Michael Snyder<\/p>\n
(RINF<\/a>) – The Dow closed above 18,000 on Monday for the first time since July.\u00a0 Isn\u2019t that great news?\u00a0 I truly wish that it was.\u00a0 If the Dow actually reflected economic reality, I could stop writing about \u201ceconomic collapse\u201d and start blogging about cats or football.\u00a0 Unfortunately, the stock market and the economy are moving in two completely different directions right now.\u00a0 Even as stock prices soar, big corporations are defaulting on their debts at a level that we have not seen since the last financial crisis.\u00a0 In fact, this wave of debt defaults have become so dramatic\u00a0that even USA Today is reporting on it<\/a>\u2026<\/p>\n Get ready to step over some landmines, investors. The number of companies defaulting on their debt is hitting levels not seen since the financial crisis<\/strong>, and it\u2019s not just a problem for bondholders.<\/p>\n So far this year, 46\u00a0companies have defaulted on their debt<\/strong>, the highest level since 2009, according to\u00a0S&P Ratings Services. Five companies defaulted this week<\/strong>, based on the latest data available from\u00a0S&P Ratings Services. That includes\u00a0New Jersey-based\u00a0specialty chemical company Vertellus Specialties and\u00a0Ohio-based\u00a0iron ore producer Cliffs Natural.\u00a0Of the world\u2019s defaults this year, 37\u00a0are of companies based in the U.S.<\/p>\n Meanwhile, coal producer Peabody Energy (BTU)<\/strong>\u00a0and surfwear seller Pacific Sunwear (PSUN)<\/strong>\u00a0this week\u00a0filed plans for bankruptcy protection. Shares of Peabody have dropped 97% over the past year to $2 a share and Pacific Sunwear stock is off\u00a098% to 4 cents a share.<\/p><\/blockquote>\n A lot of big companies in this country have fallen on hard times, and it looks like bankruptcy attorneys are going to be absolutely swamped with work for the foreseeable future.<\/p>\n So why are stock prices soaring right now?\u00a0 After all, it doesn\u2019t seem to make any sense whatsoever.<\/p>\n And it isn\u2019t just a few bad apples that we are talking about.\u00a0 All across the spectrum, corporate revenues and corporate earnings are down.\u00a0 At this point, earnings for companies on the S&P 500 have plunged a total of 18.5 percent<\/a> from their peak in late 2014, and it is being projected that corporate earnings overall will be down 8.5 percent<\/a> for the first quarter of 2016 compared to one year ago.<\/p>\n As earnings decline, a lot of big companies are getting into trouble with debt, and we have already seen a very large number of corporate debt downgrades.\u00a0 In recent interviews, I have been bringing up the fact that the average rating on U.S. corporate debt has now fallen to \u201cBB\u201d, which is already lower than it was at any point during the last financial crisis<\/a>.<\/p>\n A lot of people don\u2019t seem to believe me when I share that fact, but it is absolutely true.<\/p>\n One of the big reasons why corporate debt is being downgraded is because a lot of these big companies have been going into enormous amounts of debt in order to buy back their own stock.\u00a0 The following comes from\u00a0Wolf Richter<\/a>\u2026<\/p>\n Downgrades ascribed to \u201cshareholder compensation,\u201d as Moody\u2019s calls share buybacks and dividends, have been soaring, according to John Lonski, Chief Economist at Moody\u2019s Capital Markets Research<\/a>. The moving 12-month sum of Moody\u2019s credit rating downgrades of US companies, jumped from 32 in March 2015, to 48 in December 2015, and to 61 in March 2016, nearly doubling within a year.<\/p>\n The last time the number of downgrades attributed to financial engineering reached 61 was in early 2007. It would hit its peak of 79 in mid- 2007, a few months before the beginning of the Great Recession in Q4 2007. At the time, stocks were on the verge of commencing their epic crash.<\/p><\/blockquote>\n When corporations go into the market and buy back their own stock, they are slowly cannibalizing themselves.\u00a0 But we have seen these stock buybacks soar to record levels for a couple of reasons.\u00a0 Number one, big investors want to see stock prices go up, and so big investors tend to really like these stock buybacks and will generally support corporate executives that wish to engage in doing this.\u00a0 Number two, if you are a greedy corporate executive that is heavily compensated by stock options, you very much want to see the stock price go up as well.<\/p>\n So the name of the game is greed, and stock buybacks have been fueling much of the rise in U.S. stock prices that we have been seeing recently.<\/p>\n However, the truth is that nothing in the financial world lasts forever, and this irrational bubble will ultimately come to an end as well.<\/p>\n Earlier today, I am across an article that included a comment from Michael Hartnett of Bank of America Merrill Lynch.\u00a0 He believes that there are a lot of parallels between what is happening today and the period of time\u00a0that immediately preceded the bursting of the dotcom bubble<\/a>\u2026<\/p>\n Back then, as could be the case today, a bull market & a US-led economic recovery was\u00a0rudely interrupted by a crisis in Emerging Markets. The crisis threatened to hurt Main\u00a0Street via Wall Street (the Nasdaq fell 33% between Jul-Oct 1998, when [Long-Term Capital Management]\u00a0went\u00a0under). Policy makers panicked and monetary policy was eased (with hindsight\u00a0unnecessarily). Fresh liquidity combined with apocalyptic investor sentiment very quickly\u00a0morphed into a violent but narrow equity bull market\/bubble in 1998\/99, one which\u00a0ultimately took valuations & interest rates sharply higher to levels that eventually\u00a0caused a \u201cpop\u201d.<\/strong><\/p><\/blockquote>\n Like Hartnett, I definitely believe that a major \u201cpop\u201d is on the way, although I would like for it to be delayed for as long as possible.<\/p>\n Someday we will look back on these times with utter amazement.\u00a0 It has been absolutely incredible how the financial markets have been able to defy economic reality for so long.<\/p>\n But they can\u2019t do it forever, and\u00a0according to a brand new CNN survey<\/a> Americans are becoming increasingly pessimistic about where the real economy is heading\u2026<\/p>\n In a new CNNMoney\/E*Trade survey of Americans who have at least $10,000 in an online trading account, over half (52%) gave the U.S. economy as a \u201cC\u201d grade. Another 15% rated the economy a \u201cD\u201d or \u201cF.\u201d<\/strong><\/p>\n This gloom persists despite the fact that the stock market is on the upswing again. The Dow topped 18,000<\/a> Monday for the first time since July 2015.<\/p><\/blockquote>\n If some Americans think that the U.S. economy deserves a \u201cD\u201d or an \u201cF\u201d grade right now, just wait until they see what is in our immediate future.<\/p>\n Personally, I give our economy an \u201cA\u201d for being able to maintain our unsustainable debt-fueled standard of living for as long as it has.\u00a0 Somehow we have managed to consume far more than we produce for decades, and the largest debt bubble in the history of the planet just keeps getting bigger and bigger and bigger.<\/p>\n Of course we are very much living on borrowed time at this point, but I truly hope that the bubble economy can keep going for at least a little while longer, because nobody should want to see what is coming afterwards.<\/p>\n *About the author: Michael Snyder is the founder and publisher of The Economic Collapse Blog. Michael\u2019s controversial new book about Bible prophecy entitled \u201cThe Rapture Verdict\u201d is available in paperback<\/a> and for the Kindle<\/a> on Amazon.com.*<\/em><\/p>\n