The Coming Crisis No One Is Talking About Today
The coming crisis no one is talking about today... Corporate bonds aren't the only worry... Early signs of trouble in the U.S. Treasury market... Why Doc is preparing for a bear market now...
Regular Digest readers know we've been tracking a huge problem in the credit markets...
In short, over the past decade, companies have taken advantage of record-low interest rates – courtesy of the Federal Reserve's massive stimulus efforts – to borrow an obscene amount of money.
All told, they've racked up more than $13 trillion of debt. This is more money as a share of the economy than any other time in U.S. history. And now, a confluence of critical factors suggests it's just a matter of time before disaster sets in...
You see, a virtual "tidal wave" of this debt is about to come due. In total, a record $4 trillion in corporate debt must be paid off or refinanced over the next four years.
Meanwhile, long-term interest rates are now moving higher for the first time in decades.
And at the same time, the Federal Reserve continues to unwind its massive stimulus programs.
This is unprecedented...
Never before has so much debt come due in such a short period of time while credit conditions are tightening significantly.
A huge number of companies – many of whom are already struggling to service these massive debt loads – have little hope of refinancing. Defaults will skyrocket. And shareholders at many of these firms are likely to be wiped out in the process.
However, this isn't the only potential credit crisis on the horizon...
And while the timing of this other crisis is less certain, the potential fallout could be far more severe.
It's no secret that the U.S. government has also been on a borrowing binge. Over the last 10 years, total U.S. government debt has nearly doubled from $11.1 trillion to just shy of $22 trillion today. That's roughly equal to $67,000 for every man, woman, and child in America.
And yet, unlike in previous decades, virtually no politician on either side of the aisle is even talking about this problem today. And of course, this is largely a result of the same Federal Reserve manipulation responsible for the excesses in the corporate credit markets. As Porter explained back in the November 17, 2017 Digest...
Since this boom began in 2009, almost nobody has paid any attention to this massive increase in federal debt. You haven't heard a word about our deficits from our politicians. Nobody cares. Why? Because since 2009, these debts haven't caused our country's borrowing costs to rise.
Even though total federal debt outstanding has increased by 126% since 2008, our borrowing costs have fallen. We're still paying about the same amount in interest on this debt as we did back in the early 1990s, when our national debt was only 22% of the size of today's burden.
The thing that matters to policymakers is how much the debt costs to maintain, not how much it costs to repay. That's why you haven't heard anything about it.
But again, this won't be the case indefinitely... The same factors that are likely to create a reckoning in the corporate debt markets – rising interest rates and the withdrawal of central bank stimulus – are already pushing the government's debt service costs higher.
Yet, as concerning as this scenario is, it could soon get worse...
You see, under even the rosiest projections, the U.S. government is expected to run annual deficits of more than $1 trillion well into the foreseeable future. If past is prologue, we can expect the actual sums to be significantly higher.
And remember, the Fed is unwinding its quantitative easing program. The largest single buyer of U.S. Treasury bonds over the past few years has suddenly disappeared. Meanwhile, the White House is engaged in a "trade war" with China, which has been one of the largest foreign buyers of U.S. government debt for decades.
In other words, for the first time in modern history, the government will be required to issue a massive supply of new U.S. Treasury bonds during a period of tightening credit conditions and weakening demand.
This combination could easily trigger a cycle of even higher interest rates and ever-larger deficits that spirals out of control.
Of course, folks have been warning of a U.S. government debt crisis for decades now...
And frankly, to date, they've all been wrong. But here too, we could now be seeing the first "cracks" emerging in the U.S. Treasury market. As Bloomberg reported last week...
Of the $2.4 trillion of notes and bonds the Treasury Department offered last year, investors submitted bids for just 2.6 times that amount, data compiled by Bloomberg show. That's less than any year since 2008. The bid-to-cover ratio, as it's known, fell even as benchmark Treasury yields soared to multi-year highs in October, before falling back to their lows last month.
Granted, it's not as if the U.S. will have trouble borrowing as much as it needs. And there's little in the data to suggest weak auctions lead to bond losses. Yet the drop-off is an early warning that demand for Treasuries may not keep up as the U.S. goes deeper into the red. Debt supply jumped in 2018 largely because of the Trump administration's tax cuts. Forecasts show the deficit could soon swell past a trillion dollars and stay that way for years to come.
The weakness "doesn't matter until it suddenly does," says Torsten Slok, Deutsche Bank's chief international economist. "A declining bid-to-cover ratio increases the vulnerability and probability that investors suddenly will begin to think that a falling bid-to-cover ratio is important. Put differently, all fiscal crises begin with a declining bid-to-cover ratio."
Again, we're not predicting that either of these crises are imminent...
But we think it's important that readers are aware of these risks.
You see, whether stocks head lower immediately or Steve Sjuggerud is correct and the Melt Up resumes, we believe one thing is certain: When the next bear market does arrive, it's likely to be one for the ages.
Folks who aren't prepared could suffer huge losses. And those who are retired or near-retirement – folks who simply don't have time to "make up" for another huge drawdown in their portfolios – could be ruined.
As we noted yesterday, Dr. David Eifrig is also getting concerned...
In short, for the first time since this bull market began, "Doc" now believes the downside risks in many stocks outweigh the potential upside.
As a result, Doc is now recommending that most folks – and those who can't afford to take big losses in particular – take some defensive steps immediately. And to make sure every interested Stansberry Research reader can benefit from this information, he is hosting a free online briefing next Wednesday, January 23, at 8 p.m. Eastern to explain at all.
It's absolutely free. Click here to reserve your spot now.
New 52-week highs (as of 1/16/19): ResMed (RMD).
In today's mailbag, several readers weigh in on the bull/bear debate. Send your notes to feedback@stansberryresearch.com.
"I suggest everyone sells ALL their stocks and BUY TSLA! Hehe. Just kidding. Follow your trailing stops, accordingly. Thank you guys!" – Paid-up Stansberry Alliance member Matt E.
"This is a bear market." – Paid-up subscriber Jack R.
"Hello Stansberry Team: Simply, I do not know if this is a bull or bear market. Listening to my gut feeling, I am saying bear market. My mind is mixed. My experience tells me when I look and see cloudy conditions and mixed feelings to tighten stop losses and sit on my buying, trigger-ready fingers.
"Since it is my business to know and to advise others, it is a frustrating time for me as an advisor. But the great news is that I vowed not to get slaughtered again as I did in 2008. I just checked our accounts. Thanks to you guys and a few others such as Bill Bonner I see 55% cash in the accounts and the equities are more defensive including HSY, JNJ, MSFT, and MO (not so good an idea of mine). GLUU is the only aggressive growth stock in our portfolio.
"Over the past five months we have reduced portfolio volatility using daily research from Stansberry and TradeStops research including of course their famous stop loss alerts that we adhered to – almost to the 'T'...
"Also, I believe you interviewed Whitney Tilson for the Melt-up video. In that video, Whitney talked about how 2008 infected his thinking and he could not shake the fear of going through that again. He bowed out of the asset management business because he could not in his words control that fear and its impact on his decisiveness.
"I suffer from that same disease. My medicine is your solid research and TradeStops that you turned me onto. Because of you, I am able to earn a living to support my wife and me and manage quite a significant sum of money for my clients... all from the comfort of our handsome sailing catamaran where we live and work full-time. Thank you! Thank you!" – Paid-up subscriber Ralph H.
"Justin, when you're mentioning everyone from Porter to Dan and Doc being cautious, at least add Steve and mention that he is still betting big on the 'Melt Up.' That way readers won't think Stansberry as a whole has gone bearish. Thanks." – Paid-up subscriber Jim P.
Brill comment: Hi Jim, I did mention that my bearish outlook differs from the views of several of my colleagues. But you are correct – as Steve himself has recently written, he is still betting big on the Melt Up.
Regards,
Justin Brill
Baltimore, Maryland
January 17, 2019