almost every time I've repeated the mantra, I've also recommended allocating capital to the same core portfolio elements: - Plenty of cash - Great stocks bought at reasonable prices - Gold and silver It's a good skeleton but it doesn't have much meat on it. My most detailed fleshing out of a "prepare, don't predict" portfolio is for readers of The Ferris Report. The model portfolio contains various ways to invest in precious metals, defensive stocks, stocks trading at reasonable prices, and even a creative way to hold U.S. dollars. I've also incorporated some aspects of the core portfolio into recommendations Mike Barrett and I have made in Extreme Value. But you can build a prepared portfolio in other ways. Analyst James Montier of asset manager GMO recently published [a white paper]( examining three ways to prepare your portfolio for crashes and crises. The three methods he discussed should be familiar to regular Friday Digest readers. If you're looking for a way to prepare your portfolio for a more difficult environment than the one that has prevailed since last fall, you must know these strategies... First, hold cash... Cash is the ultimate diversifier. It's highly likely to hold its value while other assets are falling. The faster and further they fall... the better cash looks by comparison. Montier also points out that cash becomes more attractive as interest rates rise. My wife showed me a bank statement yesterday and noticed the interest rate on our account was 5.96%. She could hardly believe what she was seeing and excitedly said, "Hey we need to get some more money in there!" I did not disagree. [Like I said last week]( earning higher returns for holding cash is great for investors because they can now get a decent return on the easiest way to protect their downside. To prepare for tough market conditions, having plenty of cash on hand is hard (if not impossible) to beat. Next, buy quality, avoid junk... Montier's second method of preparing your portfolio for tough times is to buy quality stocks and sell short "junk" stocks. We don't short stocks very often in Extreme Value, but we specialize in recommending high-quality stocks. We evaluate companies using five essential financial markers found among high-quality businesses: gushing free cash flow, consistent margins, good balance sheets, shareholder rewards (dividends and share repurchases), and high returns on equity. You can use the same five markers to identify junk stocks: negative cash flow, volatile or nonexistent margins, debt-ridden balance sheets, no shareholder rewards, and little or no returns on equity. This strategy has been practiced by professionals for many years. Famed investor Julian Robertson based his successful hedge fund on the idea of buying the 200 best stocks and shorting the 200 worst. Every time I've spoken with hedge-fund manager Carlo Cannell over the past 20 years or so, he has been short various junk stocks he expects to go to zero. He calls them "animals dying by the side of the road." Finally, buy value stocks and sell short pricey growth stocks... I focused on this third point in Montier's strategy in [the July 2022 issue of Extreme Value](. I've discussed value and growth cycles in the Digest [here]( and [here](. Montier explains that investors seeking to mitigate the effects of crashes and crises should "focus on assets with large margins of safety where the bad news has already been priced in." In other words... Buying decent businesses with beaten-down share prices exposes you to less downside risk when the excrement finally hits the fan. All those strategies make sense to me, and I've shown readers how to use them all in one way or another over the years. Montier evaluated these strategies as alternatives to standard hedging practices, like buying put options. Puts work great when the market falls far and fast soon after you've bought them. But they don't act as a store of value. Owning them consistently over the long term is just a way to light money on fire again and again. It turns out these strategies work to prepare you for what Montier called "slow burn Minsky moments." He doesn't quite say what he means by "slow burn"... but I have to assume he's saying the crisis won't be as sudden as the 2008 financial meltdown or the dot-com burst. But it could be as traumatic... I still can't believe the fastest interest-rate-hiking cycle since 1980 is a nonevent... So I'll keep voicing my concerns about what the massive unseen excesses have built up in the financial markets over the past several years. Now it's one thing for me to send you a note once a week counseling caution and humility before the market. It's another thing altogether to ask why markets crash, study the problem in depth, and come up with a decent answer. That's exactly what French researcher Didier Sornette did in his 2003 book, Why Stock Markets Crash. It contains a lot of highly technical material, but much of the text is readable and he makes some excellent, easy-to-understand points... My main takeaway from the book is that investors will do themselves a huge favor by forgetting about short-term considerations and taking the time to learn as much as possible about the underlying conditions that lead to crashes. Those conditions can be in place for years before a crash happens. That's why most investors never think about them. It's a bit paradoxical when you think about it... Even fast market crashes are long-term events! What I mean is, severe events that happen in very short time frames are really just the result of long-term trends. Sornette writes: [T]he underlying cause of the crash will be found in the preceding months and years, in the progressively increasing build-up of market cooperativity... often translated into accelerating ascent of the market price (the bubble)... the specific manner by which prices collapsed is not the most important problem... a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. Focusing on the long term will reorient you away from things you can't control and toward things you can control, like how you'll prepare for Minsky moments and other hazards. The conditions you'll learn to look for are not hard to spot. For example, one of them is a buildup of debt that leads to Minsky moments. Montier's white paper included several charts clearly showing the buildup of private-market debt in the U.S., Europe, and Asia. It's an inherently unstable condition, a subject Sornette spends some ink on... Think of a ruler held up vertically on your finger: this very unstable position will lead eventually to its collapse, as a result of a small (or an absence of adequate) motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. Remember... you're not learning to spot unstable market conditions so you can use them as timing mechanisms. They're lousy timing tools. You're studying for nearly the opposite reason. You know trying to predict crashes is foolish, but you want to prepare your portfolio for when they finally, inevitably blow up. That's why I keep returning to stories about overvalued junk companies like AMC Entertainment (AMC), Bed Bath & Beyond, and the companies held by the ARK Innovation Fund (ARKK). Each one demonstrates what happens when market mistakes build up over time. The details are different and fascinating, but the overall effect on a long-term, value-conscious investor should be something like, "Wow, how did things get this way?!" But of course... It's easy to get caught off guard by crashes and crises... Most folks never see the Minsky moments coming because it's too hard to think about them when they're not happening. It feels like you're wasting your time worrying about the bad times when the market is going up... as it has been doing since October. The rally everyone is enjoying more and more with each passing day is perpetuating one of the conditions traditionally associated with market crashes – exorbitant valuation. As the chart shows, the S&P 500 is in mega-bubble territory with the so-called Shiller price-to-earnings (P/E) ratio at 31.4 – higher than the 1929 peak. It was 36.9 at the start of 2022, not far above current levels. The Shiller P/E ratio was created by economists Robert Shiller and John Campbell in 1996. It uses 10-year average inflation to smooth out economic cycles and show when stock prices are rising faster than earnings. The dot-com bubble peaked at an all-time high Shiller P/E ratio of 43.8. When the bubble burst, the metric earned a reputation for identifying what I'd call "mega bubbles." I contend that, when valuations get that high, markets are essentially broken. At those times, investors have come to believe that unjustifiably high valuations are now normal. But I don't think a Shiller P/E ratio of 30 or higher will ever be normal… nor will be interest rates at zero, like they were from December 2008 to March 2022. We can't know exactly where disaster will strike after a period of incredible euphoria and overvaluation. But it's a bit smug to suggest that the bear market is over and our problems are behind us just because the market has risen off its late 2022 lows. The 1929 and 2000 peaks anticipated rapid crashes of more than 30% in short time frames. So far, we haven't had such an episode. Maybe it's because the bear market is over and was never much of a threat. Or maybe it's because the worst is yet to come... But I don't need to know which it is because I'm focused on preparing for what the underlying conditions tell me is inevitable... even if it's not imminent. --------------------------------------------------------------- Recommended Links: [These Two Wall Street Legends Have Just Joined Forces... Why?]( Marc Chaikin helped build Wall Street, and Dr. David Eifrig is a former vice president at Goldman Sachs. With more than 90 years of combined investing experience, they both agree: Artificial intelligence is a double-edged sword that could either make or break your wealth... But most people don't know the real story! Get ready, because on July 19, they will cut through the hype and answer all your burning questions about what AI could mean for you and your money in 2023. [Click here for this important update](. --------------------------------------------------------------- [This 'Canary in the Coal Mine' for Stocks Is SCREAMING]( While the stock market hums along, a much bigger (and more important) market is flashing a huge warning. It's one that will definitely affect stocks... housing... and the entire economy. Ignoring this signal would be a big mistake. But billionaires (and some of the world's best analysts) LOVE this kind of turmoil – because it's a chance to buy world-class investments for pennies on the dollar. The same setup led to 772% gains in 2009. [Get the full story here](. --------------------------------------------------------------- New 52-week highs (as of 7/13/23): Adobe (ADBE), Analog Devices (ADI), Ansys (ANSS), ASML (ASML), Boyd Gaming (BYD), CBOE Global Markets (CBOE), Cameco (CCJ), Salesforce (CRM), Commvault Systems (CVLT), Dassault Systèmes (DASTY), D.R. 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In today's mailbag, more feedback on coinage, stemming from our note on Wednesday that the U.S. government spends 10 cents making every nickel... Do you have a comment or question for us? As always, e-mail feedback@stansberryresearch.com. "When I lived in New Zealand, we had no 1-cent or 5-cent coins. Everything was rounded up or down to the nearest 10 cents. The government said they made more money that way than having the coins. Probably won't happen here in the U.S. Seems like the government enjoys wasting money. (I should be so lucky.)" – Subscriber Gary A. Good Investing, Dan Ferris Eagle Point, Oregon July 14, 2023 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,246.3% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,076.0% Stansberry's Investment Advisory Porter ADP Automatic Data 10/09/08 817.8% Extreme Value Ferris wstETH Wrapped Staked Ethereum 02/21/20 634.1% Stansberry Innovations Report Wade HSY Hershey 12/07/07 576.6% Stansberry's Investment Advisory Porter WRB W.R. Berkley 03/16/12 518.8% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 509.1% Retirement Millionaire Doc AFG American Financial 10/12/12 402.2% Stansberry's Investment Advisory Porter TTD The Trade Desk 10/17/19 348.1% Stansberry Innovations Report Engel FSMEX Fidelity Sel Med 09/03/08 318.2% Retirement Millionaire Doc Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 4 Stansberry's Investment Advisory Porter 3 Retirement Millionaire Doc 2 Stansberry Innovations Report Engel/Wade 1 Extreme Value Ferris --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 1,500.1% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,089.3% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,034.3% Crypto Capital Wade MATIC/USD Polygon 02/25/21 850.1% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 737.2% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. 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