Stocks actually rose last week, although you'd be hard-pressed to find an investor or hedge fund manager who is feeling good about things right now.
But the Dow Jones Industrial Average did in fact gain 105 points or 0.7% to close at 16,093.53 while the S&P 500 rose by 1.4% or 27 points to 1906.90. The Nasdaq Composite Index, home of the FANGS, added 2.3% to close at 4591.18. But as the title of the novel goes, it's "been down so long it looks like up to me."
All three markets are still down sharply on the year and many hedge funds are nursing double digit losses just three weeks into the year.
Conditions are even worse in the high yield bond market, where the average yield on the Barclays High Yield Bond Index is creeping up on 10%. As of January 22, the average yield and spread on the index were 9.72% and 776 basis points. Month-to-date, the index has a total return of -3.67%, which creates a big hole for this asset class to dig out of.
Energy bonds are trading at an average yield and spread of 19.15% and 1,617 basis points while Basic Energy bonds are not far behind at 14.76% and 1,246 basis points. These are levels reminiscent of the 2008 credit market collapse. But rather than being near a bottom, these levels are likely to get even worse.
The End of The Debt Supercycle
On January 21, Moody's Investors Service placed the ratings of 69 U.S. E&P and oil field service companies (and about 50 non-U.S. companies) on review for downgrade. We are witnessing a replay of the collapse of the telecom and Internet bubble fifteen years ago that led to the 2001-2 credit crisis during which the market saw two consecutive years of default rates that exceeded 10%.
While the default rate is unlikely to beat that record, the volume of defaults will be much larger this time around because the market is much larger than in 2000. It is now clear – as I warned at the time – that the collapse in the high yield bond market beginning in mid-2014 was a warning sign of problems in the equity market. The fact that energy bonds were the epicenter of that collapse was even more alarming because it coincided with the sharp slowdown in the Chinese economy, which in turn signaled a global economic slowdown.
Some are inclined to slough off high yield bond problems as merely a liquidity problem due to the reduction in dealer inventories, which resulted from new bank regulations under Dodd-Frank. They miss what is really going on – we are at the end of a Debt Supercycle that will end up severely damaging all asset classes before it reaches its bottom. The logical place for a Debt Supercycle to start showing its age is the high yield bond market. That's exactly what happened in mid-2014.
Unfortunately, high yield bond borrowers are going to be dealing with $148 billion of debt maturities in 2016 and $224 billion in 2017. Investment grade issuers have another $505 billion in 2016 and $569 billion, according to Standard & Poor's. The costs of capital for all high yield borrowers and the high grade borrowers in energy and related industries have risen sharply.
This will lead to more defaults among the high yield bond issuers and credit downgrades among the high grade borrowers (Barclays is forecasting that $155 billion of high grade debt will be downgraded to junk). In short, as bad as things are, they are going to get worse. Put another way: even though I've been down so long, this isn't going to look like up.
Here's How We'll Stay Safe
There has been a lot of reader reaction to some of my pieces on gold and silver in Sure Money. The reason I recommend gold and silver despite the fact that they too have been "down so long" is as plain as the nose on my face.
Last week, ECB President Mario Draghi promised again to do "whatever it takes" to create inflation in the Eurozone. That means he is going to try to weaken the Euro. Pressure is rising on the Bank of Japan to weaken the Yen.
The Chinese are actively devaluing the Yuan. And the Fed may talk big about raising interest rates four times in 2016, but the odds of that are about as great as the odds of Janet Yellen having an "extreme makeover" – exactly zero. The world's paper currencies are being destroyed by the deliberate policies of central banks because they have no other tools to promote growth or inflation and governments have no other way to pay back the trillions of dollars of debt they have created.
I think these are the wrong policies, but we must take the world as it is and not as we would like it to be. Accordingly, the only antidote to the destruction of paper money is tangible assets such as gold and silver.
Sure, these could go lower, but eventually they will be worth much more than their current depressed prices. These are generational investments, not short term trades. Investors should continue to buy gold and silver and save themselves.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.