Inside today’s Daily Journal…

The DEFCON system was created in the 1950s, during the Cold War.

It is a five-level scale that defines how ready our armed forces must be for a nuclear conflict. It’s based on an inverse scale (1-5) with the lowest number (I) indicating that nuclear war is imminent and the highest number (V) indicating no current risk.

For today’s purposes, I’m using the same scale to define the risk we face of a major financial markets (equities and bonds) collapse. And there’s a reason.

The U.S. military went to Defcon III in October 1973 during the Yom Kippur War. That’s when OPEC embargoed oil, prices quadrupled, and the original stagflation nightmare began. The first oil shock removed roughly 7% of global oil supply. Crude prices rose 4x in a matter of months. U.S. consumer price inflation went over 10%. And the S&P 500 fell almost 50%.

If the Strait of Hormuz remains closed, the damage to the world’s economy will be much worse this time. Today, roughly 20% of the world’s daily oil consumption – over 20 million barrels a day – moves through the Strait. When that chokepoint is intermittently closed by mines, drone strikes, and tanker attacks, you aren’t talking about a symbolic embargo. You are talking about a corridor that carries nearly three times the share of global supply that was disrupted in 1973 being physically closed to all shipping – including fertilizer.

The difference this time is that the entire global economy is built on just‑in‑time supply chains and massive financial leverage.

In the 1970s, we had inefficient cars and long lines at gas stations – but industrial inventories and domestic production gave the system a little cushion. Today, utilities, shippers, and refiners run much leaner. A 10- to 20-day disruption to 20% of seaborne oil flows and a double‑digit percentage of global liquefied natural gas (“LNG”) exports can push electrical prices, diesel, and aviation fuel up 30% to 50% in 90 days.

And that’s not the only problem. Stagflation isn’t merely higher prices. It’s the combination of much higher prices with much weaker economic growth. In Keynesian economics, this outcome isn’t possible. In real life it is the Achilles heel of the global financial system.

In the U.S., credit is collapsing at the same time that government deficits are reaching massive, unsustainable levels. That’s going to starve the economy of credit over the next year. As bad as the coming inflation seems, it’s actually the credit market that’s the real problem.

After a decade of 0% interest rates (which encouraged borrowing), household balance sheets are carrying record nominal loads of credit‑card debt, auto and student loans, and buy‑now‑pay‑later balances.

Delinquency and default rates have risen across the board: credit‑card delinquencies have pushed back through prior‑cycle highs, auto-loan delinquencies are climbing, and subprime borrowers are seeing double‑digit default rates again. We know from Google searches (“mortgage payment help”) that mortgage defaults are going to continue climbing as well.

Then look at private credit – the market that almost everyone still calls “alternative” even though it has grown to be a major portion of the credit market.

We are now dealing with something on the order of $1.7 trillion to $2.0 trillion in private credit globally. That compares with roughly $1.3 trillion in subprime mortgage balances in 2007. In other words, the private‑credit complex today is larger in nominal terms than the entire subprime market that triggered the 2008-09 crisis. And it’s collapsing.

Default rates in private credit have moved up into the high single digits – around 9% on some benchmarks. If refinancing windows stay shut (because of rising defaults and higher rates), and earnings continue to soften, these default rates will peak between 18% and 20%. On a $1.7 trillion to $2.0 trillion base, a 9% default rate is $150 billion to $180 billion of stress; 15% to 18% is $250 billion to $350 billion.

What made 2008 dangerous was not just the size of subprime mortgages. It was the leverage and opacity layered on top. Remember the entire alphabet soup of leverage on leverage: CDOs, SIVs, CDO-squared? Private credit has recreated that environment in a different wrapper: funds borrowing from banks to lend to companies that public markets don’t want to finance, using covenant‑lite documentation and payment-in-kind (“PIK”) options – all structures that encourage risk‑taking.

This corporate loan debacle is unfolding at the same time that commercial real estate faces an existential crisis in office buildings and a huge wave of defaults in multi-family housing.

The stress is now visible in the plumbing. Large banks are marking down their exposures to software‑backed private‑credit loans and are cutting advance rates on those facilities. Big private‑credit vehicles at bulge‑bracket firms and specialist managers are seeing quarterly redemption requests equal to 10% to 15% of their shares outstanding, and they are responding by gating investors (limiting withdrawals) – honoring only 5% to 7% and deferring the rest.

That is exactly how 2007 looked in real time: first you see a few “gated” funds and “temporary” halts of redemptions, then you see forced selling of whatever can be sold, then you see widening default and loss‑given‑default numbers that retroactively validate the marks.

The difference between 2008 and today is where the risk sits. In 2008, the problem was household mortgages and the banking system’s direct exposure to structured mortgage products. Today, we have:

This is not one crack: it’s a shattering of credit in the U.S. economy.

And this is the part that you must understand: the central bank’s ability to reflate these massive credit losses will be severely constrained because this is all happening at the same time that the price of energy – the lifeblood of the economy – is soaring massively higher. That’s why interest rates keep moving higher, despite weak jobs reports and lower GDP numbers.

The Fed can’t lower rates in the face of $100-per-barrel oil.

We have just seen quarterly real GDP drop from an annualized rate in the mid‑4% range down to about 1.4% in a single quarter. Full‑year growth slid from around 2.8% to roughly 2.2%. Survey data from purchasing managers, small‑business owners, and corporate CFOs all point in the same direction: slower hiring plans, more caution on capex, and rising mention of “credit availability” as a constraint.

White-collar unemployment is about to spike from virtually zero to 20% or higher. Middle‑market companies that depended on private credit for growth capital are suddenly facing higher spreads, lower leverage, or outright refusals to refinance. Startups and software firms that rolled five‑year, covenant‑lite loans at 6% to 7% are now staring at refinancing offers in the low‑teens, if they get offers at all. That translates directly into layoffs, hiring freezes, and cancelled projects.

And that’s before considering that artificial intelligence (“AI”) means that virtually every entry-level white collar job in America is now obsolete.

So the macro picture is:

That is not a “soft landing.” It is the opening stage of a 12-to-18-month stagflationary bust: growth grinding down, inflation kept alive by structurally tighter energy and supply conditions, and policymakers trapped between supporting employment and defending the currency and bond market.

What do you do about it? We haven’t seen a real bear market in a long, long time. The COVID crash was just that – a crash, followed by the best 18-month period in equity prices ever. What we’re going to see over the next 12 to 18 months is a grist-mill bear market where every rally gets sold and the indexes grind lower and lower.

You can’t “hide” in fixed income because inflation will push rates much, much higher.

Here’s your playbook.

A simple solution for the next 12 to 18 months could look like this:

If you want to rebalance your portfolio to better guard against this outcome, put roughly a third of your equity exposure into high-quality integrated oil & gas (ExxonMobil: XOM), high‑quality miners (Franco-Nevada: FNV, Agnico Eagle Mines: AEM), and materials (CF Industries: CF). The goal is to own the companies that get paid when oil, gas, and key commodities move structurally higher.

Put a third of your equity exposure into “Lindy” pricing‑power businesses – stocks you probably already own. You want long‑lived, high‑return-on-equity companies (Hershey: HSY and Coca-Cola: KO) with clean balance sheets and the demonstrated ability to raise prices without losing volume. These names won’t be immune to drawdowns, but they can grow nominal earnings through an inflationary slowdown and they will continue to grow dividends, buyback stock, and compound.

And put the last third of your equity exposure into high-quality tech stocks with huge moats (Alphabet: GOOG, Salesforce: CRM, Nvidia: NVDA, Taiwan Semiconductor: TSM). Yes, these names will be volatile and, in a 50% index drawdown scenario they will sell off massively. So try to rotate into these names when that happens to keep your portfolio fairly balanced. You may not see capital gains here for a while, but keep the exposure because these companies will lead the market higher after the storm.

Looking at your allocation in four buckets (stocks, bonds, gold/Bitcoin, and cash), I continue to recommend sticking with a normal allocation, provided you have a five-year time horizon. If you’re retired and you can’t afford a 20%+ drawdown over the next year, then I recommend selling out of “bonds” (P&C insurance stocks in Porter’s Permanent Portfolio) and increasing the cash portion of your fund. Yes, you’ll lose purchasing power by holding cash, but you can hedge that risk with gold and Bitcoin.

Here’s the bad news.

The markets will digest the risks of the war. Credit will fail and be liquidated. If we were capitalists, life would go on. But we don’t live in that world.

The real danger we face is not what happens in the market, but how the government uses this crisis to amass still more power over our lives and our assets.

I can’t handicap that. But I know it is, by far, the biggest risk.

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

Good investing,

Porter Stansberry
Stevenson, Maryland

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1. The economy slowed significantly to end 2025. This morning, the U.S. Bureau of Economic Analysis (“BEA”) reported GDP rose at just a 0.7% annualized rate in Q4 – a downward revision of 0.7 percentage points from its original estimate and a sharp deceleration from the 4.4% growth rate reported in Q3 (the October-November government shutdown depressed this figure by roughly one percentage point). The bigger risk ahead is the oil price shock from the U.S.-Iran conflict hitting already-struggling consumers, with the Federal Reserve now caught between slowing growth and sticky inflation.

2. ​​The market shrugs off Trump’s latest oil announcement. U.S.Treasury Secretary Scott Bessent announced late Thursday that the U.S. will authorize purchases of Russian oil already at sea – roughly 125 million barrels spread across 30 locations globally – through April 11, in a direct attempt to offset the Iran-driven supply shock. Unfortunately, crude oil prices barely budged, and moved back above $95 per barrel this morning. The reason is simple: That total volume of oil represents less than a week’s worth of typical Gulf exports through the Strait of Hormuz. Until the Strait reopens, oil prices are likely to remain high.

3. Home sales remain near 14-year lows. February existing home sales rose 1.7% to 4.09 million annualized, beating consensus and recovering from January’s weather-distorted -8.4% plunge. But the broader picture remains grim: total 2025 home sales were the worst in 14 years, and even with the February bounce, existing sales are running roughly 25% below pre-pandemic norms and 35% off the pandemic peak. Affordability is the best it’s been since early 2022 and it’s still not moving the needle. This isn’t 2008 – household balance sheets and underwriting are fundamentally stronger – but housing is in a transactional depression, and with wartime oil dynamics removing the Fed’s runway to cut, there’s no obvious catalyst to thaw it.

Shares of Alphabet (GOOGL) climbed 32% following our Complete Investor recommendation in early September 2025. The rally coincided with Alphabet’s landmark $32 billion acquisition of cloud cybersecurity firm Wiz – the largest deal in the company’s history. Shares have since fallen from peak levels due to caution around Alphabet’s aggressive 2026 AI capex guidance of around $185 billion – more than double its 2025 spend.

Given the major disruptions to production facilities and to the key oil-transport route of the Strait Of Hormuz, we asked readers where they felt the price of oil would be on April 30. Yesterday, the price was $95 per barrel and before the war in Iran began on February 28, it was around $70 per barrel… It’s clear most people see the price of oil higher for longer, with 80% selecting “more than $90,” and 20% seeing the price falling from here, “under $90” per barrel by April 30.

Von R. writes:

Porter Comment: Iran has no ability to deliver a nuclear weapon to America. And long before Iran could hope to threaten the U.S., Israel would have destroyed the entire country. We are the world’s largest energy producer, by a wide margin. We have zero vested interests in the Persian Gulf or the Middle East. None.

Robert H. writes:

Porter Comment: Our government is a far bigger actual threat to my wealth and my family’s safety than Iran could ever be. It’s sad that it isn’t blindly obvious to you. It’s the government that sent my father to Vietnam – and why I never met him. It’s the government that kidnapped Iran’s president in 1953 and stole their oil, which is why they hate us. It’s the government that takes ~30% of my earnings each year and promises to take 50% of my wealth when I die. It was the government who sued me for $1 million because I dared – in a pure speech case – to expose their corruption in United States Enrichment Corp. From where I sit, the people who ought to be ashamed of themselves are the people who willingly work for them. There’s nothing American about our government anymore.

Joshua L. writes:

Porter Comment: You’re a “true believer” if you think that Iran, in any way, poses a threat to our sovereignty. They’re a turd nation full of lunatics. Much like the Soviet Union, their delusions and their arrogance will destroy them. All we need to do is let them destroy themselves. By giving them someone to hate and a reason to hate us, we grant the regime a legitimacy it would never have had otherwise. Bombing will only make their regime stronger.

*****

In regards to this “Mailbag”… I am truly astounded that so many of our subscribers – wealthy, well-educated, well-informed… continue to believe anything the government tells them. Likewise, I am genuinely shocked any American would ever support another foreign war of aggression. How many times does the government have to lie to us and waste trillions invading other countries before you’ll realize it’s all just a racket! It makes them rich. It makes us poor. And it doesn’t make anyone safer. We can already blow the world up 100 times! No one has invaded us since 1812. There are 500 million (!) firearms in the U.S.! We are not in danger – not from the Chinese, not from the Russians, and definitely not from podunk Iran. What we are in danger of is our government bankrupting all of us. If you think I’m wrong – buy stocks and short oil. Please. That might be the only way you’ll ever learn.

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