What I’m about to show you is the scariest chart in all of finance.
It portends a horrific ending to the current boom in stocks, bonds, real estate.
It, however, also shows a big opportunity for investors right now.
In fact, there’s news today about one billionaire is positioning himself to make another fortune as it all plays out.
Here’s the full story.
The Scariest Chart in Finance
If you read as much financial news as I do, you know we’re bombarded with charts.
They can be made to prove almost anything.
As a result, most of them are useless.
Today though, we have one of the most important – and potentially scariest – to show what’s ahead for the markets.
This chart is from Federal Reserve Economic Data (FRED). It shows how much debt nonfinancial corporations have loaded up over the past 60 years. And it’s very important to your financial future.
The chart - and the ups and downs within it - explains all the major economic and financial trends and crises in modern financial history.
At the risk of oversimplifying it (and I’m not trying to spark a debate over Austrian economics or fractional reserve banking), but the main conclusion is more debt means more money which means higher prices for everything.
That’s what makes it potentially very scary.
You see, when I mean asset prices, I mean assets of all kinds.
Everything from real estate to stocks to gold. It’s also in some “unconventional” assets you may not think of right away.
Consider biotech. The value of a successful drug is more today than it has ever been.
Yes, the market for most drugs is bigger than it has ever been and getting much bigger. Drugs are getting more effective too making them much more cost effective treatments. But the debt levels play a big part in biotech valuations too.
If a big biotech company can borrow money at 3% or 4% interest and buy up smaller biotech companies, the their immediate value is much higher than if the big biotech company couldn’t borrow and had pay for them out of its cash reserves.
The debt brings the value of future revenue streams (like over the next 10 years in biotech) forward to today.
The value of those future revenue streams is the asset. And low interest rates make it worth much more than it would be during higher interest rate periods.
Now apply that logic to every industry and you’ve got the makings of another debt bubble.
That’s why the chart above can be either viewed as scary or a sign of good things to come.
The New Buffett Way
Right now interest rates are low and that means big opportunities for big companies and investors of all sizes.
Warren Buffett’s Berkshire Hathaway (BRK-A) is worth more than $316 billion today. In 2000 it had a total market value of just $45 billion.
The driver of the growth has been a debt-fueled acquisition spree that really began in 2008.
That’s why Berkshire is a much bigger company now, but also has $169 billion of debt and liabilities on its balance sheet.
It has borrowed cheaply and bought a massive amount of assets.
Buffett’s not alone either in this process. The big financial news today was Richard Kinder’s new plan.
Kinder is the cofounder of Kinder Morgan Inc (KMI), Kinder Morgan Energy Partners (KMP), and Kinder Morgan Management (KMR).
They are major players in the energy transportation industry. It owns and operates everything from oil tankers to natural gas pipelines.
Today Kinder announced he was going to consolidate all of the businesses into one and add in El Paso Pipeline Partners (EPB) to the whole deal.
The total value of all the companies once combined will be about $105 billion based on their current market values.
Naturally, with any merger there is a lot of talk about efficiencies, synergies, improved metrics, and whatever other corporate-lingo seems to be prevalent right now.
But here’s why he’s really doing it.
Kinder Morgan’s debt ratings are around the “Lower Medium Grade” category. That’s just one step above “Junk” bond status.
So it’s expensive for these smaller companies to borrow. The combined company $100 billion company, however, will be able to get a much better credit rating and lower interest rates.
Take a look at Apple (AAPL). It has recently been able to issue bonds that pay about the same interest rates as the U.S. government.
And that’s where the real savings will come from in this deal. The power and perceived creditworthiness of the combined firm and much lower borrowing costs.
In debt markets, bigger is better. The Kinder Morgan empire will stay the same, but under one parent company it’s much bigger.
This Will End Badly…Eventually
This news and more like it that will come as interest rates stay low, is all why we continue to believe the debt bubble will grow. And even though there will be temporary scares – like the markets got last week – the trajectory is still up.
More importantly, it’s a sign of the major trend we’ve been forecasting for years.
Earlier this month in 99% of Investors Get This Wrong - at the height of the most recent correction/crash scare – we reiterated that trend:
The Federal Reserve’s aggressive rate cutting in response to the Asian Currency Crisis in 1997 and Russian debt default in 2008 led to the tech bubble.
It’s response to the tech bubble bursting was to double down on its rate cutting. It cut interest rates to 1%.
The result was the housing bubble, Dow 14,000, and follow-on credit crisis.
In response to the credit crisis, the Fed took historic action. It cut rates to 0% and handed out trillions of dollars in cash and guarantees to get the bubble-bust cycle restarted.
So it only makes sense we’re likely headed to the biggest bubble of all.
Everything is still intact.
It won’t last forever. And when it does end, it will end badly.
So the corporate debt levels chart could be scary or it could signal the opportunity to make good money in stocks will continue for the foreseeable future. Or both.
But there’s still a much better odds of the part continuing a few months or years before it all comes crashing down.And there’s going to be a lot to miss out between now and then.
Our advice since 2009 remains the same. Buy stocks safely and cheaply and you’ll be there for the ride with an extra bit of protection when it does end.