One of the most important questions that we can ask would be “what is it that we don’t know that could impact our investments going forward?” This question has become much more important since the 2008 meltdown. Why? Because many changes were ushered in after the fact that, in my opinion, were meant to keep the public in the dark about the real state of our economy and “markets.”

One of the major changes that took place is that the Fed allowed banks to report bonds held at face value even if the actual bond was actually 50% below that if it were to be sold today. This is what constitutes a sizable portion of the reported 500 billion or so of “unrealized losses” on the books of the major banks. I also have to wonder about the commercial real estate loans that are being offered extensions and modifications to avoid having to report losses that are likely to come at some point anyway.

While to many it will likely appear that when the SHTF moment arrives, that it will be a surprise. Looking at the “numbers”- if you believe them-it would be a surprise. I don’t believe the numbers are even remotely reliable, but almost all “investors” use the numbers to make decisions.

We have to keep in mind that as a problem shows up, it generally shows up in the weakest hands first. An example would be the subprime mortgage meltdown in 2008. Fed Chairman Bernanke at the time reassured everyone that this was a small thing and that it was “contained.” How did that work out? Pretty similar to inflation being temporary, transitory, and now sticky. I am waiting for elevated and possibly parabolic. Let’s all hope I am wrong on that.

Today, I am seeing similar cracks emerging in MANY areas but what is catching my eye more than anything else is the shenanigans and defaults showing up in private lending and subprime auto loans along with rising delinquencies in almost all forms of credit. Keep in mind that one man’s debt is another man’s supposed asset.

A few mind-boggling examples of private credit would be Renovo Home Partners which, according to Blackrock a month ago, was worth 100 cents on the dollar. Fast forward to last week and in chapter 7 bankruptcy is worth ZERO. In looking back at other recent defaults, the same game was being played. Zips Car Wash, Tricolor Holdings, First Brands- different industries but all were priced at par (full value) while the ACTUAL VALUE was ZERO. No warning just here today- gone tomorrow- along with all “investor” funds. As I am writing this, I just saw that two subprime hedge funds at UBS have gone bust. Shades of 2007 and Bear Stearns? Keep in mind that real market damage happened nearly a year AFTER the hedge funds collapsed. I try to learn from past events.

Subprime lending and private lending are screaming PROBLEMS.

With reported defaults rising and MANY Commercial Real Estate loans- along with other corporate debt not necessarily defaulting YET because of games being played to kick the can down the road, how long will it be before the public recognizes that most of the debt that is outstanding has a large possibility of NOT being repaid in full- if at all?

In addition to what I have mentioned above it appears that in a few instances- First Brands comes to mind- that the same collateral was being used for multiple loans, so the creditors don’t even know who has the right to any remaining assets. This speaks volumes about the “protection” we are getting from our rating and compliance agencies. In fact, according to Kate Berry on National Mortgage News the CFPB (Consumer Financial Protection Board) wants to REDUCE oversight of non-bank lenders. It could be they are worried about what they see and don’t want to take the blame. It may be too late to “protect” anyone at this point anyway.

Many times, in the past I have written about the fact that they are “printing money” in unlimited amounts while we only have a finite amount of collateral to attach the new debt to. There is so much debt being created to kick the can, most likely down the road further the same collateral is being used also by:

· Individuals who are pledging more and more of their future income to keep afloat today. What happens when the ability to carry the debt is compromised? What happens if the assets (collateral) backing the debt falls? With all the layoffs we may find out shortly.

· Corporations issuing debt to pay dividends, buy back stock and retire maturing debt at the cost of R&D and future projects. This lifts the PRICE of the stock- and C Suite bonuses but actually detracts from the long-term VALUE of the company. What happens when the debt spigot runs dry or revenues dry up because of all the debt repayments crowding out future investments?

· Cities and states are issuing massive amounts of debt because they have underfunded pensions and tax receipts are not covering the rising cost of goods, services, and debt payments. What happens if so many people are laid off that tax receipts plunge and this debt becomes unpayable?

· Federal Government is off the rails with spending- most of which is not discretionary and cannot be cut. The debt numbers are immense and growing exponentially. The actual numbers are far worse than the already monstrous $38 TRILLION that they let us see. Since they can “print” money it is likely all payments will be made. That doesn’t mean promises will be kept because what we will be able to purchase with the newly created confetti (or computer blip) will only be a fraction of what we were expecting.

The very act of conjuring cash up out of nowhere (and charging interest on it) is an abomination. It leads to a something for nothing attitude until the bill comes due. It appears that with the revelations we have seen in the recent past the bill is already in the mail. This has an eerie resemblance to 2007-2008 with the same games being played with new names attached like CDO (Collateralized Debt Obligations) in 2007 and CLO (Collateralized Loan Obligations) today packaged as “safe” and with a couple of extra points for interest. In 2007 it was the ratings agencies that gave the thumbs up to many CDOs that collapsed because they were FAR riskier than anyone knew. Today, it is private credit rating agencies that are mainly giving the stamp of approval to funds that will more than likely be proven to be FAR riskier than the main street investor has any clue about. Of course, they will be the last to know and get hurt the worst if history is any guide.

Don’t let that be you.

If there was ever a better argument for holding physical assets like gold, silver, oil, food- actual assets rather than someone else’s promise to repay- I haven’t seen it.

Be Prepared!

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