LONDON, ENGLAND – I’ve been trying really hard to figure out how to bet against the debt bubble.
I call it “My Search for the Hero Trade.”
I think I’ve found the answer…
Education by Field Trip
Greetings from London, one of the world’s great cities…
My family and I are a “world school” family, which means we don’t send our children to conventional school.
Instead, we educate them through real-world educational experiences. Education by field trip, you could say.
Here in London, we’re finding a wealth of field trip ideas to go on. And all the museums are free of charge. We only have to pay for our subway tickets.
We went to the Victoria and Albert Museum last week, for example. Here we are looking at Saint John the Baptist by master sculptor Auguste Rodin…
The kids learn about Rodin’s sculpture of Saint John the Baptist
The Victoria and Albert is a vast collection of objects that celebrates everything in the world that’s beautiful and elegant. We saw sculptures, paintings, tapestries, furniture, jewelry, clothing, and pottery from over the centuries.
Here we are looking at Italian Renaissance painter Raphael’s cartoons…
Raphael’s cartoons hang on the wall behind Miles and Penny
Raphael painted them in Rome between 1515 and 1516. King Charles the First brought these paintings to England in 1623. And they’re still one of the most influential and valuable artworks ever produced.
We also visited the Tate Britain, another world-famous art museum, this week. Here I am looking at a giant peach sinking into the gloom, like an apocalyptic sunset…
A giant peach sinks into the gloom at the Tate
But our field trips are not all art and history. A kind Postcards reader invited us to see the Wimbledon tennis championships yesterday.
Here we are supporting 17-year-old Coco Gauff, on court behind us, who comes from Delray Beach, Florida, our former hometown…
Supporting tennis player Coco Gauff at Wimbledon with Dusty
My Search for the Hero Trade
Back to my search for the Hero Trade…
As regular Postcards readers know, we’re in the final act of an epic global debt bubble.
The governments of all the rich nations are engaged in a huge joint financial experiment. It involves manipulated interest rates, printed money, unbacked currencies, and the unbridled use of debt.
Take the United States, for example.
U.S. debt is at 130% of GDP (the highest it’s ever been). The government is running budget deficits of $1 trillion a year. And there are $100 trillion in unfunded future liabilities.
Meanwhile, interest rates are at zero percent… the Federal Reserve is spending $120 billion a month in quantitative easing (QE)… and inflation is stirring (up 5% since last year).
And this massive debt bubble stretches to the corporate world, too.
Take Avis, the car rental company. Per the latest quarterly report, Avis has total assets of $18.6 billion. And it has total liabilities of $18.9 billion. That means it has a negative book value of $0.3 billion!
And yet, Avis’s market cap is up about 5x since the COVID-19 panic bottom. It has a market cap of about $5.7 billion today.
In other words, the accountants are saying the shareholders’ equity has no value. That’s what a negative book value tells us. But the stock market is saying Avis is worth $5.7 billion. That’s what the market cap tells us.
Anyway… Avis has $18.9 billion in liabilities. It spends $500 million per year in interest costs, or about 10% of its revenues. And it has essentially infinite leverage.
In other words, Avis’s fortunes are tied to low interest rates and easy credit conditions.
The Hero Trade, in my opinion, is not shorting Tesla or meme stocks like GameStop or FAANG stocks or Treasury bonds.
It’s shorting the equity of companies that have enormous debt burdens, resting on thin slivers of shareholder equity… And who struggle to pay the interest. Like Avis.
Analysts call these “zombie” companies. Even though they’re bankrupt, they’re still walking… because they’ve been able to borrow billions of fresh dollars at low interest rates and kick the can down the road for a bit.
Another name for them is “junk borrowers.”
The problem with these junk borrowers is that they’re on thin ice.
What happens if interest rates rise in the corporate bond market? Or if inflation heats up, as it’s starting to now? Or if lenders tighten up their lending standards just a little? Or if these companies’ highly inflated assets decline in price (used-car prices in Avis’s case)?
These companies are going to quickly go bankrupt… Their stock prices will drop to near zero in a flash… And short positions on their equity, put on at today’s prices, should be fabulously profitable.
With the frothiness in the stock and credit markets at the moment, I don’t think there’s ever been a better time to do this.
All Risk, No Return
Right now – in broad terms – interest rates are the lowest they’ve ever been in the history of banking and finance. One day they won’t be any more. It’s as simple as that.
Take a look at the chart below. It shows the yield on the ICE BofA High-Yield Index (a famous corporate bond index) going back 25 years.
As you can see, yields can’t go much lower. At these yields, corporate bonds are all risk and no return.
I’ve discussed Avis. But there are dozens more of these debt-laden zombies supported by thin equity slivers just waiting to go bankrupt.
I’m making it my mission to find them… and bet against them…
In my opinion, this is the most sensible way to bet against the global debt bubble. More to come…
– Tom Dyson
P.S. If you agree with me that there’s an epic debt bubble and we’re in the final act, but you don’t want to be bothered by making a Hero Trade, the best thing to do is simply hold physical gold and silver and other forms of hard currency and wait on the sidelines until the dust has settled. What do I mean by other forms of hard currency… And how do you build the ideal gold and silver portfolio? Watch this to learn more…
Praise for the Dysons’ homeschooling journey…
Reader comment: Hola, Dyson family, I’m daily amazed at the feedback you get regarding your decision to homeschool your children. You definitely should write an academic book on homeschooling.
The Study Unit concept is brilliant and on purpose. My husband and I didn’t homeschool our four kids who are adults, and two of the four homeschooled my grandchildren. We did, however, plan study units. We would designate a place and subject matter that would enlighten both ourselves (and at least a majority of the four who were 8 years apart).
Great humans who learned how to be interesting people in most arenas of life. Continue your programs and please continue to share them with us, your readers.
Reader comment: Tom and Kate, you have given your children beyond a master’s degree education by homeschooling (and traveling while doing it). Traditional school programs children how to think, and then those kids become controllable.
You and your children are a part of the “new consciousness,” which they don’t teach in traditional schools. If you feel they are missing out on important parts of traditional school, you can make it a unit study, and control what they learn, verses someone else programming their minds.
Tom’s note: As always, we appreciate your kind words. Please keep writing us at [email protected], and I’ll try to answer as many questions as I can in future Friday mailbag editions.