The Credit Crisis Has Already Begun…

Editor’s Note: Today, we’re sharing an essay from Mike DiBiase, editor of Stansberry’s Credit Opportunities, published by corporate affiliate Stansberry Research. With almost 30 years of experience in the world of finance and investing, Mike is an expert at finding bonds with low risk and high potential upside.

Below, he shows why the next credit crisis has already begun, why so few are talking about it, and why it could lead to quality bonds trading for pennies on the dollar.

It’s here…

The next credit crisis is finally underway.

This is the moment we’ve been waiting for since launching our Stansberry’s Credit Opportunities distressed-debt advisory more than nine years ago.

Businesses are going bankrupt at the fastest pace since the end of the last financial crisis in 2010.

The laundry list includes diet company WeightWatchers… retail pharmacy Rite Aid… Solar company Sunnova Energy… electric-vehicle maker Nikola, fabrics retailer Joann… restaurant chain Hooters, genetic-research company 23andMe… and discount airline Spirit Airlines.

Companies are dropping like flies. Last year, more companies went belly-up than in any year since the last financial crisis.

This is just the beginning.

Credit crises take many months − if not years − to fully play out. What most folks don’t realize is that this is a normal part of the credit cycle.

And to understand what’s going to happen next, you need to understand credit cycles…

The Curse of Easy Money

When times are good, lenders begin loosening their underwriting standards. That leads to a period of “easy” money.

As the credit pool expands, those lenders eventually run out of people with good credit to lend to. So, they chase profits… targeting borrowers lower and lower on the credit ladder.

Eventually, some of the low-quality loans begin to go bad. Companies can’t afford to make their loan payments. Today, the effects of high interest rates and inflation are making debt much tougher to pay.

That’s when creditors start to “tighten” their lending standards. Loans become harder to get, the loan sizes are smaller, and the terms of the loans are more favorable to lenders.

This slows the economy, making it harder for other borrowers to repay their loans. Delinquencies lead to defaults, which lead to bankruptcies.

Panic sets in. The result is a credit crisis. It clears out the bad debt and poor underwriting practices… and then the cycle starts again.

A full-blown credit crisis occurs about once a decade. The last one was from 2008 to 2009. The one before that was in 2001. So, we’re overdue for the next one.

Investors haven’t seen true devastation in the financial markets in a very long time… if ever. Some folks think the Federal Reserve will always be there to rescue the markets.

But this time, I seriously doubt it…

A New Record in Corporate Debt

With the “Big, Beautiful Bill” in the news, investors are paying attention to the federal debt, which is high and likely going higher. But not much attention is being paid to another record—corporate debt.

Corporate debt is now close to a record $14 trillion. That’s double the $7 trillion it reached at the peak of the 2008 financial crisis.

As debt comes due, companies looking to refinance are finding it much more expensive with today’s higher interest rates.

Now, with persistent inflation, the Fed is out of bullets. Any new stimulus will send inflation soaring again.

The Fed can’t save the credit market this time.

Banks are once again tightening their lending standards. When credit tightens at these levels, it always leads to a recession. I believe we’re in the early innings of the first true credit crisis since 2008. Delinquencies, defaults, and bankruptcies are rising.

Investors can’t bury their heads in the sand forever. But, at least for the time being, that’s exactly what they’re doing.

Nobody is Talking About This… Because Nobody Sees It

One of the best ways to know where we are in the credit cycle is by looking at how fearful bond investors are. And there is no better way to assess fear in the credit market than through the high-yield credit spread.

The high-yield credit spread is the difference between the average yield of high-yield (some call them “junk”) bonds and the yield of similar-duration U.S. Treasury notes. High-yield bonds are issued by companies with less-than-prime credit ratings.

Corporate bonds have credit risk that U.S. Treasurys don’t have. Companies go bankrupt. No one expects the U.S. government to default. So, investors demand compensation in the form of higher yields for the added risk.

The high-yield spread is measured in basis points (“bps”). A spread of 500 bps means that junk bonds are yielding 5% more than U.S. Treasurys.

When the high-yield spread is high, it tells us bond investors are fearful. They’re demanding higher yields for the added credit risk. A high spread also means bonds are cheaper.

And when the spread is low, investors are willing to accept much lower yields for the same credit risk. A low spread means bonds are more expensive.

Over the past 25 years, the spread has averaged around 550 bps. You’ll know the credit crisis is intensifying when the spread rises and stays above this number. And you’ll know it has really taken hold when the spread increases to more than 1,000 bps. During the last credit crisis, the high-yield spread soared to nearly 2,200 bps.

Here’s a chart I shared during my presentation at the Stansberry Alliance Conference in October of last year. It should give you an idea of what I mean.

Today, U.S. junk bonds yield around 7.25%. With 10-Year Treasurys yielding around 4.5%, it implies a spread of just under three hundred basis points. Bond investors aren’t worried… yet.

But, if I’m right, we’ll see these spreads widen (perhaps dramatically) in the months ahead. Even bonds issued by rock-solid companies could trade for a fraction of their par value.

And when that happens, you’ll want to be ready.

Buying quality bonds when the market is panicking is one of the best ways I know to see outsized returns. It’s what we specialize in at Stansberry’s Credit Opportunities.

But, please, don’t just take my word for it. A subscriber of mine recently went on camera to share his experience with this strategy, including how it permanently changed his life for the better.

If I’m even half right about what’s coming, you’ll want to watch this message.

Regards,

Mike DiBiase
Editor, Stansberry’s Credit Opportunities