From A. Tyrrell, staff writer, PBRG: In today’s Daily, we share an interview excerpt with former hedge fund manager (and editor of Mega Trends Investing) Teeka Tiwari. Teeka spoke with PBRG Editor Bob Irish in our new 2016 Palm Beach Wealth Summit presentation.
Teeka has an urgent warning for us about oil prices, junk bonds, and a coming crash in the stock market…
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Bob Irish, host of The 2016 Palm Beach Wealth Summit and editor of Retirement Insider: Tell me, Teeka, what’s your big prediction for this year?
Teeka Tiwari, editor, Mega Trends Investing: Bob, the $1 trillion junk bond debt bomb in the U.S. is going to explode this year.
In the short term, it’ll lead to a sell-off in the market.
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Stocks are going to get really roughed up.
But just like in 1990—when the stock market sold off as the junk bond market imploded—it’ll be a terrific time to load up on high-quality stocks as they go on sale…
This isn’t a prediction… it’s a certainty.
Bob: Teeka, can you explain exactly what you see happening, why it’s happening, and what our readers need to do now to protect themselves and profit?
Teeka: Sure, Bob. First, a lot of people are looking for a bump up in oil prices this year. We won’t see it. Oil prices are going to stay lower longer than most people realize.
Bob: How does that fit in with this junk bond debt bomb you mentioned?
Teeka: It took more than three decades for the junk bond market to reach $1 trillion in size. In the last four years, it’s doubled to $2 trillion. This is a bubble reminiscent of the dot-com era.
And almost all that growth in the junk bond market has come from one sector: oil and gas.
When oil was $100 a barrel, banks and funds were tripping over themselves to lend money to oil and gas companies.
As we talk, oil has dropped 65% to around $30 a barrel.
While $30 oil is great for you and me at the pump, this market price just isn’t putting enough revenue in the pockets of the oil and gas companies. At $30 a barrel, they can’t pay the debts and expenses they were able to when oil was at $100.
The only reason we haven’t experienced a complete meltdown in junk bonds yet is because the oil and gas players sold hedges against their future oil production last year.
So even though oil is trading around $30 right now, producers have hedges in place that contractually guarantee they’ll receive $75 to $100 per barrel. This is what really saved these oil companies—and their bondholders—last year.
But here’s the problem: The majority of those hedges expire in the first quarter of 2016.
If oil continues to languish below $37 (and I believe it will), scores of energy companies will go out of business.
They won’t be able to make payroll.
Shale oil drilling is very expensive. Most of the shale players need prices above $60 per barrel to break even. At $37, it’s lights out for the sector.
Bob: What makes you so sure oil prices will stay low?
Teeka: Three reasons:
- On October 27, the government announced part of the two-year budget deal. It involves selling massive amounts of oil from the strategic petroleum reserve.
Selling more oil means more supply. More supply puts a huge damper on rising oil prices.
- The oil producing and exporting countries (OPEC) are pumping oil like crazy. There’s no sign of them stopping.
I can’t get into all the details here, but OPEC is doing this—even though it hurts them in the short run—because they want to see American shale oil producers go bankrupt. It’s less competition for them in the long run.
But again, it means more oil supply flooding the world markets. It’s like a race to the bottom.
- Like Tom, I think the dollar will continue to strengthen. That also puts a negative price impact on oil. It takes fewer dollars to buy oil (or anything). So the trend of lower oil prices is with us for a while.
Bob: So what will happen from here?
Teeka: It’s going to cause a wave of defaults to break across the junk bond market. All junk bonds will go down… even the non-energy ones. The sell-off will ignite margin calls and cause sell-offs in the government bond and corporate (non-junk) bond markets.
This will spur a domino effect that’ll crush bondholders in the worst junk bond rout since the 2008 financial crisis.
You don’t want to own bonds, period. Especially not junk bonds. Here are my recommendations:
- If you have junk bonds, sell them now.
- If you must own bonds, keep your average duration to less than seven years.
- If you must own junk bonds, don’t own energy junk bonds.
- If you must own bond funds, make sure they’re closed-end funds.
(This last point is important. A closed-end fund doesn’t have to sell assets to meet redemptions like an open-end fund does. Open-end bond funds will have to sell their bond portfolios at horrible prices in order to meet the rush of redemption requests.)
Bob: So if oil stays at current prices, we’ll experience a junk bond market crash this year?
Teeka: Yes. It will affect all bonds. Period.
Stocks will get roughed up, too… but that’ll be temporary.
Big institutions invest in bonds and stocks.
Now, the problem will be that when this bond market truly rolls over, there won’t be buyers.
We call this an illiquid market.
But creditors won’t care it’s an illiquid market. They’ll still demand their money.
So these big institutions will be forced to sell some stock to free up the capital to pay their bond payments. Their primary interest isn’t actually in selling the stock… but their hands are tied.
Either way, these stock sales will push down the stock prices of amazing companies. And that’s our opportunity.
It will be similar to what we went through in 1990. The stock market sold off as the junk bond market imploded. But that was a terrific time to load up on stocks…
Bottom line: Don’t sweat the volatility on the stock side. But be terrified of the volatility on the bond side. This could be the last chance to prepare yourself for the chaos that’s about to come.
Bob: Thanks, Teeka.
Teeka: Anytime.
Editor’s Note: This interview excerpt comes from The 2016 Palm Beach Wealth Summit. It’s a special event we’re holding this January to thank you for being a loyal reader. It’s designed to help you get off to a good financial start in the New Year.
The summit also coincides with 2016’s first (and perhaps only) Palm Beach Infinity membership drive. Infinity, our most prestigious level of membership, gives you access to all our current research, plus every new service we create… for life. (That also means no more ads… and no more renewal fees for any subscription you currently have.) For more details, click here.