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The stock market will crater – a bear market is the author of bull markets, and vice-versa. It’s good to protect your assets against a major contraction in overpriced equities – but we still need to dig deeper and look further because of the pain that’s also about to wrack the bond markets.
 
The mainstream media will purposefully distract you with the ongoing back-and-forth vicissitudes of the U.S.-China trade spat or the latest developments of the Brexit fiasco, so that hardly anyone’s noticing the alarming levels of corporate debt, which has ballooned to more than $9 trillion – nearly half of the U.S.’s gross domestic product! I’ve studied the correlation between corporate debt and bear markets – it’s STRIKINGLY indicative of recessions.
 
It’s a highly reliable warning signal: each recession going back to the mid-1980s has been preceded by elevated debt-to-GDP levels, including the 2008-2009 financial crisis, the 2000 dot-com bubble, and the early 1990s economic slowdown.
 
Take a close look:

Courtesy: MarketWatch

Far too many investors continue to ignore repeated warnings about leveraged loans. These warnings have come from the International Monetary Fund Chair, Christine Lagarde, and former Federal Reserve Chair, Janet Yellen, who observed that it is not just a question of what banks do that imperils themselves, but what they do that creates risks for the entire financial system.

The Federal Reserve’s semi-annual release of the Financial Stability Report reiterated the risks associated with these leveraged loans. The bottom line from the report was that credit standards for new leveraged loans have deteriorated over the past six months.

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The Fed’s report also states that loans to businesses with especially high debt now exceed the pre-recession peak of 2007, and that the historically high level of business debt and the recent concentration of debt growth among the riskiest firms pose a major risk.
 
The latest data reveal $1.15 trillion in outstanding U.S. leveraged loans – double the amount from five years ago:

Courtesy: Los Angeles Times
 
Institutions have completely forgotten the lessons of 2008 and have abandoned common sense. At this relatively advanced stage of the economic cycle, the risk of borrowing is OUTRAGEOUS.
 
Steve Eisman, who was portrayed as predicting the financial crisis in the movie The Big Short, says that corporate debt is where the pain will be in the next recession.
 
The cause-and-effect relationship here is clear: when a recession hits, the losses will be staggering in the bond markets.
 
Bond king and DoubleLine CEO Jeffrey Gundlach is also cautioning that the corporate bond market is so much worse today than it was in 2006, and that by using leverage ratios alone, he would lower many bonds that are rated as SAFE into JUNK status.
 
BBB-rated bonds now take up around half of the more than $5 trillion market for investment-grade corporate debt. Eisman’s and Gundlach’s warnings are our alarm bells – HOLD CASH.

Best Regards,

Thomas Hugh
President, GlobalCannabisWealth.com

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