Why Defaulting Bonds Will Triggering A Financial Crisis

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What is going to happen next?

We are heading toward another Financial Crisis. It will make 2008 look tepid. I look for this Crisis to really hit in 2023 but the beginnings are already in place.

Take a look at the chart above. It shows a dotted line which is 10 year Treasury yields. The solid like is the ratio of junk bonds to investment grade bonds. This ratio shows how much stress there is in the bond market.

As you can see, stress increased significantly in 2020 which should not be a surprise given the crushing of the economy by various governments. But then things calmed down until recently.

Now, the stress is rocketing higher.


The obvious first answer is that the Fed is now tightening. Rising interest rates put stress on weak companies threatening their very existence. So junk bonds sink compared to investment grade and the spread in the chart goes up. The Fed will also be decreasing liquidity and that will hammer weak companies also.

The second reason is that banks are not making money on loans and will tighten lending standards. This can be a disaster for some weak companies because they won't be able to borrow money at any price. Or they will have to borrow at usurious levels thus threatening their existence.

What is going to happen?

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It take time for the tightening to trigger defaults. Months. So we are unlikely to see many defaults for at least six months. But they are coming. You can see it in the chart.

I have been proposing reasons why I look for a recession by next spring and perhaps even this year. The chart shows one more reason this will happen.

So how do we make money from this?

First, be patient. The wave of defaults won't happen tomorrow. But, when it does, there are two main ways I will make money from it.

First, short junk bonds or junk bond ETFs. Second, find companies with weak balance sheets and short them.

Naturally, I suggest subscribing to the Stock Navigator to see exactly what I'm doing in my own portfolio plus get in-depth research on my ideas and the exact timing of my entries and exits.

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Good trading,

Courtney Smith


Words To Live By

"He concluded that there were three simultaneous movements in the market. The first was the great primary trend or tide. In a bull market, for example, this is a broad upward movement, interrupted by frequent reactions. The primary trend may last from one year to a great many years. The next movements are the so-called secondary reactions, which reverse and correct the tidal moves. They usually last from three weeks to three months, and tend to retrace one-third to two-thirds of the previous uncorrected primary moves. The final movements are the daily moves. These minor fluctuations admittedly can be manipulated by the news of the day. Although the least important, they are the ones to which the public pays most attention. The single movement which every investor must be aware of at all times is the primary trend. Investors always should invest with this primary tide." The Dow Theory Today by Richard Russell

Nothing to add to that!

Where to get more Courtney!

Youtube: Freebee Wall Street Winners

Podcast: The Courtney Smith Show

Substack: courtneysmith.substack.com

Medium: Courtney Smith – Medium

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