264 THE BiG DROP
enough to justify the pivot into other hard assets will not be an
easy call, but that’s one of the things I will be thinking about
and pointing out to Strategic Intelligence readers in the months
and years ahead.35) Why do you think that there is a corporate debt
problem? Aren’t U.S. companies sitting on hoards of cash?
Debt comes in many forms, including high-quality U.S.
Treasury debt, high-grade corporate debt and junk bonds.
Debt is also issued by both U.S. companies and foreign com-
panies. Some of the foreign corporate debt is issued in local
currencies and some in dollars. In discussing debt defaults, it’s
necessary to keep all of these distinctions in mind.
The U.S. companies sitting on hoards of cash, such as
Apple, IBM and Google, are not the ones I’m concerned about;
they will be fine. The defaults will be coming from three other
sources.
The first wave of defaults will be from junk bonds issued
by energy exploration and drilling companies, especially frack-
ers. These bonds were issued with expectations of continued
high energy prices. With oil prices at $60 per barrel or below,
many of these bonds will default.
The second wave will be from structured products and
special purpose vehicles used to finance auto loans. We are al-
ready seeing an increase in subprime auto loan defaults. That
will get worse.
The third wave will come from foreign companies that is-
sued U.S. dollar debt but cannot get easy access to U.S. dollars
from their central banks or cannot afford the interest costs
now that the U.S. dollar is much stronger than when the debt
was issued.
The combined total of all three waves — energy junk
bonds, auto loans and foreign corporations — is in excess
of $10 trillion, more than 10 times larger than the subprime