Editor's note: Despite a recent sell-off, stocks have had a great start to the year... But according to our founder Porter Stansberry, there's a big reason to be cautious moving forward. In today's Masters Series, originally from a December 2022 issue of The Big Secret on Wall Street at Porter's company, Porter & Co., Porter analyzes a massive red flag that's flying completely under the radar amid this bullish run – one that could put your portfolio at risk...
The Ticking Time Bomb in Americans' Retirement Portfolio By Porter Stansberry, founder, Stansberry Research The Federal Reserve – and central banks around the world – dropped rates to zero for most of the past decade... Of course, this policy had many side effects for the market. Primarily, it pushed investors everywhere to reach for yields. Retirees were hit especially hard by this move... The Fed removed the ability to earn safe yields from the traditional retirement income vehicle – U.S. Treasuries. Countless retirees and other yield-starved investors had to find an alternative source of yield... So they turned to corporate debt. As I'll cover today, that's how the Fed's policies drove the rise of a dangerous investment vehicle. It has become a ticking time bomb... But no one wants to talk about it. The days of zero-percent interest are over. And if you have money stashed in a retirement fund, it's time to pay attention... Through 2020, the volume of corporate bonds held in mutual funds more than tripled since the Fed dropped rates to zero during the financial crisis. Take a look... Likewise, the reach for yield fueled an explosion in assets among corporate-bond exchange-traded funds ("ETFs"). Regulators clamped down on reckless real estate lending in the wake of 2008. So the credit that had been created over the past decade found a new home in corporate bonds. And instead of going through the banks, this credit was funneled through alternative avenues... like mutual funds and ETFs. Most mutual funds and ETFs that own corporate bonds are passively managed. That means there's no human investment manager calling the shots. Instead, the buy and sell decisions are on autopilot. They're dictated by a series of rules. One rule is that if a bond loses its investment-grade rating, it must be sold – no questions asked. What could trigger such a downgrade? Any number of things. A recession might cause a decline in earnings, for example. Rising interest rates can be another trigger. In each case, a company's debt burden and interest expense relative to earnings would deteriorate... exceeding the threshold for an investment-grade rating. The ultimate disaster scenario would be a one-two punch: a sharp recession sparked by higher interest rates. And that's precisely the scenario I see coming for the economy... The massive growth in investment-grade bonds sitting at the lowest rung of the ratings ladder – now a record 60% of the investment-grade universe – could trigger an avalanche of downgrades into non-investment-grade status. And that means one thing – fire sales. We could see billions of dollars in sell orders come from every passively managed mutual fund and ETF that owns investment-grade corporate bonds. Now, a fire sale in the highly liquid stock market is one thing... But it's a different story in the corporate-bond market. The average corporate bond trades far less frequently than stocks – depending on the issue, a few times a day to only every few days. (Less-liquid bonds can trade "by appointment," which is rare and only if a broker happens to have both a willing seller and willing buyer.) The problem is, holding these bonds in mutual funds and ETFs creates the illusion of liquidity. That's because mutual funds and ETFs are set up to allow for unlimited volumes of daily trading. But the underlying instruments in these funds – corporate bonds – don't have sufficient liquidity to process large sell orders. This mismatch is a ticking time bomb. If investors ever lose faith in their bond holdings and rush for the exits... or if a rash of downgrades forces the funds to dump their bonds... that bomb will explode. The former Bank of England Governor Mark Carney once explained this fatal flaw... These funds are built on a lie, which is that you can have daily liquidity, and that for assets that fundamentally aren't liquid. We got a taste of what the coming fire sale in corporate bonds will look like back in March 2020. The iShares iBoxx Investment Grade Corporate Bond Fund (LQD) – a benchmark for high-grade corporate bonds – collapsed by 22% in nine trading days. Check it out... The situation was so dire that for the first time ever, the Fed stepped in to buy corporate bonds. But this only inflated the bubble further... After the Fed's intervention, U.S. corporations sold a record $300 billion in debt in April 2020. With inflation still nowhere near the Fed's 2% target rate, this kind of intervention is now off the table... It won't happen a second time. And it's one of the reasons why the coming fire sale will make March 2020 look like a picnic. Regards, Porter Stansberry
Editor's note: The market has had a great year so far... the Fed is expected to cut rates... and the AI revolution is transforming the world. This unique market landscape has many investors questioning what to do with their money right now. That's why Porter is stepping forward to reveal how he's preparing for the rest of 2024 – including a step-by-step walk-through of what he's doing with his own money. Click here to learn the details...
| Recommended Link: | |  Biden Is Out, and the 'Fix' Is In If you've watched everything unfold over the past few weeks and wondered, "What in the world could be next?"... you need to watch Dan Ferris' new presentation right away. As you'll see, the "Fix" is in for 2024... and it threatens to plunge America into an economic nightmare unlike anything we've seen in half a century. It doesn't matter who the Dems pick as their nominee – this is already in motion. Full details here. | | |
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