On August 15, 1971, Richard Nixon did the unthinkable.

He interrupted “Bonanza.”

The wildly popular TV show, which followed the adventures of the Cartwright family on the Ponderosa ranch, aired every Sunday during primetime. Nixon knew that interrupting one of America’s favorite shows would be unpopular. But his advisors told him he had to make his announcement before the markets opened on Monday.

And so, on that Sunday evening, Americans turned on their television sets and heard the news – the gold standard was no more.

Under the Bretton Woods system, the big economies all pegged their currencies to the U.S. dollar, which in turn could be converted to gold at a rate of $35 per ounce. And when other countries saw the growing U.S. budget deficits, they started demanding gold for their dollars.

The demand for conversions got so bad that President Richard Nixon blew up the system. He ended “gold convertibility” that evening in 1971. With gold no longer the anchor of the financial system, it opened the door to a massive expansion of the money supply.

Making things worse, OPEC launched an oil embargo in 1973 to punish the U.S. for supporting Israel in the Yom Kippur War. The price of gas nearly quadrupled between October 1973 and January 1974. The consumer price index (“CPI”) climbed to as high as 12% in 1974.

Arthur Burns, the Fed chair at the time, dismissed higher costs as transitory. (Sound familiar?) But he was wrong… and was forced to raise interest rates – culminating in a 13% rate in 1974. Higher rates ultimately choked off inflation but led to a 16-month recession…

The government’s answer, of course, was to stimulate its way out of the recession. The money supply exploded higher in 1976 and 1977.

Only one man, economist Milton Friedman, predicted what would happen next…

Inflation began to soar again, shooting up from 5% at the end of 1976 to 12% by October 1979. It was showing no signs of slowing.

By late 1979, Burns was out. Paul Volcker was in as Fed Chair.

With inflation at 15% in 1980, Volcker raised interest rates to nearly 20%. That meant more pain for already hurting Americans.

But ultimately, Volcker’s hard medicine worked… Inflation sank to around 2.5% by the middle of 1983. Volcker succeeded where other Fed chairs had failed… because he understood that there was no easy, painless way to cure inflation.

And that brings us to today…

Brace for Landing

Just like in the mid-1970s, everyone thinks inflation is tamed. And yet, once again, government spending is out of control – and the money supply is on the rise.

We’re not in the situation Volcker found himself in… yet. But the Fed’s actions have made it an inevitability.

As I’ll explain today, a recession is very near. I expect the government will make the same mistake it did in the mid-1970s and try to “fix” the economy with more monetary stimulus.

That will only make things worse. The seeds are in place today for another 1970s-style “twin peaks” in inflation. If you’re surprised by that, I don’t blame you. Because almost nobody is saying it.

Most economists and the mainstream financial media seem confident that we’ll achieve a “soft landing.” This is the term used to describe when the Fed is able to lower inflation and interest rates without the economy crashing and going into a recession.

But soft landings are incredibly rare. The only time the Fed was able to do it was in 1994. Every other time it failed.

Despite the Fed’s dismal track record for achieving a soft landing, this is exactly what everyone is expecting.

The number of news articles mentioning “soft landing” has never been higher. We saw the same spike before the recession in 2001 and before the great financial crisis began in 2008.

Here’s the problem… If you buy into this soft-landing or no-landing narrative, you’re saying you no longer believe in economic cycles.

Here’s a chart of the annual change in U.S. real gross domestic product (“GDP”) since 1950. GDP is a measure of the value of all goods and services produced by a country. It’s what economists use to measure the health of the economy. Everyone wants to see GDP growing. When it shrinks, economists define that as a recession (shown in the gray shaded areas in the chart).

Do you see many soft landings in that chart?

I understand why many believe the soft-landing narrative.

First, rates are coming down. The Fed gave the markets an early Christmas present in September when it started cutting the one rate it directly controls, the federal-funds rate.

This is the interest rate on overnight loans that banks charge one another. This rate normally affects all other interest rates in the economy, from mortgages to credit cards to business loans.

In September, the Fed cut this rate by 50 basis points. Then, just days after the election, the Fed cut it again by 25 basis points. And it cut by another 25 basis points today to a current target range of 4.25% to 4.5%. The Fed held rates steady during the latest policy meeting in late January. But Fed economists expect they’ll cut that rate further to a range of 3.1% to 3.6% by the end of 2026.

And you might be interested to know that this also tracks with the experience of the 1970s.

Back then, inflation spiked at the beginning of the decade, just like today. The Fed aggressively raised interest rates, raising its benchmark above the rate of inflation.

That brought inflation down… and everyone thought it was beat.

But the Fed’s massive stimulus in response to the recession at the time caused the money supply to jump nearly 20% between the beginning of 1975 and the middle of 1976.

Like Milton Friedman warned, it caused another bout of inflation worse than the first. It didn’t come down until Paul Volcker’s austere policies of higher interest rates and a contraction of the money supply finally slayed it for good.

Today, we’re somewhere around 1976 in the cycle. Inflation appears to be under control. It has fallen from its peak of 9% in June 2022 to 2.7% today. But the Fed is making the same mistake it did back in the 1970s. It’s easing monetary policy before inflation is truly licked.

And the evidence is there for anybody willing to look.

Reasons to Worry

Indicators are flashing major warning signs.

I’m not talking about one or two of them, either. I’m talking about every single recession indicator.

Here are just a few of the more-known ones that are sounding alarms…

  1. Inverted yield curves

  2. The Sahm Rule

  3. The Conference Board Leading Economic Index

  4. The New York Fed’s recession probability model

  5. The Institute for Supply Management (“ISM”) Manufacturing Index

I recently did a deep dive into each indicator for members of my Stansberry’s Credit Opportunities service. But suffice it to say that they all say the same thing: We’re headed for a recession.

In recessions, corporate earnings fall by 25% on average. The stock market typically falls even more… by 37% on average over the past five recessions.

I think we’ll see a recession this year. The Fed’s response to the recession will be to ease, just like it did in the mid-1970s. And that will lead to inflation surging higher again, most likely, in 2026.

I don’t say all this to worry you, but to prepare you. You see, while a recession and market crash will be bad news for most investors… it won’t be for those who know where to look.

Opportunity in Crisis

At Stansberry’s Credit Opportunities, we specialize in finding low-risk bonds with high potential returns. And when inflation spikes, when rates rise, and when markets begin to panic… we go shopping.

In scenarios like I described above, the high-yield spread often soars to more than 1,000 basis points. The high-yield credit spread is the difference between the average yield of high-yield corporate bonds and similar-duration “risk free” U.S. Treasury bonds.

In that situation, corporate bonds trade for pennies on the dollar and offer stock-like returns.

But, please, don’t take my word for it…

Instead, all I ask is you take a few minutes to hear what one of my subscribers has to say about his experience with our service. As you’ll see, he’s an everyday guy who was able to achieve financial independence by following our strategy of distressed bond investing.

If anything I’ve said today rings true, then I think it would be worth your time to hear him out.

You can listen to his message right here.

Regards,

Mike DiBiase
Editor, Stansberry’s Credit Opportunities