'The Lowest Point in Our Nation's History'

More than half of America agrees... 'The lowest point in our nation's history'... The subprime-debt bubble continues to grow... What you need to know about the 'Melt Up' now...


You don't need to take our word for it...

A brand-new report from the American Psychological Association ("APA") confirms what we've been saying for weeks. Most Americans agree something is terribly wrong in our country today.

According to the APA's 2017 "Stress in America" survey, nearly two out of three Americans (63%) cite concern about the future of the country as a "somewhat significant" or "very significant" source of stress.

Nearly as many (59%) point to "current social divisiveness" as a one of their biggest worries.

And most notable, the same 59% of Americans polled – which include folks who lived through World War II, the Vietnam War, and 9/11 – believe "this to be the lowest point in our nation's history that they can remember."

As you might expect, folks pointed to a variety of reasons for their concern: the cost of and access to health care, declining trust in government, Social Security benefits, and rising crime. But APA CEO Arthur C. Evans believes this trend is bigger than any single issue.

"We have a picture that says people are concerned," Evans told Bloomberg this morning. "Any one data point may not be so important, but taken together, it starts to paint a picture."

We agree...

But we also believe many of these worries are connected by a common, underlying thread – economic hopelessness. As we explained on Friday...

A huge number of Americans have borrowed more money than they can ever dream of repaying...

They have little of value to show for it. They have no way out. And they have no hope that things will get better.

So what you're seeing on the news is just the tip of the iceberg... Tens of millions of angry Americans increasingly feel they have nothing to lose.

Again, the likely 'solution' to this problem is already clear...

Sooner or later, the government will have no choice but to "do something" to appease these folks. One way or another, they will wipe out these debts... redistributing trillions of dollars from savers to borrowers in the process.

Make no mistake... A "Debt Jubilee" is coming.

Of course, inevitable does not mean imminent...

For now, the subprime-debt bubble continues to grow. And companies continue to find "innovative"' ways to entice the poorest Americans to borrow even more.

For example, subprime lender Elevate Credit (ELVT) announced Monday that it is looking to expand into the credit-card business.

The firm – which considers itself a responsible alternative to predatory payday lenders – lends exclusively to subprime borrowers, whom it refers to as the "New Middle Class." As the company's website explains...

The New Middle Class is a growing group of productive credit-constrained Americans generally described as subprime or non-prime, having credit scores below 700 and little or no savings. This subprime – or non-prime status – prevents access to traditional lending products, meaning this group of approximately 160 million Americans are generally limited to expensive forms of credit or no credit at all and have few options to meet their immediate financial needs.

Elevate has originated nearly $5 billion in loans to nearly 2 million subprime borrowers in the U.S. and the U.K. In its third-quarter earnings report, the company said it now plans to partner with a third-party bank to offer "significantly higher lines" of credit than other subprime cards.

Not to worry, though... Elevate believes it can use new technology – including "machine-learning capabilities" – to mitigate the risks of subprime lending.

We wish them luck. It's a noble goal, but history suggests this won't end well. When the credit cycle rolls over, we suspect it'll quickly realize why lending large amounts of money to folks with bad credit and no savings is a really bad idea.

Speaking of bad ideas, a familiar name is also making news this week...

Longtime readers should remember "deep" subprime auto lender Santander Consumer USA (SC).

Porter and his team recommended shorting the troubled firm way back in the September 2015 issue of Stansberry's Investment Advisory. He then shared this recommendation with all Digest readers just a couple months later. And subscribers who took their advice locked in gains of nearly 50% in early 2016.

At that time, Santander appeared to be on the verge of a "death spiral," as the credit markets tightened and liquidity dried up. But that didn't happen...

The firm was saved by the big rebound in the credit markets last year following the spread of negative-interest rate policies. And shares have roughly doubled from their lows over the past year and a half.

Naturally, you'd assume the company had learned a lesson from its near-crisis last year. Surely, it's pulling back from subprime lending today. Right?

Not exactly... As industry publication American Banker reported on Friday...

After several months of playing it cool in the red-hot subprime auto market, Santander Consumer USA Holdings is getting ready to once again boost production.

During a conference call Friday to discuss quarterly earnings, Santander Consumer executives said they plan once again to rev up lending to auto borrowers with blemished credit, emphasizing that they feel encouraged by positive signs in the macroeconomy, such as low unemployment and strong overall growth...

"As we think about the market going forward, I think our outlook is less negative than it was earlier this year," CEO Scott Powell said in an interview prior to the call.

Executives at two of the country's biggest banks apparently disagree...

During their third-quarter earnings reports last month, JPMorgan Chase (JPM) and Citigroup (C) each noted they had significantly increased consumer-loan loss reserves for the first time in years. As Bloomberg reported at the time...

Both lenders set aside money in the third quarter because they expected write-offs for credit-card lending to climb in periods ahead, with Citigroup saying the increase is coming faster than it had anticipated.

"We're at an inflection point in credit," Charles Peabody, a banking analyst at Compass Point Research & Trading, said in an interview with Bloomberg Television. "You're seeing in this quarter very aggressive reserve additions in the card portfolio for future losses, so the industry knows it's coming."

Slowly, but surely, the credit cycle is rolling over...

It is simply a matter of time before the market wakes up to these risks... and the "Melt Up" turns into a meltdown.

For now, we remain cautiously bullish... History suggests the long bull market has further – potentially much further – to run.

But if you're going to stay invested in the Melt Up, you must manage your risk... And you must be prepared to get out at the first signs of trouble.

This why Steve Sjuggerud is hosting a special Q&A session tomorrow, November 2, at 2 p.m. Eastern time. Steve will share a critical update to his Melt Up thesis – including his latest prediction for when the rally will end, and the Melt Down will begin – and answer all of your most important questions.

Click here to learn more and submit your questions in advance.

 

Editor's note: Today, we're featuring the latest installment of our "Chart of the Moment," a weekly feature from our colleagues C. Scott Garliss, Greg Diamond, and John Gillin of the Stansberry NewsWire team. In the Chart of the Moment, they share the most important idea, trend, or opportunity they're following each week. We hope you enjoy it... And please let us know what you think at feedback@stansberryresearch.com.


Chart of the Moment

This week's chart compares the iShares North American Tech-Software Fund (IGV) versus the U.S. Dollar Index (DXY) over the last year.

The IGV tracks the moves of the North American S&P Technology Software Index. The largest weightings of this exchange-traded fund ("ETF") include Adobe Systems (ADBE) at 9.1%, Microsoft (MSFT) at 9.08%, Salesforce.com (CRM) at 8.4%, and Oracle (ORCL) at 7.9%, among others. Moves in the dollar are important to these companies as they all have exposure to overseas sales – this accounts for 42% of ADBE's revenues, 49.7% for MSFT, 25.8% for CRM, and 52.9% for ORCL.

As you can see below, when the dollar was stronger, the valuation of the software ETF was lower, likely corresponding to depressed sales overseas. But as the dollar has weakened, the valuation of the ETF has increased, reflecting stronger overseas sales for these companies. For example, ORCL's overseas sales jumped from 40.2% of its revenues in the fourth quarter of 2017 to 43.6% in the first quarter of 2018 (which ended August 31). ADBE has seen domestic sales as a percentage of revenues slip from 58.2% in the third quarter of 2016 to 57.7% in the third quarter of 2017.

The president is expected to appoint a new head of the Federal Reserve who is more hawkish (favoring a stronger dollar) than current Chair Janet Yellen. At the same time, domestic economic growth is on the rise. The last two gross domestic product reports have shown 3.1% and 3% growth, respectively. And the government is expected to generate new economic stimulus via tax reform.

Meanwhile, countries around the world are continuing policies that weaken their currencies. The European Central Bank has prolonged its quantitative easing measures. The Bank of Japan has said it will remain accommodative for the foreseeable future.

This all signals a stronger dollar going forward. And that could result in a slowdown for overseas software sales and a consequent pullback in the related stocks.

– C. Scott Garliss, Stansberry NewsWire


Editor's note: Stansberry NewsWire is your source for real-time, actionable financial news and analysis. You'll receive up-to-the-minute news and market research, expert commentary, and trading ideas typically reserved for Wall Street professionals and the wealthiest individual investors... absolutely FREE. Click here to sign up now.

 

New 52-week highs (as of 10/31/17): Apple (AAPL), Allianz (AZSEY), Alibaba (BABA), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), iShares MSCI Japan Fund (EWJ), iShares MSCI South Korea Capped Fund (EWY), Facebook (FB), Fairfax Financial (FRFHF), Grubhub (GRUB), Intel (INTC), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Home Construction Fund (ITB), McDonald's (MCD), Nvidia (NVDA), NVR (NVR), ProShares Ultra Technology Fund (ROM), Seabridge Gold (SA), Sabine Royalty Trust (SBR), iShares MSCI India Small-Cap Fund (SMIN), short position in GGP (GGP), and short position in the Interpublic Group of Companies (IPG).

In today's mailbag, a reader agrees with our thoughts on cryptocurrencies. What do you think? Let us know at feedback@stansberryresearch.com.

"I always remember advice given by someone in your group (I think) regarding how you will know when gold is in a bubble: 'People who you have never heard talk about gold before will be talking about gold.' This is true. I was in my early teens when gold hit $800 or so for the first time and I remember exactly that at the top.

"Crypto currencies may be in a bubble and they may be big news in financial magazines and circles, but I have never heard anyone I know mention Bitcoin yet, let alone any other cryptocurrencies. Who knows how far they will go." – Paid-up subscriber Steven M.

Brill comment: Thanks for the note, Steven... That was exactly our point. When bitcoin is making headlines in our local paper... when friends and family start calling us for advice on which "cryptos" to buy... and when we start hearing waiters and cab drivers bragging about how much money they're making trading digital currencies, we'll know for certain the top is near. Until then, these assets could go higher still.

Regards,

Justin Brill
Baltimore, Maryland
November 1, 2017