We’re in the Early Stages of Largest Debt Default in US History

We are in the early stages of a great debt default – the largest in U. S. history.
We know roughly the size and scope of the coming default wave because we know the history of the U. S. corporate debt market. As the sizes of corporate bond deals have grown over time, each wave of defaults has led to bigger and bigger defaults. Here’s the pattern.
Default rates on ‘speculative’ bonds are normally less than 5%. That means less than 5% of noninvestment-grade, U. S. corporate debt defaults in a year. But when the rate breaks above that threshold, it goes through a three- to four-year period of rising, peaking, and then normalizing defaults. This is the normal credit cycle. It’s part of a healthy capitalistic economy, where entrepreneurs have access to capital and frequently go bankrupt.
If you’ll look back through recent years, you can see this cycle clearly…
In 1990, default rates jumped from around 4% to more than 8%. The next year (1991), default rates peaked at more than 11%. Then default rates began to decline, reaching 6% in 1992. By 1993, the crisis was over and default rates normalized at 2.5%. Around $50 billion in corporate debt went into default during this cycle of distress.

This post was published at Wolf Street by Porter Stansberry ‘ November 10, 2015.