➡ There’s a $13 trillion deception in your retirement account involving something called private credit, which is credit that banks won’t approve. This unregulated “shadow banking system” is risky and could lead to significant losses for individuals with pension funds, 401ks, and other retirement accounts. The issue is that fund managers are not transparent about this risk and are benefiting from high fees at the expense of their clients. This situation could have serious consequences for a whole generation of savers when it unravels.
➡ This text discusses how some loan borrowers can’t afford to pay their interest, so instead of defaulting, they roll it into their principal. This makes it look like the fund is doing well on paper, but in reality, it’s not. The text also mentions that there are two potential outcomes for this situation: a fast version like the 2008 financial crisis, or a slow, drawn-out version like Japan’s lost decade. The text warns that the slow version could lead to long-term stagnation and deflation.
➡ Investing can be risky, especially during volatile periods where the market fluctuates. Many investors, particularly retirees, can lose money and purchasing power due to these changes. It’s important to understand what you’re investing in, how much of your portfolio is exposed to risk, and the actual value of your assets. Preparing a plan before a crisis hits can help protect your investments, especially in unpredictable markets.

There’s a $13 trillion lie sitting inside your retirement account right now. Not a risky bet, not a bad investment, a straight lie. Now, the people that are running it, they have a fraud score higher than Bernie Madoff. But what makes this so bad, so dangerous that this time, the money isn’t coming from Wall Street or the banks. It’s coming from your pension funds, from your 401ks, your retirement accounts. This belongs to teachers, to nurses, to firefighters, and maybe even you. Now, when this unwinds, the fund managers who’ve already gotten paid, they’re not going to take the loss.

You will. So here’s exactly what we’re going to cover in this video. What this actually is and how it got inside your retirement account without your knowledge. The specific math that proves the numbers are fabricated. In the two ways, this probably ends, so that you can end up on the right side as this whole system breaks and destroys an entire generation of savers. And by the end of this video, you’ll understand something the SEC completely missed, and that one guy with the laptop exposed, and we’re going to break it down. So let’s go.

All right, let’s jump right into it. We have a lot to break down. Now, this is on the back of a lot of research that’s been put together by some other people. We’ll link to their original research down below if you want it. But we’re going to talk about this $13 trillion lie. This is really dangerous to give you have a retirement account, a pension fund, a 401k, whatever you have. And I do want to say just real quick, this is a lot of work that we do, bringing these deep dive thesis all the time.

And if you wouldn’t mind doing me a small favor and just hit that subscribe button right now, it’ll really help out me, the rest of the team that we’re all here working really hard. It’ll also help other people that need to see this get this information. All right, let’s break this down. So the first thing, this is all revolving around something called private credit. Now, over the last week, you might have heard about this, because it’s coming to a pretty big deal. But most people have never heard about private credit, they don’t understand what it is.

Because of course, you haven’t invested into it, you don’t even know about it. But basically, what private credit is, is it’s credit that banks won’t approve. So typically, the banks issue loans, they give you credit, they give you business lines of credit, business loans, small business loans, things like that. But when banks won’t do it, when you’re so risky, when you’re not good, you don’t have good credit worthiness, then they the banks want to prove it. So they go to private credit. So that already tells you right off the bat, it’s like prime, subprime, and then banks won’t even touch it.

So go to private credit. Now, this is something that we’re calling a shadow banking system. Why? Well, the banking system really has three purposes, right? So we have storage of money, we have payments, and then we have loans, right? So they’re doing all the loans, but not in the traditional banking system. It’s a shadow banking system. Now, the reason why we call it shadow is it’s not in the light, but it’s also much more dangerous. It’s not really regulated the way that other banking systems are. And a lot of your retirement money is going into here, and no one’s paying attention.

But we’re going to break this down. Okay, now some of the big names, you’ve probably heard of Blackstone. They’re one of the really big participants in this. Apollo is a big one. Blue Owl, they’ve been in the news a lot lately, I’m going to break down exactly why they’re in the news. But the question is, where do they get the money? But before we answer that question, let’s just take a look at this. So you can see the growth of the private credit markets. This is going back to about 2000, when they were barely not even existent.

But as you can see, even though banks keep getting bigger, and the margin requirements keep getting dropped on banks, they can make more loans than ever before. The extent that this private credit is being used is going almost parabolic. Here we have this is to about 2023 2025. It’s even higher. But you can see the rapid rate of growth. And of course, the red here is all in America here. So you can see it’s being used in other countries, but it’s mostly being done in America. So it’s becoming really popular.

But again, you’ve probably never heard of it. But let’s take a look at this. Where does the money come from? Because this is the big piece that’s going to maybe irritate you a little bit. Let’s break this down. So as you can see here, this sort of breaks down how the private credit system works. So what we have up here, private credit in investors and borrowers. So right here, this is the long term investment horizon, this is the money that comes in. And right here, it says pension funds. So maybe some of your money going in there, we have insurance corporations, we have you have money in some sort of insurance policy, it’s right there, sovereign wealth funds, and of course, retail.

So all that money goes into these funds that we’re going to talk about here. And eventually, it comes down to these corporations that need to borrow money that are maybe too risky, that can’t get it from the banks, but it’s coming from your pension funds. It’s coming from your retirement account specifically. Now, the problem that makes this so dangerous, as I said, it’s like the shadow banking system, meaning it’s not being watched, it’s not being exposed, and it’s not being regulated the way the rest of the system is. And the problem is that we have a massive conflict of interest.

Now, I said conflict, or is it a model? Have they developed a model that’s a conflict of interest, but it’s the way the model works, and they need the conflict of interest in order for the model to work. So let’s take a look at how all of this works. Now, first of all, one of the big firms that we’re going to use as our example here is Cliffwater. So what we can see is that Cliffwater corporate lending has been given an A, an A as their issuer credit rating. So on paper, it looks great.

Oh, A plus, A, okay, that’s fine. Looks really good. At approximately 40 billion in assets, Cliffwater corporate lending is one of the largest US-based perpetual life funds, perpetual life. So they loan money through that. And A means they have a long-term issuer credit rating. Okay, so they’re really good. But how does they get that A credit rating? Well, it’s pretty interesting the way that works. Let’s take a look at this. So we can see here, it says a Bloomberg TV segment on private markets warns. So even TV is warning people, most people just haven’t picked this up.

They’re warning that private equity, they have a very strong incentive. They have strong incentives. Charlie Munger would say, show me the incentives. I’ll show you the outcome. Look at the incentives here, to cherry pick prices that let them reap higher fees at the expense of their clients. Of course they do. They want the most amount of fees. Former SEC chair warns they do things to make sure that you keep getting your stream of management fees. So what they’re doing is they’re rating their own book. They’re picking the things that have the highest fees to make their fund look like it’s doing better.

They cherry pick and they pay the valuation firm. So they have this vested interest or this, I should say conflict of interest where they pay the fund or the firm to give them a good credit rating. And if they don’t pay them, then they don’t get a good credit rating. So that’s why it’s a conflict of interest. Now, if we peek under the hood and we start looking at the real data, we can start to see just how bad this is. And I put here, cooking the books, because again, this is all a conflict of interest.

And that’s how they’re getting away with it. So if we go by loan by loan, I didn’t go through 2300 loans. I’m using somebody in some of the research by this guy, Nick, I’ll put a link to his full research down below if you want to get it. But we can see here, he went through, he went through and did the work that your regulator supposed to do. He went through and did the work that you would hope that the SEC or some sort of regulator would do to protect you. Maybe your fund manager, pension fund manager, of course they don’t because they all want their cut.

But let’s say take a look at what he did. So he went loan by loan 2330 positions. That’s a lot. Good thing we have AI today to do that. But he went through and researched hundreds of them. And here’s what he found. 189 loans, where borrowers couldn’t pay cash interest. So we have borrowers who can’t even afford to pay the interest on their loans. But instead of defaulting, instead of calling the loan due, which would cause them to mark those loans down, instead, they just let them roll it into their principal. I understand you’re too broke, you can’t afford your payments.

Don’t worry, we’re not even going to give you a delinquency. We’re just going to allow you to continue to roll it into the principal. We’re going to give you more credit, because you can’t pay for the credit you have right now. They saw that 58 of those were loans that had to be restructured entirely, because they couldn’t even afford to keep making the payments. And they kept putting it into the principal. And they couldn’t afford that either. Over 50 loans where borrowers aren’t generating enough cash to service their debt at all. So on paper, it looks like they keep making money.

On paper, the fund’s doing amazing. On paper, they report no losses. But when you peek under the hood, you can see that’s not the picture at all. What the industry calls non-accruals, they carry on the book at full value. The reason why they want to carry on the book at full value is again, so the fund looks like it’s doing good. Not quite a Ponzi scheme, sort of like a Ponzi scheme. But the interesting thing is, the question is, how many of these non-accruals does Cliffwater officially report? What do they actually show? Well, the answer is zero.

You see, so they’re cooking the books. But how do they get away with it? Well, they get away with it again, because they pay the rating agencies to come in and mark their book. And as long as they mark their book to still be active collateral, they look good. We can see right here. If the marks don’t move, so the marks being how much their loan book is worth. If the marks don’t move, volatility is near zero. If volatility is near zero, then any positive return produces an astronomical sharp ratio. So the sharp ratio shows the volatility and the return profile of that.

And so these are getting astronomical sharp ratios because they’re showing no volatility. So any uptick makes it look amazing, because there’s no downside. But why is there no volatility? Well, because the marks don’t move. And again, why don’t the marks move? Because the rating agencies don’t move the marks. That’s what we’re talking about the conflict. We can see it’s evidence that the sharp ratio being so high, it’s evidence that the marks are fiction. So we know that that loan book is not worth what they say it is. It says that they have moved because the rating agencies haven’t moved them down because of conflict of interest.

But we know they’re fiction because of that. It says the skewness of a negative 2.45 and an excess kurtosis of 1.44. So this is measuring the ratio, the sharp ratio, so we understand how much risk and how much reward profile we have. It says risk is catastrophically asymmetric to the downside. We don’t want that. We want asymmetric to the upside, meaning we have more upside than downside. But in this case, you have way more downside than upside. We don’t want to invest in that stuff. Kurtosis of 14.4 means extreme events are hiding in the tails.

So they’re not showing up, you don’t see them in the monthly returns. But eventually they all arrive at once. That’s the problem. The returns look calm 96% of the time. And then disaster strikes. So what they’re saying is that there’s massive risk, you can see it if you dig a little bit into the numbers, you can see that there’s massive asymmetric risk. So it’s not going up. All the risk is to the downside. And that’s what’s going to catch most people off guard. Okay, and the problem is, this is everywhere. When you dig through the private credit, when you dig through private equity, you start to see this is just the way the game is played.

The incentive structure, again, show me the incentives. I’ll show you the outcome. Because of the incentive structure, this is what we get. This is the outcome. Now, what we can see is Apollo, one of the big funds, let’s take a look at this. Apollo’s own executives admit as much. And we’ve seen Blackstone, one of the biggest, Blue Owl. They’ve had to recently now stop redemption. This is a pretty big deal. You can see some news headlines right here. Trapped in private credit, investors wait to pull out $5 billion. So investors who have their money in there that want to get their money back out, their redemptions are paused.

Blue Owl peers push back on private credit risks amid market jitters. You can see private credit funds face redemption crisis. So it’s not just Blue Owl. All these private credit funds are facing the same redemption crisis. Now, is why are the credit funds having problems? Well, part of it is because these are going to businesses and mostly what we’d call white collar borrowers. So these are not the blue collar borrowers. These are the white collar borrowers. And what’s happening, a lot of people are saying because of the softness in the job market, AI specifically targeting that layer of jobs is causing the weakness here.

Blue Owl, HPS joined private credit funds stung by February losses. So they’re seeing massive losses and all of a sudden they’re having to freeze redemption is never a good sign. Jamie Dimon, he says that when you see one cockroach, there’s probably many more. It’s like they say when you see smoke, there’s probably fire. When you start to see that all of these books look to be cooked and they’re starting to pause redemptions like a Ponzi scheme would, then you have to imagine there’s lots of cockroaches that there’s probably fire on the other side of this.

Now, this is a really big deal. It’s a really big deal for everybody. But we can decide which way we end up. Now, when I look at this situation, I see two potential outcomes. There could be three, I see two. Let’s break these down. The first one is that there’s a very fast version like we saw in 2008. What do I mean? In 2008, we saw the great financial system unwind, it collapsed and it happened very quickly. Everything broke at one time and then it started to recover again. That’d be the good version.

I’ll get to the second version first. But we can see back if we go back to 2008, the subprime mortgage crisis, that the losses on mortgage-backed securities rapidly spread throughout the banks. It was like contagion. As soon as it started happening, it was like one domino after another and the whole house of cards came crumbling down really quickly. It rapidly spread through the banks, forcing simultaneously interventions. Because it happened so fast because all the banks started cascading down, it required massive intervention at the same time simultaneously. It says here, an unregulated private-label mortgage securities market exploded from $148 billion in 1999 to $1.2 trillion by 2006.

This market had grown from $148 to $1.2 trillion, $148 billion to $1.2 trillion. It grew really fast unchecked. The whole system came down with contagion, and then it required a simultaneously intervention. It happened quickly. The system collapsed quickly and the intervention happened quickly. That was 2008. That would be the good version. Okay, let’s talk about the version number two. This one’s the most dangerous, and it may be the most likely of what we’re looking at. Okay, so the second one is the long, slow version, and Japan is the best parallel for this.

So with Japan, it didn’t break all at once. In Japan, it started slowly, unevenly, and it’s gone on for over two decades. Look at this. So we can see from 1992 to 2000, over two decades, Japan spent $86 trillion yuan, about 17% of GDP, dealing with non-performing loans. Exactly what we’re talking about. Loans that were going bad, and they had to keep papering over them a little bit here and there. But Japan’s lost decade, or two decades, describes how highly leveraged firms and investors defaulted over time. So not performing loan ratios, non-performing loans, sound familiar, started to rise pretty rapidly.

Banks merged, and they become zombies. They tried to kind of solve the problem. Banks started kind of joining together, merging together to try to solve it. They became zombies. They couldn’t afford it. And slow regulatory response. So because it didn’t happen quickly, we didn’t get this fast regulatory response like in 2008. It happened very slowly. And it turned what could have been a short shock into instead a decade of stagnation and deflation, which is much worse. So here, by the mid-90s, there were vast underestimates, and that those losses kept emerging, but in waves.

So it was like it got really bad, and then it kind of got better, and then it got bad, and then it got better, and it got bad and got better, and it went on for decades instead of having it all at once. And here’s where it gets really bad. So what does that mean for us as investors? What does that mean for you as an investor if you have money in a pension fund, in a stock market, in the 401k? Well, we can see what happened right here. From 1972, all the way here until 1982, for over a decade, we saw investors here in the United States in the S&P 500 lose money.

So we saw a peak right here, and then it crashed down into 1974, 1975. And it took over a decade to get back up. But that’s not what it was like living through there. So when we look back with a lens, it’s easy to go, oh, well, I guess I had to wait a decade to get my money back. Well, if you were retiring somewhere around here, or here, or here, that’s pretty bad. But for us, we go, oh, I guess it was a decade. But what was it like living through that? Because this is really the key piece.

During that time, you lost 2% per year after inflation, you lost about 20% of your purchasing power over the decade. So even though it came back, I still lost about 20% of my purchasing power. It’s really bad if I’m trying to retire. But what was even worse is the volatility that happened. And what happens is, as investors, our emotions get the best of us, and we get shaken out. And so all of a sudden, it gets worse. Oh, my gosh, I hope it’s going to hold. And then it bounces. Okay, it’s going to it’s going to bounce.

And then it gets worse. Oh, my gosh, what’s going to happen? I hope it finds its footing, and then it falls all the way down. And then maybe it bounces a little bit. And we’re like, I’m out, I’m out, I’m just going to hold my money. And I’m going to wait till it hits the bottom. So I’m going to sell somewhere here along the bottom. And what happens is humans are terrible investors, because emotions get the best of us. So we buy the tops of the market, and we sell the bottoms. And so what happens when you go back and actually study this period, you see that almost all the investors got flushed out of the market during the time frame.

So if you held for a decade, sure, you kind of got back nominally, you lost 20% of your purchasing power. But the reality of people that lived through this situation is they were shaken out of the market. They kept buying at the top, they kept selling at the bottom, they bought at the top, they sold the bottom, they bought the top, they sold the bottom. And so that’s the problem of living through this. That’s the problem of having this long, slow version, which is what we’re looking at right now happened over 20 years, the market chopped down 10% up 20% down 15%.

And we all got shaken out. Retail got completely destroyed, because again, they sell the bottom, they buy the tops, and they do that over and over and over. Okay, so now that we know all that, and thankful that we have the benefit of hindsight today, we can go back and study what’s happened in the past. What are we going to do about that as investors? And how are we going to think about this? Well, first of all, who’s exposed here? So we have to understand that retirees are the ones that are the most exposed, because they’re the ones that are living on that money right now.

And if it starts going up and down while they’re trying to live on it, it’s gonna be very difficult for them. But it’s also bad for any of us that have money in the market. We can see that pension plans have been pouring billions into private credit funds. So if you’re if you have a pension plan, or you have some sort of a plan administrative front your 401k or mutual funds, you probably have exposure here. And the key is a very important key here is that participants do not choose these complex allocations.

So we have money in your retirement, your company’s retirement plan, your pension plan, whatever, you didn’t choose this. No one gave you the option. Hey, do you want to invest in this private credit? And hey, look at how they get rated and how they mark the market and look at the sharp ratio, you didn’t get that. You don’t even know you’re exposed here, most likely, you didn’t choose this. And it says here, savers rarely see, or if they see rarely understand private fund documents altogether. So here’s what you want to do.

First, know what you actually own? What do I buy? I talked to so many investors all the time. And they’re like, well, I have my 401k. I have my mutual funds. But your 401k is just a wrapper, like an IRA, there’s stuff inside of it. What do I have in there? I have money with my pension fund. What does my pension fund hold? So the first thing is know what you actually own, you wanted to understand your exposure, then what percentage of your portfolio is exposed to this? What percentage of your portfolio is exposed to private credit and private equity? Get on the phone with your with your plan administrator and ask him that question, what percentage of your portfolio are you exposed to this stuff? Then understand the difference between asset marks.

So start to understand, well, they’re saying the value is this, but is the value really that? How do I know that’s where the value is? And we want to start to understand how they mark the value of those assets. And then finally, dig your well before you’re thirsty, build a system before you need one. So start thinking, shoot, if I have all this exposure to this, maybe all my money is in this pension fund, and I don’t really have any control over that. What happens if we’re exposed to this? What happens if we go into this lost decade? What happens if we have this volatility? What am I going to do? And you want to start building a system before you need one, that’d be investing some of your own money outside of that system, trying to get exposure in areas that may be counter to that, or some way to protect yourself, because the private credit market, it’s a problem.

It’s going to continue to be a problem. As Jamie Dimon said, if you see cockroaches, there’s probably more. And we could be like 2008, it could be swift and a swift recovery, or it could be more like Japan’s 2020. I’m going for more Japan 2020. Let me know what you think down in the comments down below. Again, share this with somebody who might be exposed to this and may need to be aware and make a phone call. Share with a friend. They’ll owe you some thanks for that. Also, click that like button, subscribe button if this video helped you at all.

And that’s what I got to your success. I’m out. [tr:trw].

See more of Mark Moss on their Public Channel and the MPN Mark Moss channel.