| Editor's note: Over the next two days here at Empire Financial Daily, we're sharing insights from our colleague Mike DiBiase over at our corporate affiliate Stansberry Research... Mike is the editor of Stansberry Research's corporate bond newsletter, Stansberry's Credit Opportunities. Before joining Stansberry, Mike had nearly two decades of experience in the world of finance and accounting, most recently serving as VP of Finance and Planning for a large, publicly traded software company. He's a former CPA and Big Four auditor and holds bachelor's and master's degrees in Accounting. In today's essay, Mike explains that the government won't protect regular investors... and how that could lead folks to make costly mistakes.
The Government Doesn't Have Your Back as an InvestorBy Mike DiBiase  With just one mistake, Dennis Buchholtz lost a quarter of his life savings...
Today, I want to share Dennis' unfortunate story with you. That's because many honest, hardworking folks just like Dennis are about to make the exact same mistake again right now. And I don't want you to be one of them... For more than 30 years, Dennis worked as a diemaker in the auto industry. He spent countless days and weeks turning sheet metal into fenders, roofs, and hoods. Finally, in 2005, Dennis retired to spend more time with his wife. During his career, he managed to save about $400,000, and like everyone, he wanted to find a safe way to earn income in retirement... After spending decades in the industry, Dennis believed the biggest automakers would always survive. So he put about $100,000 of his savings into a bond from the largest automaker at the time – General Motors (GM). Every year, the retired couple received around $7,000 in interest from the bond. They used the income to pay their property taxes and utility bills, as well as for groceries. At the time, after more than a century in business, GM was one of the most important U.S. industrial companies. On the surface, it seemed like a safe investment to Dennis. But in reality, it was a highly speculative bet on a company with a massive debt load that it could never repay. I'm certain that Dennis didn't spend a single minute studying GM's financial statements before making his big bond purchase. If he had, he might've wondered how the company planned to pay back $455 billion in liabilities when it stopped making profits in 2005. At the time, it was easy for average investors to make mistakes like this... Stocks were rising, and banks were lending, just like today. And that's simply not the kind of deep analysis that most investors do when times are good and credit is flowing. I'm also certain that Dennis wasn't a Stansberry Research subscriber... You see, our founder Porter Stansberry first started warning folks about GM's dangerous financial situation in the Stansberry Digest e-letter in January 2007. At the time, no one thought GM would go bankrupt – that is, except for Porter. In February 2007, he warned subscribers that "GM will be bankrupt within three years – or perhaps sooner if the economy slows." Porter noted that GM's total debt had doubled over the previous 10 years as its market share and profits plummeted. Said another way, for roughly a decade, the company had been burning the family furniture just to keep the furnace running. Of course, we now know that Porter was exactly right... GM declared bankruptcy in June 2009, a little more than two years after publishing that warning. Stockholders were completely wiped out. And investors who owned the $27 billion worth of GM's "safe" unsecured bonds – including Dennis – only recovered around $0.10 on the dollar of their initial investments. The massive loss wrecked Dennis' grand retirement plans. If Dennis had read Porter's work, he could've avoided nearly all of his losses and sold his GM bonds long before they crashed. But investors like Dennis believed GM was too big and too important... that it could never go bankrupt. They believed that even if the company ran into trouble, Uncle Sam would step in and bail them out. They were partially right... The Big Three automakers – GM, Ford Motor (F), and Chrysler – were protected by lawmakers in Washington, D.C. Congress would never let the automakers shut down operations, costing thousands of jobs for everyday Americans. But here's the important point that most investors missed... While the government made sure GM survived, it didn't stop the company from going bankrupt first. Sadly, inexperienced investors like Dennis make this mistake all the time... Many folks believe the government will protect regular investors with bailouts the same way it protects the employees and pensioners of vital businesses like the Big Three automakers. But the truth is... the government doesn't have your back as an investor. And yet, more than a decade after GM went belly-up, many investors still haven't learned this lesson... They still believe the government will step in to save investors of big, important businesses. And today, many people are about to make the mistakes that Dennis made back in 2005. The airline industry is just one example... The three major airlines – Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL) – owe a combined $124 billion in debt. That's up 75% from $71 billion before the pandemic. Folks aren't flying nearly as much because of the COVID-19 pandemic... airline traffic plummeted last year and still hasn't recovered. With little revenue coming in, these companies borrowed against every asset they own just to pay the bills. Just like GM in the past, they've been burning the family furniture to keep the furnace running. But investors don't seem to care. They're once again turning a blind eye and ignoring risk... Coincidentally, these three airlines have an average market cap of roughly $20 billion, which is around the same valuation as GM at the end of 2005, when Dennis invested in its bond... And debt investors have also piled into the airlines' risky bonds, which currently yield 2% to 5%, on average – even less than Dennis' GM bond back in 2005. This is a recipe for disaster. This reach for yield while ignoring risk is everywhere. The stock market is near an all-time high. And the bonds of the least-creditworthy companies yield just 4% today, on average. But despite the calm in the markets today, the U.S. economy and most businesses are in serious trouble... U.S. corporate debt has never been more burdensome than it is right now... One out of every four U.S. companies can't afford their debt. That's an alarming statistic... The truth is, many companies – like airlines – have only been paying their bills during this pandemic by borrowing more money and kicking the can farther down the road.
But you can't borrow yourself out of a crisis... Eventually, all debt must be repaid or refinanced. And with lower sales and profits for many companies, the prospect of that happening is looking less likely with every passing day. For many companies, the shift to a remote and digital economy means their sales and profits will never recover to pre-pandemic levels. This leads me to a simple conclusion... Much of this enormous, ever-increasing pile of debt will never be repaid. The only way it will be cleared off the books is through bankruptcy. That's why I believe a massive wave of bankruptcies is coming in the months and years ahead... In fact, it's already getting started. The good news is, you don't have to be a victim of this coming credit collapse... If you're prepared, you could make a killing. And you can do it while keeping your money completely out of the stock market, using a much safer type of investment... Distressed corporate bonds. The coming wave of bankruptcies will open the door to tremendous opportunities in bonds... Now, let me be clear... I'm not talking about investing in risky, expensive corporate bonds like the GM bond Dennis bought. I'm talking about safe bonds whose prices have collapsed. You see, when the default rate soars, investors panic and dump their bonds… even safe ones. When they do, bond prices collapse. Bond prices and bond yields move in opposite directions... so the cheaper the bonds get, the more they yield. But here's the important point... not every company with a bond whose price collapses will default... In a crisis, investors even beat down the bond prices of companies that can easily pay off their debt. The key to success with this strategy is knowing which bonds are safe to own. That's where my colleague Bill McGilton and I come in... We do all the work for you. Each month, in our Stansberry's Credit Opportunities newsletter, we tell you which distressed bonds are safe to invest in. Bill is a former corporate lawyer. He pores through the key debt agreements of the companies we're interested in. And I analyze whether we'll get paid all of the interest and principal on our bonds we're legally owed. I've been analyzing financial statements for more than 25 years, including around 20 years as an auditor and corporate finance and accounting executive. In the nearly six years since launching Stansberry's Credit Opportunities in November 2015, we've closed 50 bond positions with an 86% win rate (43 were winners). And the average annualized return of these 50 positions, including our losers, is 18.2%. That's more than two times the 8.1% return you would've earned if you had instead just invested your money in the overall high-yield corporate-bond market in that span – as measured by the iShares iBoxx High Yield Corporate Bond Fund (HYG). We've nearly beaten the 21.1% return of the stock market (S&P 500 Index) over the same holding periods. And we've achieved these results without a credit crisis. As you can see, when you're able to buy safe bonds at bargain-basement prices, you can make equity-like returns... with far less risk than investing in stocks. Some of the world's greatest investors use this strategy. When a crisis unfolds – like what we're expecting soon – they pounce. That's when you can make the biggest returns with this strategy. And you can be just like these world-class investors today by taking advantage of the tremendous opportunities outside of the tumultuous stock market today. I hope you'll join us for this ride... After all, your retirement could depend on it. Learn more here. Regards, Mike DiBiase
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