'After the debt binge comes the bill'... The most defaults since 2009... Markets losing 'faith' in the Fed?... Porter's latest advice...
"Today... Even though it's not Friday, I (Porter) wanted to reach out to every subscriber directly. There's something very serious I need to discuss with you. The forces and factors I've been warning you about for several months are gathering momentum.
Please... stop what you're doing. Read the following very carefully. Don't go to bed tonight until you understand the main points I'm making below. Don't go to bed tonight until you've adjusted your affairs accordingly...
We're approaching a critical point in the markets... a crisis that will lead to the greatest legal transfer of wealth in history. Millions of people are about to be wiped out. But you don't have to be one of them."
Just hours after Porter wrote those words in a special Digest last week, the Financial Times published an article that will sound all too familiar to regular Digest readers...
After the debt binge comes the bill... and that is the grim message for investors looking at the present performance of the U.S. corporate-bond market.
As the third quarter draws to a close, slowing global economic activity threatens the earnings power of many U.S. companies, which have amassed $7.8 trillion in debt. Years of easy monetary policy that kept borrowing costs low, a wave of mergers and acquisitions, and the specter of shareholder activism have all contributed to an erosion of balance sheet quality.
The article noted "junk-rated" companies are particularly vulnerable... representing $2.5 trillion (nearly one-third) of the recent corporate debt "binge," with about $1.5 trillion of that debt needing to be paid off or refinanced over the next five years. And refinancing those debts could be virtually impossible for many companies as bond yields rise. More from the article...
For the first time since the financial crisis, total returns from speculative-grade U.S. debt – generally riskier bonds issued by companies rated BB+ or lower by Standard & Poor's or Ba1 by Moody's – are set to decline. The Barclays U.S. High-Yield Index is down 2.3% for 2015.
As borrowing costs rise and defaults have accelerated, investors have withdrawn more than $14 billion from junk-bond funds since the middle of April. The yield on the BofA Merrill Lynch High-Yield Index has climbed to 7.98% from 6.52% a year ago.
"We are in the late stages of the credit cycle," said Edwin Tai, a distressed-debt portfolio manager at Newfleet Asset Management. "Cycles last five to seven years and we're in the seventh year. It's when the U.S. economy slows that you have defaults across the board."
According to ratings firm Standard & Poor's, 47 U.S. companies have already defaulted this year... more than in any year since the financial crisis. And as Porter has explained, many more defaults could be coming.
Making matters worse, the market could now be losing "faith" in the power of the Federal Reserve and other central banks. From an article this weekend on financial-news service Bloomberg...
More and more, bond traders are drawing the same conclusion: central bankers globally are coming up short in their attempts to combat the world's economic woes.
Even after hundreds of interest-rate cuts and trillions of dollars in quantitative easing, the bond market's outlook for inflation worldwide is approaching lows last seen during the financial crisis. In the U.S., Europe, U.K., and Japan, those expectations are now weaker than they were before their respective central banks began their last rounds of bond buying...
"There's a lack of faith in monetary policy – you've thrown the kitchen sink at it, you've cut rates to zero, you're printing money – and still inflation is lower," said Lee Ferridge, the head of macro strategy for North America at State Street Corp. "It leads to a risk-off environment."
In other words, governments around the world have been "printing money" for years in a misguided attempt to increase prices and wages to boost the economy.
Yet despite their unprecedented efforts, they've had relatively little success...
The U.S. economy is far from "booming," while other large economies, like Europe and Japan, are still teetering on recession.
Instead, as Porter has explained, this "money" created a massive bubble in the credit markets. Now, this bubble appears to popping... and markets are beginning to wonder if central banks have any "ammunition" left. More from Bloomberg...
"The next stage for both the Bank of Japan and [the European Central Bank] is more easing; they're going to keep putting fuel on the fire, but at some point the fire's big and there's nothing left to burn. What do we do?" said Philip Moffitt, the Asia-Pacific head of fixed income at Goldman Sachs Asset Management, which oversees about $1 trillion globally. "So your immediate response to that would be a huge selloff in risk assets."
That's already started to happen. While government bonds in developed nations rallied last quarter, an exodus from developing nations, commodities, and corporate credit accelerated. Compounded by China's shock devaluation, an index of 20 emerging-market currencies plummeted to the lowest level on record, while the Bloomberg Commodity Index suffered its worst quarterly decline since 2008. Yields on junk company bonds soared past 8% to the highest in three years.
Again, these problems will be terrible for many folks... But they don't have to be terrible for you. Taking just a few simple steps today can help ensure you have the capital available to take advantage of once-in-a-lifetime opportunities over the coming months.
If you missed Porter's recommendations last week, be sure to read them here. And you can read his special, two-part subscriber Q&A here and here.
Of course, we don't expect the Federal Reserve or other central banks to "give up" anytime soon. Desperate governments are likely to resort to even crazier ideas to spur "inflation" as these problems continue.
Here's the thing to remember: Policy makers can only print money. They can't create wealth.
We don't know exactly what will happen as huge segments of the bond market begin to experience rising defaults. But it's not hard to predict the kinds of things that governments and central banks will try.
Porter explained the best ways to avoid these growing political risks in his recent book America 2020 – The Survival Blueprint... including getting some of your money into foreign real estate, opening a foreign bank account, and having somewhere to go if things get really bad.
Regular readers know we've long recommended Nicaraguan beachfront development Rancho Santana as a great way to cover those bases...
Developed by Agora founder Bill Bonner, "The Ranch" is a great place to live... and an even better place to diversify some assets outside of the U.S. Porter has been visiting for years... and he and several of our colleagues and friends personally own property there.
Rancho Santana has always sported incredible views and long stretches of pristine beaches. But recently, more amenities have been added... like high-speed Internet, 3G cellular service, and a New York Times-recognized restaurant. And the nearby Costa Esmeralda International Airport is set to open next month.
Until recently, the resort was flying under the radar. But lately, it has started to attract real attention... It appeared in Forbes in February, Fortune in April, Travel + Leisure in May, and Food & Wine magazine in June.
Our colleague Dr. David "Doc" Eifrig told Digest readers about his latest trip to Rancho Santana in the September 17 Digest...
The new hotel is as luxurious as any place I've ever been. The local infrastructure is in place and growing with the new international airport opening [in November]. And just like Porter recommends in his book America 2020, it hits many of the "check boxes" you need to feel safe to move some assets overseas...
Agora is developing the property. So you'll be joining folks that are committed to its success. Like-minded people abound. In fact, over a hundred folks like you and I have already purchased property here... including several of my colleagues you likely know by name. It's a real community.
I also like the ability to easily get a permanent visa and open a real bank account in Nicaragua, which Porter also recommends in his book.
Next week, Rancho Santana's director of sales, Marc Brown, will be presenting at the 2015 Stansberry Conference Series & Alliance Annual Meeting at the Aria Resort & Casino in Las Vegas.
If you're interested in protecting some assets overseas – or would like to learn more about Rancho Santana – be sure to stop by and talk to Marc next week. He's organizing two more upcoming trips in December and January. And if you won't be joining us in Vegas but are interested in investing, you can e-mail Marc at marcb@ranchosantana.com. Spots are limited... so don't delay.
New 52-week highs (as of 10/2/15): National Beverage (FIZZ).
In the mailbag, another question about holding cash... and one subscriber wants an investing "tutorial." What's on your mind? Let us know at feedback@stansberryresearch.com.
"As a recipient of many of your newsletters, I have just been reading the recent Investment Advisory newsletter. It well points out what we all know is going to happen. I appreciate the fact that you cannot give individuals any investment advice but I think my question would be of much interest to many of your readers. It may well be that you have covered it in one of your other excellent newsletters, but, if you have, I have somehow missed it... I suspect that a lot of us would like to know what are the safest places in which to put some of our cash while we await the inevitable downturn." – Paid-up subscriber Ian W.
Brill comment: Porter discussed "holding cash" in last Tuesday's Digest, and answered a question on holding cash in retirement accounts in his subscriber Q&A on Thursday.
"I need a Tutorial program for understanding stock market lingo and investments please send me info." – Paid-up subscriber Daniel
Brill comment: As Porter often says, there is no teaching, only learning... and learning about investing will take some effort on your part. That said, we have some suggestions...
You can always find a list of our favorite investment books on the Stansberry Research homepage right here.
But you can learn most of the "basics" without spending a dime...
We think our books – The Stansberry Research Starter's Guide for New Investors and The Stansberry Research Guide to Investment Basics – are great places to start. They're available for free to all Stansberry Research subscribers.
Regards,
Justin Brill
Baltimore, Maryland
October 5, 2015
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