Dear Reader,

The days are ticking down to my Emergency Briefing…

As I’ve been sharing over the past week, there’s one “contrarian” sector of the market suffering under the weight of bad headlines and dropping prices.

But I couldn’t be more excited…

This fast-growing sector is one of the few places where regular investors can still get into companies early in their development cycle. That means the biggest profits are still within reach.

And this sector is different from the usual trends we follow like 5G, biotechnology, self-driving cars, and artificial intelligence. Yet I haven’t been this excited about an opportunity in years.

This “discount” window may not last long, however.

That’s why I’m encouraging all Bleeding Edge readers to save their spots at this Emergency Briefing. There, I’ll explain what makes this space so unique… and show you how to learn my top recommendations.

I’ll even give away a free recommendation as thanks to everyone who attends. So please don’t miss out. It’s all happening on May 26 at 8 p.m. ET.

Now let’s turn to this week’s mailbag. If you have a question you’d like answered next week, be sure you submit it right here.

Is there truly hope for the economy?

Let’s begin with some concerns about where the markets are headed:

Hi Jeff, For the past few months I’ve been reluctant to invest in new assets… Several of the investment newsletters I was introduced to around the same time as I came into focus on yours say there is a “Bubble Burst” on the horizon. On one hand, I see opportunity. On the other, I see my model portfolio with Exponential Tech and Near Future taking hard hits recently. What are your thoughts on this?

 – Reiner B.

Hi Jeff, I hope you post this in The Bleeding Edge or one of the other monthly updates. I started out with The Near Future Report last October and became a Lifetime Member in January…

I am no stranger to volatility, as I have weathered so many booms and busts since starting to invest in the late ’80s. Now I am five to eight years from partial retirement, and things seem to matter more. It is not volatility that bothers me. It is a market crashing and a Fed-sponsored catastrophe that bother me.

We keep reading about how great it is to invest in companies with good valuations… that will be our saving grace. Even the Outlier stocks, where the big money is going, are falling like rocks. From October 2020 (when I started with you) until mid-February this year, I was up 37%. As of today, I am down almost 5%. It isn’t volatility; it has been a bloodbath.

Also, many readers, including myself, have not been with you over the years. I scratched and clawed, waiting to get stocks under your buy-up-to price…

My point is, where are we going? Is there truly hope for the economy and our stocks? This does not seem to be a time of volatility but the beginning of a steep crash. How do we make this all work?

– Daniel K.

Hello, Reiner and Daniel. Thank you both for subscribing and writing in. You expressed similar concerns, so I’ll address these questions together.

First, I’ll say that having concerns like these is normal during a market pullback. Since the end of April, the tech-heavy Nasdaq Composite has dropped more than 7%. Understandably, many positions in our portfolios have pulled back as well.

These kinds of drops are always uncomfortable. We always ask ourselves, “Is there more to come?” It’s natural to do so.

I always find it useful to step back and look at the bigger picture. Since March of last year, the Nasdaq has risen more than 90%. Stocks essentially marched straight up following the crash.

As a result, the dip we’re experiencing is natural… and expected.

It may sound odd to hear me say this, but I’d be concerned if the stock markets didn’t pull back after that kind of run.

And after seeing many companies rise to absurd valuations, it’s even a bit of a relief. There are companies I’d have loved to recommend, but I simply couldn’t do so because of the levels they were trading at.

So this temporary pullback could give us some excellent buying opportunities as valuations become more rational. And I’ll discuss one discounted space this pullback has highlighted at the Emergency Briefing I mentioned above.

Ultimately, though, we simply need to stay the course. I expect this to be a temporary situation. We don’t want to get shaken out of great companies unnecessarily.

My team of analysts and I are watching the economy closely for longer-term shifts, however…

As I’ve shared, the Biden administration’s proposed tax changes are a serious consideration. While it’s still unclear whether the tax increases will be pushed through, they would have a far deeper and more lasting impact on the economy than the volatility we’re experiencing now.

The government’s heavy money printing is another concern. From what we are seeing, the U.S. will probably print $10 trillion in less than three years, or maybe even two.

And these reckless fiscal policies are already causing rampant inflation for consumers. We can see it in food prices, in gasoline prices, in real estate prices, and in commodities.

These things deeply concern me. However, we do have some great things going for us right now.

Interest rates are still near record lows, there is more “dry powder” ready to be invested than ever before, and venture capital (VC) investments are at record highs, driving incredible innovation and new jobs. The pandemic is basically over in the U.S. Everyone will quickly return to work over the next couple of months as the economic recovery continues.

To be clear, if these positive dynamics weren’t happening right now, I’d be scared to death for the markets.

I suspect the spike in inflation will take longer than we expect to happen, so there is still a strong environment for the markets and equities.

If I see that kind of risk becoming more immediate, we’ll plan to take profits off the table and let the storm pass. And then we’ll take advantage of the situation by buying the best names that still have fantastic growth potential – even in an inflationary environment.

The key is for us to be invested in sectors and companies that are growing far faster than the rate of inflation. That way, we can still significantly outperform the markets and generate substantial real returns.

And in the end, I’m still optimistic about our opportunities to profit over the coming months and years. There will always be asset classes that are in a bull market. And I’ll be sure to keep readers up to date if it’s ever time to act because of market conditions.

Conservative vs. speculative…

Next, a reader wants to know more about our approaches in Blank Check Speculator:

Dear Jeff, I have a question about the conservative versus speculative approaches that you present for our positions. I understand that the purpose of the service and buying special purpose acquisition corporations (SPACs) is to show us a “back door” way to invest in companies before they enter the public markets…

So then why would we use the conservative approach?… We would be selling our shares to recoup our original investment and not have the opportunity for them to increase in price as the company grows. I would think we would want to keep them to allow them to grow once the SPAC has identified the company that it is going to form a business combination with.

I know we still have the warrants. However, they are only a percentage of the total shares (usually 1/4 or 1/5) we would have. It seems like we are losing our opportunity to profit by doing this.

And in respect to warrants, once the units split and the cost of the warrants is so low, why wouldn’t we want to buy more warrants? I know that they are like buying options. However, the cost of them seems worth it. You can buy 100 warrants from anywhere between $150 to $200. That seems very inexpensive considering their potential upside. And with the service targeting high-quality SPACs, it would seem to make a very good investment.

I know none of our positions have yet to form any business combinations. However, with your experience and guidance, the future looks very bright. I look forward to the next four to six months to see how it plays out. With the volatility in the stock market now, it will be a welcome relief. I appreciate you explaining it further to me. Thank you very much. Make it a happy and healthy day!

– Harris F.

Hi, Harris. Thanks for your message and for being a subscriber. I’m glad you’re trying to understand how our strategies work.

As a refresher, in Blank Check Speculator, we offer a conservative and speculative approach for each investment we make.

In both cases, subscribers are purchasing units of SPACs before they have announced which private company they will merge with to take public. These units then split into shares and warrants.

Conservative investors can plan on buying units, holding until the units split, and then selling the shares at or above the price that they acquired the units. Typically, they can recover most or all of their original invested capital. Then they can hold on to the warrants – for which they have essentially paid nothing − for the upside.

Speculative investors, however, can hold both the shares and the warrants until a business combination has been announced. That will give them the potential opportunity to sell both of these securities for a profit.

While the conservative approach potentially reduces the profits investors will receive, it also reduces some of the risk… which is an important factor for some people.

Especially if someone is nearing or in retirement, they may wish to recoup their original expense to either spend or reinvest while still holding on to the warrants for profit.

It also frees up some of an investor’s capital if they do not want to wait until the SPAC announces the company it will merge with. While it often happens well within this time frame, SPACs generally have up to two years to arrange their reverse merger.

And the warrants can provide even greater profit potential than the shares. This is how investors could have achieved a spectacular 1,371% profit on Virgin Galactic while making “just” 260% on the shares.

So anyone following the conservative approach still has an excellent chance to profit from just the warrants.

(As a reminder, I can’t give personalized investing advice. If anyone is unsure which approach is better suited, I recommend reaching out to a licensed financial advisor.)

As for your suggestion about buying more warrants, our official recommendation is to invest in a number of units to maximize our warrant coverage. For example, if a SPAC’s units come with one-fifth warrant coverage, that means we’d receive one warrant for every five units.

But some readers have written in about using warrants in other ways, such as lowering their cost basis. In general, I support readers using my research in ways that they find useful for their situation.

However, I would offer a cautionary note about buying warrants.

As a reminder, a warrant gives you the right – but not the obligation – to buy a share of the stock at a certain price within a certain time frame (usually five to seven years).

When you exercise a warrant, you’re buying another share of stock from the company for a predetermined price (often $11.50 a share for most SPACs).

But buying warrants can be higher risk than simply buying shares. Like options, warrants can expire worthless. It is possible to lose 100% of your money if the price of the stock is below the $11.50 strike price when the warrants expire.

So I do encourage subscribers to keep rational position sizing in mind. For example, it doesn’t make sense to purchase more warrants than the number of shares owned.

Suspicions about the government…

Let’s conclude with a question about how our government might use a central bank digital currency (CBDC):

Hi, Jeff, I am deeply suspicious of our federal government and the banking cartel. So here is a question for you. Do you see a potential government strategy in using a conversion from dollars to a U.S. stablecoin as a means to cancel our enormous national debt? If so, how would we preserve our wealth in such a scenario? As a lifetime Brownstone Unlimited member, I sure do love your work.

– John S.

Hi, John, and thanks for being a lifetime subscriber. You’ve sent in a question on a very interesting topic.

I’ve written before about how governments all around the world are gravitating toward CBDCs. We’re seeing clear signs that the U.S. is heading in this direction as well.

However, I don’t see the scenario that you described as being likely. It presumes that the government even cares at all about the debt levels (right now, it clearly doesn’t care at all).

One of the prevailing and most dangerous topics being espoused concerning monetary policy is Modern Monetary Theory (MMT). The theory basically states that for a reserve currency like the U.S. dollar, debts don’t matter. The government can continue to print, without remorse or concern. It can simply add stimulus and “free money” without negative economic or financial repercussions.

For all of us who work, pay taxes, balance our family budgets, and save for retirement, this kind of thinking should make us very upset. Endless printing only destroys the value of the hard-earned money that we have been saving for ourselves and our families.

Aside from this prevailing belief that debts don’t matter, there is another reason why using a CBDC to cancel all debt is unlikely.

59% of central bank foreign reserves are made up of U.S. dollar debt. U.S. Treasuries are the most widely purchased debt amongst central banks due to the reserve status of the U.S. dollar.

If the Federal Reserve were to simply “print” U.S. dollar stablecoins out of thin air to pay back and “cancel” all debt, it would grossly devalue the dollar overnight.

The impact on foreign central banks would be devastating, and there would also be severe ramifications for the global economy – none of which would be positive for the United States.

The likely approach is to slowly and consistently devalue the U.S. dollar year after year so that the pain is spread out over extended periods of time. This is a “trick” that has been used for centuries by governments around the world.

The race toward CBDCs or fiat-backed stablecoins is happening for another reason.

As you noted, a CBDC gives the government some additional powers that it will find irresistible. It would give the federal government even tighter control over the money we use. A CBDC would allow the government to track and tax every transaction we ever make. The Internal Revenue Service (IRS) would celebrate.

What’s interesting to watch is how certain countries see CBDCs as a way to gain a new competitive advantage in both trade and reserve status.

Not only has China launched its digital currency in a limited fashion, but Russia is also working on a digital ruble. If the U.S. doesn’t find a way to launch a CBDC, it risks becoming uncompetitive in this new world.

The U.S. is already trying to catch up, but it has some alternatives in the private sector as potential backup if it needs to move quickly.

There are already U.S. dollar stablecoins that have scaled well domestically. The technology and the talent already exist in the private sector. The Federal Reserve could collaborate with these players to accelerate the timeline to launch a stablecoin.

And just recently, Facebook announced a major pivot. Facebook is moving its own digital currency project, Diem, from Switzerland to the U.S. And it is going to focus only on a U.S. dollar stablecoin, which will be done in collaboration with a U.S.-based and regulated bank (Silvergate).

I have already speculated that this may very well be intentional and the result of some closed-door collaboration between the Federal Reserve, the government, and Facebook. This would be a fast way for the Fed to bring the new digital currency to market.

But back to your question… What do we do to preserve our wealth? With all this money printing comes inflation… which means your question about how to preserve our wealth is quite astute.

Here are some of my ideas…

  • Finance or refinance our primary residence with a fixed, 30-year loan at the lowest possible rate. We’ll be paying back the loan over time with inflated dollars, and we can invest the money that we didn’t put into the house to make higher returns.

  • Finance income-producing properties also using fixed interest rate loans. These could be rental properties or timberland. It is the same reason as above, and the benefit is that land is a fixed asset.

  • Invest in digital assets like cryptocurrencies. Well-designed digital assets that have predetermined conservative monetary policy, like bitcoin, are an interesting alternative. But they do not come without risk. If governments see them as too much of a threat, they can make it very difficult to transact with cryptocurrencies. And, as we’ve recently seen, they can be extremely volatile.

  • Precious metals like gold and silver might be interesting, but after watching what happened between 2008 and 2016, I’m not convinced at all. Even with roughly $10 trillion printed during that window, gold just didn’t move that much. And with all the current stimulus spending, gold is still only at $1,881 an ounce.

  • And the most important thing that we can do to grow our wealth during inflationary times is to be investing in the highest growth industries and in companies that have highly differentiated products and services that are disrupting their respective markets.

    These are the companies that can grow at rates that are far faster than the economy and the rate of inflation. Doing this keeps us ahead of irresponsible monetary policy.

    And it will continue to generate real returns that not only help us preserve but grow our wealth

Of course, we’ll be looking for opportunities that thrive in an inflationary environment for our Brownstone portfolios. This is something that we think about every day, especially now.

And if you want to learn about the ways I see to profit as the coming reset of our financial systems gets closer, you can go right here to watch my presentation on this topic.

That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.

Have a good weekend.

Regards,

Jeff Brown
Editor, The Bleeding Edge

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