From Porter Stansberry, founder, Stansberry Research: I’m 100% certain we’re going to enter another recession next year…

I’ve been writing about the warning signs for a long time—falling industrial production, declining trade, falling corporate profits, and rising corporate defaults.

Next year is going to be ugly for stocks. But it will be even worse for corporate bonds.

In 2017, we’ll see the first maturities on the huge amount of junk bonds that were issued in the record issuance cycle between 2010 and 2015.

Roughly $125 billion will be due. The default rate across the sector will approach 10%. It will be much more difficult, and maybe impossible, for companies to refinance these obligations. And it will continue to get worse and worse. In 2018, another $250 billion will come due. In 2019, another $350 billion. And that’s before two years of $400 billion or more in junk matures in 2020 and 2021.

If we’re in a recession next year… look out. All of these debts will be seen as unfinanceable. The bond prices of highly leveraged companies will seriously collapse as these liquidity problems spread. As for stocks, the damage to share prices will be much worse.

The fact is, most of these loans should have never been made. These companies are vastly overleveraged. And their financial condition, as a group, hasn’t improved since 2010… It has gotten worse. The huge bubble we’ve seen in junk bonds has financed massive overcapacity, where these companies simply can’t generate enough income to pay back their loans. A reckoning is coming—and it’s long overdue.

Unfortunately, small, junk-rated companies aren’t the only ones who will have a big problem…

Historically, “investment grade” meant that a corporation was extremely unlikely to ever default, regardless of the economic circumstances. The overall investment-grade default rate is usually just above zero during a recession. However, the lowest-rated “tranche” of investment-grade debt (BBB) would typically see a few defaults. In the default cycle between 1998 and 2002, a little more than 1% of these bonds defaulted. But… BBB isn’t what it used to be.

We know from our analysis of corporate credit in Stansberry’s Credit Opportunities that a lot of BBB credit is just wishful thinking.

A good example of a weak BBB credit is Devon Energy (DVN). We know the company well. Back in 2014, we essentially begged Devon to prepare for a big fall in the price of oil by selling its Canadian oil sands assets to pare down its debt and invest in higher-quality assets, like the Eagle Ford Shale.

The company never bothered to reply to our concerns. Around six months later, just about everything we warned them would happen did happen. Now, its oil sands assets are an anchor around the company’s throat. Meanwhile, it’s carrying more than $12 billion in debt, which is equal to 267% of its equity.

Today, Devon is a highly levered oil and gas business that routinely operates with negative cash flows. (Last year’s tally was negative $290 million.) Incredibly, in our minds, despite the obvious risks to this individual balance sheet and the historic booms and busts of the domestic energy industry, Devon’s benchmark bonds are only paying 3.4% and the company is rated BBB.

How can a company be considered “investment grade” if a one-level credit downgrade could leave it unable to access the capital markets? After all, in periods of credit stress, junk-bond issuance disappears. And selling assets won’t repay these debts… the company is far too encumbered.

There are dozens and dozens of companies like Devon. Maybe hundreds.

How bad is the situation, really?

Historically, the BBB tranche of the investment-grade market made up a tiny portion of the total investment-grade market. But that has changed since 2009. As companies added debt in this cycle, more and more of them have been downgraded into BBB—just one step above junk-bond credits. Where 10 years ago only 14% of investment-grade bonds were BBB-rated, today more than 30% of the investment-grade market is BBB-rated. In other words, “investment grade” just doesn’t mean what it used to.

That’s why even though annual default rates on investment-grade bonds have historically been low, we suspect that the coming default cycle is going to be much, much worse. I expect we’ll see annual default rates on BBB debt of at least 3%, with cumulative defaults reaching close to 15%. Keep in mind, almost $2 trillion worth of BBB-rated “investment grade” debt is outstanding. Losses like the kind I expect during the next cycle could result in more than $500 billion in total defaults. And that’s just the defaults from the “investment grade” debt.

I’ve been warning about the coming credit cycle for about a year…

So far, I’ve been pretty much on the mark. Default rates keep creeping higher and higher. Economic conditions are getting weaker and weaker. What’s coming in 2018 and 2019 will be the biggest economic storm of our lives. It’s going to wipe out a lot of people—unemployment will go way over 10%. And more than $1 trillion worth of bonds will default. This is absolutely going to happen, because while the government can buy all the bonds it wants, it can’t make them pay.

This situation doesn’t have to be a disaster for you, though. Don’t think of it a crisis. Think of it as a reckoning. The foolish and spendthrift are going to learn a lesson. And the wise and patient will reap their fair reward. That’s why I call what’s coming “the greatest legal transfer of wealth in history.” It’s going to be an incredible show.

Reeves’ Note: Want a front-row seat to the show? Porter’s working on a big trade to take advantage of the madness in the bond market… and you’ll have a chance to join him.

His team over at Stansberry Research has built a database of virtually every U.S. corporate obligation. They look at 40,000 separate securities every month and assign their own credit ratings to between 3,000 and 4,000 issues.

Their plan is to spend the next five years or so predicting corporate defaults. They’re figuring out who’s going to default and when…

Porter’s hosting a webinar on November 16 to explain exactly how his plan works. If you’re interested, you can pre-reregister, for free, right here…