A Deadly 'Wave' That Cannot Be Stopped

From carefree to catastrophic in the blink of an eye... A critical lesson from the deadliest tsunami ever... A lot like the coronavirus pandemic... Now is not the time to relax... A deadly 'wave' that cannot be stopped... What you can do to prepare – and even profit – as the wave crashes...

Edie Fassnidge will never forget the picture-perfect scene along the Thai coast...

In late 2004, the 25-year-old England native went on a months-long vacation with her boyfriend, Matt. They climbed Mount Kinabalu in Malaysia, bought their first digital camera at a high-tech mall in Singapore, and learned to surf in Bali. Edie's mother, Sally, and younger sister, Alice, later met up with the couple in Thailand to celebrate Christmas.

On the morning of December 26 – Boxing Day – the skies were blue, the water was clear, and the weather was calm. So the group of four decided to rent kayaks and enjoy the gorgeous scenery.

They started out at Ao Nang Beach, heading south toward Tonsai Bay and Railay Beach. Along the way, Edie stopped to take some pictures. As she later recalled to The Guardian...

I remember saying, "It's so beautiful here." We were floating along in the sea, and there was a dramatic limestone column right by us, a little island in the background, and we were all really happy.

But all of a sudden, the air felt different. And Edie noticed something strange off in the distance...

A white "ridge" had formed along the horizon. Even worse, the ridge seemed to be heading straight for them across an otherwise tranquil sea. They didn't have any way to escape it.

Edie and her companions were sitting in the crosshairs of an incoming tsunami...

They didn't know it at the time, but a magnitude 9.1 to 9.3 earthquake – the third-strongest ever – struck that morning off the western coast of Indonesia. And as a result, waves that would rise to as high as 130 feet were racing across the Indian Ocean at speeds up to 500 miles per hour.

A sick feeling came over Edie as she watched the massive incoming tsunami capsize a sailboat without much effort. The group became paralyzed with fear. They were helpless.

In the next instant, Edie was thrown underwater and spun around as if she were inside a giant washing machine. The wave banged her head repeatedly against the rocky limestone cliff.

Finally, the water calmed down and Edie was able to swim to the surface. She saw her boyfriend, sister, and mother also at the surface and thought to herself, "We're all OK."

Unfortunately, everyone wasn't OK.

In today's Digest, I (Mike DiBiase) will explain why Edie shouldn't have been thinking about resuming her peaceful vacation that morning... and more important, I'll detail how we can learn from her ordeal as we continue to endure the current coronavirus pandemic.

While things might seem to be improving right now, I believe it will soon get much worse...

You see, I believe the coronavirus pandemic is a lot like a tsunami...

It appeared with little warning. At first glance, it didn't look that harmful... It was just a strange distraction happening miles away (or in this case, on the other side of the world).

But as it approached, the dangers became apparent. And its impact became unavoidable. Now, roughly four months later, we know the coronavirus is a disaster on many levels...

It's a humanitarian disaster, reportedly killing more than 376,000 people so far. It's an economic disaster, forcing more than 40 million Americans out of work so far. And it's a psychological disaster, putting a strain on our mental health as we're forced into isolation for months.

After suffering through several months of mandatory lockdowns since the World Health Organization declared the virus a global pandemic, most of us felt a bit like Edie did that morning after the wave struck... tossed around, dazed, and confused.

Like Edie, we want to believe that this nightmare is over...

The lockdowns in many states and countries are ending. And with the anticipation that everything will return to normal later this year, folks expect to see a "V-shaped recovery." The benchmark S&P 500 Index has surged to within 10% of its all-time high.

The stock market today reminds me of what Edie thought as she resurfaced... Investors seem to be saying, "We're all OK. We made it through. Now, let's get on with this bull market."

These days, investors don't seem that concerned about the virus at all. They're more anxious about something else... the fear of missing out ("FOMO") on the market's latest rally. You may be suffering from FOMO, too... itching to jump headfirst back into stocks.

That would be a big mistake.

Now is not the time to relax...

It's far too early to think we've made it through the worst of the coronavirus pandemic.

You see, pandemics – like tsunamis – rarely consist of only one wave. And in both cases, the first wave is often not the worst. That's why you need to know the rest of Edie's story, which she shared in the 2016 book, Rinse, Spin, Repeat...

Edie's elation at seeing her boyfriend and family in the water after the first wave didn't last long. Glancing behind them, she noticed another wave rapidly approaching...

Edie was soon underwater again, fighting for her life. Once more, she made it to the surface and gasped for air. But this time, Edie couldn't find her loved ones. She had little time to search before being battered by several more waves. Finally, Edie managed to climb on to some nearby rocks... and realized that she suffered wounds on her legs so deep that she could see her bones.

Dehydrated and physically drained, Edie somehow found the strength to hike up the rocks and along the shore until she was rescued. While being treated, she reunited with Matt, who had also managed to survive.

Sadly, her sister and mother weren't as fortunate... They died that day, along with nearly 230,000 other people in the deadliest tsunami in world history.

We can learn an important lesson from survivors of tsunamis like Edie...

No matter what, be prepared for more than one wave.

Look, I'm not a pessimist... I hope there isn't a second wave and that things go "back to normal" soon, too.

But hope alone is not enough...

Hope is what's driving the stock market today. The market rallies on every glimmer of hope, every promising study of a potential vaccine... no matter how small or early stage they are.

Microsoft (MSFT) founder Bill Gates has poured billions into studying viruses and finding vaccines. He said we shouldn't expect a vaccine in less than 18 months. And even after that, Gates knows it's still an uphill battle. As he wrote on his Gates Notes blog in April...

We need to manufacture and distribute at least 7 billion doses of the vaccine.

In order to stop the pandemic, we need to make the vaccine available to almost every person on the planet. We've never delivered something to every corner of the world before. And... vaccines are particularly difficult to make and store.

There's a lot we can't figure out about manufacturing and distributing the vaccine until we know what exactly we're working with.

Many other experts agree with Gates' 18-month timeline for a vaccine. Even that would be an incredible feat considering the fastest a vaccine has ever been developed is five years.

That's a long time to spend "flattening the curve." Meanwhile, we're flattening the economy.

And that's without considering what would happen if a "second wave" of the virus were to hit... I like to listen to doctors who don't have politicians looking over their shoulders. And from what I've seen, we're much more likely to see a second wave of the virus before we see a vaccine. Some experts say a second wave in the fall or winter is almost inevitable.

What do you think a second wave will do to the market's expected V-shaped recovery?

That brings me to the most important point of today's Digest...

Even if we don't see a second wave of the virus, we must worry about another dangerous 'wave'...

This wave is unstoppable. And thanks to our economic slowdown, it's already forming today.

It's a massive wave of bankruptcies.

The list of companies that have defaulted on their debt grows by the day. It includes rental-car giant Hertz Global... retailers JC Penney, Neiman Marcus, J. Crew, and Pier 1 Imports... newspaper publisher McClatchy... burger joint Krystal... telecom Frontier Communications... and oil and gas producers Diamond Offshore Drilling and Whiting Petroleum.

And this is just the beginning...

The list will get much longer in the months ahead. Many more companies will follow in the footsteps of these victims... Other companies teetering on the edge of bankruptcy include retailers Lord & Taylor, Sur La Table, Party City (PRTY), GNC (GNC), and Guitar Center, as well as energy firms Chesapeake Energy (CHK) and Denbury Resources (DNR). Bloomberg estimates that nearly two-thirds of publicly traded restaurants are at risk of going under.

The high-yield default rate equals about 4% today. That means only 4% of all corporate borrowers have defaulted over the past year.

Thanks to the coronavirus and its effects on the economy, credit-ratings agency Standard & Poor's (S&P) currently forecasts that the default rate will rise to 10% by the end of the year.

While that's a big jump in a short span... I believe it's too conservative.

To know where the default rate is headed, you need to look at the number of companies whose credit has already been downgraded. Credit downgrades always precede defaults. And as you can see in the chart below, downgrades have soared to unprecedented levels...

So far this year, S&P has downgraded the credit of more than 1,650 companies. That's already more than any year on record... and we're not even halfway through.

We've never seen anything like this... It tells us that the number of defaults (bankruptcies) is about to soar higher than ever before. During the last financial crisis, the default rate peaked at 12.2% in 2009. It's likely to surge well past that number in this credit crisis.

The first wave of the coronavirus has already exacted tremendous damage...

Remember, U.S. corporate debt was already at an all-time high (more than $10 trillion) before the crisis began. The crisis is causing most companies to burn through cash and borrow like there's no tomorrow. Corporate debt is growing larger with every passing day.

The thing is... credit can dry up extremely fast. That's why American companies have been busy maxing out their bank credit lines and issuing bonds to investors while they still can...

U.S. companies have issued a record $1.2 trillion in bonds so far this year, according to market-research firm Dealogic. That's up nearly 80% from the same period a year ago.

Companies with investment-grade credit ratings issued most of this debt. And companies on the lower end of the credit spectrum – high-yield or "junk" borrowers – are out of luck...

The Federal Reserve is doing little to help these companies. Even before the coronavirus kick-started the latest credit crisis, around one in every five companies were considered "zombie" companies. That means they could barely afford to pay the interest on their debt.

It has now gotten much worse for the companies with poor credit...

Credit is now starting to dry up...

Banks are again tightening credit, making it more difficult for companies to borrow money.

And it goes beyond that... In the latest Federal Reserve survey of large and small banks across the U.S. on their lending standards, banks reported their largest quarterly increase in tightening... ever. As you can see, credit is now tighter than at any time since 2008...

This is important...

High-risk borrowers are hurt the most when the banks start tightening credit. They rely on banks to "roll over" their debt – using new loans to pay off their debt as it comes due.

Without access to credit, they'll simply die.

With plummeting sales and access to credit cut off, these zombies are already dropping like flies. It's another reason I believe the massive wave of bankruptcies is just getting started.

And for many individual investors like yourself, that could be devastating...

A wave of corporate bankruptcies could wipe out many stock investors...

The U.S. default rate has only passed 10% four times over the past century – 1932, 1991, 2002, and 2009. And as you can see, stocks perform horribly when that happens...

On average, stocks fell 53% from their peak as the default rate soared. Notice that it took around two years, on average, for the default rate to peak from the time that defaults started spiking like they're doing today. If we follow a similar pattern this time, it could mean that the default rate might not peak until late 2021 or early 2022.

This is especially concerning because we're on the verge of an economic depression for the first time since the 1930s. We were in relatively short recessions when the default rate peaked in 1991 and in the early 2000s, each lasting about eight months. The comparisons with the early 1930s and 2008 are much more appropriate to what's happening today.

So what can you do to protect yourself – and even profit – as this cycle plays out?

Plain and simple... you should hold a lot of cash.

That will protect you if stocks sell off. And even better, it will allow you to capitalize on fantastic opportunities as the crisis unfolds...

You'll be able to once again buy shares of great businesses at fire-sale prices. But investors will sell more than just stocks... When crisis strikes, they'll also dump corporate bonds.

No one wants to hold bonds when the default rate begins to soar – even safe bonds of companies that can survive. Bond prices will plummet to bargain-basement prices. It happened in 2009, and it will happen again.

But the thing is... savvy investors can make a killing buying cheap, safe bonds. That's the strategy my colleague Bill McGilton and I employ in Stansberry's Credit Opportunities.

The best time to invest in corporate bonds is as a crisis strikes... like the one we're about to enter. You can earn stock-like returns while taking on far less risk than owning stocks. But don't take my word on it...

Learn more about our bond strategy from a longtime subscriber's experience – and find out how to claim instant access to Stansberry's Credit Opportunities at an all-time low price – right here.

New 52-week highs (as of 6/1/20): BlackLine (BL), Sprott Physical Gold and Silver Trust (CEF), Quest Diagnostics (DGX), DocuSign (DOCU), Equinox Gold (EQX), Fortuna Silver Mines (FSM), GreenTree Hospitality (GHG), Hecla Mining (HL), MAG Silver (MAG), MarketAxess (MKTX), Pan American Silver (PAAS), Flutter Entertainment (PDYPY), Sprott (SII.TO), SilverCrest Metals (SILV), and Victoria Gold (VGCX.TO/VITFF).

In today's mailbag, another reading recommendation about the Great Depression. Do you have a comment or question? As always, send it to feedback@stansberryresearch.com.

"The Forgotten Depression: 1921 The Crash That Cured Itself, author James Grant. Book about how both Warren Harding, president in the U.S., and Arthur Meighen in Canada believed in keeping the government out of the economy, did not interfere, and allowed the natural rules of capitalism to fix the problem. Short, sharp depression. Then Roaring Twenties...

"All recessions on some level are caused by unwise use of credit. In many cases, the government itself encourages that unwise use of credit. Example for quite a long time is the U.S. government. And most of the others.

"In addition many in government are greedy and dishonest. The Willy Loman principle. He kept robbing banks, 'Because, your Honor, that's where the money is!' Lots of money in government. Attracts thieves.

"An article in Canada's National Post, entitled "Remember the right 1920s depression" written by Peter Shawn Taylor is the article that mentioned The Forgotten Depression. Date Tuesday, May 26, 2020 of the Financial Post section on page FP12.

"The 4 saeculae (?) make sense. First group lives in an era of plenty and takes it for granted since they did not build it. The next group works less and the economy starts to deteriorate. It does deteriorate and people are in fear. Then the crisis where that generation has to work and do without until they build it up again. Their children are very affected and work hard when they are adults.

"It seems like an emotional generational pattern, like children of very wealthy parents who do not have to do much and may learn little as a result... Hard times coming." – Paid-up subscriber Katharine B.

Regards,

Mike DiBiase
Atlanta, Georgia
June 2, 2020