Get Ready for the Greatest Financial Mania the World Has Ever Seen, Part 2

Get Ready for the Greatest Financial Mania the World Has Ever Seen, Part 2

Editor’s note: Today, we’re sharing Part 2 of a special essay from longtime friend and founder of Stansberry Research, Porter Stansberry. In case you missed Part 1, you can read it here.

The full essay was originally published on September 9, 2016, in The Stansberry Digest.

Today, around the world, something around $15 trillion in fixed income is trading at a price that guarantees investors will lose money if they buy the bond and hold it until maturity.

I want to make sure you understand what’s happening because the bond market and bonds are a mystery to a lot of individual investors.

A bond can trade at a negative yield to maturity (guaranteeing a future loss) while still paying a current coupon. How can that happen? It happens when investors bid the current price of a bond so far above par that the remaining coupons to be paid won’t cover the loss when the bond matures.

So, for example, you might see a bond trading at $130 when it only has $29 worth of interest left to be paid before it matures at $100. An investor buying a bond like this has to believe he’ll be able to sell it at an even higher price, to an even bigger fool… or else he’s guaranteed to lose money.

Of course, all investors believe that they will be nimble enough to sell before that happens. And all investors believe that governments will continue to buy these bonds… or maybe even stocks… and do whatever it takes to keep the bubble growing.

This situation is the definition of an investment mania. Everyone knows that, someday, these bonds will reach maturity. And, at some point before they do, just as surely as the sun rises, these bonds are going to cause huge losses. And yet, despite these obvious facts… investors have begun to price even “junk” bonds – that is, noninvestment-grade debt – at prices that guarantee investors will take losses.

Just like Templeton back in 2000, I know for certain that this mania is running out of steam. How can I know for sure?

There are three big “tells”:

First, total U.S. corporate debt is now 45% of GDP. That’s where the two previous credit cycles peaked (’02 and ’08). It’s simply not possible that the amount of credit outstanding to corporations can grow much from here because, even at very low rates of interest, there are not enough willing borrowers. Think about yourself. Does it really matter if someone offers you a 2% rate on a credit card? Are you going to go into debt for any reason? Nope.

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