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Financial Crisis 2016: High Yield Debt Tells Us That Just About EVERYTHING Is About To Collapse

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Money Tornado - Public DomainDid you know that there are more than 1.8 trillion dollars worth of junk bonds outstanding in the United States alone?  With interest rates at record lows all over the world in recent years, investors that were starving for a decent return poured hundreds of billions of dollars into high yield debt (also known as junk bonds).  This created a giant bubble, but at first everything seemed to be going fine.  Defaults were very low and most investors were seeing a nice return.  But then the price of oil started crashing and the global economy began to slow down significantly.  Energy company debt makes up somewhere between 15 and 20 percent of the junk bond market, and the credit rating downgrades for that sector are coming fast and furious.  But it isn’t just the energy industry that is seeing a massive wave of defaults, debt restructurings and bankruptcy filings.  Just like with subprime mortgages in 2008, investors are starting to wake up and realize that the paper that they are holding is not worth a whole lot.  So now investors are rushing for the exits and we are starting to see panic on a level that we have not witnessed since the last financial crisis.

Just look at what has been happening in recent days.  Investors took nearly 500 million dollars out of the largest junk bond ETF (iShares HYG) last week alone.  The following chart shows that HYG has now fallen to the lowest level that it has been since the last financial crisis

HYG February 2016

During the last financial crisis, junk bonds starting crashing well before stocks did.  In fact, many consider junk bonds to be a sort of “early warning system” for stocks.  For many analysts, when you see high yield debt collapse that is a huge warning sign that you need to get out of stocks as soon as possible.

And this makes perfect sense.  When financial trouble erupts, it is going to hit more vulnerable companies first usually.

Blue chip companies are typically not in the high yield debt market.  Normally, high yield debt is only for companies that have more risk associated with them.  And it is risky companies that typically start to crumble the quickest.

Another high yield ETF that I watch very closely is JNK.  As you can see, the chart for JNK looks nearly identical to the chart for HYG…

JNK - February 2016

What these charts are telling us is that a new financial crisis began during the second half of last year and that it is now accelerating.

At this point, yields have reached levels that we have not seen since the collapse of Lehman Brothers.  The following bit of analysis comes from Wolf Richter

The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy, as we pointed out. Today, that average yield is nearly 22%!

Today even the average yield spread between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:

Junk Bond Spreads - Wolf Richter

At this cost of capital, companies can no longer borrow. Since they’re cash-flow negative, they’ll run out of liquidity sooner or later. When that happens, defaults jump, which blows out spreads even further, which is what happened during the Financial Crisis. The market seizes. Financial chaos ensues.

After junk bonds crashed in 2008, virtually every other kind of investment followed suit.

Just about the only thing that didn’t crash were precious metals.  Gold and silver soared, and that is what you would expect to happen during a major financial crisis.

Another thing that I am watching closely is margin debt.

During past financial bubbles, we have seen lots of people borrow lots and lots of money to buy stocks.

If that sounds like a really bad idea, that is because it is a really bad idea.

Whenever margin debt peaks and then starts to decline precipitously, that is a signal that a stock market crash could be imminent.  The following chart comes from James Stack

Margin Debt - James Stack

After looking at that chart, I can’t understand how anyone couldn’t see the pattern.

We keep making the same mistakes, but we never seem to learn from history.  In fact, the mainstream media keeps telling us that this new financial crisis “isn’t 2008” over and over again.  Even though the exact same patterns are happening once again, they still believe that this time will somehow be different.

And to a certain extent that is actually true. This current crisis is not going to be the same as the last one.  Eventually, it is going to prove to be even worse than the last one once everything is all said and done.

So what should we all be doing?  In a recent article entitled “70 Tips That Will Help You Survive What Is Going To Happen To America“, I gave my readers some basic pieces of advice on how to get prepared for what is coming.  But not all of them will apply immediately.  For example, my wife and I don’t believe that we will need our emergency food next month.  But down the road we are absolutely convinced that we will need it.

For the moment, one of the key things is to build up an emergency fund.  In my opinion, everyone should have an emergency fund that can cover at least six months of bills and expenses.  And now is not the time to go into debt.  Instead of buying lots of shiny new toys, now is a time to spend money on practical things that will be needed during the hard times that are coming.

Unfortunately, most people believe what they want to believe, and most people do not want to believe that hard times are coming.  They have an extraordinary amount of faith in the system, and they are convinced that this time will be different somehow.

So I wish them the best, but as for me and my family, we are getting prepared.

What about you?

Are you getting prepared?

Please feel free to share your thoughts with the rest of us by posting a comment below…

  • Jim Davis

    That S&P chart is rather anti-doom. As can be seen every time there is a rapid-sell off, i.e. correction, the upward move, i.e. boom, starts again. Being in cash is probably the best place to be right now. That’s where I’ve been since the beginning of the year. But after the other shoe drops, I’ll be looking for good re-entry point.

    • Former

      Money is satan’s toy

      • Guest

        That doesn’t even make sense…it’s obviously your personal opinion.
        Just remember, not even Jesus said money was eve ok BUT THE LOVE for money was evil.

        • Guest

          Correction: not even Jesus said money was evil…

        • algol2000

          It is true. Money is ACTUALLY satan’s boy. It is the means by which satan enslaves many.

          Study the scriptures and you will find that Jesus never personally handled money.

          • Jim Clark

            Be sure to send me all your money so you are never tempted by Satan.

          • algol2000

            I work, and I am netitled to be compensated. The method by which they choose to compensate me is in the local currency because that is the popular method. However, as soon as I get it, I dispose of it by buying some tangible asset (not stocks). I need resources, not money.

      • Jim Davis

        But Jesus built my hotrod!

  • Former

    I will destroy that ugly looking deformed demon now

  • MaxRockatansky33

    Meanwhile Saudi Arabia, Turkey, UAE, Katar, Bahrain and other Arab countries are preparing for a ground offensive in Syria. Saudis are sending 150 000 troops close to the Syrian borders while Russia is warning that a major global conflict is imminent. Any ground offensive in Syria will be considered as a start of World War 3.

    • Gay Veteran

      ROFLOL, Saudi Arabia can’t even win their war of aggression against Yemen (the poorest country in that region)

      • awb22

        the same for any Arab country except Israel

      • awb22

        no, but turkey could

  • iris

    We certainly need to be prudent with money, especially in times like these, whether we have much or little. Getting out of debt is important, and preparing when possible for unforeseen emergencies of different kinds, since life can be full of them, but nations rise and fall and much of this economic chaos has been planned in advance by global powers. All this is also happening in fulfillment of prophecy.

    So, I hope to focus on the main reason I’m here, to share the gospel in word and deed in His Spirit and truth, according to His will. Compared to that, the rest is not worth worrying about, since God knows who His own are, and can protect them if He wants to. If He allows suffering or even death, for those who know Him, His grace will be even more abundant and our security in Him is sure. It’s time for us to look up, because our redemption draws closer with every day.

    Where people spend eternity is at stake, so I pray for salvation for those who don’t know Him and that those who do will be strengthened and comforted in Him. And I try to give what I can to those who are in need, locally and in places in the world where there is next to nothing at hand. When we consider that many thousands of people in the city of New Delhi alone, are born, live out their lives and die in cardboard boxes, even the homeless in the U.S. have something to be thankful for.

  • Gay Veteran

    Very good article, and no bible thumping.

    “…In my opinion, everyone should have an emergency fund that can cover at least six months of bills and expenses….”

    and don’t forget having a lot of CASH on hand in case of a bank “holiday”

    • awb22

      Who said anything about bible thumping, whatever that is?

  • Jim Clark

    I noticed in the last chart that shortly after each downturn at the market peak, the market started going upward and higher than before. So the correct philosphy is buy! buy!! buy!!!

  • Mistanick

    So a “junk bond” is a bad thing huh? They are high yield higher risk investments and have been a part of the investment landscape for a long time. Some folks are willing to take that higher risk to seek a gain higher than is available most anywhere else. This is not a bad thing and is a product of liberty. Why are you trying to scare people?

    • Hyakkidouran

      Maybe because money from people’s PENSIONS and BANK ACCOUNTS have been invested in junk bonds by banks and hedge funds, without their consent?

  • carson

    collapse of things as they’ve been known..or change.
    And so they bring out the NIRP and to make even steeper NIRP retire large cash bills/ban large cash bills first then give it time and ban the small cash too and by then the already rolled out by the big banks blockchain digital currency will have most of the bugs worked out and all can use that..
    and he causes all to receive a mark and without it none can buy or sell…
    oh, and make some large regional wars to the top off the angst and fear along with a more general and global economic woes, drive people to desire and clamor for their solution.

    Most people will look to man for solutions rather then Christ, like a trap. Jeremiah 17 say’s cursed are those who look to man…and forget God, and 1st john 2:17 shows the fate of the world and rev 19 shows the fate of unredeemed mankinds rule, so why look to man to ‘fix’ things when all that is written will be fulfilled, look to Christ.
    The worlds way’s end and Christ will reign and those who are His bought with a price the cross and blood of Christ will go onward, be His.
    Many will look to dear leaders..but rev 6:15-17 shows dear leaders hiding in a hidey hole from the wrath of the Lamb/Christ Jesus for His time comes..
    so why look to trust in hope in menkind? why not look only to Christ. Be saved.

    • iris


  • dhdj

    are mobile devices modded? or ip

  • Jim Davis

    Patience. I’m sure Michael will come up with a gloom and doom angle on that too.

    • Marty Mann

      I’ve said myself that things are bad all around but the author of this blog loves to paint it 10,000 times worse than what it is. I’ve read the phrase “about to collapse” so many times over the past eight years that it’s almost sickening. He knows himself that it’s not going to collapse anytime soon but the gloomy headlines grab people and they want to participate in the conversation and Michael knows that’s what puts money in his pocket, the same money that is supposedly going to be worthless “real soon.” It’s not a coincidence that he promotes Jonathan Cahn’s books like “The Shemitah”, that had people believing something major was going to happen back in September, well you know the rest of the story.

  • iris

    Who was that, please? I heard about Scalia, of course.

  • Casey Dumas

    How bad is it supposed to get? Seriously how bad is bad?