Dear Reader,

There is a particular cliff in America that could play a key role in the coming recession. It’s called the “BBB cliff.” Once a corporate bond falls over that cliff, it turns from investment grade to junk bond status.

And in the current economic environment, that could lead to a crisis of enormous proportions. We’re looking at a $3 trillion quagmire. That’s subprime housing crash or worse.

Let me explain.

The issuers of US corporate bonds are now much more leveraged than in 2007. And many of them have borrowed money not to grow their business, but to buy back shares. My friend David Rosenberg calls it “a giant debt-for-equity swap.”

To me, this is an excellent example for the deadly economic sin of Greed.

What’s even more frightening is that about 50% of all corporate debt issuers are now in the lowest investment-grade tier, BBB.

In a market downturn, they could easily drop off that BBB cliff to “junk bond” rating. And if that happens, it may unleash a terrible chain reaction.

You see, some institutional investors like pension funds and mutual funds are required to hold only investment-grade bonds. If a bond deteriorates to junk status, they will have to sell it immediately, even if they lose money doing so.

Currently, the bonds of nearly 50 companies are ready to fall off the BBB cliff and turn into junk bonds. And those are not small, inconsequential companies. We’re talking about the titans of American industry.

The first domino to fall was Ford Motor Company (F) whose bonds were downgraded by Moody’s to junk status in mid-September. The downgrade affected Ford’s entire $84 billion debt load.

Peter Boockvar, CIO at Bleakley Advisory Group and author of the Boock Report, is no stranger to the topic. He has been discussing corporate debt on business networks like CNBC as well as in my Over My Shoulder service.

Last week, I asked him to discuss this sordid topic in a video interview with Jonathan Roth. Here’s a short clip.

Tomorrow, we will talk about the sin of Envy.

Your dizzied by the BBB cliff analyst,

John Mauldin
Co-Founder