You’d think I was yelling “fire” in a crowded theatre.

Over the last several days I’ve been writing about the growing risks of a 1973-1974 financial crisis.

If you haven’t seen the last several Journals, the narrative is simple to understand: the ongoing decline in the dollar worsens, investors begin to dump Treasury bonds more rapidly, and interest rates suddenly spike higher, above the “Biden Bust” level of 2023.

To prevent enormous damage to the banking system (which owns trillions of Treasury bonds), the Federal Reserve engages in large-scale operations, buying trillions in Treasury bonds to “peg” interest rates below 5%. The result is a huge loss of confidence in U.S. assets, leading to massive selling in the stock market.

In that exact scenario in 1973-1974, stocks fell 50% and didn’t recover, in real terms (adjusted for inflation), until 25 years later. These kinds of risks, by the way, also triggered the 1987 “Black Monday” stock market crash. Other factors (portfolio insurance) caused that sell-off to be even more severe, but the root cause was a falling dollar and the risk of much higher interest rates.

My goal in writing about these risks was to simply warn all of you that they exist. It is something you should understand and be prepared to handle. But I did not say “sell everything today.” And, even if these events were to unfold tomorrow, for many of you the advice to sell everything is unlikely to be practical or useful.

I’ve gotten dozens and dozens of letters from concerned subscribers, many of whom have asked complicated questions about what they should do. Rather than writing a new Journal today, I’ve instead posted several of these letters. I hope this will address concerns you have too and give you more context around what my warnings mean for you and your portfolio.

In many ways, I wish I had never brought any of this up. And I want to reassure you that if you, like me, are a life-long investor with income that’s outside of the market, a crisis like this is primarily a buying opportunity. The world is not going to end. It just might feel like that for a few months.

A few specific points before we get to the “Mailbag”:

1. Yes, our insurance companies face unique risks because of their heavy exposure to the bond market. But they also have effective tools to manage these risks. There’s no reason to sell these shares now, and if they do fall temporarily during a crisis I would look to buy more. I answer this in far greater detail below.

2. Porter’s Permanent Portfolio will offer a lot of protection for you in a crisis scenario, but it probably won’t offer 100% protection. If Treasury rates go above 5% and I believe a crisis is coming, I’ll update our allocations. We’ll move to 50/50 gold and short-term fixed income.

3. Yes, there’s a big risk to holding cash – over the long term. But it is very important to have cash to dampen volatility and to provide liquidity at the bottom.

I hope you will take the time to read the “Mailbag” below carefully. You’ll find a lot more detail and discussion around these issues.

I care very much about all of you. You’ve given me an incredible life and a career that is engaging and challenging. I hope you can see that I shared these ideas with you because I am genuinely concerned about the stability of the financial system. But I cannot predict the future. And I’m not trying to do so with this warning. I’m simply giving you all of the information that I would want if our roles were reversed.

My greatest concern is that many of you, upon reading these warnings, will decide to abandon your investment discipline. Equity holders earn excess returns because they accept these kinds of risks. We cannot avoid risk completely and still earn excellent returns. What we must do instead is manage the risks. And I’m confident that we can help you do that.

Regards,

Porter

“What About Safe Havens: Gold, Silver, And Bitcoin”?

Mark B writes:

Porter Comment: My concern about a rout in the bond market triggering a financial crisis is based on the growing risks of a technical default. Our government has been on an insane spending spree ever since COVID and it shows no signs of stopping. The Feds have borrowed a mind-boggling $22 trillion since 2019. They’ve doubled our national debt in only six years. Even after the Republicans gained control of both houses of Congress and the presidency, the large deficits continued.

Our government is losing all credibility in the financial markets, which means our dollar is at risk of losing its standing as the world’s reserve currency. Currently, U.S. Treasury bonds are the basis of the world’s financial system because of the size of our economy and our government’s seemingly endless ability to generate revenue through taxes. These bonds are said to be “risk free,” because it seems inconceivable that the U.S. Treasury would ever default.

However, a careful study of our government’s actual creditworthiness tells a far different story.

We have defaulted twice in the last 100 years: 1933 and 1971. We didn’t default by not paying. We defaulted by paying claims backed by gold with paper backed by nothing. That’s the “technical” part.

Today, what exactly constitutes a “technical” default is a matter of debate. Last December, the Fed began expanding its balance sheet again, by $40 billion per month. So if your definition of a technical default is printing money to refinance government debt, then we’re there.

My definition is using the printing press to buy substantial amounts of long-term debt in an effort to hold interest rates below the inflation rate. In short, using the printing press to buy government debt when investors won’t. That hasn’t happened yet, in my view, but I do think it is inevitable. If inflation returns this year (and I believe it will) then long-term rates could easily surpass 6%. A good proxy for estimating long-term interest rates is simply adding nominal GDP growth to the inflation rate. The government’s massive deficits are driving nominal GDP much higher, perhaps to 4% to 5% this year. If consumer price index (“CPI”) inflation comes in at 3% to 4%, you could see 10-year yields north of 7%. That would be catastrophic for the banks, like Bank of America, which owns hundreds of billions worth of mortgages and other fixed-income securities at much lower yields (under 2%). In that scenario, the bank’s losses would wipe out all of their equity capital and lead to runs on the bank. To prevent this, the Treasury would likely instruct the Fed to buy as many bonds as required to prevent yields from rising.

That’s the kind of technical default I expect could occur over the next several months. And if that happens, there could very well be a run on all dollar-based assets, like stocks. That’s what happened in the 1930s and that’s what happened in the 1970s.

In both cases, gold proved to be a good hedge against the crisis… sort of.

In the 1930s, the government seized all of the privately held gold, but gold stocks, like Homestake Mining, soared. And in the 1970s, it wasn’t legal to own gold until January 1, 1975, but, from that point forward, gold went up about 8x in five years. So while there aren’t direct comps, it doesn’t take a genius to realize that if the government is printing trillions of dollars, then hard assets (gold, silver, Bitcoin, real estate, etc.) are going to move nominally higher.

And, it seems to me, the growing risk of the government relying on the printing press to fund its operations is what’s propelling gold and silver higher right now.

“I’m Confused”

Mike L writes:

Porter Comment: I’m sorry I ever brought it up!

My advice — to “get out of the pool” — if Treasury bond yields move above 5% is based on my study of financial history.

Our government’s incredibly precarious financial position puts the world’s financial markets at risk because Treasury bonds form the foundation of the world’s financial system. If there’s a technical default (if the Fed begins to monetize large amounts of Treasury debt) it will trigger a significant financial crisis. I believe such a crisis is inevitable.

Here’s how I see it unfolding.

The government’s massive deficit spending will cause inflation to rise again, pushing interest rates on long-duration bonds much higher. That will cause massive losses in banks’ fixed-income investments. Bank of America is already sitting on $100 billion+ of such losses. To prevent these losses from spiraling higher, the Fed will have to monetize a substantial portion of the Treasury’s enormous $40 trillion in debt. That’s what I mean by a “technical default.”

That’s what happened in 1973-1974. I believe it will happen again — but the timing of these risks is unknowable. And I’m not offering any prediction about when this will happen. I’m only offering advice about what to do if it happens. Until then, I suggest staying the course.

But when this happens — whether that’s next month, next year, or in five years – the banks’ huge losses will be transferred to the public via inflation. Most people will not understand what’s happening. But sophisticated investors will. And to avoid the resulting loss in purchasing power, investors will sell U.S. assets, in mass.

In this kind of a scenario, market correlations grow very strong: virtually every kind of financial asset will decline in price. The baby will be tossed out with the bathwater. You won’t want to own stocks that day.

If you study the ‘73-‘74 fiasco, you’ll see that it took 25 years for stocks to recover their highs in real terms (adjusted for inflation). You’ll also notice, however, that stocks bottomed after about a year. So crisis leads to opportunity, too.

To avoid a bad outcome for your investments, I’ve suggested that many investors would be better off going to cash (30-day Treasury bills) if Treasury rates go back above the “Biden Bust” level of 5%.

This advice, while well intended, has caused us all far too much trouble. For example, it seems to be beyond the grasp of most of my subscribers that even though holding cash isn’t a good idea (over long periods of time), when the market is crashing, holding cash is a great way to avoid losses.

And then there’s endless complexities involved in every subscriber’s personal portfolio.

For example, if you invested $1 million into The Hershey Company in December 2007 on my advice (I wrote it would be my best recommendation of all time), you would be sitting on more than $6 million worth of Hershey stock today and it would be paying you $140,000 in dividends each year. Selling those shares just because the rest of the world is going broke doesn’t make any sense. You’d trigger a bunch of taxes and you’d lose a one-of-a-kind asset that’s paying you handsomely to own it.

I write investment research to a broad audience — more than 100,000 people read this Daily Journal. I do my best to give you the information I’d most want if our roles were reversed. Sometimes, though, I wish I didn’t.

“Hard For Insurance Companies To Navigate”

Opher L writes:

Porter Comment: Yes, it’s certainly true that insurance companies have large exposures to the bond market. If there’s a rout in Treasury bonds (sending rates much higher) they could lose a lot of money on their investments. But I think that’s very unlikely.

Insurance companies can mitigate these risks by moving their investments to the short end of the duration curve. That’s exactly what W.R. Berkley (WRB) did in 2020. As a result, unlike Bank of America, W.R. Berkley didn’t suffer investment losses. And their shares bounced back strongly after the COVID crisis. The shares are up about 3x since before COVID. Selling would have been a huge mistake.

Insurance companies, unlike banks, are not subject to overnight liquidity requirements, like banks that offer demand deposit accounts. That means, even if they suffer mark-to-market losses, they can’t be forced to sell those bonds at a loss. They can simply hold until maturity.

Well-run insurance companies, like W.R. Berkley and Kinsale Capital (KNSL), also continue to grow their underwriting profits and the size of their “float.” Kinsale, for example, was able to make 24% more on their investments over the last year than they did the year before, thanks to growth in float. That kind of growth covers a lot of “sin.”

And there’s one other factor that I’m sure will just confuse most readers: inflation. Insurance companies sell policies in “hard dollars.” But they pay claims — sometimes years later — in greatly devalued dollars because of inflation. That insurance companies get paid first makes them a primary beneficiary of the Cantillon Effect, which posits that, in an inflationary economy, whoever gets the money first wins.

I can’t know the future. I can’t know when (or if) the Treasury market will “roll over.” And I can’t know, with any certainty, how our insurance companies will manage these risks. But what I do know is this: Warren Buffet kept roughly half of Berkshire Hathaway’s book value in property and casualty (P&C) insurance from 1967 until today — including during the ‘73-‘74 bond and stock market rout.

My general advice about using P&C insurance as the foundation of your portfolio isn’t going to change simply because of the growing risks of the bond market.

So, yes, if rates move rapidly through 5% and there is a crisis in the financial markets, then it is very likely that our P&C investments will fall sharply — at least temporarily. But trying to avoid these risks will probably cost you far more money than it’s worth. If you’ve held these shares since I first recommended them in 2012, you may want to simply sit tight rather than triggering taxes and losing a good dividend payment. Or you might hedge your exposure to the bond market with gold, silver, or Bitcoin — like we do in Porter’s Permanent Portfolio. Or you might want to “go to cash” completely as I suggested previously. It really depends on your situation, your risk tolerance, and your goals.

My job is just to make sure you understand these risks so that you’re equipped to handle them. And remember, equity holders earn higher returns because they shoulder extra risk.

“Why Am I Buying Distressed Debt?”

Rick T writes:

Porter Comment: I was writing about long-duration Treasuries. Shorter-duration corporates, especially distressed debt trading at a discount, are a completely different asset class. I agree, all financial assets will suffer if there’s a collapse of the financial system. But that’s an “if.” It may not happen. Or it may not happen for three more years. In the meantime we’re making close to 30% a year in bonds with Distressed Investing lead analyst Marty Fridson. I don’t see any reason to change our strategy yet.

“How Much Cash Should I Hold?”

Linda writes:

And finally I am considering purchasing the pre-IPO from either Crowdability or Starlink from Jeff Brown. My total portfolio is $284,000 – not big enough to take a big loss. Currently I am fully invested except for the cash set aside for Trading Club puts. So I have two questions for you:

Thank you for all your wisdom and care for us! I have learned a great deal from you – one day I hope to come to your ranch retreat.

Porter Comment: I can’t give you (directly) the kind of advice you’re looking for in question #1, but if you consult Porter’s Permanent Portfolio, you’ll discover the cash allocation we recommend for conservative portfolios. Regarding #2… I can only speculate. You’re asking a question about the future. We are going to do our best, but I have no way of knowing if that will be enough. And re: #3. I think the political theatre that goes on in our country is a massive waste of time. I ignore it. The politicians change; their bullshit stays the same.

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

Porter Stansberry
Stevenson, Maryland

Presented By Crowdability

Matt Milner, founder and Chief Investment Officer of Crowdability, recently dropped a video about the #1 move to make right now to kick off 2026. But a fair WARNING: You have an extremely short window to act.

By February 2, it could be too late to take advantage of this situation. Click here now to watch my short video, before it’s gone.

Editor’s Note: Keep in mind, we only accept advertising from publishers we know to offer well-researched ideas vetted by a legal team, excellent customer service, and reasonable refund policies. Crowdability is one such partner. We do not, however, under any circumstances make any representations about their investment ideas or strategies, nor will we warrant them as equal to our own. We do recognize that the markets are tempestuous and, at times, ideas that we may not endorse prove valuable.

1. The Federal Reserve pauses after three consecutive rate cuts. This afternoon, the Federal Open Market Committee (“FOMC”) held rates unchanged in a range of 3.50% to 3.75% as expected. As has been the case in several recent meetings, there were dissents, with two Fed governors – Stephen Miran and Christopher Waller – both voting for another 25-basis-point cut. In his post-meeting press conference, Chair Jerome Powell explained the pause, indicating the FOMC believes the outlook for the labor market has improved since last month, while inflation remains “somewhat elevated.” Given this “balance of risks,” Powell said the Fed is not on a preset course and future rate decisions will be made on a meeting-by-meeting basis.

2. China picks up steam in the AI race. Chinese leaders have greenlit the import of Nvidia’s (NVDA) H200 chips, with the country’s tech giants ByteDance and Alibaba moving to secure a massive 2-million-unit pipeline. But there’s a catch: a 25% U.S. tariff and a strict ban on the more powerful Blackwell chips, ensuring the U.S. retains a generational lead. Nvidia shares rose 1.6% in pre-market trading, as the potential $40 billion in incremental 2026 revenue reinforces Nvidia’s position as the primary arms dealer in the global AI race.

3. Another fast-food joint goes bust. FAT Brands – owner of Fatburger, Johnny Rockets, and Twin Peaks – filed for voluntary Chapter 11 bankruptcy yesterday… allowing the company to operate as it negotiates with creditors. With just $2 million in cash on hand, repayment was not an option. FAT Brands joins a growing list of casual and fast-food chains – including Hooters, Red Lobster, and TGI Fridays – that have filed bankruptcy protection.

Yesterday, a record $32 billion worth of the iShares Silver Trust (SLV) shares changed hands – more volume than any other security on the planet, including the S&P 500 ETF (SPY) – and a classic indicator of a late-stage buying frenzy.

Please note: The investments in our “Porter & Co. Top Positions” should not be considered current recommendations. These positions are the best performers across our publications – and the securities listed may (or may not) be above the current buy-up-to price. To learn more, visit the current portfolio page of the relevant service, here. To gain access or to learn more about our current portfolios, call our Customer Care team at 888-610-8895 or internationally at +1 443-815-4447.