This Will Trigger the Next Bear Market

We're not out of the woods yet... What happens when credit dries up?... This will trigger the next bear market... The warning signs to look for...

Financial disasters don't happen slowly...

Like a volcano erupting, disasters occur suddenly... and seemingly without warning.

The sad truth is that most disasters could have been avoided. Investigators who study them almost always find signs – sometimes obvious ones – that warned of trouble well before disaster struck. But the warning signs are often ignored... leading to unnecessary catastrophe.

Today, I (Mike DiBiase) want to share what I believe will cause the next financial crisis. I'll explain the danger lurking despite the appearance of calm on the surface today... the critical warning signs to look for... and most important, how you can prepare for – and profit from – what unfolds.

If you're like most investors, you probably pay close attention to the stock market...

It's where you invest the bulk of your money. It's where all the "fun" happens... The stock market – and individual stocks, in particular – can quickly soar. When a stock goes up hundreds of percent, it can produce life-changing returns.

But the opposite is also true... Your gains can also disappear almost overnight.

At the end of last year, many investors likely experienced that first-hand as stocks sold off. The benchmark S&P 500 Index plunged nearly 20% from its mid-September high of 2,930 to a low of 2,351 on Christmas Eve.

Since then, the market has made a dramatic recovery... Stocks rose 15% from their December bottom through the end of January. And as we end this month, they're up another 3%.

It's easy to feel like we're out of the woods. Fears of a bear market have subsided.

Most people think that recessions cause the stock market to tank. And by most indicators, there's no immediate risk of a recession today. As long as the economy continues to grow and unemployment remains low, you should stay invested in stocks. You don't have anything to worry about... right?

That's backwards... I believe the same thing will trigger both the next recession and the next bear market.

In fact, the next stock market collapse will likely happen before the next recession begins. It will happen suddenly, and most investors won't have time to react.

The problem is, most people are looking in the wrong place for the warning signs...

They're focused on the rate of unemployment and inflation... the Federal Reserve's interest rate changes... and corporate earnings. But the real warning signs will come from the same place that caused the last financial crisis: the credit market.

The credit market is where all types of debt – government, consumer, and corporate – are bought and sold. Because the credit market isn't as exciting as the stock market, investors often ignore it altogether.

Remember how the last financial crisis began? One type of consumer debt (subprime mortgages) started going bad, causing massive selling of the troubled loans. It's critical to understand what's happening in credit.

The credit market drives our entire economy. It's highly cyclical. When interest rates are low and credit is cheap, we experience "booms." When rates rise and credit tightens, we experience "busts." Since the last financial crisis, credit has been cheap and easy to access. And during the current credit cycle, the biggest excesses have occurred in corporate debt.

When this corner of the credit market starts to turn – as more and more high-yield ("junk") corporate debt goes bad – it will kick off the next crisis.

Most investors are oblivious to the dangers lurking in the corporate debt market...

Since the last financial crisis, companies have gorged themselves on cheap credit. Yield-starved investors have gobbled up this debt in record numbers... U.S. corporate debt has ballooned to $9 trillion today, roughly double the amount from 2007. In the chart below, you can see that corporate debt is at all-time highs – both nominally (black line) and as a percentage of GDP (blue line)...

But it's not just the sheer size of corporate debt that's troubling... It's also the quality. The largest portion of this debt today – a record $3 trillion worth – is rated as the lowest level of investment-grade debt, one level above junk status. Meanwhile, companies are even more leveraged today than they were before the last financial crisis. Making matters worse, $3.5 trillion in debt is coming due over the next three years.

Something has to give.

It's clear that we're nearing the end of the current cycle. When the current credit bubble pops, enormous amounts of capital will be lost, wiping out unprepared investors.

By paying attention to one key warning sign, you'll be able to spot the danger before most people...

I believe the bubble will pop when the majority of banks are tightening credit. That's when they are demanding higher interest payments and greater credit protections (or worse, cutting off credit completely to some companies).

The banks hold all the cards. They are the linchpin that has kept the credit bubble alive.

Most companies can't afford to pay off their debt when it comes due. Instead, they rely on banks to refinance it. For most of this cycle, banks have been loosening credit and refinancing the debt – even as corporate debt has ballooned and credit quality has weakened. The banks have been kicking the can down the road.

Many companies that can barely afford their interest payments have been on "life support." But this game can't go on forever...

Interest rates are rising at the same time massive amounts of debt are coming due. Eventually, banks will refuse to take on the added risk. Suddenly, many companies won't be able to refinance their debt, forcing them into bankruptcy.

The default rate will rise sharply, causing investors to dump their bonds. And since the high-yield bond market is far less liquid than the stock market, many bond prices will quickly fall off a cliff.

Banks don't have to worry nearly as much about huge credit losses...

That's because they sit atop the debt structure. They get paid first in a bankruptcy. And they have much greater credit protections. So they'll recover far more of their investments than most debt investors.

If the banks don't do it on their own, an inverted 'yield curve' will force them to tighten...

Banks borrow money with short maturities and lend it out with long maturities. So they make money when long-term rates are higher than short-term rates. When this relationship flips – the yield curve inverts – banks suddenly begin losing money. They have to pay more in interest to their creditors than they earn on their loans.

This doesn't happen often – normally, long-term rates are higher to compensate investors more for tying up their capital longer. But when it does, banks start tightening.

The most widely used yield curve is the difference between rates on 10-year U.S. Treasurys (which yield 2.66%) and two-year Treasurys (which yield 2.50%). The difference is just 16 basis points (0.16%) right now. In other words, the yield curve is extremely close to inverting.

The yield curve last inverted in 2006. Before that, banks had been loosening credit. After the yield curve inverted, they immediately began tightening. By 2008, more than half of all banks were tightening. We all remember what happened next.

And last month, banks began to tighten for the first time since 2015.

In 2015, the banks tightened as oil prices collapsed. The yield curve wasn't close to inverting. Banks eventually loosened credit as oil prices recovered.

But that isn't the case this time... If this tightening trend from the banks continues, I believe it will trigger the next financial crisis. The high-yield corporate bond market will crash first. But it will spread beyond the bond market into the stock market. Investors will flee from highly leveraged companies considered safe investments today, crashing their share prices.

You want to be prepared for the next crisis...

The good news is, you don't have to fear the coming collapse. You don't have to be one of the victims. In fact, you can profit from it...

When the panic arrives, investors won't pay attention to what they're selling. The bonds of many good companies will be sold off indiscriminately along with the bad ones.

It will be a fantastic, once-in-a-decade buying opportunity. You'll be able to pick up extremely safe bonds for pennies on the dollar... allowing you to earn large, equity-like returns through the corporate bond market. You'll get the upside of stocks but with far less risk. You'll be able to make a killing by buying these safe bonds.

New 52-week highs (as of 2/27/19): Ionis Pharmaceuticals (IONS), Ingersoll Rand (IR), MarketAxess (MKTX), Motorola Solutions (MSI), New York Times (NYT), and W.R. Berkley (WRB).

We received a lot of notes about yesterday's issue on the new socialist movement that has suddenly taken hold in America. In today's mailbag, we're sharing a few of the most interesting ones... as well as some kudos for the way we do business. As always, you can send your thoughts, comments, and concerns to feedback@stansberryresearch.com.

"Reading Wednesday's Digest regarding the American perversion of socialism, it could also be called the American perversion of capitalism. I prefer to call our system a blend of crony capitalism with substantial government intervention that is generally designed to benefit the wealthy while at the same time appearing that it's benefitting the poor. And the middle class masses end up paying a disproportionate portion of the bill.

"When we look at the gradual decline towards what we like to call socialism today, the American healthcare system is a good example of why we're seeing this trend. Our healthcare system is broken. In decades past, most hospitals were owned and run by the churches for the benefit of the people. Now they are predominantly corporations with a profit motive.

"And the examples of extreme greed in our pharmaceutical industry is epic. No wonder that healthcare costs have outpaced inflation by excessive amounts for decades, to the point that it now consumes nearly 18% of our GDP, and in fact, is not the finest healthcare system in the world. Far from it.

"And the masses are getting upset and looking for resolutions. So steps in the more 'progressive' members of our government to propose a solution, Medicare for all.

"This scares the hell out of me. But you know, our current system scares me as well. I'm honestly not sure which is worse. So then you get thoughtful folks thinking that just maybe change is better than what we have now. The ultimate point is that though crony capitalism and greed we're doing this to ourselves as a society. I'm starting to think that leaving the U.S. may be the best answer for me.

"Added note... I wasn't at all upset at the Digest as the starting paragraph implied that this would upset a lot of people. I'm mostly in agreement. I'm angry because we let our system get so perverted. And like Porter back in 2011 I'd love to think that the American people would get smart. But in fact, I believe the majority are more like sheeple, eager to believe whatever the spin doctors within all levels of government, corporate and the media wish to spew.

"We need to remember that there's some very smart people in positions of power and influence that know exactly how to manipulate the public psyche for the benefit of the Protected Class (as Peggy Noonan calls them/us) and the Dark State (as referred to by Doug Casey and friends). While these two groups may not entirely be the same, there's a lot of overlap. Anyway, I'm long past long-winded and time to hit send." – Paid-up Stansberry Alliance member Mike B.

"You state that [the] article may lead to a wave of cancellations. I disagree, in fact the vast majority of your subscribers are more likely screaming 'Amen' than anything else. You need only consider who subscribes and reads your emails to realize this.

"Americans can no longer stick their heads in the sand and let somebody else deal with this problem. We can blame the continuing failings of our education system now dominated and motivated more by unions than the educational needs of our children. We can blame the media which, for the most part, appears to be complicit with the radical left's agenda.

"Less educated people who are led like lambs to the slaughter by listening to the (mostly) lying voices of the mainstream media are a key issue. Combine that with the radical left's agenda to allow everyone into our country because of no borders and even a blind person can see that the appeal of getting paid from an inability to work or lack of desire to work that the radical left proposes, offers too many people a 'free ride.' No wonder everyone in the world wants to come to the U.S. and the radical left sells these people their lies so they can assume power.

"Wake up Americans!!! What does it take for evil to succeed? The answer remains the same... for one good person to do nothing. We all have voices... our viewpoints also need to be heard!!!!

"Thanks for saying what just about everybody seems to be afraid to say! We need more intestinal fortitude to speak the truth, lest we go the way of Venezuela or any of the other examples of the total and absolute failure of socialism." – Paid-up subscriber Aldie B.

"[Yesterday's] column is right on the money. Keep telling it like it is. Also, good to have you back Porter. Hope you are doing well. I need to lose some weight. I am jealous." – Paid-up subscriber Brian M.

"Hi! This is the first time I've read a warning like this: 'By opting in to receiving an eletter, you will also be opting in to receiving an occasional marketing email.'

"I was completely snowed in by unwanted mails from other publishers. Now I understand why. It took me almost a year to dig myself out. I just didn't understand what was happening. Terrible. It ate up a year of my life!

"I think it's really great that you warned the unsuspecting reader. Before you presented the various newsletters! Thank you for your honesty!" – Paid-up subscriber Christina B.

Regards,

Mike DiBiase
Atlanta, Georgia
February 28, 2019