How to Profit When the $217 Trillion Global Debt Bubble Bursts

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While in London recently at an exchange with British Academy President Lord Nicholas Stern, Federal Reserve Chair Janet Yellen really let the cat out of the bag.

She told Stern that banks are now “very much stronger,” with another financial crisis like the one in 2008 unlikely to happen anytime soon, and not likely “in our lifetime.”

According to Yellen, the Fed has “learned” from the Great Recession of 2008 and is now more watchful over underlying risks in the financial system. She’s comfortable saying, “I think the system is much safer and much sounder.”

Well, isn’t that reassuring…

Really, it’s just more of the hubris that got us into the last financial crisis – the one that dragged the global economy to the edge of a precipice and vaporized trillions in wealth. I’m sure you remember it well, even if Yellen seems a little foggy on the details.

On the one hand, central banks periodically warn us against overpriced assets, interest rates at or near extreme lows, and excessive borrowing.

And on the other hand, it’s their freewheeling, easy-money policies, ostensibly put in place to stimulate the post-crisis economy, that have just coaxed global debt levels to new records.

That, in my view, has only pushed us further along toward the next crisis. With debt completely out of control all over the world, it won’t take much to tip the cart over.

Student debt, subprime auto loans, credit cards, name it: Any one of a number of debt bubbles could be the last straw.

That’s why I think my recommendation today is going to knock it out of the park…

We’re Hitting “Peak Debt,” and Yellen’s Not Paying Attention

During a May 2015 CNBC interview, crisis-era Treasury Secretary Tim Geithner’s own words were, “There’s been a tremendous loss of confidence in public institutions and in government.”

global debt bubble

Geithner also said there will be another financial crisis where the treasury secretary will go to Congress asking for billions (or trillions?) to bail out banks.

I give a lot more weight to the candor of a former government official warning against a future crisis than a current Fed chair saying “not in our lifetimes.”

What’s more, just a few days after Yellen “reassured” us, Reuters reported global debt has now reached an all-time high.

But apparently, in Yellen’s world, that’s just hunky dory. She’s hardly alone. The world is on a debt binge right now…

In the past year alone, global debt has swollen by an additional $500 billion. That puts worldwide debt into record territory, ringing in at an almost incomprehensible $217 trillion.

As Reuters tells it, the Institute of International Finance (IIF) reports global debt is now a whopping 327% of worldwide economic output.

It’s gotten to the point where you’d be hard-pressed to find a tight belt anywhere in the public or even private sector.

That’s right; it’s not just consumers and governments reaching their borrowing limits, but corporations, too.

And that’s been just fine for yield-happy investors who’ve had to chase yields to make up for the fact that their money’s not working for them.

But there’s a big, fat reckoning coming.

Big Spenders Are Throwing Off Big Yields

Enter the world of high-yield bonds, better known as “junk bonds.”

The basics are that these bonds typically pay a higher yield because they are considered lower quality, therefore carrying higher risk of not being paid back.

The other point to remember is, as bond prices rise, yields fall.

When the 2008 financial crisis hit, investors in high-yield bonds made a race for the exits, stampeding out of them and sending their more typical yield from about 7.5% to 22% in 24 months.

Since then, yields have been coming steadily down, in large part thanks to Yellen & Co. keeping rates near 5,000-year lows.

Anyone wanting more yield has had little choice other than to move up the risk ladder toward higher-yielding bonds. That demand has bid up prices, driving down yield on junk bonds.

Just look at what’s happened to the massive $18 billion iShares IBoxx High Yield Corp. Bond Fund (NYSE Arca: HYG).

how to profit when bubbles burst

Since early last year, it’s been a relentless climb as investors have thrown caution to the wind and blindly chased yield.

Already, longer-term treasuries appear to put in a bottom in the summer of 2016, causing lower-risk rates to rise. The moment someone yells “Fire!” in the crowded high-yield market, this massive ETF will go “no-bid” in no time and sink like a stone.

My suggestion is to watch the HYG ETF with an eye to short it once it breaks down in a sustained way below the $87 per share level.

From there, it will be a long way down for HYG and a long way up for your profits as this debt bubble pops.

Lots of America’s once-great retail names hopped on the free-spending debt bandwagon in good times, but now plummeting customer traffic and merciless competition likely spells doom for these dinosaurs. There could be as many as 50 retail bankruptcies in 2017, and by learning how to play their demise, Shah Gilani’s readers have had the chance to make average gains of 44% per day, including partial closeouts.  One recent trade was closed out for 995% in profits. What’s more, Shah expects to continue this incredible achievement for at least the next 18 months. Click here to check out what he’s up to…

 

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