Issue #42, Volume #2
And Don’t Be Surprised As Market Conditions Will Get A Lot Worse
This is Porter’s Daily Journal, a free e-letter from Porter & Co. that provides unfiltered insights on markets, the economy, and life to help readers become better investors. It includes weekday editions and two weekend editions… and is free to all subscribers.
| These moments define you as an investor… We are in the early stages of a massive financial reordering… U.S. government deficit spending is completely out of control… The Fed has become the overwhelmingly largest holder of U.S. Treasury obligations… Retail investors still have a huge appetite for stocks… |
For the last week we’ve seen stocks trading with the kind of volatility that you only see once in a decade.
Last week, I told you that while most people hate to see market action like this, these are the moments I live for.
And these situations are what will define you as an investor. If you can learn to ignore the volatility and the fear you hear all around you and simply focus on buying great businesses when they’re trading at good prices, you’ll be fine.
There are two caveats to my advice:
#1. Don’t buy anything you might have to sell in the next five years (minimum) or, even better, for the next decade.
#2. Make sure you only buy truly great businesses that you understand and that you’re virtually certain will continue to produce rising sales and earnings for the next 20 years.
Everyone’s circle of competency will be different, but, as an example, these are companies we’ve covered over the last three years in The Big Secret On Wall Street. I’d bet most of you can easily understand their products and services.
- BWX Technologies (BWXT; ROE: 28%) – market leader in small nuclear reactors (the “spice” must flow)
- NVR (NVR; ROE: 40%) – ultra-high-quality homebuilder that consistently buys back stock
- Franco-Nevada (FNV; ROE: 10%) – highest-quality gold and copper “streamer” and excellent inflation hedge
- Philip Morris International (PM) and British American Tobacco (BTI; ROE: 20%+) – leading purveyors of “safer” smoking devices and nicotine pouches, some of the world’s oldest and most valuable brands
- The Hershey Company (HSY; ROE: 50%) – one of America’s oldest and most beloved brands and one of the world’s all-time great businesses
- Uber (UBER; ROE: 56%) – leading provider of ride-sharing services and one of the world’s most valuable brands
And, stick with us here. In our Journal, I’ll continue to share extraordinary opportunities, like I did 10 days ago when I pointed out that Rémy Cointreau (“A Very Superior Old Business”) was trading well below the value of its inventory alone!
Finally, I highly recommend that you organize your portfolio in a structure that’s similar to Porter’s Permanent Portfolio. This structure is designed to produce very consistent results because the four recommended asset classes are non-correlated. The strategy works: despite the markets’ radical volatility this year, our Permanent Portfolio is up a hum-drum, nothing-to-see-here 3% so far this year. Plus, having the 25% in cash will come in handy when, at some point, there are great opportunities in distressed debt.
We are in the early stages of a massive financial reordering that will end the U.S. dollar’s status as the world’s only reserve currency.
We are entering a period of monetary plurality that will see the dollar, the euro, gold, the Chinese yuan, and Bitcoin all compete as the monetary reserve currency.
This transition will be extremely painful for America, which for the last 50+ years has enjoyed the “exorbitant” privilege of being able to print the reserve currency. That’s enabled us to run huge deficits and to finance those deficits very cheaply. I’ve been writing about the inevitability of the changes (what I call the End of America) since 2011, when the U.S. began to monetize its Treasury obligations. I knew, sooner or later, that would lead our foreign creditors to abandon the dollar and to sell our bonds.
That’s what’s happening. And this chart should make it clear to you why:
As you can see, we’ve monetized so much of our Treasury debt that the Federal Reserve has become the overwhelmingly largest holder of U.S. Treasury obligations. That’s what’s allowed our interest rates to remain so low. And what’s kept inflation low was our foreign trading partners continuing to provide manufactured goods, raw materials, and even services for extremely low prices.
President Donald Trump’s trade war means this global order – our deficit spending and our large trade deficits – can no longer be financed only with the currency we print.
This is a massive change, and it will lead to a severe recession, much higher inflation, and a huge increase in U.S. interest rates.
What’s driving these problems isn’t merely Trump’s trade war. It’s also the fact that our government’s deficit spending and budget are completely out of control. Don’t believe the DOGE (Elon Musk’s Department Of Government Efficiency) hype: not only is spending not decreasing, it’s accelerating.
Federal spending for the first half of FY 2025 totals $3.56 trillion, a 10% increase over the $3.25 trillion spent in the same period last year. And, you guessed it, that means our deficits and debts are growing faster than ever. So far this year, the Feds have racked up a $1.3 trillion deficit, up $245 billion (22%) from last year’s $1.07 trillion deficit for the same period. And the scary part is that we’re seeing the beginning of a “doom loop,” where inflation from our deficit spending is pushing up interest costs (monthly debt servicing is averaging $100 billion, up from $80 billion last year), which in turn is driving more deficit spending.
The result? The U.S. bond market is selling off at a scale I’ve never seen before.
Normally, when global market volatility strikes, investors rush into U.S. Treasury bonds. Now, investors (most likely foreign central banks) are dumping bonds, producing declines that are virtually unprecedented.
As yields move higher, there are important consequences.
Investors who own older bonds will see massive capital losses, as higher yields means a lower face value for long-duration bonds.
That’s a huge threat to financial institutions, most notably Bank of America (BAC).
Bank of America invested over $600 billion into long-duration, low-yield mortgages (45%) and Treasury bonds (52%) at the top of the bond market in the summer of 2020. The amortized cost of this portfolio (at the end of 2024) is $592 billion and, again, as of the end of 2024, the current value of these bonds was $489 billion. The average yield, as of the end of last year, on this portfolio is only 2%.
As the 10-year yield moves higher, the value of Bank of America’s enormous bond portfolio will continue to decline. Worse, as inflation rises and investors seek out higher-yielding accounts to provide protection from inflation, Bank of America will see deposits leaving the bank. This combination of declining deposits and massive losses in its bond holdings could easily spark a run on one of America’s leading financial institutions.
So… make some popcorn. The last 50 years has seen the creation of an immense financial bubble in government bonds. That bubble is now being popped. And there’s going to be a lot of fireworks.
I expect the full unwind of this situation will take a decade, at least. And I have no idea when the worst of the collapse will occur, but I know what it will look like: government bonds yielding 10%+, major financial institutions collapsing (Bank of America won’t survive), and high-quality stocks trading for less than 10x earnings.
We are a long, long way from there. So, like I said… make some popcorn. The movie is just getting started.
But… don’t forget to be an investor. On the days when the CBOE Volatility Index (VIX) is trading over 50 (!), the bond market is crashing, and there are rumors of a bank failing, etc., don’t be afraid to step up and buy great businesses.
They will survive. And so will you!
Three Things To Know Before We Go…
1. Retail traders show no fear. The recent market turbulence hasn’t lessened the speculative appetite among retail investors. During Wednesday’s buying frenzy that sent the Nasdaq up 12%, retail investors bought $3.3 billion of stocks in the first half of the trading day alone, the third largest amount ever. And they’re piling into the most speculative corners of the market, like the 3x leveraged Nasdaq ETF, which received a record $2.5 billion in net inflows this week. We’ll file this under “things you don’t see at the bottom.”
2. Inflation unexpectedly slowed in March. On Thursday, the Bureau of Labor Statistics reported the consumer price index (“CPI”) rose at a 2.4% annual rate in March. This was well below Wall Street expectations of a 2.6% increase, with prices actually falling 0.1% month over month – the first monthly decline since May 2020. Core CPI – which excludes food and energy prices – slowed to a lower-than-expected 2.8%, its first sub-3% reading in four years. Wholesale prices echoed the slowdown in the CPI, with data this morning showing that the producer price index (“PPI”) fell 0.4% month over month in March to a 2.7% annual rate. While this inflation slowdown is welcome news for the Federal Reserve, it could be short-lived with tariffs taking effect this month.
3. Gold soars as Treasuries get dumped. Despite cooling inflation, Treasury yields are surging. In 2022, with inflation running at 9%, the 10-year Treasury yield peaked at 4.23% – but today, with inflation below 3%, the same yield just touched 4.57%. That’s the bond market signaling anxiety – about Trump’s tariff policies, the government’s deteriorating fiscal outlook, and the Fed’s next move. Markets are still pricing in a 68% chance of a rate cut in June, but if that happens, yields may rise even more. Since the Fed pivoted in September, bonds have been on a steady decline and gold has emerged as the big winner… up 38% in the past year.
How Trump’s Mar-A-Lago Accord Will Send These Gold Stocks Up 10x
Among Trump’s biggest moves, none will be as important to the American economy or the gold market than the revaluation of American gold holdings.
Click here to read how a “Mar-A-Lago Accord” could reshape global monetary action for decades to come – and find out which gold securities are primed to benefit.
And one more thing… Poll results
On Wednesday, on a day when the S&P 500 swung from down 12% to up 10% following President Donald Trump imposing and then pausing tariffs on global trading partners, we asked readers how long the market turmoil resulting from Trump’s policies would last… More than half (55%) of survey takers selected “more than a month,” while 36% chose “more than a year,” while just 9% went with “more than two years.”
Let me know what you think – good, bad, or indifferent: [email protected]
Enjoy the Masters this weekend.
Good investing,
Porter Stansberry
Stevenson, MD
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