The 'Canary in the Coal Mine' Is Concerning

In today's Masters Series, adapted from the January issue of Stansberry's Credit Opportunities, Mike explains how elevated interest rates have distorted the overall economy... details why leveraged-loan default rates are poised to march higher in 2023... and explains how that spike in default rates signals that a credit crisis is coming... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Master Series] Editor's note: [The storm clouds aren't passing anytime soon](... With sky-high inflation and heightened geopolitical tensions weighing on the markets over the past few years, many folks have scrambled to stay afloat as prices remain elevated. And with credit-card loans becoming more difficult to attain, many investors remain unsure about what to do with their money right now... That's why Stansberry's Credit Opportunities editor Mike DiBiase believes it's crucial for investors to begin preparing their investment plans immediately in order to navigate this ongoing mayhem. In today's Masters Series, adapted from the January issue of Stansberry's Credit Opportunities, Mike explains how elevated interest rates have distorted the overall economy... details why leveraged-loan default rates are poised to march higher in 2023... and explains how that spike in default rates signals that a credit crisis is coming... --------------------------------------------------------------- The 'Canary in the Coal Mine' Is Concerning By Mike DiBiase, editor, Stansberry's Credit Opportunities 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... --------------------------------------------------------------- Recommended Link: [Crisis Alert: Our No. 1 Recommendation in the Face of Financial Turmoil]( The fallout from the recent bank failures has barely begun. Recession risk remains high. Many will panic – but YOU don't need to. For the first time in months, we're sharing our firm's No. 1 strategy for times of financial turmoil. It's a way to see double-digit yield potential... plus triple-digit capital-gains potential... all virtually guaranteed by LAW. For the next few days, we're sharing it at no cost, [right here](. --------------------------------------------------------------- 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. 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 yesterday]( 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. Good investing, Mike DiBiase --------------------------------------------------------------- Editor's note: The credit bubble is on the verge of bursting... but that doesn't mean you have to suffer. In times of crisis, perfectly safe corporate bonds sell off to absurd, distressed levels. Savvy investors then scoop them up for cheap and make a killing... That's why one of Mike's paid-up subscribers recently went on camera to reveal how this strategy helped him retire early at age 52... and why he never has to worry about his money no matter what's happening in the markets. [Click here to get the full details](... --------------------------------------------------------------- Recommended Link: [Bank Collapse Causes Gold Price to Soar]( Last week's bank collapse sent shock waves throughout the financial industry... Silicon Valley Bank was the second-largest bank in American history to fail, and investors have started piling into the safety and security of gold. But if you're not taking advantage of a little-known way to invest for around $5 today, you're missing out. [Click here for full details](. --------------------------------------------------------------- You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberryresearch.com. Please note: The law prohibits us from giving personalized investment advice. © 2023 Stansberry Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Stansberry Research, 1125 N Charles St, Baltimore, MD 21201 or [www.stansberryresearch.com](. Any brokers mentioned constitute a partial list of available brokers and is for your information only. Stansberry Research does not recommend or endorse any brokers, dealers, or investment advisors. Stansberry Research forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees of Stansberry Research (and affiliated companies) must wait 24 hours after an investment recommendation is published online – or 72 hours after a direct mail publication is sent – before acting on that recommendation. This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.