The Economy is not Fine, It’s Financed!

Following a conversation with Steve Eisman, the Neuberg Berman Group money manager who famously predicted the collapse of subprime mortgages in advance of the 2008 financial crisis, Bloomberg is reporting on his new and equally disturbing concern, that the U.S. corporate debt market will suffer “massive losses” if the U.S. economy falls into recession. The story of Eisman’s subprime research and actions are chronicled in the 2010 best seller by Michael Lewis, “The Big Short.” Steve Carell played a character based on Eisman, in the movie adaptation of the book.

Current activities involving the corporate debt market are not as covert as subprime mortgage activities were in 2008, but they are equally dangerous and stupid. Only 1/3 of outstanding corporate bonds are “investment grade,” another 1/3 consists of purely junk bonds, and the final third are a combination of marginalized leverage loans and high yield bonds. Tranches of the bottom 2/3 are potentially just as worthless and dangerous as tranches of 2008’s subprime mortgages. As media continues to report that the U.S. financial system is strong, Eisman adds that it “doesn’t mean we won’t have a recession. And in a recession I think there will be massive losses in the bond markets because there’s a lack of liquidity.”

Eisman goes on to say, “You will see big losses in things like triple-B corporate debt, high-yield etcetera, but you need a recession first. Corporate debt isn’t going to cause the next recession, but it’s where the pain will be in the next recession.” Gavekal Research reported this week that half of the $6 trillion in investment-grade corporate bonds now hold a BBB-rating, which is five times what it was just a decade ago. Gavekal’s CEO, Louis-Vincent Gave, told Bloomberg that the continuing rapid acceleration of the corporate bond market, could introduce instability, particularly in certain industries. The Fed’s decision earlier this month, to hold off on interest rate increases, led to a spike in the U.S. corporate bond market. Interestingly, CCC-grade bonds, the riskiest categorization, have seen the highest gains so far this year.

Money Week has reported that total non-financial corporate debt in the U.S. is now 46% of overall GDP, causing a great number of financial analysts to point out that today’s corporate debt-to-GDP ratio is very close to the same ratio seen just prior to the 2008 housing bubble burst. The simple fact of the matter is that there is no shortage of pitfalls and economic calamities simmering at this time, just waiting to derail our currency, economy and/or stock market. Considering the ignorance carelessness that’s gone into creating this massive economic house of cards, it seems like the perfect time to take the steps necessary to protect your portfolio, assets and legacy with the time-tested safety and long-term productivity of physical precious metals. Today’s support-level prices are just another great reason not to wait for arrival of the bandwagon. Call the professionals at American Bullion at (800) 653-GOLD (4653) before the onslaught.

Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.