By Justin Spittler, editor, Casey Daily Dispatch
“Debt doesn’t matter.”
I know… It sounds ridiculous.
After all, we all know people who racked up too much credit card debt… or someone who took out a bigger mortgage than they could afford… or someone who borrowed too much money to go to college and ended up regretting it dearly.
But many so-called experts are peddling this idea that the national debt doesn’t matter.
That’s right. Many people honestly don’t think it’s a problem that the U.S. is now $22 trillion in debt. That’s $67,018 for every U.S. citizen… and $179,907 for every U.S. taxpayer.
Just look at this headline that CNN published last month…
You can read the entire article here if you want. But I’ll save you the agony.
In short, the author argues that the national debt doesn’t matter because the U.S. government can just print more money.
Of course, longtime readers know that this is a recipe for disaster. Money printing destroys the value of a currency. Plain and simple. If left unchecked, it can render the currency completely worthless.
It’s ridiculous to think that the national debt doesn’t matter.
The same can be said about corporate debt, which – as you’re about to see – has exploded in recent years. And yet, many investors aren’t fazed.
Those people are putting themselves in serious danger. I’ll explain why in a second. I’ll also show you what you can do to protect yourself today from the consequences of this.
ADD
But let’s first take a closer look at the corporate debt market…
Starting with the basics, corporate bonds are debt issued by companies to raise money.
Practically every major company borrows this way. But corporate borrowing has skyrocketed over the last decade.
This is, of course, thanks to the Federal Reserve’s easy money policies. Remember, the Fed dropped its key interest rate to effectively zero in December 2008, and held it near record lows for almost seven years.
This made it incredibly cheap for corporations to borrow money. You can imagine how corporate America responded…
Just look at the chart below. You can see that there’s been an explosion in corporate debt since 2008.
The amount of outstanding corporate debt is up 86% since 2008. For comparison, the U.S. economy grew just 18% over the same period.
To understand why that’s a problem, take a look at this next chart…
It shows corporate debt as a percentage of U.S. gross domestic product (GDP), the most popular measure of economic growth.
You can see that corporate debt as a percentage of GDP is now higher than it’s ever been… higher than it was during the recession of the early ’90s… and at the peak of the dot-com bubble in the early 2000s… and the 2008-2009 financial crisis.
That alone is a major red flag. But it gets worse…
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We’ve seen an explosion in BBB-rated corporate debt since 2007…
Let me show you what I mean by that…
When a company issues debt, a ratings agency such as Moody’s, Standard & Poor’s, or Fitch will assign the debt a credit rating. This rating tells investors the risk level of a bond.
The table below breaks down the different credit ratings. The red line separates “investment grade” bonds (which are considered the safest) from “junk” bonds (the riskiest).
You can see that BBB-rated bonds are the riskiest within the investment-grade community.
Now, look at the chart below. It shows how much the BBB-rated corporate debt market has grown over the last two decades.
BBB-rated corporate debt is up more than 400% in just the last 12 years.
It’s now a nearly $3 trillion market. That makes it twice as big as the subprime mortgage market at the height of the last housing boom.
And we all know how that ended…
The collapse of the subprime mortgage market triggered a major stock market crash. And it tipped the U.S. economy into its worst economic downturn since the Great Depression.
I’m not the only Casey analyst deeply worried by this, either…
Nick Giambruno had this to say in last month’s issue of The Casey Report:
Today, BBB makes up about 50% of the overall so-called “investment grade” market, an all-time historical high. It’s also now larger than the entire corporate bond market was in 2008.
Further, over half of BBB-rated companies have a higher net debt-to-EBITDA ratio than the average for the BB segment. (Net debt-to-EBITDA ratio is a key metric for determining a company’s debt burden. The higher the ratio, the more debt per dollar earnings a company makes.)
This means over half of so-called “investment grade” BBB companies are more leveraged than their junk counterparts.
In short: there’s a lot more corporate debt than there was a decade ago. The quality of corporate debt is also significantly worse, on average. Not only that… many of the so-called “safe” bonds are actually much riskier than people realize.
This is bad news for investors with heavy exposure to BBB-rated bonds.
Think about it. When the U.S. economy falls into recession (which it is long overdue for), many companies will struggle to pay off their debts. And that will lead to huge losses for investors who own risky corporate bonds.
Fortunately, there’s a way to protect yourself.
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I suggest you look “under the hood” of any corporate bond fund you own…
You can do this easily (and for free) on Morningstar. Just click the “portfolio” tab once you’ve found the fund you own. There you can see a breakdown of what kind of bonds the fund owns.
Here’s an example. This is the credit quality breakdown of the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).
You can see that almost half of the fund’s bonds are “BBB” rated.
This is not the kind of fund you want to own today. If you own funds with heavy exposure to BBB bonds, consider shifting money to funds with heavier allocations to safer “AAA/AA/A”-rated bonds.
Investors who take this step will put themselves in a much safer position should the corporate debt bubble pop.
Editor’s note: Next Wednesday, February 27 at 8 p.m. ET, former money manager E.B. Tucker is teaming up with Doug Casey to put on our biggest event of the year.
It’s called The Stock Market Escape Summit, and you’re invited to attend for FREE.