For a decade now, Americans have enjoyed a stock-market rally. Some $17 trillion in new wealth has been created. The economy has boomed. Unemployment is at all-time lows.
And yet, almost none of this prosperity is real.
This doesn’t mean that the end is here. The sky isn’t falling. In fact, the market will probably make new highs in the coming months.
But if you have grown complacent in your portfolio… If you aren’t quite sure about the level of risk you’re taking on… Or if you haven’t thought about which companies will get destroyed in the next downturn… Please, you must prepare today.
Because while many factors helped drive the stock market over the past 10 years – economic growth, deregulation, real earnings – the most important, by far, was debt.
- Over the past 10 years, total U.S. government debt has nearly doubled, from $11.1 trillion to just shy of $22 trillion today.
- Total household debt has climbed for 18 quarters in a row. It’s now at a record $13.5 trillion… and well over the previous credit-cycle peak of $12.7 trillion in the third quarter of 2008.
- And U.S. corporate debt has ballooned to $9 trillion today, roughly double the amount from 2007.
We suspect that the next crisis will come from corporate debt. Right now, companies are even more leveraged today than they were before the last financial crisis. And a stunning $3.5 trillion in debt is coming due over the next three years.
Never before has so much debt come due in such a short period of time while credit conditions are tightening significantly.
Something has to give.
As Stansberry Research founder Porter Stansberry reported recently…
Corporate earnings haven’t grown nearly as much as stock prices during this bull market. What has grown? Corporate debt. Those debts have been used to fuel share buybacks. That has produced upward momentum for the stock market, so the valuation of stocks has gone up, too.
Thus, we have fewer shares trading at higher multiples of earnings… but no real meaningful improvement in the productivity or profits of our country’s biggest businesses.
Where does that lead? Not to real increases in wealth. It leads to slower growth (as the debt burden builds) and a lot more volatility as this financial mirage eventually falls apart.
And the level of government debt will handcuff the feds from repeating the easy-money magic trick they pulled in the last crisis.
Essentially nothing in America works without debt…
Education is broken. More than 44 million folks owe $1.5 trillion in student loans. The New York Fed estimates that nearly a quarter of this student debt is delinquent. And more than 40% of people who borrowed from government student-loan programs are behind on their payments or have stopped making payments altogether.
Health care is a disaster. Some 79 million Americans have medical bill problems or are paying off medical debt.
The affordability of housing has plunged. When home prices and interest rates rise – like they have in recent years – affordability falls. And if affordability gets too low, folks simply can’t afford to buy. Forbes recently reported that affordability has skyrocketed nearly 20% in just the last year alone.
The vehicles we drive aren’t worth what we owe. One out of every three cars that are traded in for a new car have negative equity – meaning the unpaid portion of the old loan is “rolled” into a new loan. And the durations of auto loans have been extended… now upward of 70 months… or nearly six years. In fact, today more than 7 million auto loans outstanding have gone unpaid for 90 days or more – a new record.
What does it say about America when tens of millions of folks are saddled with unpayable debt?
Do you think the price of education, hospital bills, cars, and homes would be as high as they are without massive levels of debt, fueled by subsidies and near-zero interest rates?
And how do you think this all ends?
So please, enjoy the current market while it lasts. But have a plan for when it all goes wrong.
Next Wednesday, May 15, at 8 p.m. Eastern, Porter Stansberry and legendary investor Jim Rogers will detail how this credit cycle ends… as well as what to do to prepare your portfolio for the inevitable crisis. You can listen in by reserving your seat here.
Now here is some of the news that we’re reading…
All seems well with the economy. At least, for now…
It is the third consecutive poll in which Mr. Trump’s handling of the economy has received favorable marks from a majority of Americans.
The turnaround was largely the result of Trump’s reversing Obama’s anti-growth agenda and implementing policies that today’s Democratic Party vehemently opposes: tax cuts and deregulation.
No one is looking forward to the next bear market. We all remember the last bear market in 2008-2009, when stocks fell almost 60% from their peak. Now, every little tremor or correction in the market – like the one we experienced in December – reignites that fear.
Trade wars and real wars…
If Trump follows through with his threats, virtually all goods imported from China to the U.S. would face some sort of tariff.
The United States is deploying an aircraft carrier strike group and a bomber task force to the Middle East on short notice in response to “clear indications” Iran and Iranian proxies were planning an attack on U.S. forces.
Socialism versus capitalism… as simple as Venezuela versus Warren Buffett…
Even as the Venezuelan crisis unfolds on TV screens across the world, the orientation of governance in the United States is in danger of degenerating into the same socialist experimentation.
“I’m a card-carrying capitalist… I believe we wouldn’t be sitting here except for the market system.”
And something completely different…
Smarter than the Hardy Boys and wittier than Nancy Drew, Encyclopedia Brown solved mysteries for nearly 50 years and never charged more than a quarter.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
May 8, 2019