The Next Crisis Will Be Much Worse Than the Last
Editor's note: It was the first to fall... but it won't be the last.
Today's Masters Series essay is adapted from a brand-new special report. In it, Stansberry's Credit Opportunities editor Mike DiBiase explains why the recent demise of toy retailer Toys "R" Us is a much bigger story than many people realize... and why it will eventually lead to an even bigger disaster than the last financial crisis...
The Next Crisis Will Be Much Worse Than the Last
One of America's most iconic companies just took its last breath...
After several troubling years, Toys "R" Us – once the world's largest toy retailer – finally succumbed to the weight of its massive $5 billion in debt. Last September, the 70-year-old company said it could no longer afford its $400 million in annual interest payments and filed for Chapter 11 bankruptcy protection.
Initially, Toys "R" Us simply planned to reorganize its long-term debt and continue operations. But things played out differently...
Ultimately, a federal judge ordered the company to liquidate its assets – including every toy on every shelf – to pay back whatever debt it could. A months-long process ended with the company shuttering its remaining stores across the U.S. yesterday.
It marked a sad ending to a once-great company.
The Toys "R" Us bankruptcy might not matter much to you. You might think it's just another outdated "brick and mortar" retailer that never completely adapted to the Internet age.
It's much more important than that, though... It's not a one-time event. Toys "R" Us will be the first in the biggest wave of corporate bankruptcies in American history.
Of course, this wave will lead to a massive decline in the stock market...
Worst of all, most investors aren't prepared. They could see huge portions of their wealth wiped out in a short period. Some investors could lose everything in the years ahead.
But you don't have to be one of the victims...
Not every bankrupt company will go out of business. Instead, these companies will simply have their equity "reset"... And new stockholders will take control of them.
The only thing that will change is who owns the assets... That's why Porter says this event will be the greatest legal transfer of wealth in history.
More important, the wave of bankruptcies will open the door to tremendous opportunities. That's what we're going to capitalize on... When investors panic – as they always do at some point – even great companies will sell off. If you're prepared, you could make a killing.
Some of the world's greatest investors wait for moments like this...
We're talking about billionaires like Warren Buffett... John Paulson... Paul Singer... Andy Beal... Sam Zell... and Wilbur Ross. These guys do the exact opposite of most investors.
While everyone else is chasing prices higher in the euphoria of the late stages of a bull market, these billionaires are busy raising cash. Then, when the crisis unfolds, they pounce. They use a little-known type of investment to make more money than you ever thought possible.
This weekend, we'll share the "secret" of these world-class investors. But first, you need to understand how we got to this point...
Since the last financial crisis, American companies have binged on debt...
Over the past decade, they've taken advantage of the Federal Reserve's artificially low interest rates to borrow more than $12 trillion altogether. Today, companies have borrowed more money as a share of the economy than at any other time in U.S. history.
Like children with a giant bag of candy, many companies didn't know when to stop... In the past several years, they continued borrowing and borrowing – assuming interest rates would always stay low and that the American economy would remain healthy forever.
The total debt of these companies has now grown to unsustainable levels. And as a result of two factors converging in the market today, the "day of reckoning" will soon arrive...
- These debts are now starting to come due. A tidal wave of this corporate debt – a record $4 trillion – must be paid or refinanced over the next five years. And...
- Interest rates are rising... quickly. Companies that can barely afford to maintain their debts today – at artificially low rates – will collapse as rates go higher.
Many companies won't be able to refinance their debt coming due in the years ahead. Just like Toys "R" Us, a company that no one expected to go out of business at this time last year, their equity will suddenly become worthless. This is just the start...
You see, Toys "R" Us was simply one of the first companies to try to refinance its massive debt load in what Wall Street billionaire and current U.S. Secretary of Commerce Wilbur Ross calls a "wall of maturities" starting in 2018 and building up through 2021 and 2022.
Never before has this much debt come due in such a short span of time.
To give you an idea of just how bad things could get, let's look at what happened before...
Back in 2007, just before the last financial crisis, close to 6% of the largest companies in America weren't earning enough to even cover the interest payments on their debts. Today, according to a study from Bianco Research, that number is an alarming 15%. In other words, almost three times as many companies can't cover even the interest on their debts.
Want more proof? Take a look at this chart...
As you can see, corporate debt as a percentage of U.S. gross domestic product is higher than ever. Yet defaults remain near a 20-year low. This situation simply can't last. Even a top analyst at S&P Global Ratings says something has to give.
Meanwhile, interest rates are heading higher... much higher. Through June, the Fed has already raised interest rates twice in 2018 and plans to do so twice more this year. It recently increased the "federal funds rate" – the rate that banks charge each other – to 2%.
All interest rates in the U.S. are tied to this rate – including the interest rate on the 10-year U.S. Treasury note, which has trended higher for the past couple of years. In May, it briefly broke past 3% – a key level that implies grave danger for the most-indebted firms...
As this figure rises, companies' borrowing costs rise, too. They'll have to pay more – and some will have to pay significantly more – to refinance their debt. As companies plunge into the wall of maturities, hundreds simply won't be able to afford these higher rates... They'll go bankrupt when the burden of their interest costs suddenly becomes too heavy.
Many won't even get the chance... Creditors won't be willing to lend them new money at the higher interest rates. That will force these companies into bankruptcy, as well.
And yet, despite all of this, both the stock and bond markets have barely reacted so far...
(The corporate-bond market is where the debt of companies that issue bonds to the public trade.)
Both the stock and corporate-bond markets have been in "bull markets" for years.
In fact, the current bull market in stocks has been driven almost entirely by these companies borrowing money they can't afford to repay. Most investors don't understand how big of a role new debt has played in the equity boom that we've seen in recent years.
As a result, the coming wave of bankruptcies will surprise most investors... It will lead to the biggest disaster since the last financial crisis. Remember, stock prices plunged 50% in the ensuing bear market, which led to a national bailout of the banking system.
Now, with the Fed aggressively raising interest rates for the first time since before the last financial crisis... and with a record tidal wave of maturities about to hit... a similar scenario will soon play out across dozens of the biggest and most respected companies in America. Only this time... because of the buildup of massive amounts of debt, the losses for investors will be much larger.
Good investing,
Mike DiBiase
Editor's note: Fortunately, you don't have to be one of those investors. You see, there's a massive opportunity hidden in this mess. It's a sophisticated type of investment that most investors know nothing about...
But the world's best and richest investors have been using this type of investment to grow their wealth for decades. It's a way to boost your profits completely outside of stocks... with the potential for equity-like capital gains... and with far, far less risk than individual stocks. Learn more here.