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In today’s Daily Journal, a free e-letter from Porter & Co., we’ll explore:

I began warning investors about General Electric (GE) in 2002.

The “tell” was simple: my research showed the company was a net-debtor for 25 years in a row.

It didn’t make any sense to me that a prudent company would continually borrow, more and more, every single year for 25 years.

At the time, GE was the largest publicly traded company in the world. It had a rare, gold-plated, AAA credit rating, meaning its bonds were thought to be as safe as U.S. Treasury bonds. This gave the company an incredible advantage over virtually every other business in the world: a vastly lower cost of capital. GE’s borrowing capacity was virtually unlimited.

As I dug further into GE’s books, another trend was obvious: as the size of the company’s assets grew, its returns declined dramatically. What had been a great business in the 1990s had become a below-average business, at best – with return on assets below 6%. What happened?

I learned by talking to many people who had done deals with GE (primarily selling them a business) that GE’s financial executives were second-rate at best. And if you’ve ever been around people with far more money than brains, you’ll find a common trait: arrogance. That was GE’s reputation – they didn’t know what they were doing, so they always overpaid.

Typical example: a few years after the shale revolution began, GE decided it was going to become a leader in the space. Think about how ridiculous this idea was… a bunch of liberal, feminized city boys from New England are going to head to Texas and teach them something about the oil business! Not in a million years.

GE bought a third-tier oil field services firm, Lufkin Industries, in 2013 – right at the peak of the shale oil hype cycle and about a year before oil prices collapsed. It paid 13.5x EBITDA for Lufkin – a huge premium to the industry’s normal valuations. Within a year, GE was shutting down Lufkin, laying off hundreds of workers, and looking for a way out of the business.

To get out of the oil business, in 2017, GE contributed all its oil and gas assets and gave Baker Hughes $7.4 billion in cash (!) in what was kindly called a “merger.” Meanwhile, GE ended up writing off $9 billion after being in the oil business for about five years.

I watched these deals and saw one disaster after another – Alstom, WMC Mortgage, Amersham, Dresser, etc. – and marveled that GE, somehow, had avoided bankruptcy. But remember: GE had a AAA credit rating. After every bad deal, it simply borrowed more money, bought more assets, and promised analysts that this time the deal would “print.”

How did GE hide how bad all these deals were? GE was engaged in the largest accounting fraud in U.S. history. Enron was amateur hour compared to what GE was doing with its accounting.

There was a $370 million gain from GE’s locomotive sales in 2002 that never occurred. GE routinely lied about its interest-rate swaps to avoid reporting changes in quarterly earnings. It played all kinds of games with depreciation, especially in its aircraft-engine business – fraudulently boosting earnings by almost $600 million.

Even after all of this stuff was made public via a 2005-2008 U.S. Securities And Exchange Commission (“SEC”) investigation (which cost GE $200 million in legal fees and $50 million in fines), it still didn’t lose its AAA credit rating!

That didn’t happen until after the financial crisis and after the government had to guarantee all of GE’s outstanding debt to avoid a complete collapse of the U.S. financial system.

GE wouldn’t receive a realistic credit rating until 2018, when S&P Global downgraded its bonds for the last time, to BBB+, two notches above junk.

By that point, the stock was down 80% and investors had lost close to $500 billion – or almost 10x more than investors lost with Enron.

Finally, in the fall of 2018, GE brought in an outsider as CEO, Larry Culp, to restructure the company. He cut the dividend to $0.01, sold off billions in assets (oil and gas, biopharma, transportation), paid down GE’s debt by $100 billion, and then broke the company into its remaining three core businesses: GE Aerospace, GE Healthcare, and GE Vernova.

If you were involved in the financial markets in any senior capacity between 2000 and 2019 the most important decision you needed to make was to avoid any GE-related security.

No, GE wasn’t the only risk, but it was, by far, the biggest. And don’t forget, its securities were supposedly the safest.

Like the late Berkshire Hathaway Vice Chair Charlie Munger always taught – All I want to know is where I’m going to die so I’ll never go there – one of the most important things investors can do is to simply stay away from big risks. Not losing money is even more important than making big returns.

So what’s the big risk in the markets today? What do most investors believe is risk-free but that is heading for a collapse? What’s the most obvious (and yes, GE’s problems were obvious) large-scale credit misallocation in the markets today?

Long-dated U.S. Treasury bonds.

As federal debts and deficits continue to outpace GDP growth by a wide margin, it is a mathematical certainty that within the next three or four years, U.S. Treasury bonds will collapse.

Most financial professionals ignore this obvious risk, like they did with GE, because of a kind of fraudulent accounting. Just as GE would create “earnings” to cover any given year’s profit shortfall, any slack in demand for Treasury bonds can be managed by the Federal Reserve’s interventions (money printing). That means, to most investors, Treasury bonds look like they are guaranteed and completely safe.

But this sleight of hand can only go on for so long. Over time, printing money to support the bond market becomes self-defeating. The resulting inflation increases long-term costs (COLAs, higher interest rates) and propels government deficits higher and faster.

At some point – and no one knows exactly when – the market will finally perceive this reality. And, by that point, because of the enormous size of these liabilities – the resulting financial destruction will be unprecedented. It will be like GE, but instead of $600 billion in liabilities spread across the financial system, the world will be looking at tens of trillions in toxic debt.

The largest single looming “debt bomb” that could destroy the Treasury bond market is the impending insolvency of The Old-Age And Survivors Insurance (“OASI”) Fund, aka Social Security.

While the Social Security Administration claims the fund will not reach insolvency until 2033, higher inflation rates and worsening unemployment could cause insolvency as soon as 2029.

There is no viable political solution to cut or reform these benefits, implying huge ($200 billion+) increases to annual deficits.

Looking at these inevitable risks… if you were running one of the world’s major commercial banks (JPMorgan CEO Jamie Dimon, I’m looking at you), when would you begin to follow foreign central banks into buying gold and selling Treasuries?

Remember the movie Margin Call: If you sell first, it isn’t panicking.

Surely the banking industry is familiar with the severe risks of using extremely short-term loans to finance enormous, long-term obligations of dubious quality. (That’s exactly what went wrong in the Global Financial Crisis.)

Executive officers and directors of banks have a fiduciary duty to depositors and shareholders to ensure the safeness and soundness of the bank’s reserve assets.

There’s no way any of them could honestly believe that holding virtually 100% of their reserve assets in dollar-denominated fixed-income securities meets any meaningful test of soundness.

And today every large commercial bank in America holds more Treasury bonds than another other kind of reserve asset.

That won’t be true, one way or another, in seven years.

If you’re a senior financial executive in a commercial bank, you should show these facts to your risk management committee. Remember: the bank that sells first wins.

1. The AI power crunch. Today, U.S. President Donald Trump and a coalition of state governors are slated to unveil an “emergency power auction” plan. The initiative will force tech giants to fund the construction of new power plants to meet the massive energy demands of artificial intelligence (“AI”) data centers. The move comes in response to record-high residential electricity prices across America. Earlier this week, Trump commented: “I never want Americans to pay higher electricity bills because of data centers.” With AI-driven power demand already straining America’s electric grid, meeting the future electricity needs of this AI revolution will create huge opportunities for U.S. energy producers.

2. Banks look to rein in stablecoins. The Guiding and Establishing National Innovation for U.S. Stablecoins Act (“GENIUS Act”) – which became law last July – officially banned stablecoin issuers like Circle Internet (CRCL) from directly paying interest to holders. However, it left open a loophole for platforms like Coinbase Global (COIN) to pay interest to holders in the form of “rewards.” Commercial banks are now fighting back. They have added a provision to the Digital Asset Market Clarity Act (“CLARITY Act”) – now being marked up in the U.S. Senate – to ban these rewards as well. The incentives are obvious… The average U.S. savings account pays a paltry 0.39%, while short-term U.S. Treasuries – which Circle and other issuers back their stablecoins with – yield 3.72%. Unable to compete at market rates, major banks – led by Bank of America (BAC) – are rightly worried that up to $6 trillion in deposits could leave the banking system and move into stablecoins on platforms like Coinbase, where consumers can actually earn a reasonable yield on their cash.

3. Stellar Taiwan Semiconductor earnings show no end in sight to AI boom. Yesterday, chip maker Taiwan Semiconductor Manufacturing (TSM) beat Q4 earnings projections: revenue increased 25.5% year-on-year to $33.73 billion, exceeding analyst estimates by $400 million. Just over a year ago, Porter placed TSM into Porter’s Permanent Portfolio, with shares now up 89%. The company benefits from the artificial intelligence (“AI”) boom without incurring the capital risk other companies do – making chips for Apple (AAPL), Nvidia (NVDA), and Broadcom (AVGO). It produces 90% of the world’s most advanced sub-10 nm computing chips used in AI, and these Q4 results indicate that demand for AI applications shows no sign of slowing. Since its 1994 IPO, Taiwan Semiconductor has grown revenue at a CAGR of 18% with a return of 43,186% – compared to the S&P 500’s 2,537%% return over the same period.

Yesterday, Tech Frontiers editor Erez Kalir recommended selling shares in pharmaceutical company Roivant Sciences (ROIV) after a gain of more than 100% in less than two years. It’s the sixth 2x winner for Tech Frontiers – as Erez has plucked gems in an-otherwise biotech bear market – and he sees more gains ahead for Roivant in particular and biotech in general. This week, Erez attended the JPMorgan Annual Healthcare Conference in San Francisco and will share his findings in the Daily Journal later in the month. To get access to Erez’s next recommendation, getting to paid-up subscribers on February 5, click here to learn more.

Porter & Co.’s Distressed Investing team also notched a big win… just this morning recommending readers sell their shares of nutrient-drink maker Herbalife (HLF) for a more-than-100% gain since recommending them just seven months ago. It’s the seventh time Marty Fridson and his team have recommended shares of a company after having realized big gains in that same company’s bonds. On February 12, Distressed Investing will be doing that again – recommending shares of a company whose bond it recommended two months ago… which is already up more than 12%. To learn more, click here.

On Wednesday, we asked Daily Journal readers where they thought inflation in the U.S., as measured by the consumer price index (“CPI”) would be at the end of June 2026… 61% said higher – selecting “at least one percentage point higher than the current 2.7% annual rate,” 36% select “about the same,” and just 3% of survey takers think that inflation will be lower by the end of June.

Tell me what you think: [email protected]

Good investing,

Porter Stansberry
Stevenson, Maryland

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