The 'Canary in the Coal Mine' Is Concerning

Editor's note: Here at Empire Financial Research, we're long-term bulls over the future of the U.S. economy and stock market... But it's always useful to follow the analysis from smart people who have different opinions. As such, we're turning again this week to our friend and colleague Mike DiBiase – lead editor of our corporate […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Editor's note: Here at Empire Financial Research, we're long-term bulls over the future of the U.S. economy and stock market... But it's always useful to follow the analysis from smart people who have different opinions. As such, we're turning again this week to our friend and colleague Mike DiBiase – lead editor of our corporate affiliate Stansberry Research's distressed-debt newsletter, Stansberry's Credit Opportunities – to share a warning about the U.S. economy... --------------------------------------------------------------- The 'Canary in the Coal Mine' Is Concerning By Mike DiBiase --------------------------------------------------------------- [Have you heard of 'SWaB'?]( More than 100 countries around the world are rolling out a system called "SWaB" that could have a bigger impact than the Internet in the days ahead. Here in the U.S., it's already being implemented in 38 states and counting. This year, massive investments are pouring into this innovation from some of the richest people in the world – like Elon Musk, Jeff Bezos, and Warren Buffett. Even the world's most powerful companies, like Apple, Microsoft, and Google, are spending billions to onboard it. That's because every single modern technology – 5G, artificial intelligence, blockchain technology, IoT, robotics, quantum computers, and EVs will have to switch over to SWaB to stay relevant. [Get the details here](. --------------------------------------------------------------- []When a canary kicks the bucket, it's time to get out... In 1911, British miners began taking canaries with them down into coal mines. Because of their faster metabolism, the small birds would show the effects of carbon monoxide before the deadly, odorless gas could harm the miners. That practice led to the idiom "canary in the coal mine." Today, it means an early warning of danger ahead. In our []Stansberry's Credit Opportunities monthly advisory, my colleague Bill McGilton and I are always on the lookout for a "canary" that will tell us when the credit bubble is getting ready to burst. That canary just might come from leveraged loans... Leveraged loans are made by banks and other lenders to junk-rated borrowers. Although they trade in the secondary market like corporate bonds, retail investors can't buy them. Only banks and other institutional investors can. These loans are considered less risky than junk bonds because they typically have adjustable-rate interest payments and are secured by borrowers' assets. They are senior to most junk bonds. Their adjustable interest rates remove interest-rate risk. And the security backing the loans increases the chances of a higher recovery in the event of a default. But leveraged loans have a downside... When rates are rising – like they are today – it's harder for companies to afford the interest payments. And heading into a slowing economy, these loans will be much more difficult to refinance. That's why we expect leveraged-loan defaults to rise before defaults spike in junk bonds... In other words, a spike in leveraged-loan defaults will be our canary in the coal mine. According to credit-ratings agency Fitch, the average default rate for leveraged loans over the past 15 years was 2.5%. Thanks to the post-pandemic stimulus, that rate dropped close to all-time lows of less than 1% in 2021. Rising interest rates, inflation, and a slowing economy started to push the default rate back up toward its historical averages last year. And it's headed higher... Fitch estimates that leveraged-loan defaults will hit 3% to 4% by 2024. We think they're headed much higher than that. So do some analysts... like Matt Mish, a strategist at Swiss investment bank UBS. He thinks leveraged-loan default rates could hit 9% in 2023 if the Federal Reserve continues to aggressively hike rates. Around $27 billion in leveraged loans defaulted last year. That's around 3 times higher than the $9.8 billion that defaulted in 2021, according to Fitch. --------------------------------------------------------------- [You see this countdown?]( Well, it's counting down to exactly 1 p.m. Eastern time on March 28th. And it's all because Whitney Tilson will sit down with someone he's never introduced you to before. But what this man has to say could change your financial future. Here's what to do right now... Bookmark this page: [EmpireBackdoor.com]( and mark your calendar for March 28, 2023, at 1 p.m. Eastern time. We'll give you more details as we get closer to the event. --------------------------------------------------------------- Some investors are already running for the exits... The Blackstone Private Credit Fund ("BCRED") is one of the world's largest direct-lending funds. It owns a portfolio of $50 billion in leveraged loans. Despite 94% of BCRED's loans being secured – all at floating rates, with zero defaults – many investors want their money back before the trouble starts. BCRED hit its quarterly redemption limit in the quarter ended November 30, meaning investors demanded their money back on at least 5% of outstanding shares. We predict leveraged-loan default rates will soar in 2023 and the leveraged-loan market will dry up. That would shut off an important source of corporate liquidity and trigger more corporate-bond defaults. And that's not just speculation. The canary isn't looking so good these days... Leveraged loans are getting hit with a wave of credit downgrades. In the fourth quarter of 2022, downgrades of these floating-rate loans hit their highest level in five years. Investment bank Morgan Stanley (MS) says the downgrade wave is just getting started. Remember, downgrades precede defaults. We expect to see a wave of leveraged-loan defaults next. The default wave will spread to other types of loans, too... from credit cards to auto loans, business loans, and bonds. The conditions for the financial storm are getting worse. Inflation remains stubbornly high. Interest rates are still rising. And [as I explained in yesterday's essay]( credit continues to get tighter... We can see this in the Federal Reserve's latest surveys of bank loan officers... They are getting concerned and lowering their risk. More and more of them are saying they are "tightening," meaning they are making loans harder to get, shrinking loan sizes, and offering terms that are more favorable to lenders. And they did so across all types of loans... including loans to big and small businesses as well as credit-card loans to consumers. Excluding the brief period following the pandemic, we haven't seen credit this tight since right before the last financial crisis. All of these signs tell us the U.S. economy is in deep trouble. But for now, investors remain oblivious... The stock market is up this year. And so are the largest high-yield ("junk") exchange-traded funds. Stocks and bonds were already expensive at the start of the year. Investors continue chasing up prices, making them even more expensive. They're like miners heading deep underground without a canary by their side. Don't be one of them. Regards, Mike DiBiase March 22, 2023 Editor's note: As Mike says, a true credit crisis would be a good thing for a select group of investors. While many folks will be scared, this is exactly when you want to buy safe bonds. In a special presentation, one of Mike's Stansberry's Credit Opportunities subscribers went on camera to explain how this strategy helped him retire early... and he did it at age 52. [Get the full story here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 1125 N. Charles Street, Baltimore, Maryland 21201 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](