The Debt Bubble That’s About to Pop

The economic fallout from COVID-19 will only get worse…

In the last few days, there has been story after story about well-known businesses that are considering bankruptcy. With folks staying at home and with the government forcing many businesses to close their doors, bankruptcy is the only option for many management teams.

Take gym chain 24 Hour Fitness, for example.

24 Hour Fitness is one of the larger gym chains in the U.S., with nearly 4 million members across 14 states. The gym has 448 different clubs… And it had to close all of them because of the pandemic.

The company said it would suspend all of its membership billings this week if it was not able to reopen its gyms soon.

This is a business like many others in the U.S… It’s in a competitive industry and has struggled because of new low-priced competitors. And to stay open, it has taken on a good amount of debt over the past few years because of cheap interest rates.

Now that its revenues have come to a standstill, paying off that debt seems impossible. From a recent CNBC report…

Gym chain 24 Hour Fitness is working with advisors at investment bank Lazard and law firm Weil, Gotshal & Manges to weigh options including a bankruptcy that could come as soon as the next few months.

Now, there has been good news for the gym industry… The Trump administration said that gyms would be one of the first businesses to reopen in their new “3 phase” plan.

But if you think everything will return to normal once gyms are reopened… think again.

The fact is that millions of Americans have lost their jobs or had to take reduced hours because of the shutdown. Many families will struggle just to pay their rent. That means folks will try to find a way to cut excess costs.

They’ll try to cook from home more to save money, order less things on Amazon, and cancel their gym memberships.

Even if you are still employed, you may be hesitant to go back to a crowded gym in a month or two.

The hardship for 24 Hour Fitness and other gyms will likely last at least a few months. And just like other businesses in the U.S., loans from the government will not be enough to avoid bankruptcy.

As another example, luxury retailer Lord & Taylor is considering filing for bankruptcy. It was also forced to close all of its department stores because of COVID-19.

Although Lord & Taylor sells its products online, it can’t compete with ecommerce giants like Amazon (AMZN). With its brick-and-mortar stores closed, the department store is in a world of trouble.

Also, just like the gym industry, it will be tough for retailers to return to normal even when the economy reopens. Since people have been forced to shop online because of the shutdowns, they might be less inclined to visit traditional brick-and-mortar stores in the future. Shopping habits may change for good.

Another retailer, Neiman Marcus, is also planning to file for bankruptcy. And there have been reports that JC Penney (JCP) is considering bankruptcy as well…

So even though there has been positive news about the virus slowing down and optimism about the economy reopening… there will likely be more bankruptcies in the coming months – even with the Senate passing an additional relief bill for small businesses yesterday.

The point is that things will not return to normal overnight. Even with the economy reopened, many businesses will continue to struggle. There will be a wave of bankruptcy filings.

And if you’re a certain type of investor, you should be ecstatic…

When there are more bankruptcies, bond investors will start to get nervous. (The last thing a debt holder wants is for the company to file for bankruptcy because they won’t get all of their money back.)

Because of the fear in the corporate bond market, bond prices across the board may begin to fall. That means that even bonds of companies that should have no problem paying off their obligations will go on sale.

It’s an incredible opportunity to make a lot of money with little risk.

With the corporate debt bubble about to pop (some believe it has already popped), there are going to be bonds trading for big discounts.

All you have to do is buy a bond of a company that doesn’t go bankrupt, and you can make a small fortune.

This is something that you can only do in times of crisis… And today is one of those times.

Click here to learn more about this strategy and how it helped one of our paid-up subscribers retire at age 52… and sleep easy through the latest market turmoil.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
April 22, 2020