Here’s What Happens When the World Overdoses on Debt

Justin Spittler


Bonds are no longer assets. They’re liabilities.

You might find this hard to believe. After all, most folks think of bonds as a safe way to grow their money. For decades, you could make a decent return of 5% or more in government- and investment-grade bonds without risking big losses.

Not anymore.

These days, most bonds pay next to nothing. Some have negative interest rates, which means owners must pay interest on the bond instead of earning interest. If you own a bond that pays a negative interest rate, you’re guaranteed to lose money if you hold the bond to maturity.

And yet, folks are lining up to buy these bonds.

Dispatch readers know we’re in this mess because governments have gone mad trying to “stimulate” the economy. Central banks have cut rates more than 650 times since the 2008 financial crisis. Global rates are now at the lowest level in 5,000 years.

Low and negative rates have done nothing for the global economy. The U.S., Europe, Japan, and China—the world’s four biggest economies—are all growing at their slowest rates in decades. About the only thing these policies have done is put investors in serious danger.

Today, we’ll explain why the global financial system is more fragile than ever…and we’ll show you two proven ways to protect yourself.

• You can’t escape negative interest rates…

More than $13 trillion worth of government bonds now have negative rates. That’s more than one-third of all government bonds. Keep in mind, negative rates were unheard of until about two years ago.

Negative rates are taking over the corporate bond market too. Last week, Bloomberg Business reported that $512 billion worth of corporate bonds now have negative rates. There are now 11 times more corporate bonds with negative yields than there were at the start of the year.

There’s no reason to think negative rates will stop spreading.

Two weeks ago, German railroad company Deutsche Bahn AG sold 350 million euros worth of five-year bonds with a rate of -0.006%. It became the first non-financial company to issue bonds with a negative yield.

• You're probably wondering who buys this garbage that’s guaranteed to lose money…

The answer is giant institutional investors. You see, many pension funds and insurance companies are required by law to own “safe” bonds like those issued by governments and companies in good financial shape. And right now, many of these bonds pay nothing in interest or charge you to own them.

This has made it very hard for institutions to meet investment return goals. For example, the average U.S. public pension fund made just 0.4% last year, the lowest average return since 2008. Most public pensions expect to make between 7% and 8% each year.

While rock-bottom rates have made life difficult for pension funds and insurance companies, they’ve also allowed companies to gorge on cheap money.

• U.S. corporations have borrowed more than $10 trillion in the bond market since 2007…

Last year, they issued a record $1.5 trillion in bonds. Corporate America is loading up on debt faster than it did during the dot-com bubble or before the 2008 financial crisis.

The same thing is happening around the world.

According to Bloomberg Business, the debt-to-earnings ratio for global companies hit a 12-year high in 2015.

Soaring corporate leverage led credit rating agency Standard & Poor’s (S&P) to downgrade 863 companies last year. That’s the most downgrades since 2009…when the world was in the middle of a global financial crisis.

• There’s no end in sight for this epic borrowing binge…

Last week, S&P said it expects global corporate debt to jump from $51 trillion today to $75 trillion by 2020. That’s a staggering 47% jump in four years.

This huge surge in corporate debt supposedly won’t be a problem as long as the economy keeps growing, companies pay their lenders, and rates stay low.

• Dispatch readers know those are dangerous assumptions…

As we said earlier, the global economy is barely growing.

And companies are already falling behind on their debts. According to MarketWatch, 100 corporations have already defaulted this year. That’s 50% more defaults than there were at the same time last year. At this rate, we will see more defaults this year than there were in 2009.

If this happens, lenders will take huge losses. This could spark a “credit crunch” where banks make fewer loans, cut lines of credit, and charge higher interest rates. In other words, the easy money could dry up. That could lead to even more defaults.

In other words, it’s extremely likely that the huge surge in corporate debt will create serious problems.

• S&P admits that the global financial system is very fragile…

CNBC reported last week:

"Central banks remain in thrall to the idea that credit-fueled growth is healthy for the global economy," S&P said. "In fact, our research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy."

S&P says about half of the companies outside the financial sector are “highly leveraged” right now.

Longtime Casey readers know companies with too much debt aren’t just a threat to themselves. They're a threat to the entire global economy.

During the last financial crisis, the collapse of a handful of large, highly leveraged banks triggered a chain reaction that brought the entire global financial system to its knees.

S&P says we could see a repeat of the 2008 financial crisis if something “unforeseen” happens. CNBC reported:

"A worst-case scenario would be a series of major negative surprises sparking a crisis of confidence around the globe," S&P said in the report. "These unforeseen events could quickly destabilize the market, pushing investors and lenders to exit riskier positions ('Crexit' scenario). If mishandled, this could result in credit growth collapsing as it did during the global financial crisis."

• Regular readers know we’ve been warning about the huge buildup in corporate debt for months…

Now the mainstream media, which is typically behind the curve, is finally starting to catch on. This is a sign that we’re getting very close to a financial crisis.

We encourage you to protect yourself today. Step #1 is to own physical gold.

As we often say, gold is real money. It’s preserved wealth for centuries because it’s unlike any other asset on the planet. It’s durable, easy to transport, and easily divisible.

Its value doesn’t depend on a growing economy, a healthy financial system, or a responsible government. The price of gold often soars when things fall apart. It’s one of the only assets in the world like this.

If you’re worried about the global economy or financial system, the first thing you should do is own gold. We recommend you start by putting 10% to 15% of your money in gold. Once you feel like you own enough gold, you could put some money in silver. Regular readers know silver is also real money. Like gold, it often does well during times of turmoil.

We also encourage you to watch this short presentation. It explains why a collapse of the debt market is a threat to your wealth even if you don’t own a single stock or bond. That’s because this could trigger something far worse than anything we saw in 2008 or 2009.

As you’ll see, this coming crisis could reach you no matter where you are in the world.

Tech Recommendation of the Day: Buy or Sell Facebook?

Today, we have something special to share with you. Instead of our usual “Chart of the Day,” you’ll find valuable insight on technology stocks from tech guru Jeff Brown.

If you don’t know Jeff, he’s a true tech insider and angel investor. Over the past 25 years, he’s built tech startups and held high-level positions at some of the world’s largest tech companies.

On Friday, Jeff explained why longtime tech darling IBM (IBM) is a “dangerous stock.” Today, he gives his take on social media giant Facebook (FB). Keep in mind, the following was taken from a recent interview between Jeff and Amber Lee Mason, who runs our affiliate Bonner & Partners:

Amber Lee Mason: So next up we've got a name that you hear about all the time. It's one of the hottest stock stories we've seen in the last five years. We've got Facebook.

Jeff Brown: Facebook, wow. This is a strong buy. It’s an amazing company and one, I think, that has been widely misunderstood by a lot of the market. People know how pervasive Facebook is as an application and a company, but many people don't understand what Facebook actually owns.

Facebook owns a company called Instagram. They've also got their messenger platform. Instagram was a company that Facebook acquired back in, I think it was 2012. It only had about 30 million users, and they paid $1 billion for it, and the market thought that Mark Zuckerberg, the CEO, was crazy for doing that. Today, Instagram has over 0.5 billion users and was recently valued at $35 billion alone. So that's a 35 times return on that $1 billion investment in 2012 in a matter of less than four years.

And so, if you add up the amount of time the average user spends on Facebook, Instagram, and its Messenger product on a daily basis, it's 50 minutes. Fifty minutes, and Facebook has 1 billion-plus users today. They watch more than 100 million hours of video on Facebook a day. And so, again, this is an extraordinary company with extraordinary reach, and it's been very aggressive on developing its artificial intelligence assistant. It's called “M.” It's not widely deployed yet, but you're going to be hearing a lot about it soon and it will be one of the most functional artificial intelligence assistants available on the market.

Another acquisition worth mentioning, that they made, was a company called WhatsApp – which is a very well-known messaging application acquired in 2014 for what again was thought to be an extraordinary amount, $19 billion – and is now thought to be a genius acquisition. That division is forecast to generate about $5 billion a year in revenue by 2020.

And on top of everything else, Facebook has been very progressive in the work they're doing on augmented reality and virtual reality. They had a large acquisition in 2014 of a company called Oculus, and they're doing a lot of extra work in that space. They have such an incredible platform to launch new products and services from. This is, again, a strong buy.

Jeff may be a big fan of Facebook. But he sees even better opportunities in other tech stocks.

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