Credit reset explained: bonds, silver and the Fed's next move

0:00America just borrowed money and paid the highest price for that privilege it has paid this century. And the same week, the borrowing tied to Oracle and SpaceX and the giant data centre behind Meta all fell to record lows. The bonds collapsed.

0:22I saw that SpaceX chart over breakfast and I thought I wasn't going to make a video today, but this is really important for people to understand. Because the stock market is at this almost all-time high, so mainstream media tells you all is well, but underneath it 89% of American stocks have fallen more than 10% in just a couple of months. And the insurance against Paramount, a major American company, insurance against Paramount going bankrupt now costs what it did in the financial crisis.

0:58So if you've got savings or a pension or a portfolio, this stuff matters to you because every time credit has cracked just like it is right now, the people at the top have reached for the same lever and the savers have ended up paying for it year after year. Regular investors end up paying for it year after year. And then you have silver, like $1.6 billion just walked out in one week from the silver market. And on the face of it, that looks like bad news. And I actually think it's the opposite because of what usually follows when you get flushed out like this. And the guys who do this for a living, they already know what's going on. And by the end of this video, you will too.

1:43And if you're wondering who I am, my name is Felix Nikolas Prehn. I'm an economist and a former investment banker. And I'm also the founder of the Prehn Institute where we publish research on financial markets and also provide instruction on how they actually work. There are zero sponsorships here, zero endorsements and it means I can say whatever the hell I like while I'm travelling here.

2:01Before we get into this deeply, I'm going to throw quite a lot of numbers at you and if you want to really review those, then download the free report that's down below. It's completely free, no jargon, no anything. Just go to prehn.org/creditreset and let's jump straight into it.

2:18So, 3 things today. First, what this credit reset actually is in just plain English and why it ends up in your life. Second, that $1.6 billion silver flush and what it really tells you, very different from what the headlines say. And then third, the 2 places I'm looking at right now. One quite frankly is silver and the other is so unloved that most people would probably laugh if I told them unless I explained it first which I'm going to do for you.

2:48So credit is the price of borrowing. That's basically all it is. And almost everything in your financial life is priced off it. Your mortgage, your pension, the value of shares you own, every investment you own depends on the price of credit. The price of your house does. And for the last 15 years, borrowing was absurdly cheap. Governments, companies, households all got used to money costing almost nothing at all.

3:15And one bond analyst puts it this way. He said, "For years, yields were below where the economy said they should be. That is no longer the case." Yields is essentially the cost of borrowing. And that's the reset. The price of money is going back to where it arguably should have been all along, and everything is priced off just that thing and therefore those prices have to adjust.

3:37And if you look at the chart, hopefully put it on the screen for you, the 10-year government bond yield chart. So in the summer of 2020, America could borrow for the next 10 years at about half a per cent. Half a per cent. At this week's auction, America sold $39 billion of these 10-year debt notes at 5.3%. And the Wall Street Journal put it actually quite nicely and they said it's the highest borrowing cost since 2000. And the 30-year borrowing, it touched 5.66%, the highest since 2002.

4:13And if you think that government debt is $40 trillion, it was just $23 trillion in 2020. Just to give you a bit of an idea about the speed of this train leaving the station. Every year a chunk of that old cheap debt that was financed at near 0% now has to be refinanced at today's prices. So a debt that was at say 1%, it now gets to be refinanced at 5%. Well, it just means the interest bill, already bigger than what the Pentagon spends, could get significantly bigger.

4:44And you might be numb to the whole debt story by now. I get it. Numbers are so big it seems to not matter. But what does a government actually do when the interest bill gets up and up and up and it starts eating all the money? Well, historically, 3 doors. Door 1, cut spending. Door 2, raise taxes. Door 3, let inflation do the work, which means you print money and you get the central bank to buy your own debt. And at the same time, your money loses tremendous amounts of value.

5:11And America has walked through door 3 just now. The money supply, which is what we economists call M2 because it makes us sound smart, is up 51% since the pandemic. The Fed's balance sheet went from $4 trillion to about $9 trillion, still sitting at close to $7 trillion right now. Consumer prices are officially up almost 30% since 2020. And your wages and your savings almost certainly didn't go up in line with it. And that's the pain that you are suffering. And in my humble opinion that pain is about to get a lot more painful and a lot bigger which is why this is so important.

5:47So before we look at the opportunities and silver and the other thing that I'm looking at buying, do you understand the force underneath all of this now? Right, when credit cracks, the bill for debt gets too big, the government's going to print money. Your mortgage, your borrowing, your car loan, everything is going to get more expensive to do and therefore your housing market's going to get affected, the share prices are going to get affected, everything gets affected by it, the dollar loses value.

6:17But just knowing that doesn't actually solve it for you, right? Because understanding why the printing happens and making money from it are 2 very different skills. Knowing inflation is coming doesn't put any money in your account. The question is, do you know which stocks have tended to rise when the printing starts? Do you know which sectors get hit first when credit tightens? Do you know when the people with the best information start buying and when they quietly sell? Do you know what you'd actually buy on a Monday morning if the Fed blinked tonight?

6:47Well, they do. The funds do, the insiders do, the banks do. And quite frankly, they're already positioned for it. And when the story reaches your evening news, well, they're going to tell you what happened in the last couple of months. And it means you become what Wall Street kindly calls exit liquidity, as in they sell you their things, so they take profits and you take all the risk on. And I'd like to change that. That's the entire purpose of what we do here.

7:14So, we're going to run this week live from London a free live session and I call it the greatest stock market opportunity before the end of the year because I think that's what it is. And I'm going to walk you through that playbook, what I'm watching, what I buy. I'm not going to tell you what to buy. I'm going to explain to you this process behind it so you can come to your own decisions, your own conclusions. I'm not a financial adviser.

7:36So, if you are in America, if you are in Europe, timing should work for you. If you're in Asia, even the timing should work for you. So, grab yourself a free ticket at greatestplaybook.com. Again, the link is in the description and in the pinned comment down below. And if you're going to join us, just write "join" in the comments down below. I know you're going to be there and you're going to show up for yourself.

7:57So, let's get back to credit here. It's always where the trouble shows up first and the stock market is where it shows up last. It's just credit is really boring, so media doesn't talk about it, so they just talk about stocks. This is a little easier to comprehend.

8:09So, I want to walk you through 4 bond charts here that just came out together this week. And I know you're going, "No, don't make me look at bond charts." And I share that sentiment. There's nobody who wants to be locked up with a bond trader in a room. But if you look at each one, it's like, oh, okay, interesting. But if you put them together, I think they really tell you something incredibly important.

8:32So hopefully we can put these on the screen here. Number 1 is Oracle. Oracle has borrowed very heavily to build data centres for the AI boom. Now, one of its bonds, it pays 6.7% interest, was issued at a dollar, 100 cents. Well, now you can buy that same bond at just 82 cents. And what does that mean? It means effectively that bond is now paying you more than 8%. And the cost of insuring Oracle's debt against default, like bankruptcy, has gone from about 60 a year ago to 244. So it's 4 times more expensive to insure the same company, one of the greatest, biggest American enterprises out there. Okay? So just let that sit with you.

9:11Number 2, SpaceX. SpaceX sold a bond that also pays almost 7% interest just a few weeks ago and that was trading at 100 cents, which is how we always issue bonds, is now at 85 cents. It's an all-time low. So, the bond lost 15% of its value. And this is this unstoppable company that's going to revolutionise the world. And arguably, that's actually a realistic outcome.

9:37Number 3, we have something called Project Bay or something like that. I can't pronounce it, but it's the bond that financed Meta's huge Hyperion data centre. And a year ago, you could buy that bond for 110 cents, so $110. Now it's trading at 91 cents. Now the stock looks fairly decent, but the bond market is telling you something about Meta that the stock market isn't realising yet.

10:07And then you have number 4, Paramount. Everybody knows Paramount. The cost of ensuring Paramount's debt is now at the worst point of the 2008 financial crisis. So Paramount is being priced at financial crisis levels. It's not a wobble. We're a little bit concerned, we're really in the danger zone here.

10:25And I'll step back from one of this. Why does this matter for you, your portfolio, your pension, all of it? Because of concentration. According to JP Morgan, AI stocks now make up 49% of the S&P. At the start of 2023, it was 26%. And those same companies account for 70% of all the gains of the stock market this year. 70% of the market is up because of AI. And if you were to add SpaceX to the index, AI would now be 51% of the whole thing, not just 40.

11:00So 3 of my 4 cracked bond charts I just showed you, Oracle, SpaceX, and Meta, are AI. And AI is half your index fund, 70% of your returns this year if you're in index funds. Now, another bank, another great glorious bank, just ask them, they'll tell you. Morgan Stanley, they tell you the bit that mainstream media is missing. Morgan Stanley looked at the Russell 3000, which is basically the whole American stock market. And since the start of June, 89% of those stocks are down more than 10% from their peak.

11:32More than half of them are down 20%. 7% have fallen more than half. Basically, every semiconductor stock is down more than 10%. Banks have held up best, but they're also down. So the index looks fairly calm because a handful of giants are holding it up while most of the market is actually in a pretty crummy market. It's a bear market. And that's what a credit reset looks like from the inside.

11:56Which brings me to silver. Now, in the last week, $1.6 billion left silver and it was just dumped by institutional money. Now, I should have mentioned one bit. If you want to look up your exposure to AI stocks right now, go into the Winston app, just sign up for it. There's a free trial down below and it'll prompt you as you log in for the first time to put in your stocks. You do that, takes you 30 seconds and it'll then tell you immediately your AI exposure. And I think you're going to be fairly shocked by that number. And maybe put the number back into the comments down below, but there's a link down below for that. Risk-free trials, cancel if you don't like it.

12:31Now, back to silver. There is a report out that explains why silver is down this much. And it gives 3 reasons. The dollar remains a headwind. Speculative positioning has taken a hit. And the trend following funds, the computer-driven funds that the industry calls CTAs because it makes it sound smarter, they are also selling. But it also says silver is approaching a critical technical juncture, the heck what that means.

12:58And again, one thing we track in the Winston is institutional positioning. And what we can see is that this $1.6 billion in selling is just the latest leg in a much, much longer shakeout. And what comes next statistically, and it's not a promise, I'm not a crystal ball, just the historic pattern is this. And to understand that you need to understand that there are two kinds of sellers on the market.

13:18The first kind of seller has changed their mind. They've studied the thing and they decided silver is now worth less. And if people do that, you should respect that. The second kind of seller sells because a rule tells them to. A trend following fund sells because prices fell and the prices fell partially because other trend following funds sold.

13:38And you then have a lot of traders in the silver markets that are highly leveraged. They borrow a lot. And when the broker demands more margin, the cost of borrowing goes up and they haven't got it. What do they do? Well, they also have to sell. But none of that selling has anything to do with how much silver the world needs next year.

13:58And a simple example basically shows you how fast this can snowball. Say you're the trader and he has $100,000 of silver, but only $10,000 of that is their own money and the $90,000 is borrowed through their silver broker. And this is a fairly realistic scenario. So silver drops 5%. Now their position is worth $95,000 but they still owe $90,000. So they lost half their money. 5% drop, they lost half their money because they're 10 times leveraged.

14:27So the broker is going to ask for more cash and if they can't find it, the broker is going to sell for them. It's automatic. And that selling does what? Pushes the price down a little bit more, which triggers the next trader's margin call and the next and the next and so on. And nobody in that chain has changed their view on silver. They simply just ran out of room for their speculation.

14:47So from the 3 reasons in this report, 2 are the second kind. Positioning and taking a hit, trend funds selling and so on. So the dollar though is a real force and I'll come back to that because this is important. But if your view is longer and you're not highly leveraged like those lunatics on the COMEX, then you got to ask yourself, has the world stopped needing silver? Or is it just the weakest holders been shaken out by the rules and by leverage and their own speculation?

15:17Because remember those 3 doors from earlier? The government can cut spending, can raise taxes or can let the central bank do the work through money printing. Well, door 3 is I think what they're choosing. And if you look at how much money the Fed has created every single time credit has broken properly, this line, the Fed money, has gone up very, very fast.

15:39So how does that work? Well, the Federal Reserve just buys the debt the government issues and also assets from other banks and it pays them with money that didn't exist the day before. And what does that do? Well, it pushes down interest rates, it props up bond prices and it floods the system with fresh cash, fresh money. So it stops the credit crisis from turning into a collapse, which is why they do it.

16:04But the side effect is this. More dollars chasing the same amount of everything else, and things that can't be printed like silver and gold, well, it tends to be good for them. Not a promise, just historically tends to be good for them. So what happens if Oracle style stress spreads and if more of these AI bonds slide and if a big name maybe can't actually refinance? Well, based on history, I'd expect the Fed to step in again, not because they want to, but because the alternative is a credit collapse.

16:33And that's not really good because it's going to make government debt insanely expensive. And then you have to take a step back and look at what is gold and silver priced. Well, they're priced in dollars and there's only so much gold and silver, but there are more and more and more dollars. And that's why historically gold and silver tend to get priced upwards because it's simply, I always say the dollar is losing value, gold isn't going up, if you follow me there.

17:01But silver is the nervous excitable cousin of gold. So bear that in mind. It tends to fall a lot harder in a panic and it tends to rise a lot harder in a recovery. So it's not for everybody. You can apply what I call the stomach lining test. But flushes like this tend to come before money printing, not after.

17:16The leverage traders and the trend funds are sellers right now. We're seeing that. And once they're out, the people left holding silver are the ones who actually want it. And if the printing continues at the present rate or it gets accelerated, which is what I'm expecting, there are actually fewer weak hands, if you wish to call them that, that are left to sell into the rally.

17:36Now, there's of course a chance the Fed doesn't blink and it lets credit stress run and it keeps rates high and the dollar could keep rising and then the whole thing is going to be a total, I was going to say show, but you're not meant to say that on YouTube. So there's no guarantees here. It's also possible that the credit market simply calms down because maybe these big AI companies borrow a lot less. Although at the moment that doesn't seem to be happening, but it's possible. So if you see those things happening, then my thesis is a lot weaker than I think it presently is.

18:07So what am I doing? I'm watching for the selling to dry out. So I'm not someone who buys a falling knife. There's some very simple rules to when we look at buying something potentially. As skilled money we want to look at other people doing the same thing, and again come join me on Saturday and I'll teach you that process. It's very simple, I can teach you in about 2 hours. Because the skilled money knows the process, they saw the 2008 movie, they saw the 2020 movie and they know what credit stress does, know the opportunity it brings and they're definitely positioned for it, definitely watching the right things. But most people are not. Hopefully it's a little bit clearer for you right now.

18:47And it's a really, really unloved place, and it's called bonds. And I know it's really, really boring, kill me now, but there's an Economist cover out right now and it says "Will bonds blow up?" And for me that's an indicator that they're probably so hated by now it might actually be an opportunity. Bit of a contrarian view, but you see, by the time fear is on the cover of a major magazine, at least that's what the Economist calls itself, a lot of people have usually already acted on it.

19:16We've seen a huge amount of inflows into long-dated bonds over the last week. We've seen Bank of America come out and saying, "Time to buy bonds," and that sort of thing. It doesn't mean you should run out and buy it. You got to come to your own conclusion. But think about it from the buyer side. A 30-year government bond right now pays you 5.6%, 6%, the highest in over 20 years.

19:35So if you buy one and you hold it, you lock in that income for the next 30 years from the most reliable borrower in the world. I know that's what it's come to. And then there's a second part. Bond prices and yields move in opposite directions. So when interest rates come down, yields come down, the prices of the existing bonds are going to go up. And the longer the bond, the more it moves.

20:00So rough guide is this. If a 30-year yield drops 1%, then the 30-year bond would gain roughly 16%. About half of its length. So if interest rates go up by 1%, the same bond is going to lose about 15, 16%. But if you connect the whole thing, if a credit crisis, this credit reset we're seeing, forces the Fed to step in, the first thing it usually does is it pushes down interest rates because it's good for the market. It's also very good for long bonds.

20:31So silver and bonds and other shiny stuff can benefit potentially from the same event. Just a bit of a different process. But always be aware of the risk. Obviously we could be wrong. Inflation could come back really hard and rates will stay higher and the new Fed chair could turn out to be a fundamentalist. Who knows?

20:53So I treat the long bond thing as a measured position. I haven't bought any yet. I'm still looking at it. But it's never a bet your house on an idea kind of a thing. That's never something we do. We always size our positions in a way that if we're wrong, we're just fine.

21:09Now, if you're wanting to look at bonds, and please don't run out and buy them, I'm not telling you to buy it, I'm not a financial adviser. There's an index fund called TLT, which is pretty much the easiest way for most of us to get exposure to long-term bonds if you wish. But always bear in mind the risk. It's on you. Both the wins and the losses are on you and there will always be losses as well as an investor. It's a natural thing. The question is how we manage them and how big the position is and everything else.

21:37But essentially I'm watching all these things that I was just talking about. I'm watching the bond stress. I'm watching the interest rates. I'm watching the government debt markets. And it actually takes me about 30 seconds to do that pretty much. Maybe a few minutes a day.

21:50Again, the Winston app writes a personalised newspaper for you every single day. It tells you about the stuff that actually matters for your portfolio, which is why I built it for myself because I hate reading the news. So again, check that out. There's a link down below as a free trial.

22:04And if you want to actually learn the real rules, the process, it's going to take me about an hour and a half to teach you, 2 hours to teach you. We can't do that in a YouTube video. It would just be ridiculously long. But join me on Saturday live here from London. I think it's afternoon London time. Should be morning US time and sign up for that. Be on time. There won't be a replay. Don't ask for one. And I appreciate you watching this and I wish you a safe 2026. I think it's probably what we all need. All the best.

22:36Right now I think we're going through some sort of weird phase transition. And normally when you get bad economic news or you get bad jobs data, people are going to fly to safety into the bond