by Porter Stansberry, Casey Research: If you haven't noticed, a historic mania has developed in the world's bond markets.
Central banks have pushed so much new money into bonds (in an effort to manipulate interest rates lower) that corporate bonds have begun trading with negative yields, meaning that corporations are now being paid to borrow.
This, as you might realize, makes absolutely no sense. Sooner or later, it's going to cause catastrophic problems with the world economy – perhaps even the collapse of the entire financial system.
I hope you'll print out today's essay, read it carefully, and continue to monitor a few of the data points I detail below. What I've written here is a guide to understanding how this incredible global mania will end…and when.
The last time I saw the markets with this kind of clarity was June 2008.
That's when I penned what's perhaps the most famous issue of my Investment Advisory newsletter (or any newsletter). The headline gave it all away: "Freddie Mac and Fannie Mae Are Going to Zero."
In that letter, I explained why the world's two most important mortgage banks (Freddie and Fannie) were certain to fail. I showed why rising mortgage-default rates would also cause at least Lehman Brothers, Citigroup, and Merrill Lynch to follow suit. And I warned that virtually the rest of the entire global financial system could follow. I didn't mince words…
Fannie Mae and Freddie Mac, the two largest and most leveraged owners of US mortgages, are sure to go bankrupt in the next 12 months…
I recommend you sell an equal amount of each stock short.
I have so much confidence in this trade I recommend you use a 25% stop loss, not a trailing stop loss, as the position could be volatile for the remainder of this year. And unlike most short sell positions that I recommend you buy to cover after you're up 50%, I recommend you hold these positions until the shares literally no longer trade.
About a month after I published my report, Hank Paulson, the US Treasury secretary at the time, officially denied that Fannie and Freddie were in peril, claiming both firms were "adequately capitalized." Rarely has a bigger lie ever been told—Paulson's was a $5 trillion fib. The entire financial system imploded about 90 days later, wiping out even AAA-rated collateral, not to mention wiping out Fannie and Freddie. Remember: The government has always lied about every "financial crisis," including what's happening in Europe right now. And it'll certainly lie about the next one, too.
Nine months after I warned Fannie and Freddie would fail, not a single leveraged U.S. financial institution would have survived without the explicit backing of the federal government. Trillions of dollars were ginned up in an alphabet soup of bailout plans. In about a year, the world had turned upside down, from the supreme confidence of the stock market's highs in November 2007 to the biggest panic since at least the Great Depression.
It will happen again. Soon.
As I'll detail in today's essay, rising default rates on corporate debt, along with a sharply slowing global economy, will one day cause a new wave of panic in the financial markets. I've been warning about these trends since they first appeared in mid-2014. Longtime readers will be familiar with the themes and data I summarize below.
I want to talk about what you can do to position yourself to profit from these trends safely. I'm not talking about "betting the farm" that you can nail the timing of the next big market turn. I'm only talking about setting up a portion of your portfolio so that when the huge wave of corporate credit defaults hits, your portfolio will be well-protected – insured, if you will – against losses.