All weekend, we'd been waiting to see what China would do to retaliate to the White House's threat to slap tariffs on virtually all remaining Chinese imports, and yesterday morning, we got it.
A tsunami of fear started yesterday morning in Asia, and it raced like it was trying to beat the sun to Europe and across the Atlantic to American markets.
At first glance, China looks like it's retaliating with a roundhouse kick; it's making moves to devalue the yuan to its lowest level in a decade. And the government has asked its state-owned enterprises to halt "agricultural imports" from the United States.
Now, that second threat could prove to be bluster. It's a tall order, and it's certainly easier said than done.
But the Chinese can manipulate their currency all day long, as easily as anyone can. And that alone was enough to send stocks prices, bond yields, oil prices, and optimism crashing through the floor. The Dow alone was down more than 700 points after lunch.
But I'll tell you something: Investors aren't scared of the right things right now. Their eyes are off the ball, and that could mean big trouble a few months down the line - and big profits for folks who know what's really going on...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
The Fed's Big "Extend & Pretend" Game
In Social Studies class, we learned the Federal Reserve operates under a "dual mandate" from Congress: to achieve maximum employment, maintain stable prices, and moderate long-term interest rates. I know - that's three mandates, but we're talking about Congress, after all (and to be fair, you can treat the last two as different sides of one coin).
These days, though it's nowhere written in the actual congressional mandate, the Fed's No. 1 job seems to be making the president happy and supporting markets.
Watch Now: Robert Herjavec is helping everyday Americans discover the next Airbnb. Click here now...
And right now, that means keeping the price of money artificially, insanely cheap.
Non-financial corporations are under a record $9 trillion debt load as of Q1/2019, according to the St. Louis Fed. That's just a little smaller than the GDP of the United Kingdom, India, France, and Brazil combined.
It's ridiculous the amount of low-quality debt out there; so many companies would otherwise be well on the way to insolvency if it weren't for the Fed's cheap money racket.
Make no mistake about it: These companies would drop like rocks if they weren't able to sell ever-increasing piles of debt at prices that would never in a million years be available to them if not for the Fed's manipulation of interest rates, and the debt market's anticipation of cuts that make that debt cheaper.
And that debt market is massive: During that same Q1/2019, according to Morningstar, buyers scooped up a record $102 billion in taxable (that is, corporate) bonds.
Why buy such extreme quantities of dubious debt? Why pay good money to own a lousy ticking time bomb?
Well, thanks to the Fed, there's a perception that the tick-tick-ticking will go on forever, that the "KA-BOOM!" will be delayed indefinitely.
When you own that debt, you get capital appreciation as interest rates go down. Thanks to lower rates, high yield is a bonus...
... that is, until it isn't.
The game is called extend and pretend, and it's being played out at a frightening pace, on a terrifying scale.
But it can't last forever.
Here's What the Endgame Looks Like (and How to Cash In When It Happens)
But one day (and that day may be coming a lot sooner than everyone realizes), the bond market is going to stop supporting the game for loser companies.
We're getting closer to that day, on account of the economy doing well and the Fed lowering the fed funds rate, for no other reason than markets and their unacknowledged political masters expected them to.
You Have to See It to Believe It: Claim your stake in this 1,000x market phenomenon with just $50. Click here now...
Now, since they instantly expect them to cut again in September, price appreciation is being baked into outstanding debt.
That's front-running, and it's really stupid.
If the economy actually starts to slow down, the Fed's cutting ahead of the slowdown will have investors worried that there's no ammo left, that the Fed will have to lower even more to stave off recession.
What's more, there are bond market vigilantes out there. They will take profits on their huge gains in overleveraged companies and then slap the Fed in the face just for the sheer hell of it.
That's going to be the signal, like a starter pistol going off, to make obscene amounts of money.
I'm researching moves for my paid 10x Trader subscribers right now. I can't share the exact details with everyone - that wouldn't be fair - but I can tell you we're in a target-rich environment.
My screen's got lots of overleveraged, cash-starved companies on it that are now billions in the hole and which are starting to run into trouble "rolling over" their existing debt. Negative cash flow - and big opportunities - abound right now.
Go here to learn about the kinds of moves we'll be making.
Change How You Invest
Conventional Wall Street advice will never afford you the kind of lifestyle that I've grown accustomed to living - it'll never enable you to LIVE RICH. Because here's the thing: LIVING RICH requires you to be unconventional - to go against the grain. If you're ready to make that leap, just click here to learn more.
Follow Money Morning on Facebook and Twitter.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.