Porter Stansberry, of Stansberry Research, says, “U.S. corporate debt now equals roughly 45% of U.S. gross domestic product (GDP). Every time we’ve reached this point in recent history, it has resulted in a spectacular crash…” That would be 2001/2002, 2008/2009, and 2016/x as I write.
“And thanks to the government’s intervention during the last financial crisis, much of the bad debt from 2008 is still out there, it’s just been papered over. So this corporate default cycle is likely to be far worse than average… Get this: Bond-market veterans are expecting something around $1.5 trillion in defaults through 2021 – that’s more in defaults than we saw in the mortgage crisis. And, unlike mortgages, the recovery rates on defaulted corporate bonds are likely to be very low.”
“Companies have spent so much of this borrowed money buying back stock that there’s very little in the way of assets to back these loans… Historically, corporate bond defaults have seen recovery rates around $0.40 on the dollar, meaning that investors lose around 60% of their capital when a bond defaults. More recently though, these recovery rates have fallen to around $0.15, meaning that investors have lost around 85% of their capital.”
“These shockingly big losses will hurt our banking system far more than the mortgage crisis. Meanwhile, the most systemically important financial firms in America are already hanging by a thread.”
He is talking his book, but that doesn’t mean he’s wrong. The quotes are from The Biggest Trade in Generations.