The government does NOT have your back as an investor

The government does NOT have your back as an investor

September 01, 2021
Share |

With just one mistake, Dennis Buchholtz lost a quarter of his life savings...

Today, I want to share Dennis' unfortunate story with you.

That's because many honest, hardworking folks just like Dennis are about to make the exact same mistake again right now. And I don't want you to be one of them...

For more than 30 years, Dennis worked as a diemaker in the auto industry. He spent countless days and weeks turning sheet metal into fenders, roofs, and hoods.

Finally, in 2005, Dennis retired to spend more time with his wife.

During his career, he managed to save about $400,000, and like everyone, he wanted to find a safe way to earn income in retirement...

After spending decades in the industry, Dennis believed the biggest automakers would always survive. So he put about $100,000 of his savings into a bond from the largest automaker at the time – General Motors (GM).

Every year, the retired couple received around $7,000 in interest from the bond. They used the income to pay their property taxes and utility bills, as well as for groceries.

At the time, after more than a century in business, GM was one of the most important U.S. industrial companies. On the surface, it seemed like a safe investment to Dennis.

But in reality, it was a highly speculative bet on a company with a massive debt load that it could never repay.

I'm certain that Dennis didn't spend a single minute studying GM's financial statements before making his big bond purchase. If he had, he might've wondered how the company planned to pay back $455 billion in liabilities when it stopped making profits in 2005.

At the time, it was easy for average investors to make mistakes like this...

Stocks were rising, and banks were lending, just like today. And that's simply not the kind of deep analysis that most investors do when times are good and credit is flowing.

GM declared bankruptcy in June 2009. 

Stockholders were completely wiped out. And investors who owned the $27 billion worth of GM's "safe" unsecured bonds – including Dennis – only recovered around $0.10 on the dollar of their initial investments. The massive loss wrecked Dennis' grand retirement plans.

Investors like Dennis believed GM was too big and too important... that it could never go bankrupt. They believed that even if the company ran into trouble, Uncle Sam would step in and bail them out.

They were partially right...

The Big Three automakers – GM, Ford Motor (F), and Chrysler – were protected by lawmakers in Washington, D.C. Congress would never let the automakers shut down operations, costing thousands of jobs for everyday Americans.

But here's the important point that most investors missed...

While the government made sure GM survived, it didn't stop the company from going bankrupt first.

Sadly, investors like Dennis make this mistake all the time...

Many folks believe the government will protect regular investors with bailouts the same way it protects the employees and pensioners of vital businesses like the Big Three automakers. But the truth is... the government doesn't have your back as an investor.

And yet, more than a decade after GM went belly-up, many investors still haven't learned this lesson... They still believe the government will step in to save investors of big, important businesses. And today, many people are about to make the mistakes that Dennis made back in 2005.

The airline industry is just one example...

The three major airlines – Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL) – owe a combined $124 billion in debt. That's up 75% from $71 billion before the pandemic.

Folks aren't flying nearly as much because of the COVID-19 pandemic... airline traffic plummeted last year and still hasn't recovered. With little revenue coming in, these companies borrowed against every asset they own just to pay the bills.

Just like GM in the past, they've been burning the family furniture to keep the furnace running. But investors don't seem to care. They're once again turning a blind eye and ignoring risk...

Coincidentally, these three airlines have an average market cap of roughly $20 billion, which is around the same valuation as GM at the end of 2005, when Dennis invested in its bond... And debt investors have also piled into the airlines' risky bonds, which currently yield 2% to 5%, on average – even less than Dennis' GM bond back in 2005.

This is a recipe for disaster.

This reach for yield while ignoring risk is everywhere. The stock market is near an all-time high. And the bonds of the least-creditworthy companies ("Junk Bonds") yield just 4% today, on average. That's an all-time low in yield for these very risky bonds. High-yield debt issuance has totaled $298.7 billion in 2021, up 51.1% from the same point in 2020, a year itself that saw a record-smashing $421.4 billion in junk issuance, according to SIFMA data. At the same time, investment-grade issuance has plunged 32.7% this year.

But despite the calm in the markets today, the U.S. economy and many businesses are in serious trouble…

U.S. corporate debt has never been more burdensome than it is right now...Zombies are everywhere...

One out of every four U.S. companies can't afford their debt. That's an alarming statistic...

For those of you who have watched too much of The Walking Dead, I'm not talking about a reawakened corpse... I'm talking about a "zombie company."

These are companies that don't make enough money to pay even the interest on the debt they've accumulated. Basically, they're living on borrowed time.

The number of zombie companies has been steadily increasing since the 1990s. But because of COVID-19, the number has skyrocketed. According to Bloomberg, since the start of the pandemic, a few hundred major companies have become zombies. There are now more than 700 of them out of 3,000 of America's largest publicly traded companies.

The truth is, many companies – like airlines – have only been paying their bills during this pandemic by borrowing more money and kicking the can farther down the road.

But you can't borrow yourself out of a crisis... Eventually, all debt must be repaid or refinanced.

And with lower sales and profits for many companies, the prospect of that happening is looking more likely with every passing day. For many companies, the shift to a remote and digital economy means their sales and profits will never recover to pre-pandemic levels.

This leads me to a simple conclusion... Much of this enormous, ever-increasing pile of debt will never be repaid.

The only way it will be cleared off the books is through bankruptcy. That's why I believe a massive wave of bankruptcies is coming in the months and years ahead...

In fact, it's already getting started.  Last year, 146 U.S. companies defaulted on their debt, according to credit-ratings agency Standard & Poor's ("S&P"). That's the highest number of defaults since 195 companies defaulted in 2009 during the last financial crisis. 

The percentage of corporate borrowers who have credit ratings below investment grade ("BB+" or lower) – in other words, "'junk" credit – is now at an all-time high of 58%. That's up from 43% in 2004. In other words, nearly six out of every 10 borrowers in the U.S. have dubious credit ratings. These are the borrowers who are much more likely to default.

The good news is, you don't have to be a victim of this coming credit collapse...

If you're prepared, you can move your money completely out of the stock market, using a much safer type of asset...

Reposition at least some of your assets into insured, 'can't lose money' assets. We specialize in a number of safe and proven strategies - one of them may work for you. Contact us today!