The next credit crisis is – here... The credit market's biggest enemy was indeed fear... Mike DiBiase was spot-on... How many kitchen sinks does the Fed have left?... Three 'crisis bonds' to buy today...
The next credit crisis is... here...
Back in December, our colleague and Stansberry's Credit Opportunities editor Mike DiBiase warned in the Digest that "the next credit crisis is right around the corner."
Mike wrote that it was inevitable... explained why the Federal Reserve's fingerprints were all over this "house of cards"... and said how one thing – fear – could cause the whole fragile credit market to collapse entirely.
Mike's analysis could not have been more spot-on, everything down to when he used the word "contagious" while making his case. Here's just part of what Mike wrote in that December 2 Digest...
If you want to know where the stock market is headed, it's wise to pay attention to the credit markets...
Problems often appear in the credit markets before the stock market. And as [Stansberry Research founder Porter Stansberry] likes to say, problems in the credit markets are contagious. Their problems spread to all parts of the economy.
In this case, Mike explained that he was talking about the corporate-bond market... where the debt of corporate America is traded. He pointed out that the $10 trillion in debt on corporate America's books was an all-time high...
It's a high both nominally and as a percentage of gross domestic product ("GDP"). In a Digest earlier this year, I warned that the next bear market will be triggered when the corporate credit bubble pops.
It's a matter of when, not if...
If Mike could show you only one chart to sum everything up, he said it was this one...
Mike noted that this chart showed "the inevitability of the corporate-credit bubble popping"...
The chart shows how many U.S. companies can't pay their debt (the high-yield default rate) versus total corporate debt. Total debt is measured against U.S. GDP. The shaded areas show bear markets...
'The credit bubble's biggest enemy is fear,' Mike said...
And not only that...
It's important to understand that fear can take hold of the markets incredibly fast.
Fear causes investors to sell without asking questions.
Fear causes banks to tighten credit – a process that I'll get into below – and it causes the credit market to dry up.
Well, we now know what happened next...
In March, as COVID-19 fears reached the U.S., the credit bubble popped, and the next bear market was triggered...
Stocks, bonds, and almost everything else – even bitcoin and gold – sold off at the same time... Several times, the panic triggered the "circuit breakers" on the New York Stock Exchange...
And the markets and corporate America experienced a debt-fueled blow that played out exactly as Mike predicted... Credit markets were seizing up like it was 2008 all over again.
Money was lost... then money was created...
The Fed, as it did more than a decade ago during the 2008 financial crisis, stepped in with more "unprecedented" measures to make sure the entire economy didn't crash...
Unlimited quantitative easing ("QE")... $2 trillion-plus and counting... and eventually, the Fed said it would buy up to 20% stakes in exchange-traded funds ("ETFs"), like Japan-style QE, which has worked out terribly over the past several decades.
The Fed disclosed that it hired BlackRock (BLK), the world's largest asset manager, to handle the central bank's newly created bond-buying business. (Just writing those last seven words in a sentence make me feel terrible.)
How many kitchen sinks does the Fed have left?
This is the question Mike and his Stansberry's Credit Opportunities co-editor Bill McGilton recently posed to their subscribers...
Almost all of the Fed's stimulus efforts over the past six weeks have been to keep the ever-fragile credit markets afloat. Multiple Fed governors have said as much in various forums.
But according to Mike and Bill, this still hasn't changed their expectations... or the expectations of many others, like credit-market soothsayer Edward Altman)... on corporate defaults or credit-rating downgrades from "AAA" (safest) to "BBB" or lower. As Mike and Bill wrote to Stansberry's Credit Opportunities subscribers in a special update on March 27...
At the start of 2020, credit-ratings agency Standard & Poor's ("S&P") forecast a 3.3% high-yield default rate – the percentage of companies with "junk" credit expected to default within 12 months. Less than four months later, it's now forecasting a 10% default rate.
S&P has never increased its forecast so drastically. And its current "pessimistic" forecast projects the default rate to reach about 13% by the end of the year. That would be a new 40-year high.
It clearly doesn't believe the Fed's wide-ranging actions will stop the bleeding.
The Fed started buying junk bonds in March... and then last week, the central bank said it would be buying corporate bonds that have recently been downgraded... via, go figure, BlackRock's high-yield ETF, the iShares iBoxx High Yield Corporate Bond Fund (HYG).
You really can't make this stuff up.
The opportunity in 'crisis bonds' today...
The critical point for individual investors interested in growing and preserving their wealth is that, if you know where to look, you can find tremendous opportunities today to buy "distressed bonds" trading at discounted prices given the amount of risk you're taking on.
As Mike explains, these are different from the bonds in your 401(k). And they have nothing to do with "bond" mutual funds... U.S. Treasury bonds... or bonds issued by blue-chip companies like Apple (AAPL).
These are sophisticated debt investments in a little-known area of the market. And it's a strategy that some of the world's greatest investors – like Warren Buffett, Paul Singer, and Wilbur Ross – use when they're looking to deploy cash during crisis times like today.
The biggest point is, not every company with a bond that sold off will default...
Be it because of Fed intervention or otherwise, there are "safe" bonds that Buffett or anyone else can buy. As Mike and Bill wrote to their subscribers in the March 27 update...
This is the type of environment we've waited for since we launched this publication back in November 2015. We're seeing many attractive distressed-debt opportunities today...
We still believe it's imperative to be cautious. There are still many "unknowns" as the coronavirus continues to play out. But we don't want to sit on our hands any longer.
Over the past week, we've studied dozens of bonds that have sold off. And now, it's time to take advantage...
In a special report for new subscribers published last week, Mike and Bill identified three of these opportunities... for "the beginning of the crisis."
They described these opportunities as "crisis bonds"... explained exactly how the public can buy them... and why investors can make more money than they ever thought possible – with less risk than stocks.
We're talking about years and years of return on your capital. And it's possible from a part of the market that many investors don't even know about or understand... but one that can be tremendously lucrative.
Click here right now to learn more about how to access these incredible opportunities today.
As for the short term in stocks...
Our colleague Greg Diamond, a Chartered Market Technician, continues to update his Ten Stock Trader subscribers multiple times per day on the key technical levels he's watching in the U.S. indexes and major sectors.
Last week, in the April 7 Digest, we highlighted one of Greg's short-term indicators. As we wrote...
He will be keeping an eye on the 2,715 level in the benchmark S&P 500 Index moving forward...
If the S&P 500 closes above that level multiple times next week, Greg said that would change his mind about whether we've seen "the" bottom already.
Well, now "next week" is "this week"... and the S&P 500 has held above 2,715 yesterday and today. Greg updated Ten Stock Trader readers earlier today with new numbers to watch during this "bear market rally"...
2,885ish is the level to watch on a completion of the move. If 3,130 is broken, I'm throwing in the bearish towel. Doesn't mean I flip crazy bullish, but will take a step back from expecting more downside.
Stay tuned. As always, we'll keep tracking Greg's indicators and analysis in the Digest.
New 52-week highs (as of 4/13/20): Dollar General (DG), DB Gold Double Long ETN (DGP), DocuSign (DOCU), Franco-Nevada (FNV), SPDR Gold Shares (GLD), Barrick Gold (GOLD), NovaGold Resources (NG), and Wheaton Precious Metals (WPM).
In today's mailbag, feedback from Monday's Digest about the coronavirus and the meat industry and how this all impacts producers. As always, e-mail your comments and questions to feedback@stansberryresearch.com. We cannot respond to every message, but we do read your notes.
"Corey and Stansberry Research Team, Read with interest your 4-13 comments regarding Smithfield, Wayne Farms, Tyson, Costco and Amazon supply chain potential problems.
"Please give some thought to the producers who have cattle, hogs, lambs and chickens ready for harvest (used to be called slaughter but now to be politically correct is called harvest, just like grain and vegetables are harvested).
"These protein sources when held off market cost the producer lots of money, even to the extent of being in severe red ink. It is remotely possible that to make room for those held over waiting for harvesting that future production will be slowed by reducing sow population and setting eggs. In the case of hogs that will put a greater burden on producers to find processing plants to reduce the herd size.
"Farm hog prices are presently at lows not found in several years. Finished cattle will continue to be fed at much less profit, if any profit, adding to the total beef protein supply. Cattle herds cannot be reduced or increased with the same speed as swine and chickens. An example of an abrupt decrease in finished beef prices at only the farm level occurred when just one plant was closed due to a fire last year in Holcomb, Kansas.
"Another result of a decrease in institutional/restaurant sales is the milk processing industry. There is a lack of home use (retail) processing and packaging capacity to offset the production that was going to the institutional/restaurant trade. Bulk type processing/packaging versus half gallon/gallon packaging. Therefore there are examples of raw (not processed) milk being dumped due to the lack of retail processing/packaging facilities. This is at a time when farm dairy prices are low to begin with, resulting in smaller to mid-size operations deciding whether to stay in business.
"Just thought I would give you a very brief economic sample of what is going on in the farm/ranch country which lets you enjoy the best quality and safest sources of protein in the world. Respectfully..." – Paid-up subscriber Ron H.
"Ironically, the coronavirus pandemic, which has caused the terrible loss of lives globally, may actually help save the planet if we continue to drastically reduce the global consumption of oil and gas products." – Paid-up subscriber Barry B.
"The story about Smithfield was interesting especially since the Virginia plant has been sending pig carcasses to China for processing for quite some time. This is a scary world and this should not be allowed... ever! See the story here." – Paid-up subscriber Mike F.
All the best,
Corey McLaughlin
Baltimore, Maryland
April 14, 2020