The Weekend Edition is pulled from the daily Stansberry Digest.

America's Worst Abuser of Debt Isn't Who You Think

By Mike DiBiase, editor, Stansberry's Credit Opportunities

The summer of celebration is in full swing...

For the most part, we're returning to our normal lives following the COVID-19 pandemic.

Roughly 177 million Americans are now fully vaccinated against the virus... Some businesses are transitioning to hybrid work setups... And despite the Delta variant, the number of new cases is still down significantly from its peak last winter.

All the news these days is about how global economies are getting back on their feet after spending much of the past year in lockdown. Stock markets are hitting new all-time highs. If you're an investor, everything seems rosy.

The only thing you might be worried about is how fast the rebound is happening... The economy is running too hot, leading to rising prices in many sectors. Still, the Federal Reserve tells us not to worry about that... It assures us it's just a short-term problem.

However, I believe the storm clouds forming on the horizon are worth watching. The good times might continue for now, but as we've learned throughout the years... they don't last forever.

The COVID-19 pandemic has left us with a massive problem in the U.S...

And in my opinion, this isn't something the Fed can simply brush aside as "transitory" – like it's trying to do with the recent uptick in inflation.

Specifically, this problem is our country's collective debt load... which keeps growing higher.

I know debt isn't a sexy subject. But if you want to become wealthy, it's important to know about debt... when it can be beneficial... and most important, when it's dangerous.

The first thing to understand is that not all debt is bad. Some debt can be a good thing...

Debt can be used to increase a company's earnings per share and return on equity. By using leverage, companies can push their stock prices higher, much faster. But as I noted last year in the DailyWealth Weekend Edition...

The problem, of course – as with most things in life – is excess...

Too much of a good thing becomes dangerous... The extra leverage brings added risk. When the sun stops shining, the debt doesn't go away. It still must be repaid.

That's exactly what has happened with debt in our country... And the biggest offender isn't who you might expect.

The American consumer has always been the poster child for our country's long-lasting debt problem. But that isn't the case these days...

Households are actually the most responsible borrowers in the U.S. today...

Americans didn't just use their stimulus checks and unemployment benefits to bid up "meme stocks" like GameStop (GME) and AMC Entertainment (AMC). Some folks acted responsibly and used the money to pay down their credit-card debt and home-equity lines...

Credit-card debt has fallen by 15% since the beginning of 2020. Credit-card delinquencies are now at their lowest level in a decade. And home-equity debt is down 17% since the start of 2020, despite tens of millions of people being out of work.

This deleveraging has left the average U.S. consumer in much better financial shape than before the pandemic.

Meanwhile, the biggest abuser of debt these days – by far – is the federal government...

The U.S. now owes more than $29 trillion. This pile of debt represents 126% of our country's gross domestic product. The pandemic caused this ratio to soar to as high as it has ever been... It's even higher than it was at the end of World War II.

Since the last financial crisis, the U.S. government's debt has more than doubled, increasing by $18 trillion in that span... And around $6 trillion of this increase has been added since the start of the pandemic.

The U.S. government runs up debt like it doesn't have to ever pay it back... Last year, it spent nearly twice the amount it collected in taxes, running a $3.2 trillion budget deficit.

Imagine if the average American household behaved like that...

The median family income in the U.S. is around $69,000. According to the website Federal Budget in Pictures, if the median family managed its budget like the government, it would've spent $132,000 last year and racked up the $63,000 difference in credit-card debt... And that's on top of the $541,000 in debt that the family would've already owed.

Of course, individual Americans don't have the government's luxury of being able to pay back debt by simply printing more money. And neither do corporations...

U.S. companies have gorged on debt since the last financial crisis...

Corporate debt is up 70% since the end of 2008... It now tops $11 trillion.

This is just an acceleration of a trend that goes back four decades. Corporate debt has increased nearly 1,200% over this period.

Why? Because the Fed has lowered interest rates over and over again during this time period.

Take a look at the chart below, which shows corporate debt and interest rates – measured by the 10-year U.S. Treasury yield – over the past 40 years. As you might know, the 10-year Treasury yield is the most important rate for corporate borrowers. The interest rates they have to pay are based on this rate. That's why I'm using it in this example...

You'd think the Fed was playing a game of limbo... How low can rates go?

Interest rates have steadily descended to zero over the past four decades. And it's pretty easy to see the effects of these changes. Corporations have acted like five-year-olds set free in a candy store and told to eat as much as they want until they're full.

The pandemic only accelerated this trend...

At the onset of the pandemic, the Fed lowered the federal-funds rate – the interest rate it directly controls – to essentially zero (to 0.05%). All other interest rates in the economy are based on this rate. So it's no coincidence that the 10-year Treasury yield hit its lowest point ever (0.51%) last August.

On top of having to pay next to nothing on borrowed money, corporations got another gift from the Fed during the pandemic...

Last spring, the central bank began buying corporate bonds for the first time in its history...

This unprecedented move gave the bond market a needed boost of confidence in the middle of the pandemic. More important, it prevented credit from drying up – averting a crisis.

U.S. companies used the Fed's generosity to issue record numbers of bonds last year... Collectively, they issued $2.3 trillion worth of bonds, crushing the full-year record of $1.7 trillion set in 2017. And so far this year, we're on pace to break that record once again...

So-called "investment grade" companies are responsible for around 80% of this borrowing... They're the most credit-worthy borrowers. They can borrow money at lower rates than their less-credit-worthy peers – the so-called "high yield" (or "junk") borrowers – because they are much more likely to pay back their debt.

But investors are even throwing massive piles of money at risky, junk-rated borrowers these days...

For example, junk-rated health care company Centene (CNC) recently sold $1.8 trillion in bonds for a record-low interest coupon of 2.45%. That's the type of rate only companies with clean credit used to be able to get. Back in 2016, health care giant Johnson & Johnson (JNJ) – which is one of only two companies with a perfect "AAA" credit rating – issued a bond with a 2.45% coupon.

But that's where we are today... The worst abusers of debt are being treated like royalty. Junk bonds yield an average of just 4%... the lowest they've ever yielded. It's even less than inflation today.

If you buy a basket of junk bonds today, more than 4% will almost certainly default. That would turn a 4% return into a guaranteed negative return after factoring in credit losses.

Corporate debt can only go down in one of two ways...

It gets paid back... Or it gets wiped out in bankruptcy.

In a normal credit cycle, all of the bad debt from the excesses of the cycle gets wiped away, leaving corporations with less leverage...

We saw deleveraging after the last financial crisis. But not this time...

The pandemic caused 146 U.S. companies to default on their debt last year, according to credit-ratings agency Standard & Poor's. But that wasn't nearly enough to wipe away all of the bad debt.

Corporate debt hasn't fallen... It has done the opposite, growing faster and higher than ever before.

One out of every four companies is a "zombie." They're only alive today because the Fed has consistently lowered interest rates, allowing them to keep kicking the can down the road.

But now, the Fed has painted itself into a corner...

With interest rates near zero, the Fed can't lower them any further. And with inflation rising, it can't afford to keep them low much longer. Soon, it will be forced to raise them.

The problem is that it can't afford to raise them very far either... If it does, the cost of the debt will be too much for many borrowers to handle. Higher rates will set off a wave of bankruptcies like we've never seen before.

Fortunately, this wave of bankruptcies is nothing to fear – if you're prepared for it...

You can make massive returns when it does happen by buying corporate bonds.

If you've never considered buying corporate bonds, hear me out... Unlike stocks, bonds are the legal obligations of companies. That makes them much safer to own than stocks. Companies must pay their bond investors no matter what's happening in the economy or the markets.

Here's why you should consider investing in corporate bonds...

When the next credit crisis arrives, many corporate bonds will get much, much cheaper. As bankruptcies begin to soar, investors will want nothing to do with corporate bonds. You'll be able to buy some of them for pennies on the dollar – even the safe ones.

And the less you pay for these bonds, the more money you'll make.

That's because the companies that issued these bonds are legally obligated to pay you the full principal of the bonds at maturity regardless of what you paid for them. You'll earn interest as well as potentially large capital gains – as much as 100% or more.

Buying safe corporate bonds at huge discounts is a strategy that the world's wealthiest investors use in times of crisis...

These investments allow you to build your wealth when everyone else is losing money. And with America's corporations abusing debt like never before, it's a strategy you need on your side – right now.

Good investing,

Mike DiBiase

Editor's note: A credit collapse is coming... And if you don't prepare for it, your capital could get pummeled. Mike says by investing in assets outside of traditional stocks, you can earn noteworthy returns – while nearly everyone else's hard-earned profits disappear in the coming crisis. To learn more about Mike's investing strategy straight from one of his subscribers, click here.

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