A sign of big trouble most people are missing...
A sign of big trouble most people are missing... Another reason to worry about 'junk'... Time is running out...
By now, every Stansberry Research subscriber should know why we're concerned...
For the past several months, we've been explaining why problems in the credit markets – particularly in high-yield corporate (or "junk") bonds, subprime auto debt, and student loans – are likely to lead to a period of vast credit default... and the largest legal transfer of wealth in history.
But these markets are only where the worst "excesses" have occurred...
Cheap capital from the Federal Reserve and other central banks spread to nearly every corner of the economy over the last several years, leading to booms in markets across the globe.
But now – despite unprecedented amounts of "easy money" around the world – something is changing. In Friday's Digest, Porter shared an insight you likely haven't heard anywhere else...
There's something in all of these numbers that most people will not see or ever understand – not until it's way, way too late. Our bankers have been world-class in providing more capital than ever before for corporations and consumers. They're doing a splendid job. Don't hate the bankers. They only did what the government told them to do. Besides... it's not their money. It's yours.
The trouble is, nobody – not even the world's best investors – can find a way to make a profit with all of this capital. That's a huge red flag. Declining profitability for both investors and corporations is a sign of big trouble.
A recent Barclays study shows that a decline in profit margins at public companies led to a recession in every example (except one) since 1973. And recent data show that U.S. corporations' profits fell 4.7% in the third quarter of 2015, the largest annual decline since 2009...
This combination of falling profits, rising interest expenses, and record levels of low-quality consumer-borrowing presages a world of hurt. If entrepreneurs and investors can't make a profit with all of the capital being created by our wonderful bankers, it must mean that far too much of the money is going to completely unproductive activities... like students studying basket-weaving and homeless people pretending to buy cars.
In other words, the central-bank-fueled boom of the past several years appears to be ending... The economy could be slowing, just as consumers and corporations alike have racked up record amounts of questionable debt.
If this reminds you of the run-up to the last credit crisis in 2007, you aren't alone.
But falling profits aren't the only sign the economy could be slowing...
A report in this weekend's Wall Street Journal noted the junk-bond market itself could be sending an early recession warning. From the article...
Junk bonds are headed for their first annual loss since the credit crisis, reflecting concerns among investors that a six-year U.S. economic expansion and accompanying stock-market boom are on borrowed time.
U.S. corporate high-yield bonds are down 2% this year, including interest payments, according to Barclays PLC data.
The article notes that annual losses in the junk-bond market are rare – according to Barclays, there have only been four other instances in the last 20 years – and tend to "foreshadow" economic slowdowns. In particular, two of these coincided with the recessions (and market crashes) of the early 2000s Internet bubble and the 2008 crisis.
More concerning is the signal from default rates...
So far this year, the junk-bond default rate sits just less than 3%. This is still below the 30-year average default rate of 3.8%, but estimates suggest defaults will jump to nearly 5% or more next year.
Why is this important? A rising junk-bond default rate has an even stronger correlation with the economy. More from the article...
Mounting defaults signal an end to the six-year bull run in credit fueled by the Federal Reserve's long commitment to low interest rates, said [New York University Finance Professor Edward Altman, inventor of the most commonly used default-prediction formula].
He said downturns in the junk-bond market often presage stock-price declines and economic slowdowns. Some investors fear just such a reversal as the Fed prepares to raise interest rates this month for the first time since 2006.
"In most high-default periods we've seen in the past, the rise in default rates precedes a recession," said Mr. Altman, who has been studying the subject for more than 50 years.
In fact, over the past 25 years, junk-bond default rates above 4% have a perfect record of forecasting recessions... The default rate broke above 4% prior to each of last three official recessions in the U.S. in 1991, 2001, and 2009.
Of note, each of those times, the default rate ultimately peaked well above 10%. As Porter has explained, because the Federal Reserve cut the last default cycle short, we expect the coming default cycle to be among the biggest ever.
Once again, we hope every reader will heed these warnings...
At the very least, we hope you're holding plenty of cash and are keeping a close eye on your trailing stops.
The coming default cycle will be massive. And millions of people could be wiped out.
But as we've been saying... It doesn't have to be a tragedy for you and your family. If you're prepared, you can not only avoid these problems... you could make a literal fortune over the next few years.
To learn how – and to learn more about our brand-new distressed-debt service – click here. But don't delay... this offer expires this Wednesday, December 9.
New 52-week highs (as of 12/4/15): American Financial (AFG), Activision Blizzard (ATVI), Becton Dickinson (BDX), Chubb (CB), McDonald's (MCD), Microsoft (MSFT), NovaGold Resources (NG), ProShares Ultra Technology Fund (ROM), and Constellation Brands (STZ).
In today's mailbag, another question on insurance companies... and more praise for our new distressed-bond service. What's on your mind? Send your questions, comments, and concerns to feedback@stansberryresearch.com.
"Porter, In Volume 16, the December issue of Stansberry's Investment Advisory, you warn that, once again, the credit crisis is edging a little closer. You go on to say that 'problems in credit markets are different than those in equity markets... Corporations that appear sound can find themselves in trouble because they have invested in toxic debt... Downgrades from credit agencies can mean institutions like mutual funds or insurance companies can no longer hold the debt. It doesn't take much bad news before a selling frenzy begins.'
"How, then, can you continue to advise your readers, via the Investment Advisory Model Portfolio to continue to 'buy' four of the seven insurance companies listed? We all know that Insurance Companies tend to hold a considerable amount of funds in bonds, which you feel are in for a huge crash. Could you please explain this aberration." – Paid-up subscriber Rick F.
Brill comment: Porter answered a similar question in Friday's Digest. If you missed it, you can read it here.
"Hugs have not been given out because I have no live bankers... only broker types. But all of this made so much sense to me that I decided to do some bond and CD investing. All of this makes complete sense to me. Just like investing in stocks you buy good and not so good. As always it is about spreading out the risk. But it is an area that I knew stuff about but never just did it. I am with you Porter the risk is much lower than stocks. Sure, if you look at it from a liquidity perspective it is very different. But from a buy and hold perspective the risk in buying bonds is very low even in the default arena. Funny how most people don't even look at it.
"From my perspective I changed from trading options this year to buying bonds. This will give you a chuckle. My old daddy who is 96 thinks that I am a genius for going that direction. In fact one of my calls a couple of weeks ago that was the first thing out of his mouth. He wanted to know what I had done over the course of the week. As a male impressing your father is important. And he wants to see that you have done better than he did. But that response was so humbling it brought tears to my eyes. Thanks to all of you for making me look good in my father's eyes. I grovel at your feet." – Paid-up subscriber Jeff S.
Regards,
Justin Brill
Baltimore, Maryland
December 7, 2015
|