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September 15, 2020 | Fed ‘Sink Hole’ No. 3

Sean Brodrick

Sean is the natural resource analyst for Weiss Group. You can read his thoughts on gold, oil, cannabis, uranium and other natural resources at EdelsonInstitute.com

Why are the markets running around like actors in a “B”-rated horror flick?

Because investors know something is lurking out there.

Growing.

Spreading.

This thing is like The Blob … all consuming.

I’m talking about the rot behind the walls of the credit markets.

You see, before the coronavirus crisis struck, even the lousiest, highest-risk companies were able to raise tons of money.

It’s the same kind of high-risk behavior that gave us advance warning of nearly every other economic catastrophe in recent history, including the Great Recession.

It’s also what happened before the Great Depression of the 1930s.

Like in the Roaring 1920s, the Roaring 2010s saw investment bankers and bond salesmen sipping Cristal champagne and partying with customers’ money earned in HIGHLY questionable, HIGH-RISK deals.

But it became even more extreme than the 1920s, with Wall Street cashing in on the massive flood of FREE MONEY the Fed pumped in.

End result: America’s shakiest companies have taken on a mountain of debt. One that makes Everest look like a bunny hill.

A decade ago, U.S. corporations held $3.3 trillion in debt. Now, they’re buried under more than $10 trillion … nearly half of the country’s 2019 GDP of $21.5 trillion!

And if you include partnerships and small business debt, the figure stands at an eye-watering $17 trillion.

That’s a higher percentage of the U.S. economy than at any point in history — including the peak of the dot-com bubble.

And the Fed’s zero-interest policy made it especially easy for Wall Street to peddle junk investments again, starting with the junkiest of them all.

Remember Michael Milken, the financier who was thrown into jail for massive junk bond fraud in 1989? Well, if you think those days are over, think again.

Bond investors are getting suckered into junk bonds like never before, desperate for yield. It’s all “perfectly legal,” luring even more investors into the trap of a lifetime.

But what makes this real-life horror movie even worse is a surge in the absolute RISKIEST kind of debt ever created on Wall Street …

The technical term for this debt is “Covenant-Lite loans.” They’re so risky because they don’t include strict rules on how much debt borrowers can take on … or how much cash they need to keep on hand.

That’s why they get a rating of single-B, which is the bottom tier of the junk pile.

 



And that’s why I call these loans “garbage debt.”

The problem: They’ve surged roughly EIGHT TIMES OVER since 2010 — to an all-time record of over $400 billion.

What’s worse, garbage debt now represents a whopping 75% of all leveraged loans — far and away the highest market share of all time.

But now, as the global economy sinks … geopolitical tensions rise … and delinquencies and defaults climb …

investors and lenders are starting to balk.

The sweaty hands of bond traders are hovering over their sell buttons like an army of “Jeopardy” contestants.

And in the aftermath of the pandemic, these sick companies — and even ones that until now were fairly healthy — are sicker than ever …

… in spite of the Fed’s “emergency” move to purchase $750 billion of corporate paper — junk included.

Giant oil companies … auto manufacturers … airlines … hotels … restaurant chains.  They’re bleeding red ink like targets of Jack the Ripper.

The Wall Street Journal pulls no punches by saying, “The economic earthquake the coronavirus has unleashed is likely to trigger a wave of corporate distress and bankruptcy unseen in years.” Many believe that once the pandemic is behind us, things will return to normal.

Don’t make this mistake 

The almost-total shutdown of the world’s economy is something that has never happened before.

The hayride is over.  You’re not in Kansas anymore.

So, what is average joe investor to do?

One option is the ProShares Short High Yield ETF (NYSE: SJB, Rated C-), which rises when junk paper falls. However, you should know that despite an explosive move to the upside in March — triggered by the most recent market crisis — SJB remains in a downtrend and under pressure. Here’s a weekly chart:

 



Or, you can buy gold, or the miners leveraged to it. The yellow metal is up more than 27% since the March lows. Big gold miners, as tracked by the VanEck Vectors Gold Miners ETF (NYSE: GDX, Rated: B-), are up more than 61%. And VanEck Vectors Junior Gold Miners ETF (NYSE: GDX, Rated B-) is up a whopping 76%.

 



Gold is the ultimate “safe harbor” in times of market trouble. If the rot in the credit markets gets worse, and another crisis is triggered, gold will likely shine even brighter.

All the best,

Sean

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September 15th, 2020

Posted In: The Edelson Institute

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