Impeachment, a trade war, the inverted yield curve…
There seems to be no shortage of bad news that could bring an end to the record-long U.S. expansion.
But ominous as those concerns are, there is one that could have far worse implications for the economy.
Whispers are spreading that this risk has the potential to lead to a situation as dramatic as the subprime mortgage crisis of 2008.
I’m talking about leveraged loans.
Bigger Than The Subprime Mortgage Crisis?
Leveraged loans are one of the riskiest investments on the market.
They are issued by companies that have already borrowed excessively… meaning the chances of default or bankruptcy are greater.
Unfortunately, investing in leveraged loans has become increasingly popular.
In the last 10 years, the market for leveraged loans has more than doubled. It is now worth around $1.4 trillion.
Moreover, a whopping 9% of corporate credit in advanced economies belongs to leveraged loans.
That number might seem small, but I assure you it’s not.
In 2006, at the height of the subprime mortgage epidemic, subprime mortgages represented 13% of the market… and we all know how that played out.
What worries me even more is the rate at which junk debt is expanding.
Three times as many corporations are having their credit ratings downgraded compared with those being upgraded… an indication that this risk is intensifying exponentially.
You Portfolio Could Include Hidden Risks
However, the real issue is that many investors have absolutely no clue that they are holding leveraged loans in their portfolios.
I am sure you remember mortgage-backed securities (MBSs), one of the main culprits behind the ‘08 crisis.
As the name suggests, MBS are investments backed by mortgages. They allow investors to profit from the mortgage business without buying or selling an actual home loan.
The problem is that different mortgages have different levels of risk, depending on their quality.
And Wall Street, in its eternal search for profit, found a way to repackage the risky ones and sell them as low-risk investments, leading, ultimately, to the Great Recession.
The same practice is happening once again, but with one small but important difference. Instead of mortgages, Wall Street is now repackaging leveraged loans.
And, because these are sold primarily to other financial institutions, which then include them in their products, leveraged loans find their way into many investment funds and ETFs.
Unfortunately, the ultimate investors rarely understand the full risk of their choice.
How To Survive The Next Crisis
For that reason, my advice has been to steer clear of institutional products.
Stocks in their purest form are a much better solution.
You don’t pay any management fees, and you get to know each investment intimately.
Many stocks offer yields as attractive as those of leveraged loans… with much less risk.
Including, for example, one I’ve identified and am revealing in the latest issue of my True Retirement Wealth subscription service.
It’s a recession-proof, trade war-proof business, with excellent projections and a growing dividend currently yielding 4.11%.
Again, I’ll reveal the details in tomorrow’s issue of True Retirement Wealth.
Get yours before it’s too late.