His Distortion Field Is Blinding His Supporters
Steve Jobs was famous for having what one of his colleagues called a “reality distortion field.”
His ability to manifest results at Apple (AAPL), especially in product development, was based on getting people around him to believe they could build things that had never been built before – in a matter of days, not years. (If you don’t know the story, the development of Gorilla Glass is a perfect example of Jobs’ reality distortion field at work.)
I met former President Donald Trump at Mar-a-Lago, his club in Palm Beach, last March.
I believe he has a similar reality distortion field. He knows that America’s economy, and our society, have been warped by progressive politics, and he believes (correctly) in the American people. Restoring our property rights (by reducing regulatory burdens) and slashing the cost of the government will allow America to grow out of its debt burdens and restore a broad prosperity to the middle class.
Trump’s reality distortion field, however, is blinding his supporters into thinking that this will happen without major dislocations in the markets.
And, unfortunately, decades of woeful financial management have left our country more at risk than ever before to an enormous debt-fueled economic collapse – witness the huge rise in bankruptcies this year.
Most at risk?
The U.S. consumer. Credit card debt is up 214% from $350 billion in 2008, to a record high $1.1 trillion today. Auto loans are up 100% from $800 billion in 2008, to a record high $1.6 trillion today. Student loans are up 200% from $600 billion in 2008, to a record high $1.8 trillion today.
As employment declines (we’ve seen nine straight months of declining employment) and consumer debt defaults mount, there’s a rising likelihood of massive consumer debt default. And, as Trump moves to cut government spending and steps up efforts to collect on student loans, there will be a big decline in discretionary spending.
And, in fact, that’s already begun.
How do I know? The restaurant sector is on track to post the highest number of bankruptcies in decades (not including the pandemic-induced shutdowns in 2020).
In Miami Beach last weekend, I was able to walk into Prime 112 without a reservation at 7 pm on Saturday night. The restaurant was only half full. By 10 pm, it was empty. For the past 20 years, Prime 112 has been the highest-grossing restaurant in the country, per square foot. And… for the first time ever… the restaurant group had to close down one of its other Miami Beach eateries. The key culprit is rising inflation hitting consumer wallets and higher operating costs squeezing restaurant owners.
The Wall Street Journal reports: “More eateries on the edge are likely to file for bankruptcy in the coming year, according to restaurant executives, attorneys, and lenders.”
Trump’s move to cut government spending will also impact a lot of big businesses.
That’s important and will bring economic benefits over the long run. But, for today, it means we’re facing huge economic risks: U.S. corporations have never borrowed more money, ever before, as a percentage of GDP.
All of this debt has led to a big decrease in corporate credit quality.
Currently there’s a huge wave of investment-grade bonds ($60 billion in total) that are trading just one notch above junk status. When they’re downgraded to junk, this will trigger a huge decline in corporate bonds because most bond and pension funds aren’t allowed to own non-investment-grade (“IG”) corporate debt.
One big culprit: Boeing (BA).
“It’s kind of this slow-moving car wreck,” said Hunter Hayes, chief investment officer at Intrepid Capital Management. “Obviously, some of these bigger, on-the-cusp, IG names have had some issues – Boeing being the poster child. But there are a handful of them, and what’s interesting about it to us is just the size.”
When Boeing is cut to below investment grade, that will kick off the next big corporate default cycle.
When that happens, it won’t be a good week for the stock market. (What happens to Boeing shares? They’re a great short, as we explained last week.)
But it will set up a once-in-a-decade opportunity to buy high yielding, “money good” corporate bonds with yields-to-maturities between 20% and 30%.
These corporate credit cycles are a wise investor’s path to prosperity. And, fortunately for Porter & Co. subscribers, the world’s best high-yield analyst, Martin Fridson, runs our Distressed Investing research team.
Stick around. We’ll show you how to turn Trump’s distortion field into reality.
Good investing,
Porter Stansberry
Stevenson, MD
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