Inside today’s Daily Journal…

Over many years I’ve learned to listen to gold.

Gold tends to rally after credit expands rapidly. It is a harbinger of the growing risk of credit defaults. Gold is where liquidity flees when counterparty risk grows. People often mistake gold for an inflation hedge – and over time, yes, it will protect you from currency debasement. But it more accurately tracks the end of major credit cycles, not the beginning.

Gold soared last year because counterparty credit risk has grown massively – as I’ll show you in the data below.

Likewise, many people believe that Bitcoin is a hedge against currency debasement. And, again, over the long term that’s certainly true. But, unlike gold, Bitcoin isn’t a barometer of credit / counterparty risk. And it doesn’t track growth to monetary aggregates (like M2 money supply) either. Instead Bitcoin is an extremely sensitive barometer of available liquidity in the market.

Bank reserves are the cash that commercial banks hold on deposit at the Federal Reserve. They represent readily available liquidity in the banking system. When reserves grow (often from Federal Reserve actions like bond purchases), more cash flows into the economy. When reserves shrink, liquidity tightens.

The price of Bitcoin tends to track these changes very closely. (This data is released every Thursday at 4:30 pm.) Bitcoin has fallen recently because liquidity, as measured by bank reserves, has declined.

When I see gold rallying and Bitcoin declining, that indicates the beginning of a credit default cycle.

Counterparty risk up and liquidity down is a tough environment for stocks.

I wanted a proprietary way to track the worsening credit conditions, so I’ve built a custom index that’s made up of 10 leading U.S. consumer credit businesses:

To show the credit cycle that’s in progress, I set the Porter & Co. Consumer Credit Index (“PCCC”) to 100 at the bottom of the last credit cycle (fall 2022). Since then the index has rallied, peaking at 251 in mid-September 2025. Today, the index is in the midst of a sharp drawdown, down 26% from that 251 peak. Subprime auto (Credit Acceptance and CarMax) and “buy now, pay later” lenders (Affirm and Upstart) have been notable laggards.

The PCCC began to decline last September, a move that coincided with CarMax announcing a large increase of $142 million to its loan-loss provisions.

These declines accelerated last month when the New York Federal Reserve released the Q4 Household Debt And Credit Report – revealing that the aggregate consumer delinquency rate was 4.8%, up from 3.6% a year earlier. The increase in the delinquency rate is significant because it’s the highest level since 2017 and because it correlates with the resumption of student-loan collection efforts.

I think these rising default rates are meaningful. They indicate the beginning of the first credit default cycle we’ve seen in years and the first since the resumption of student-loan collection efforts. Currently, corporate earnings and corporate credit default rates remain resilient, but history shows consumer credit tends to lead the overall default rates across the economy.

After years of easy credit and record household borrowing, tighter lending standards are forcing consumers to curtail big-ticket purchases, lean harder on credit cards, and tap into 401(k) accounts – as we reported on in yesterday’s Daily Journal. We’ve built this index to keep a close eye on how these trends unfold.

The PCCC Index’s decline, so far, does not mean a full-blown credit default cycle will happen tomorrow. Unemployment is not yet spiking and corporate America is still posting solid numbers. But the combination of ballooning loan-loss provisions at consumer lenders, the New York Fed’s 4.8% aggregate consumer delinquency rate, and the index’s nearly 30% pullback from its September peak strongly suggests the opening chapters of a consumer-led default cycle are being written.

That’s good news, if, like me, you’re a connoisseur of distressed credit. We might be entering a period where our Distressed Investing editor Marty Fridson makes all of us a lot of money by sifting between “the quick and the dead.”

But, overall, I would urge extreme caution right now.

I believe the risk of a 1970s-like stagflation cycle is growing, where we could see both soaring inflation and interest rates and rising unemployment. That’s about the worst possible outcome for the stock market because it implies weaker earnings and a lower earnings multiple.

Nobody sees these risks right now, but they seem very obvious to me. If that begins to unfold, stocks will fall 50%+ over the next 36 months.

We’re not there yet. I’ve warned that the 5% level on U.S. 10-year Treasuries is the “everyone out of the pool” level. And to get there, we’d have to see rising inflation. That shouldn’t happen with rising consumer defaults and a weakening job market, but it could happen now because of the war in Iran, rising oil prices, and the growing risk of debt monetization.

We’ll keep you posted.

Tell me what you think of the index and of today’s Daily Journal: [email protected]

Good investing,

Porter Stansberry
Stevenson, Maryland

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1. A firehose of funds into U.S. ETFs. The record-shattering $380 billion in U.S.-listed ETF inflows year to date – an 80% surge over 2025 and a 700% boom from 2019 – signals a massive structural migration toward passive U.S. investment vehicles. With $9 billion moving into U.S. funds daily, a 52% year-over-year increase, this financial firehose has sparked a heated debate: it’s either a powerful “melt-up” for equities or a “herd mania” fleeing weakening global currencies.

2. More private credit cockroaches. The world’s largest asset manager became the latest victim of a total wipeout on a private credit loan. BlackRock extended $25 million in credit to Amazon re-seller Infinite Commerce Holdings – valuing the loan at 100 cents on the dollar just three months ago. It now expects to take a total loss on the investment. While a pebble in BlackRock’s total book of business, it’s another worrying sign that valuations across the multi-trillion-dollar private credit market may be systematically mispriced.

3. The $130 billion tariff giveback. A federal judge has ordered the U.S. government to refund more than $130 billion in global tariffs. Following a decision by the U.S. Supreme Court last month, the ruling impacts over 2,000 lawsuits from major corporations like Costco Wholesale (COST) and FedEx (FDX) seeking to claw back duties paid under contested trade policies. Investors should watch for a cash infusion into the balance sheets of heavily affected retail and logistics giants.

In the February Porter & Co. Roundtable discussion, the editors debated whether AI would wipe out software subscription businesses, such as Salesforce (CRM), down 13% since Complete Investor’s October recommendation. Meanwhile, the sector benchmark index (EMCLOUD) has seen a 9% bump this week, leading some to argue that reports of the death of software by AI have been greatly exaggerated.

Which leads up to today’s Daily Journal poll.

In Porter’s Journal essay “Yesterday Was A Warning” he commented on Tuesday’s market decline, noting that it was only a warning from John the Baptist and that Christ is yet to come. Readers shared their thoughts…

David A. writes:

Tim P. Writes:

Matt V. writes:

Jeff D. writes:

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