A DEADLYWAVE THAT CANNOT BE STOPPED
around two years, on average, for the default rate to peak from the time that defaults started spiking like they’re doing today. If we follow a similar pattern this time, it could mean that the default rate might not peak until late 2021 or early 2022. This is especially concerning because we’re on the verge of an economic depression for the first time since the 1930s. We were in relatively short recessions when the default rate peaked in 1991 and in the early 2000s, each lasting about eight months. The comparisons with the early 1930s and 2008 are much more appropriate to what’s happening today.
This is important... High-risk borrowers are hurt the most when the banks start tightening credit. They rely on banks to “roll over” their debt – using new loans to pay off their debt as it comes due. Without access to credit, they’ll simply die. With plummeting sales and access to credit cut off, these zombies are already dropping like flies. It’s another reason I believe the massive wave of bankruptcies is just getting started.
And for many individual investors like yourself, that could be devastating... A wave of corporate bankruptcies could wipe out many stock investors... The U.S. default rate has only passed 10% four times over the past century – 1932, 1991, 2002, and 2009. And as you can see, stocks perform horribly when that happens... On average, stocks fell 53% from their peak as the default rate soared. Notice that it took
With plummeting sales and access to credit cut off, these zombies are already dropping like flies. It’s another reason I believe the massive wave of bankruptcies is just getting started.
Default Wave Beg.
Default Wave Peak
Stock Market Bottom
Default Rate Peak
Stock Market Decline*
Economy
1930
1932
1932
15% -86% Depression
1989
1991
1990
w12% -20% Recession
1999
2002
2002
11% -49% Recession
2008
2009
2009
12% -57% Recession
AVERAGE
12% -53%
2020
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Depression
* From peak before default wave
22
June 2020
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