 Good day fellow investors. 2008 was all about the housing bubble. 2019-2020 might be all about the corporate credit bubble that is forming. And in a recent interview, Paul Tudor Jones and even Ray Dalio said that there are bubbles forming smaller bubbles, but extremely dangerous bubbles. Let's see what Paul Tudor Jones has to say. You know, credit was, it was actually real estate mortgage credit that got us into so much trouble in 07. I think this time it's going to be corporate credit. And I think the breakdowns are something that we have to pay attention to in the last day or two. And they're really scary because one thing about this credit bubble is we've had liquidity absolutely dry up in so many markets. Thank you Paul. Now, why is corporate credit so important? Because as Dalio said in another interview that we discussed in a video, most people are long equities, pension funds, people, investment trusts, whatever. Most people are long stocks and long equities. Thus they are long corporations. Thus if there is a corporation corporate credit bubble that will very, very negatively affect stocks. So it's extremely important to see what's behind this corporate credit bubble, why and where it is, is it forming so that you can go back to your stocks, see whether those are affected or might be affected by what is coming towards the credit environment, especially the corporate credit environment with rising interest rates and perhaps an economic slowdown. Those are factors that not many are talking about, but will be crucial in the next crisis because usually people don't see what the next crisis is and where will it come from. So extremely important video, see how that fits your portfolio, check every stock, but let's first explain what you have to look for. The topics corporate debt, what is corporate debt, size, risks affecting it, what to check the first crack or cracks already appearing in the corporate debt markets, what does this mean for a stock, what's the potential that can happen, think general electric and how do I personally invest in that environment, what do I do, how do I expose my portfolio. So let's start with corporate debt. The IMF International Monetary Fund recently released a big warning. So sounding the alarm of leveraged lending. So we have 1.3 trillion of leveraged loans outstanding and add on that 1.2 billion of high yield debt and then you see that, okay, this is a big, big bubble because on top of all the debt that we'll discuss later, there is also this leveraged debt. What are leveraged loans? Those are usually arranged by a syndicate of banks to companies that are heavily indebted or have weak, very weak credit ratings. These loans are called leveraged because the ratio of the borrowers debt to assets or earnings significantly exceeds industry norms. So we have a situation where highly leveraged companies have been eager to get to the cheap debt out there with 80 years of interest rates close to zero all around the world if you are someone who likes debt, who lives on debt to just survive, you take as much as you can and consequently investors with interest rates at zero didn't find any safe investments to invest in zero and were willing to risk and lend to those companies at 1, 2, 3%. So we have now one side that they don't care about risk just giving more debt and now we have investors that invested into them. And that's a big, big risk when things change. When interest rates go up and investors become scared, then all these credit leveraged corporations suddenly stay out lose funding and then you have a bubble popping. Further, what are corporations doing? Investors are increasingly concerned that this leveraging up will crash and that it will also affect the stock market because corporations are increasing the payout ratios, dividends and buybacks and at the same time increasing their debt. So they are borrowing money at low interest rates but they will never pay back that debt and they are buying stocks or paying dividends. So they are not investing into productive assets or growth or development research or whatever, they are investing in financial engineering. And that is a signal of a big, big crash ahead. Also credit requests are relaxing. Remember the ninja loans, no income, no job. So that is what's going on now in the credit market. You see that investors have been willing to lend money to creditors with deteriorating debt to earnings levels. So less than 20% of loans in 2009, 2010 were given to such institutions and now we are at above 50% of the debt is given to corporations that have already high debt levels. Also underwriting standards and credit quality have deteriorated in the United States. The most highly indebted speculative grade firms now account for a larger share of new issuance than before the 2008 crisis. So Moody's loan Covenant Quality Index Core just went up significantly and those with low debt covenants, so if something changes to earnings, it doesn't matter if your balance sheet changes in, it doesn't matter. Those kind of debt issuance has increased and increased, which means that investors are less and less scared about what might happen and that usually changes sooner or later. Further adjustments to earnings are allowed, thus highly optimistic projections are made, which is accounting misuse. So when there is a merger or acquisition, everybody includes the synergies into the earnings calculations and they simply push up projected future earnings and that's not good for when things actually change and we have a recession. And this is very interesting, I will read this. Institutions now hold about 1.1 trillion of leveraged loans in the United States, almost double the pre-crisis level. That compares with 1.2 trillion in high yield or junk bonds outstanding. Such institutions include loan, mutual funds, insurance companies, pension funds, pension funds and collateralized loan obligations. Do you remember something about collateralized loans in 2008? Well, this is the same thing. Which package loans and then resell them to still other investors? CELOs buy more than half of overall leveraged loan issuance in the United States. Mutual funds that invest in leveraged loans have grown from roughly 20 billion in assets in 2006 to about 200 billion this year, accounting for over 20% of the loans outstanding. And to sum everything up, this is the big, big picture. This is corporate debt in the United States. It was at 3.4 trillion in 2008 and since then low interest rates, it really exploded to 6.2 trillion and it's just going up. So the corporations that are doing the buybacks are just borrowing money to do those buybacks and pay those dividends and they are really high on low interest rates. If an interest rates are already changing, this leads to disaster. So of course, if you're a company, you see, okay, I can borrow at 1%, 2% in Europe, at 0%. So why not take that money, deploy it into buybacks and get a yield of 4% even if you are buying at the top of the market? That doesn't matter. 4%, 0%. Of course, I'm going to borrow, I'm going to increase my bonus at the year end and I'm going to buy myself a new Porsche or a new house. However, what happens is that nobody ever thinks, okay, when are we going to repay that debt? Because these companies, for example, they do a buyback or they do an extremely expensive merger and acquisition and nobody says, okay, in the next recession, the earnings of the acquisition will fall and we will have trouble repaying the interest. On top of it, the refinancing on the debt will not be that easy. Nobody is going to give you money because you overpaid for something and then you have big, big problems for the corporation that is highly leveraged when interest rates change and when the economic environment change. Then as Delio said, you see who will be swimming naked. That's Buffett's analogy. But Delio said, we will differentiate between the winners and the losers. The winners will be those who think about risk today and the losers will be those who don't think about risk today. And interest rates have already been increasing, which leads to trouble for the first companies out there. But if they continue to increase, then things might get really, really bad. You see here the high yield US corporate debt. It was 5.5% but now we are already beyond 7% and that is just over this year. If the Fed continues to increase, if we see a recession, I expect we will see again 22% like it was the case in 2009. In Europe, things are even scarier because the interest rates on corporations is 0%, 1% and they really leveraged themselves to give cars with loans of 0%, etc. When this interest rates, if there is inflation, if there is economic trouble, goes to 5%, 6%, 7% like it's normal for interest rates to be, then we have a lot, a lot of problems. So this is the double whammy for companies. You have higher interest rates and if there is a recession, your earnings go down. So the discrepancy between the debt ratios that look good now increases and changes very, very quickly and that's something few analysts are incorporating in their models. So take advantage of that, check your portfolio, check your assets and see who is at risk. What stock in your portfolio is at risk of higher interest rates and a slowdown in the economy. That one will be the hardest hit when the chickens come to roost. Just an example of what happens to bonds and how quickly that can deteriorate. General electric bonds have been priced above par around 105 in 2017 and then during this year they have gone down to 80. So that is a big blow for bonds, a big blow for all the refinancing that general electric might do. So you see what happened to general electric, this will happen to many, many companies out there as interest rates go up and their earnings go down and the debt covenants are breached and investors get scared about lending to corporations or investors say the US government will give me 4%, why would I risk everything to give to a highly leveraged companies at 5% or 6%, I want 10%, 15%, 20% to risk my money to lend it to you. And then there is a credit crunch, corporations cannot get to the liquidity, layoffs, lower economic activity, recession, downturn and then we see how the Fed or politicians are going to save us again. What are they going to do? So that's a similar normal cycle. It happens over, over and over again, in good times people are greedy, over leveraged themselves to gain short-term benefits without thinking about the long-term risks. General Electric's CEO, the previous one, he pumped up buybacks just to get a huge bonus when he retires and left the company to where it is. Thank you Jeff Immelt. Very good action. You also recently did a video on Enbridge, they increased their debt levels three times in the last four years, three times from 20 billion to 69 billion or 22 to 69 billion. So they are thinking, okay, it's low interest rates, let's lever up, let's take advantage, let's increase our profits, let's push that dividend higher, but when things change in the environment that really hands down the company and might make it broke, bankrupt, so it might be a zero and that's something you have to check in your portfolio. What do I do personally? I have, first, I manage everything with portfolio exposure. When I find great companies with low debt, with low risk, with no permanent capital loss risk, then I invest a lot of my portfolio. I don't find them that easily now or the risks are a little bit higher, therefore I have just a small part of my portfolio in stocks and the rest is in cash waiting for the opportunities. So I'm researching constantly the markets, looking for those companies that will give me protection and those companies that I can be happy buying more if things turn around in the markets and that's why you will see a lot of videos now focused on debt companies that have a lot of debt and those companies will go into my hedging strategy because if I buy put options on those companies I might be able to make huge gains with small inputs when the actual crisis comes. So that's how I am investing in this environment. So you can check my stock market research platform where there is everything in detail, what I do and I encourage you to do that because it will give you a good perspective on this complete channel. There is a 30 day money back guarantee. If you don't like it, just send me an email. I want my money back in a few business days, it's back on your account. So really, really I encourage you to check the platform. If you like it, you even lock this low price forever because in 2019, the price will go up off my stock market research platform. The link is in the description below on the YouTube video. Check that out. So think about your portfolio. It's all about exposure. Think about the risk that you're carrying with your positions. Are there any stocks that are highly leveraged that might be really in trouble if interest rates go up and the economy goes down? Write them down in the comments so we can make a list and go through them when we analyze hedges and potential hedges also on my stock market research platform. I plan to make a big list of such companies to see where we can buy puts if we want to buy puts. And that's it. Think about the risks. Don't lose money, as would Buffett say. Don't lose money. Don't lose money. And then the upside will come by itself. Thank you for watching. Again, comment below and I'll see you in the next video.