Dear Money & Crisis Reader,
By the time we realized just how badly we’d messed up, it was already too late.
I remember we were sitting in our new kitchen, with piles of documents and files stacked on the table.
There was a roast bird in the oven, but neither of us felt like eating that night.
Even a cursory look at those stacks was enough to make us lose our appetite.
Money lost. Money owed. Money we’d never see again.
Truth be told, it shouldn’t have been actual “news” to us. But back then, we were terrible at keeping track of our finances.
It wasn’t until I lost my job that we started actually paying attention. And then there was suddenly a lot of “concerning information” to pay attention to.
The country was in the midst of a full-blown financial crisis. Unemployment, which I was now a member of, was soaring. And we were flat broke.
Like the Queen of England, who famously asked why “nobody saw this crisis coming,” I thought this crisis had hit without warning.
“If only someone had seen the writing on the wall and told everyone else.”
Of course, people had been. The Queen and I just hadn’t been listening.
In fact, my colleague Jim Rickards accurately predicted the 2008 financial crisis. And he says there’s a new crisis coming our way. One where the corporate debt will be at least six times larger than the subprime losses in 2008.
Once the tsunami hits, no one will be spared. The stock market is going to collapse in the face of rising credit losses and tightening credit conditions.
Jim reveals the most likely cause of this new, much larger crisis, and how you can take steps to protect your finances, in today’s issue of Money & Crisis.
All the best,
Editor, Money & Crisis
P.S. After more than a decade of secrets, Jim has revealed this incredible information. You might not know this know this… but Jim was involved with developing a special tool while working with the U.S. government.
Here’s Where the Next Crisis Starts
The case for a pending financial collapse is well grounded.
Financial crises occur on a regular basis, including 1987, 1994, 1998, 2000, 2007-08. That averages out to about once every five years for the past thirty years. There has not been a financial crisis for ten years so the world is overdue.
It’s also the case that each crisis is bigger than the one before and requires more intervention by the central banks.
Today, systemic risk is more dangerous than ever because the entire system is larger than before. Due to central bank intervention, total global debt has increased by about $150 trillion over the past 15 years. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.
This means a market panic now would be far larger than the panic of 2008.
The Pattern of a Crisis
Each credit and liquidity crisis starts out differently but ends up the same.
Each crisis begins with distress in a particular over-borrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!”
First, one asset class has a surprise drop. The leveraged investors sell the sinking asset, but soon the asset is unwanted by anyone. Margin calls roll in. Investors then sell good assets to raise cash to meet the margin calls. This spreads the panic to banks and dealers who were not originally involved with the weak asset.
Soon the contagion spreads to all banks and assets, as everyone wants their money back all at once. Banks begin to fail, panic spreads and finally central banks step in to separate winners and losers and re-liquefy the system for the benefit of the winners.
Typically, small investors (and some bankrupt banks) get hurt the worst while the big banks get bailed out and live to fight another day.
That much, all panics have in common. What varies in financial panics is not how they end but how they begin.
The 1987 crash started with computerized trading. The 1994 panic began in Mexico. The 1997–98 panic started in Asian emerging markets but soon spread to Russia and the big banks. The 2000 crash began with dot-coms. The 2008 panic was triggered by defaults in subprime mortgages.
The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the overleveraged banking sector.
Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not. Risk has simply shifted.
What Will Trigger the Next Panic?
Prominent economist Carmen Reinhart says the place to watch is U.S. high-yield debt, aka “junk bonds.”
I’ve also raised the same argument. We’re facing a devastating wave of junk bond defaults. The next financial collapse will quite possibly come from junk bonds.
Let’s unpack this…
Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or “junk bonds,” to rise about 60% — a record high. Many businesses became extremely leveraged as a result. Estimates put the total amount of junk bonds outstanding at about $3.7 trillion.
The danger is that when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.
This is from a report by Mariarosa Verde, Moody’s senior credit officer:
This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default… A number of very weak issuers are living on borrowed time while benign conditions last… These companies are poised to default when credit conditions eventually become more difficult… The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.
If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be at least six times larger than the subprime losses in 2007-08.
Many investors will be caught completely unprepared. Once the tsunami hits, no one will be spared. The stock market is going to collapse in the face of rising credit losses and tightening credit conditions.
But corporate debt is not the only dagger hanging over the economy. Credit conditions have already begun to affect the real economy. Student loan losses are also skyrocketing. Losses are also soaring on subprime auto loans, which has put a lid on new car sales. As these losses ripple through the economy, mortgages and credit cards will be the next to feel the pinch.
Have we already seen the beginning of the next crisis? No one knows for sure, but the time to prepare is now. Once the market falls apart, it’ll be too late to act.
That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.
Both the panics of 1998 and 2008 began over a year before they reached the level of an acute global liquidity crisis.
Investors has ample time to reduce risky positions, increase cash and gold allocations and move to the sidelines until the crisis abated. At that point there were bargains galore for those with cash.
An investor with cash in 2008 could have preserved wealth during the crisis and nearly quadrupled his money since then by buying the Dow Jones index at 6,550 (even with the recent turmoil, today it’s still around 23,600).
Relatively few investors did this. Instead they suffered from “fear of missing out” as markets rose until the panic began. They persisted in the mistaken belief that they could “get out in time” if markets reversed, not realizing that reversals happen much faster than rallies. They held onto losing positions hoping they would “come back” (they did after 10 years) and so on.
Simple behavioral biases stand in the way of doing the right thing almost every time.
For now, it’s not clear which way things will break next. Volatility is back and markets are still in a precarious position.
Fed chairman Jay Powell threw markets a bone last Friday when he basically said all rate hikes are off until further notice and that he’s willing to scale back quantitative tightening “if needed.” Markets have naturally rallied since Powell’s remarks.
If you still need proof that today’s rigged markets still require support from the Fed, here it is. But it’s far from clear the next crisis can be avoided at this point.
You don’t want to be heavily exposed to these markets. It’s far better to get out too early than too late. You should not be the last to be get ready. Start now to decrease equity allocations and increase your allocations to cash and gold so you can weather the coming storm.
Preparation means 10% percent of your investible assets in gold or silver and another 30% in cash. That allocation will preserve wealth and provide dry powder for bottom-fishing in the crisis to come.
P.S. This could be my most important message for the New Year.
To date, the CIA has given clearance to fewer than 100 people in the entire world involved with this project. But as a tax-paying American citizen, you deserve to know the truth.
Click here for all the details on “Project Prophesy.”