Are You Sure You Understand What Your Financial Advisor Has You Invested In?

“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.  - Article Link

That short article is a must-read, by the way.  For those who don't know, the BIS is the global Central Bank of Central Banks.  In the U.S., banks are supposedly supervised by the Fed (we know that's b.s. though).  But the Central Banks in each country are ultimately controlled by the BIS.  Some think the BIS is ultimately hidden "heart beat" of the global power structure.

The quote above is from a former chief economist of the BIS, who was there when the U.S. banking system hit the wall - a de facto collapse that was "stick-saved" by massive Fed printing and a  massive amount of Taxpayer dollars.  You can thank Hank Paulson, Tim Geithner, Ben Bernanke and Barack Obama for handing your tax dollars over the big banks.

At any rate, there were a couple of troubling indicators in that article that might directly affect any of you who have turned your retirement nest-egg over to your "trusted' financial advisor, in some cases probably someone who calls you a "best friend forever" (in the superficial sense, of course).  Truth be told, 90% of all of the financial advisors I've known in my time are nothing more that glorified car salesmen who somehow managed to pass some exams that I passed without studying and could have done in my sleep.

Here's the first extremely troubling thing - aside from the quote above - that Mr. White said:

The BIS said in its quarterly review that the issuance of subordinated debt -- which leaves lenders exposed to bigger losses if things go wrong -- has jumped more than threefold over the last year to $52bn in Europe, and jumped tenfold to $22bn in the US.

What's the big deal there?  You see that $22 billion of subordinated (i.e. risky) debt number for the U.S.  Who do you think funds that?  Most of that is funded indirectly YOU - either via your "safe" 401k bond fund or your "safe" IRA, in which your Einstein-esque BFF-advisor probably has told you he has you well-diversified into U.S. and European corporate bond funds.  Please see what happened to Drexel Burnham to understand what can happen to the price of subordinated debt - hint: it can go to near-zero.   And that number cited by the BIS, in the absence of any meaningful growth in anything other than the global money supply tells me that most of the subordinated debt that your portfolio is invested in is really just junk bonds in disguise.

Worried yet?  If not, this do the trick:

The share of “leveraged loans” used by the weakest borrowers in the syndicated loan market has jumped to an all-time high of 45pc, ten percentage points higher than the pre-crisis peak in 2007-2008...The BIS said investors are snapping up “covenant-lite” loans that offer little protection to creditors.

Let me translate that:  What it means is that the amount of low quality bank debt being issued by an expanding universe of risky companies is now at a level that is 10% higher than it was just before the financial collapse of 2008.  Think about that for a minute.  The "covenant-lite" adjective means that the bank debt and bonds that are being issued offer a lot less protection to investors in the event that the issuer (the company borrowing from you) gets into financial trouble.  By the way, in the search for yield, I can guarantee you that your bond portfolio has exposure to this debt.

In other words, the actual leverage - i.e. financial risk - embedded in the financial system, and therefore embedded in your "diversified, safe bond portfolio" is even greater now than it was in 2008 before the financial crisis hit.  Better think about that one a littler longer and harder.

Finally, Mr. White issued this warning - and it's something you will NEVER hear from your BFF-advisor because it's something that is well beyond his ability to intellectually comprehend - and even if he did he would assure you that it's not the case now:

Mr White said the five years since Lehman have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines.

"Running out of lifelines."  There's no question we are almost at that point on the global collapse time curve.  The last remaining "lifeline" we be for the Central Banks to engage in outright hyper-printing of their respective currencies.  Oh wait, Japan is already doing that.  I may be wrong about this - and if I am  then it means our system here in the U.S. will soon completely collapse - but the U.S. Fed is probably not too far away from following Japan's footsteps with the printing press.  Or, as Ben Bernanke would say - in a perverted distortion of Milton Friedman's original proposition - "drop money from helicopters.

The engines on the whirly-birds are warming up, regardless of the what the FOMC announces today.  The ONLY way you can protect yourself is to load up on physical gold and silver that you safekeep in your own possession or with a money manager who keeps the gold outside of the banking and financial system.  Capire a tutti?