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Business/Finance See other Business/Finance Articles Title: [CRISIS ALERT] Tom interviews Porter on how to survive the new credit default cycle [CRISIS ALERT] Tom interviews Porter on how to survive the new credit default cycle Ready? Editor’s Note: On Friday, we asked to know your concerns over the Federal Reserve’s looming interest rate hike. The response was overwhelming... and the feedback was disturbing. People fear their retirement savings cannot withstand another shock to the financial system. We’re marshaling PBRG’s maximum “firepower” to help carry you through this economic minefield unscathed. In two days, we’re holding an emergency wealth-protection summit. All PBRG subscribers are invited to attend. In preparation, we share a can’t-miss interview below. PBRG Founder Tom Dyson just conducted it... with his friend and mentor Porter Stansberry, founder of Stansberry Research. Porter explains the dangerous times we’re entering... as well as how to protect your wealth. Doug Casey Tom Dyson, founder, Palm Beach Research Group: Porter, it’s clear from our subscriber feedback they’re concerned the Fed’s interest rate hike will devastate their portfolios. You’ve said we’re entering a period of “vast credit defaults.” What does that mean? What does it look like? Porter Stansberry, founder, Stansberry Research: There’s a well-known corporate credit cycle. There are periods when credit builds, and then there are periods when credit contracts. And this has gone on for pretty much all of human history... all the way back to biblical times. Think about the pharaoh: “There will be seven years of plenty followed by seven years of famine.” It’s the same idea. It’s an organic, natural human cycle. But this particular credit default cycle I see beginning now will be worse than usual. That’s because it’s related to the preceding credit growth. The 2008-2009 period of credit contraction was cut short by the federal government and central banks around the world. That forestalled the natural “cleansing” cycle—defaults and bankruptcies—by making credit available to companies of all stripes, in an unlimited capacity. For example, for a period of about three years late last decade, the federal government guaranteed General Electric’s entire credit profile. There was never a normal credit contraction. The current “extended” credit cycle’s been building since probably 2002. So this is a long period of credit excess and expansion. As a result, the inevitable default cycle will be much worse than it would’ve been otherwise. Tom: So the question is, when’s the cycle going to turn? Or has it already turned? What data and analysis do you look for to indicate this? Porter: Great question. The first sign is the obvious one: it’s called the credit default cycle because defaults begin to creep up. Over the last year, the default rate has doubled. The second sign to look for is increasing amounts of “credit stress.” You measure that by looking at various corporate bonds versus similar U.S. Treasury bonds. Look at a five-year corporate bond and compare the yield on that to the yield on a five-year Treasury bond. As you know, right now the yield on a Treasury bond is very low. (It’s artificially low because of the government’s actions over the last six or seven years.) The spread between the corporates and the Treasuries was decreasing for a long time. Credit was flowing more readily and more easily into corporate bond issues. But now the spread is widening... significantly. That shows you credit is beginning to retract. We’re entering a period of credit contraction... as opposed to credit expansion. The most interesting thing about all this is a lot of these corporate debts can never be repaid. So you’ll know the default is coming because they won’t be able to roll over the debt at any reasonable interest rate. And so it’s kind of a “chicken-or-the-egg” scenario. The defaults lead to a tightening of credit conditions... which leads to more defaults... which leads to further tightening of credit. It’s a self-reinforcing cycle in that way. Tom: Right. Most analysts predict Fed Chair Janet Yellen is going to raise the Fed funds rate about a quarter of a percent on December 16. Is this important to the credit cycle? Porter: A very good question. Let me pose a contrary in reply: I don’t believe she will raise rates. The question of what the Fed is going to do is extremely interesting right now. All across the economy, there are significant signs of weakness: There’s a credit contraction under way... Defaults are rising... Companies are missing earnings estimates... And a lot of strange things are happening, like the VW scandal... where companies seem to have to break the law to maintain profit margins. So there are just a lot of “interesting” things going on right now. I’d be very surprised if Yellen raises rates. We’ve begun this weird period that happens in the life cycle of paper money... When countries start paying their bills by printing money, the process never stops... until there’s a collapse. And every time, the dislocations and the problems paper money causes are different. Printing Money You see these paper-money collapses in American history, going all the way back to the colonial period. They all happen the same way: There’s an economic emergency. So the politicians say “we’re just going to print a little bit of money to get us over the hump.” But they end up going back to that well again and again. That’s because the dislocations brought on by paper money cause further economic problems. And the politicians try to solve these problems with more paper money. We’re in that exact same spiral right now. So no, I don’t believe Janet Yellen is going to raise rates. In fact, by this time next year, I think we’ll be talking about a huge new increase in “quantitative easing”—banker talk for even more freshly printed money. Because as the defaults happen, the political desire to avoid the pain will become enormous. And the Fed will be called in once again to be the “fire brigade”... trying to put out the problem by printing more money. Tom: They’ll buy all the debts that would otherwise default. Porter: Exactly. Just like they did last time. If Janet Yellen doesn’t raise rates, it’s an important indicator I’m probably right about us being trapped in the paper-money spiral. And, if she does raise rates, it doesn’t mean I’m necessarily wrong. You’ll just see the Fed unable to maintain the rate hike for long. Then they’ll have to go back and lower rates... and do more quantitative easing. Tom: I agree. It wouldn’t surprise me to see a “token” raise right now. But I can’t see them raising rates again—nothing like putting rates back up to three or four percent. That’s unimaginable. Reeves’ Note: Tom concludes his interview in tomorrow’s Daily. In it, Porter shares his exact plan for profiting in the new credit default upheaval. Don’t miss it. Right now, Tom’s at work with PBRG’s full research crew prepping for Thursday’s emergency wealth-protection summit. The event will reveal our top recommendations to safeguard your wealth and profit from the market’s surging volatility. Admission is 100% free. Click here to attend. Post Comment Private Reply Ignore Thread
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