ISSUE I

POVERTY IS A CHOICE

ISSUE II

THE WEALTH SECRET

ISSUE III

A PERFECT WINDOW

ISSUE IV

EX-WIFE v GIRLFRIEND

ISSUE V

DOLLARS FOR CENTS

ISSUE VI

A DRUG STORY

The Great Wealth Transfer Issue #3:

A PERFECT WINDOW 
OF OPPORTUNITY

A PERFECT WINDOW OF OPPORTUNITY 

  • A simple household budget example that perfectly identifies what’s rotten in the U.S.’s $25 trillion woodpile…
  • ​The winners and losers of the cheap money boom... (Pssst: savers and investors got shafted and what we’re going to do about it)... 
  • ​How we got here, what’s going to happen next, and how you can fast track your financial goals via the least-understood, most under-the-radar, highest-upside asset class… 
  • ​Including how to get “paid first” now that the easy money era is over... 
  • ​Plus much, much more... 

Let me ask you a question…

If you have dirt-poor credit, how easy is it to get a mortgage?

If you’re an individual, you can’t. You’ll be laughed out of the bank.

But for a company with terrible credit, it’s a snap to get oversized loans. 

It’s especially easy if it’s during an extended period of cheap money. 
Like the kind of period we’ve had here in the U.S. until recently.

The pain comes when it’s time to pay that money back.

And a lot of companies are about to experience a world of pain.

As interest rates rise, it will only get more difficult for those firms that have loaded up on cheap debt to roll over their liabilities. 

Or in other words, replace their existing debt with new debt at significantly higher rates…

Add in a recession and you’ve got a lit fuse and a powder keg.

Simply put: a lot of lousy businesses are about to go up in flames.

But at the same time, a lot of good companies – with ample liquidity – will be treated by investors as if they also won’t be able to make their payments…

And the bonds of these financially robust companies will collapse in price.Even though the chances they won’t be able to make their bond payments are very slim.

In other words, the babies will get thrown out with the bathwater!

That’s why we’ve created this special series of articles. 

To show you step-by-step how we got here, what’s going to happen next, and how you can fast-track your financial goals via the least-understood, most under-the-radar, highest-upside asset class.

Because many bonds will appear to be close to default. 

But bonds that are “thrown out with the bathwater” can deliver higher and more reliable returns than stocks… for years and years… with less risk.

These distressed corporate bonds can deliver triple-digit returns on an established schedule and there isn’t any guesswork involved in how you’ll be paid.

This is a massive, misunderstood market that offers extraordinary investment opportunities… and it’s hiding in plain sight. 

But in order to understand how to profit, you have to understand how we got here, and that’s the topic of today’s issue…

MONEY DOESN'T GROW ON TREES

Money doesn’t grow on trees – that takes too long.

Instead it’s been the Federal Reserve’s mission the last few years to bury the U.S. under a mountain of paper.

As of May 31st 2022, nearly 80% of all dollars that have ever been created were printed over the previous 17-month period. That’s in part to the $6 trillion or so in COVID-19 stimulus.

Here's the problem: When an economy is awash with this much liquidity – that’s to say, lots and lots of cash – capital flows to companies become much higher risk and more speculative.

It’s the inevitable result of there being too much money looking for a way to generate a return.

Think of a family budget. If money is tight, it’s allocated to the most important, mission-critical efforts and projects for the family: Food, rent or mortgage, utilities, and education.

The return on that investment – sustenance, a roof over your head, electricity and heat, and building for the future – is immense.

But then, let’s say… the family wins the lottery.

Suddenly, there’s way more cash than important things to spend it on. 

Before you know it, ne’er-do-well cousins and in-laws come calling… and the excess cash starts going toward small business loans to support more and more hare-brained ideas.

Then these businesses start inhaling capital like Tony Montana in Scarface.

Economy wide this has been on full display, as companies used the cover of the evolving pandemic to draw down credit lines, sell bonds, and take out loans as if preparing for the zombie apocalypse…

Covid brought economic uncertainty and it looked like the U.S. would enter a prolonged recession, causing negativity to reach an all-time high.

Many investors feared that companies would not fulfill their interest payments or debt obligations with a global economic shutdown.

This caused spreads to rise, and the government interfered with aid and stimulus in the form of lower rates. They also injected $3.9T of liquidity into the system to prevent economic collapse.

But there’s no such thing as a free lunch, really.

Yields contracted sharply, as we see between June of 2020 and July of 2021. You can see the progression here…

Liquidity flowed into the system and corporations now had access to debt paying very little interest as you can see from rock-bottom rates in interest rates in the U.S.: 

When interest rates are close to zero, it creates an environment where creditors are willing to renew financing on unproductive assets, as it ensures their previous credits will be repaid.

The cost to borrow was extremely cheap in the ultra-low-rate environment, so companies looked to raise capital. Companies therefore issued debt. Lots and lots of debt.

Corporations could now issue bonds with lower interest rates, meaning that bondholders were paying low premiums for worse credit.

The boom of cheap money was great for bankers. 

And it was great for companies.

For investors? Less so.

But they didn’t have much choice. 

In a world of 0% interest rates, even getting 3.5% for AT&T sounds pretty good.

Until the music stops, that is... 

"YOU CAN NEVER BE TOO RICH OR TOO THIN"

Legend has it that Wallis Warfield Simpson, the colorful divorcee who married England’s King Edward – owned a pillow embroidered with the motto, “You can’t be too rich or too thin.”

The pillow was wrong on both counts – it’s definitely possible to be too thin, and believe it or not, it is possible to have too much money.

From the second quarter of 2019 to one year later, total borrowing by U.S. companies (excluding financial institutions) increased by 16% to an all-time high, according to data from the St. Louis Fed.

Also bolstered by strong profitability, total cash balances (which includes borrowed funds) of U.S. companies were up an incredible 54% as of March 31, compared to a year earlier. 

At that point, they were more than double the levels of early 2019.

That’s a lot of cash – and it’s created a case of mo’ money, mo’ problems.

The too-much-money phenomenon has actually been going on for a while. “The global economy’s bizarre problem: Too much money,” headlined Quartz in April 2015, decrying the 400% growth in the Federal Reserve’s balance sheet during the period since 2007.

In June 2019, Axios warned, “A truly bizarre trend is having an impact on the economy — wealthy people and corporations have so much money they literally don’t know what to do with it.” 

Sound familiar?

And what exactly did companies do with all that cash?

Some companies reinvested into the business, made smart acquisitions, strategically expanded their operations, and bolstered research and development…

In other words, they did the kinds of things you’d hope they’d do to generate returns for shareholders and grow...

But when interest rates are close to zero – as they were during the past easy money era – it’s easy for both good and bad companies to get credit, which makes it harder for investors to decipher the good companies from the bad.

As Warren Buffett famously says, “only when the tide goes out do you discover who's been swimming naked.”

When interest rates are low, capital is more readily available, and it allows companies to pursue more aggressive growth strategies that are riskier but reap higher potential profits…also known as a “liquidity rush.”

Investors are the same. 

When bond yields are much lower, investors look to equities as the environment created by lower interest rates makes the returns on these assets that much more attractive.

During the Covid boom, there was a large supply of liquidity, and it resulted in a “risk-off” run in public equities. 

The number of companies that went public in 2020 and 2021, even compared to this year, indicates just how frothy the market really was... 

- 134 IPOs in 2022
- 1035 IPOs on the U.S. stock market, a record in 2021
- 480 IPOs in 2020 (which was a record until the following year).

During the easy money era, you can see a dramatic reduction in bankruptcies in the U.S. (as, interestingly, happened right before the 2008 crash, too):

But a funny thing happened on the way to the forum...

The Fed turned hawkish in March 2022. 

Now that the Fed expects to raise rates to north of 5% by the end of 2023 to combat rampant inflation, unstable companies that took out debt during the pandemic are at even greater risks.

Some companies were on the brink of bankruptcy and issued debt to ensure they’d make it through the pandemic. 

But these companies will be faced with entirely new problems on the other side of the pandemic as the Fed raises rates and the “liquidity rush” is over.

Companies that have weak balance sheets, or are burning through cash, will face challenges accessing capital in an environment with higher rates, as the price of raising capital becomes more expensive…

Some of those companies that borrowed cash when interest rates were at or near historic lows will leave the buyers of their debt holding the bag (you might want to take a long, hard look at your portfolio if you own Bed, Bath & Beyond, AMC or Capri!)... 

But many other bond issues that the casual observer might think will go bust… actually won’t.

And that’s what this special series of essays is all about. We want to provide you with the insights and the resources to understand this historic opportunity, and to profit from it.

So, here’s where the rubber meets the road in all this…

When interest rates rise… bonds (high-yield bonds in particular) fall in value as bond prices and interest are inversely related.

In other words, when interest rates rise, bonds become less attractive and decline in price as the risk-free rate of return, or interest rate, rises.

When interest rates decline… the price of bonds rises, as they become more attractive compared to interest rates and borrowing costs are lower. 

These interest payments on a bond are more attractive when the risk-free rate of return declines. 

Investors then demand higher returns as the risk-free rate of return rises. And that leaves the bond universe ripe for the picking.

Unlike the stock market, where dozens of analysts cover the biggest companies (for example, Amazon had 46 analysts following the stock in November 2022) – and even many small-cap companies have a bevy of eagle-eyed followers – the bond market flies relatively under the radar.

In fact, many brokers don’t even like to sell bonds because it’s more work and there’s much less volume. They may even recommend not buying high-yield bonds because they aren’t common investments.

That means distressed debt is a surprisingly well-kept secret – and over the next few issues, we’ll show you the best ways to play them.

As we wrote in our previous issue, we have assembled a world-class distressed investing team here at Porter & Co. – headed by none other than Martin Fridson, the Dean of High Yield Debt.

This group has decades of experience finding the best opportunities in distressed debt… starting with distressed bonds.

We’ll talk more about how Marty’s team finds these incredible investments as we go. 

To get you ready, we’ll send you an in-depth refresher on how bonds work... why they’re often preferable to stocks... and how and where to buy them…

And remember, if you have any questions, you can drop us a line at AskPorter@PortersWarning.com

We of course can’t reply with individualized investment advice, but we’ll certainly tackle any and all recurring questions as we go. We’d love to hear from you!

Sincerely,

Porter & Co. 

ISSUE I

POVERTY IS A CHOICE

ISSUE II

THE WEALTH SECRET

ISSUE III

A PERFECT WINDOW

ISSUE IV

EX-WIFE v GIRLFRIEND

ISSUE V

DOLLARS FOR CENTS

ISSUE VI

A DRUG STORY

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