The New "Big Short"

  Hear that sound in the distance? It’s the leading edge of the $14 trillion debt tsunami Jim Rickards has warned us about for more than three months.
“Kaisa Group has become the first Chinese property developer to default on its overseas debt, which is estimated to be about $2.5 billion,” says a story from the BBC.
The firm borrowed in dollars when dollars were cheap to finance huge land purchases in China. Then the dollar went on a tear. Now Kaisa’s missed two interest payments totaling $52 million.
  “The next financial collapse will come from junk bonds, especially energy-related and emerging-market corporate debt,” Jim warned us in this space on Jan. 14.
Total corporate debt issuance for energy exploration between 2009-2014 works out to $5 trillion, and it’s shaky in light of the 2014 oil price collapse. Meanwhile, companies in emerging markets have issued dollar-denominated debt to the tune of $9 trillion, and that’s shaky in light of the dollar’s epic 2014 rally.
“The result,” said Jim, “is a $14 trillion pile of corporate debt that cannot possibly be repaid or rolled over under current economic conditions. If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be six times larger than the subprime losses in 2007.”
  Jim labels the phenomenon “the new Big Short.”

The original Big Short — taken from the Michael Lewis book of the same name — was about the people who had the foresight to bet against subprime mortgage debt in 2005-06.
China “has one of the most highly leveraged economies in the world,” says Jim, “including the largest amount of dollar-denominated debt of any emerging-market borrower.”
Add up nonfinancial corporate debt plus household debt… and it works out to 202% of China’s GDP.

The debt bubble “is far bigger than what the U.S. and the developed economies faced in 2007,” Jim adds.
  “A Fed rate increase now might be just what it takes to pop this bubble,” Jim adds.
“The problem is that Janet Yellen and other members of the Fed Board of Governors have not shown particular awareness of these dangers. They are looking almost exclusively at the U.S. economy, with very little concern shown for the rest of the world.
“If China has to dump U.S. Treasury securities to deal with a crisis caused by a U.S. rate increase, that will drive U.S. interest rates higher, making the crisis even worse.
“Many crises over the past 25 years, including the sterling crisis of 1992, the Mexican peso crisis of 1994 and the Asian-Russian financial crisis of 1997-98, have taught that once confidence is lost and a run on a central bank starts, no amount of reserves are enough to stop it.”
Jim’s guidance for now: Stay away from Chinese stocks. “They may go higher on more monetary easing, but a bubble is still a bubble, and they always burst in the end.”
[Ed. note: Agora Financial readers had their own shot at the “Big Short” in 2008… and it was good for gains of 462%.
Now with the $14 trillion debt tsunami gathering speed, we’re looking to repeat — and even better — those results. That’s part of the idea behind the IMPACT system Jim and his team have spent the last six months developing and refining.
We took the wraps off IMPACT 11 days ago, and the response has been strong. Little wonder, considering the back-tested results have revealed trades that could make you six or nine or even 13 times your money in a matter of months or even weeks.
Jim extends you a personal invitation to examine the research for yourself when you click here.]
  So far, it’s a “meh” day for U.S. stocks. The major indexes are a mixed bag, the Dow slightly in the red, the Nasdaq slightly in the green.
There are no significant earnings reports or economic numbers to speak of.
  General Electric’s move to get back to its industrial roots can mean only good things, says our income specialist Zach Scheidt.

We mentioned GE’s plans to spin off most of its finance arm, GE Capital, when they were announced a week ago Friday. As it happens, Zach recommended GE to his readers last June.
“The company took a big hit during the 2008-09 financial crisis — especially GE Capital,” Zach reminds us. “It borrowed more than $12 billion from the U.S. government in October 2008 just to stay solvent.
“In March 2009, GE’s stock price dropped below $6 per share, down from more than $41 per share in September 2007. Investors were worried that GE Capital might drag the entire company into bankruptcy.
“Today, GE is back to being profitable. It’s paid back the $12 billion it borrowed from the government. And last year, the company reported operating earnings of $5.6 billion.
“Once GE Capital is spun off, GE will be able to focus on its core (and profitable) industrial business. According to the new plan released last Friday, GE will generate 90% of its earnings from industrial business lines in 2018, compared with 58% of earnings last year.”
Zach says GE is a buy up to $29. This morning, it’s a shade below $27.
[Time-sensitive announcement: Discounted access to Zach’s premium advisory, Income on Demand, shuts down tonight at midnight.
Only this morning, he laid on a trade good for $450 in instant income. And with that, his readers have had the chance to collect $1,270 so far in April. He’s made good once again on his pledge to generate at least $1,000 in income a month.
Yes, you do need a fair-sized brokerage account to make it work. That’s why access to Income on Demand doesn’t come cheap. But using the discount, your subscription could pay for itself in — at most — six weeks. Again, the discount expires at midnight. Grab it at this link.]
  All’s quiet in the commodity complex: Gold is struggling to get back to $1,200; at last check, the bid is about $3 shy. Crude is holding on to most of yesterday’s gains at $56.67.
Gold’s lack of movement belies significant gold news…
  “Big day in gold,” our Jim Rickards tweeted last night. Indeed, it was, and the news focused on the BRIC nations…

  • Russia’s central bank is once again adding to its gold stash, adding 30 metric tons in March. The total is now 1,238 metric tons — the highest since at least 1993. The Russians took a breather from their buying during January and February as they regrouped from Western sanctions and low oil prices
  • India’s gold imports are likely to be 89% higher in April compared with a year ago, according to the All-India Gems and Jewellery Trade Federation. The trade group says at $1,200, the price is right… and it helps that India’s central bank is easing up a bit on import limits
  • But the big story comes from China. China’s corporations might be larded down with debt (see above), but the central bank has grown its stash gold stash to 3,510 metric tons — according to an estimate by Bloomberg Intelligence. As a reminder, the People’s Bank of China last disclosed its gold stash six years ago, saying it was 1,054 metric tons.

“China may be preparing to update its disclosed holdings,” says Bloomberg, “because policymakers are pressing to add the yuan to the International Monetary Fund’s currency basket, known as the Special Drawing Right, which includes the dollar, euro, yen and British pound.”
It’s no surprise if you read Jim Rickards’ 2014 book, The Death of Money: “The next update to the gold reserve figures can be expected in 2015.”
We have no doubt the IMPACT system will spot some profit opportunities accordingly…
  The bastards got away with it, Part 1: So far, Warren Buffett’s Berkshire Hathaway has skated out of being labeled a “systemically important” part of the global financial system.
U.S. regulators are drawing up a list of such “too big to fail” institutions. Many banks and insurers are on the list. They’ll have to step up the amount of capital they must keep on hand to cover losses during a crisis.
But reinsurance firms — companies that provide insurance for insurers — have evaded this designation so far. And reinsurance is Berkshire’s biggest business, accounting for more than a quarter of its net earnings.
It’s all too much for the Bank of England: This morning’s Financial Times tells us the Brits wrote a letter to the U.S. Treasury last fall asking, more or less, “What gives?”
Neither the Treasury nor anyone from Berkshire is commenting. Heh…
  The bastards got away with it, Part 2: Jon Corzine is looking to launch a hedge fund, according to The Wall Street Journal.
It was Corzine — ex-Goldman Sachs CEO and New Jersey politico — who brought down MF Global on Halloween 2011. Corzine took one of Wall Street’s most staid and storied firms… and turned it into a lab rat for his experiments in financial “innovation.”
One of his experiments — a bet on eurozone government debt — went sour. So he resorted to the “innovation” of raiding customer accounts to meet a margin call in the firm’s own trading account. Customers were out $1.6 billion. They weren’t repaid in full until a year ago.
The one saving grace: Corzine likely can’t launch the hedge fund until civil litigation brought by the feds is resolved. And the trial probably won’t begin till early next year.
  “There is a point the Alternative Minimum Tax (AMT) stops,” reads an email replying to another reader yesterday. “You just have to make more money to correct your problem.
“You still have to pay it on the initial $500,000 or $1 million or whatever, but it does disappear. It is better to incorporate and own a dozen houses and live in one and have a shack that you claim as your dwelling for taxes. Rent the dozen houses and deduct everything.”
The 5: Hmmm… This is the point at which we always say, consult a qualified tax professional before you do anything.
  “The individual who attacked Greg Guenthner and ‘his sidekick’ Jonas Elmerraji sort of ticked me off,” a reader writes after yesterday’s episode.
“You know those two are right… A LOT. And maybe they are ‘chart monkeys,’ but when the chart monkeys are right A LOT… who’s the f****** idiot?”
The 5: What is it about chart work that brings out the potty-mouths?
  “Dave, it’s good that you publish other readers’ feelings on your editors who contribute to The 5.
“On the other hand, I particularly look forward to the input from Guenthner and Elmerraji, and also Chris Mayer, for that matter! Keep up the good work!
“P.S. Don’t forget to give Uncle Al (Gore) the full credit he deserves for inventing the Internet also. He can read all about his invention on his trip to purify Mars, don’t ya think?”
  “I am getting tired of ETFs and similar being described as not being actively managed,” a reader writes after a remark made in passing yesterday.
“The truth is that most of those funds effectively just outsource the active part of management to S&P/Dow Jones indexes. Whenever the benchmark list is updated, that is a very active act by some real humans.
“The ETFs are just a relatively cheap way to piggyback onto the actions of that noted rating organization, but the fact is the ETFs are not much more insightful than seagulls following a fishing boat. You could build your own personal ‘fund’ by buying the Dow for your own account and avoid even the ETF overhead.
“In my experience, the biggest hurdle in choosing a public stock to purchase is finding truly competent management. Big companies can fly along, drifting for years of average market-matching returns, despite whatever management is in place. Real insight and skill are much more rare than big egos.”
The 5: Funny, at the Agora Financial editorial meeting last Thursday, your editor was calling out actively managed mutual funds for high costs and poor performance — something I do regularly as a contributor to the Laissez Faire Letter.
Jonas Elmerraji of our trading desk reminded me index funds are “actively” managed in the sense that you say.
And it’s true: 74 companies in the S&P 500 were replaced by other companies between 2011-14… either because of mergers or because the market cap shrinks as the firm loses its relevance (Eastman Kodak, RadioShack, New York Times Co.).
According to a 2012 study, the churn in the S&P 500 is such that 75% of the firms that were in the index during 2011 will be replaced by 2027.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. One more reminder: Discounted access to our premium income service, Income on Demand, expires tonight at midnight.
We’ll send a final reminder notice tonight at 6:00 p.m. EDT, but if you’ve given any thought in recent months to joining up and taking advantage of “the ultimate retirement loophole,” now’s the time to pull the trigger.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

Recent Alerts

Wall Street Goes Clean and Sober

If mainstream financial media are to be believed, all of Wall Street’s operating assumptions since the Panic of 2008 have been flipped on their head. Read More

“A Different Economy”

Nomi Prins on the “reopening” economy: “The old model will be supplanted by different businesses.” Read More

Real Profits From AI Invasion

“[AI] has slowly become ingrained into our everyday routine,” tech maven Ray Blanco observes, “and has become more powerful every year.” Read More

59 Days to Critical Mass

It’s the fastest that any technology has reached critical mass — and our resident futurist Robert Williams says it’s not too late to get in. Read More

“Climate Lockdowns”

We hasten to point out this “lockdowns for better climate” thing is not new. But last fall brought a new twist… Read More

Yes, in My Backyard! (YIMBY)

“Millennials are just aging to their PEAK buying years,” says Zach Scheidt. This industrywide shift — and others — makes homebuying a trend to watch… Read More

Life Cycle of a SPAC

“This trend isn’t going anywhere,” says our tech maven Ray Blanco. “So how can you invest in SPACs for profit?” Read More

The “Two-Thirds” Myth

Our biggest beef with GDP is that it’s a nigh-meaningless statistical abstraction. Now for a new spin on one of our long-standing complaints… Read More

The Stealth Dollar Crisis

The global power elite are set to declare a crisis of confidence in the U.S. dollar… Not that they’ll put it in those terms… Read More

Our Green (Nuclear) Future

Like it or not, a “greener” world will require more electricity, and — surprise — environmentalists are resorting to nuclear power. Read More