One of the Worst Sell-Offs in Decades
Some 'good' news from the Fed... Millions of Americans are still just $400 from disaster... One of the worst sell-offs in decades... Why the decline in corporate bonds is just beginning...
Today, the Federal Reserve shared the good news...
According to its latest annual survey of household finances – the Report on the Economic Well-Being of U.S. Households in 2017 – only 41% of households don't have enough savings to cover a $400 emergency expense without borrowing.
"How is that good?" you're likely wondering. That's because it's down a full three percentage points from the 44% of households who couldn't afford a $400 expense in 2016.
Now, we'll understand if you're not impressed...
After all, that means that nearly a decade into the post-financial crisis recovery, more than two in every five households still have virtually no savings to speak of. But that's not all...
More than 20% said they already expect to miss payments on some of their bills in the coming year... with one-third of those saying primary expenses like rent, mortgage, or utility bills will be left unpaid.
In other words, despite a booming stock market and rosy economic data, millions of Americans are just one small emergency from financial disaster.
If there was a bright spot in the survey, it was that 74% of those surveyed said they were "living comfortably" or "doing OK." However, given that many of these folks are necessarily among those with no savings today, we suspect they may feel differently when access to cheap credit inevitably begins to dry up.
As we noted yesterday, this situation cannot continue forever... and it will not end well.
Of course, regular Digest readers know many American companies aren't much better off...
While a small number of firms have racked up massive cash hoards in recent years, a huge swath of corporate America has become dependent on cheap credit to get by. And here, too, the situation is unsustainable.
Like U.S. consumers, companies have taken on far more debt than they can reasonably expect to pay off. And a huge amount of this debt comes due over the next four years. For many firms, their only hope is to refinance this debt – to "extend and pretend" – before it does.
Unfortunately, the 'clock' is ticking...
And we may already be seeing the first signs of trouble in the corporate bond market. As Bloomberg reported yesterday...
You need to rifle through 18 years of history to find selloffs that compare to the one corporate bond investors are now enduring.
Debt of American companies just posted their third-worst 100-day returns since 2000, according to a JPMorgan Chase & Co. index, as tighter monetary conditions leave their mark on high-quality bonds with longer maturities...
A Bloomberg Barclays index of U.S. investment-grade credit is down 3.9% so far this year...
To be clear, the biggest declines have been in investment-grade debt to date...
Prices of the riskier high-yield (or "junk") bonds we've warned about in the Digest have been relatively stable so far. This may be surprising, but the reason is simple...
Because investment-grade corporate bonds tend to have lower coupons and longer durations than high-yield bonds, they generally carry more "interest-rate risk." This means their prices are more sensitive to changes in interest rates. On the other hand, high-yield corporate bonds tend to carry greater "credit risk," meaning their prices are more sensitive to risk of default.
These recent moves tell us the bond market is responding to rising interest-rate risk...
But it simply isn't worried about rising credit risk today.
This makes sense. Interest rates have been moving higher for months, while corporate defaults and debt downgrades remain relatively stable... for now.
But regular readers know it's only a matter of time until that changes...
Rising rates – which are only now beginning to hurt some corporate bonds – will inevitably make it much harder for the most-indebted companies to refinance. And if they can't refinance, many will default.
Sooner or later, the market will wake up to this reality... and when it does, the panic out of high-yield bonds will begin.
But again, none of this has to be bad news for you...
In fact, as Porter and his Stansberry's Credit Opportunities team have explained many times over the past couple years, this panic will create huge opportunities for patient investors. As senior analyst Brett Aitken wrote in the March 16 Digest...
Our Stansberry's Credit Opportunities team has been following every movement in the bond market for more than two years. They're eager for a jump in bond-market volatility. They know that as fear hits, bondholders – even those owning the bonds of companies we know are safe – will panic. They'll sell for whatever they can get, just to move to cash or cash-like securities. That's when we'll swoop in and make recommendations at a huge discount to par.
We know many of you aren't interested in "boring" bonds. But patient investors will be rewarded. They'll earn interest payments along the way and enjoy massive capital gains when they get paid in full at maturity (or when the market sends the bond prices back to par).
Stay tuned to the Digest for more on this critical trend.
New 52-week highs (as of 5/21/18): AllianceBernstein (AB), Eaton Vance Enhanced Equity Income Fund (EOI), ETFMG Prime Mobile Payments Fund (IPAY), Lindsay (LNN), Monsanto (MON), Okta (OKTA), Sabine Royalty Trust (SBR), United States Commodity Index Fund (USCI), Cambria Value and Momentum Fund (VAMO), Verisign (VRSN), and W.R. Berkley (WRB).
Two readers weigh in on rising poverty in America. What's on your mind? Let us know at feedback@stansberryresearch.com.
"34.7 mil households are notch above poverty. 16.1 mil households are living in poverty. In a recent Digest you noted the bubble of bonds that are one rating above junk and the amount of bond indebtedness rated junk, sorry I don't remember the exact numbers. But, I do recall there is 1 Trillion of debt that has to be refinanced in the next 4 years. Whether it's personal finance or corporate finance, we are pushing the envelope. There will come a day when the 'ledger' of personal finance and the 'ledger' of corporate finance will be forced to balance.
"Reminds me of a old, prophetic cartoon. An old, long in the tooth man, was sitting in his recliner waving an envelope at his wife with 'Hell' as the return address, and his captioned words were 'I told you when you did that there'd be hell to pay.' The bill is coming due, both personally and corporately. Thanks for the heads up." – Paid-up subscriber Randy W.
"I would suggest many of these people 'officially' in poverty are there because they can't live within their means. My parents taught me if you don't have the money you don't get it. You can borrow money for a house and maybe a car. I have taught my kids those same values with one exception. They had to borrow a little for college so that it has value to them.
"While the expenses listed may be ordinary, a cell phone is certainly not necessary. Most people consider going out to eat, cable TV, and other common things for Americans almost 'rights', they are not. What ever happened to saving money for a rainy day." – Paid-up subscriber Kelly T.
Regards,
Justin Brill
Baltimore, Maryland
May 22, 2018