$1.2T in risky corporate debt showing similar warning signs to subprime crisis
latimes.com
latimes.com
Much of the concern in markets right now seems to stem from the idea that as the Federal Reserve tightens credit, both through raising interest rates and through unwinding its previous QE programs, there will be a significant impact on companies that have borrowed at lower interest rates. Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default.
If you're a country which borrowed in dollars, the tightening of US monetary policy will often lead to a change in exchange rates that makes it more expensive to pay back debt. Coupled with a global economic slowdown resulting from a trade war, and things start to look nasty wherever you look.
fiscal FY2019 CMMS spent $270B - a 24% increase YOY
therefore, it seems disingenuous to equate taxation with spending, there's just no way to arithmetically catch up.
edit: accidentally put medicaid instead of CMMS
The Laffer curve is not interesting when you are way on the left side of it.
If high government debt was decreasing economic participation that would be cause for concern. But is there any reason to believe it is? Japan is running a much higher debt-to-GDP ratio and while people are (probably rightly) worried, the fact that nothing catastrophic has happened there yet suggests that there's at least that much slack available.
The question is whether tax revenues could be raised by raising tax rates to the point that revenues exceeded current expenditure. Whether or not that is possible is uncertain.
If you're worried about overspending it seems weird to try and reduce the spending by.... reducing receipts. Just reduce spending!
https://itunes.apple.com/us/podcast/odd-lots/id1056200096?mt...
[1] https://www.macrovoices.com/edu (scroll to bottom)
https://www.slideshare.net/eldon/sequoia-capital-on-startups...
I've got mixed feelings about this. It's not 2008, and there's no reason to expect another 75-year economic event again. On the other hand, tech and VC investment has more than tripped since 2008.
We now have "1000-year floods" five times in a year [1], is there good reason to think the economic predictions are more accurate than the climate ones?
[1] https://www.edf.org/blog/2016/09/01/we-just-had-five-1000-ye...
In practice it's calculated with models that are tuned with historical data (among other things), so if you fail to notice some important changes and update your models you might be wildly off.
Adding to this, the Swiss Franc revaluation in 2015 was called a 20 standard deviation event [0].
[0] https://www.ft.com/content/5a06ef16-b5e4-11e4-a577-00144feab...
Whether they really are is a different story.
It has been known for a long time that his is not the case: https://www.amazon.com/Fractals-Scaling-Finance-1st-First/dp...
The conclusion is: due to faulty mathematics, far out of the money options are underpriced. Or, who Mandelbrot concluded, "investing on the stock market may be riskier than you think".
It gets more and more difficult to accurately forecast that as uncertainty increases, which is why they're not priced as efficiently farther in the future. But since this is somewhat well known, you need to have some kind of edge to make it work - buying options haphazardly won't.
But if you have a few bucks to spare and want to gamble you could buy far out of the money options for a downturn. VIX gets priced in, don't know how it looks currently.
Or you can gamble with "paper money" at Thinkorswim.
If you see a 25 standard deviation you are either
1. Incredibly lucky
2. Incredibly unlucky
3. Or don't have a standard distribution (but a fat tail distribution or Levi flight or whatever)
And "the market can stay irrational longer than you can stay solvent" - by definition this produces few, rare payouts.
Far better to employ the LTCM strategy and write a lot of out of the money options: https://en.wikipedia.org/wiki/Long-Term_Capital_Management
The trick is to do that with other people's money, on which you initially get huge returns. You can then collect large managment fees. The collapse takes out the fund, but it's an LLC so the staff get to keep their bonuses from previous years.
In practice there are a bunch of concerns. You have the gambler's ruin problem: even if your bets are positive expected value, it's very easy to go bankrupt. Since your fund makes all of its money from crises you have a bunch of counterparty risk along a risk of regulatory intervention etc.. Your fund will lose money in most years and it's very difficult for potential investors to know whether you're actually positioned to make money from a crisis or just wasting all their investment. See Keynes' line about sound bankers.
Taleb endorses and advises a fund that tries to bet on "black swans"; it's explicitly advertised as a fund that will lose 5% of its value every year in "normal years", but hopefully pay off in exceptional years. You can invest in it if you want. In theory it should work, but no-one will really know until after we have one of those exceptional years.
The strict statistical meaning of a standard deviation applies to any statistical distribution
While I think a downturn may be in the cards, I don’t think another financial crisis is for the US.
China however...
Now maybe that is just a way to sell books and it was a fun read, but I don't know.
I get the feeling we all know something is coming because it always has and it always will. Some suspect it's going to be catastrophic like never before. It's at least assumed it's going to hurt. We don't know when but it seems people are in agreement it's edging closer and closer and things are about to get really unfun for a while.
I just hope all the pain and misery happens to other people and I get through it unscathed. Totally going to take my share of the hurt most likely and that's OK I suppose. It's sort of fingers crossed at this point.
2008 crisis, mortgages get made boring, and the action now is in... well, if you can figure that out then there's a lot of money to be made. Car loans? Corporate loans? Foreign exchange? Commodities? I've seen all of those bandied about.
How do we know it's a 75 year event? Because it happened once 75 years before? How often should it happen?
We can't honestly answer how often it's going to or should happen. We can't honestly assess these sort of risk patterns because we don't have models that take enough of the variables into account (or even could?)
Check out Taleb's Black Swan. His big thing is understanding what risks are measurable (very few), which have a bounded/estimable impact (still very few), and which are both unbounded and immeasurable or most of them.
We do have models that take it into account.
Taleb's argument isn't that you can't model the market, it's that most people aren't using the appropriate models [0].
[0] https://en.wikipedia.org/wiki/Fat-tailed_distribution#Fat_ta...
https://www.springer.com/us/book/9781846284199
Enjoy!
Yeah but at some point the "250 year flood" might need a new name, like every other year flood or something.
Because that so called 75-year economic event never really happened, or at least its full consequences, has been delayed by doctors injecting lots of adrenaline keeping it alive.
Japan, China, EU, and US has since printed unprecedented amount of money. A lot of people think there wont be another 2008, I would be happy if it was only 2008 recessions. I am worry it will end up like 1930 with Great Depression.
Are you able to elaborate on the derisking you've been seeing?
As far as I'm aware, employment data is considered a lagging indicator [0], as labor tends to be reasonably sticky.
> These are companies whose management is in very close personal contact with the capital markets, and so often make decisions very quickly in response to what's going on there.
I was fishing for other data, in part, because current data does not support the assertion that layoffs have accelerated [1][2]. In fact, initial claims data appears to be at -- or close to -- historical lows.
[0] https://www.thebalance.com/lagging-economic-indicators-list-...
The giant amount of credit that was raised for LBOs during last 5 years of stocks rally.
A lot of those LBOs went sour.
Barbarians at the Gate is a popular book that goes into the details while telling the story of a large LBO.
To be frank, I guess the parent was talking about general fraud trends. It will be a little disingenuous to suggest the same set of events have to repeat for it be classified as fraud.
For eg, these days start ups with no way of turning in profits, but raising billions in debt could be suggested as a fraud eventually.
If you’re trying to say that corporate bonds are going to tank the economy, you’d need to find an increase in fraudulent issues. This is not the case—-the corporate bond market is highly regulated.
Find me a recent issue that isn't properly priced considering the riskiness of the firm.
https://www.investopedia.com/ask/answers/052715/how-big-deri...
All of Latin America, pretty much
This became much less of a concern in late December, when Fed Chair Powell acquiesced to plummeting equities markets and declared a pause on rate hikes, emphasizing the data dependence and lack of a preset course for Fed policy. These statements signaled a shift in tone from the 'dots' published after FOMC, which indicated further hiking and a median expected neutral rate around 3% [0].
> both through raising interest rates
After Powell's comments, expectations for rate hikes have diminished. Looking at 30-Day Fed Funds Futures, you can see that the market is pricing in ~1 more rate hike before the Fed reverses course [1 - chart][2 - source data].
> unwinding its previous QE programs
It remains to be seen how aggressively the Fed will continue unwinding, but I'm curious how much balance sheet the Fed will actually be able to unwind. They've been rolling off ~50B in UST per month [3], starting from ~4.5T. For perspective, the Fed's balance sheet was ~800-900B prior to the GFC. There's reasonable concern that the Fed may not be able to reach pre-QE levels. The money stock appears to exhibit response to the Fed's balance shit reduction [4], which will not help foreign borrowers.
> Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default.
It looks like loans have been refinanced such that the bulk of them mature in 2021 or later [5], giving issuers some breathing room for the time being.
[0] https://www.cnbc.com/2018/12/19/fed-dot-plot-december-2018.h...
[1] https://imgur.com/a/43Gt8si
[2] https://www.barchart.com/futures/quotes/ZQ*0/all-futures
[3] https://www.cnbc.com/2018/11/29/the-fed-is-still-tweaking-it...
[4] https://imgur.com/a/RA62s4e
[5] http://www.leveragedloan.com/us-leveraged-loan-maturity-wall...
As Taleb puts it, executives at these companies don't have "skin in the game". Increasing shareholder value short-term is lucrative especially when their own compensations are tied to short-term stock value gain.
Another part is lack of progress in executive education. While engineering as a discipline have constantly improved by introspection. No such thing have happenned in business management area. It's all about maintaining the status quo and appearing in controls even when they are nowhere near it.
> If amount of money is fixed, then this problem will go away on its own.
There was a time when this in was in fact the case. It was known as The Gold Standard and it basically required governments to back up their currency with an equivalent amount of gold.
The Gold Standard ended when it was abandoned by the USA.
Basically the USA did start to print money and they didn't have the gold to backup that printing press.
Basically when retail banks need money they get it from the Central Bank through the Open Market Operation.
What happens is the retail banks offering up theirs bonds (which are assets), and the Central bank effectively buys (or sell) these bonds using a swap or repurchase agreement.
The retail banks then use that money to offer up loans to the public.
So the Central bank has the ability to print money by being prepared to buy up these bonds (using money that is effectively printed), but retail banks don't have that ability.
Retail banks and companies can do something similar by offering up their own bonds and selling them to investors, however should that organisation go broke the bonds take on junk status which basically means any investor that paid good money for them has lost the money.
For these transaction the money being used is real money.
You walk into Friendly Neighborhood Bank and ask for a loan, and since they’re friendly they make the loan. Now, what does that mean? From your perspective you now have a liability (the loan) and an asset (money in a bank account). From the bank’s perspective, they now have an asset (the loan), a liability (your bank account), and an income stream (the interest payments).
The bank didn’t have to move any money around from the Fed or other people’s savings accounts to make this happen. They just entered the debits and credits into their system and boom the money appears in your account, just as good as any other money. They literally created it out of thin air.
If you go to your Friendly Neighbourhood Bank for a loan they are giving you their money, so you can then give that money on to someone else.
Now the bank is not so friendly that it gives you their money, instead they offer to lend you their money, on the proviso you pay it back in full and with interest.
For example lets say you want to buy a new car, so you go to the bank to get the loan.
The bank transfers the money to pay for the new car to the car dealership and you end up with a new car and a whole lot of debt.
They create that money by crediting your checking account (their liability) and debiting your loan account (their asset).
Also your loan account is not a bank asset, it is a bank liability.
It is money the bank might not get back.
I'm not sure which part of the GP you're disagreeing with.
Fractional reserve is exactly that banks lend out a fraction of the deposits that they take in (the rest is kept in reserve).
The only reason it looks like money is created is because people (and economists) think of 'money in their account' as real money, when in fact it's just a IOU from the bank to you (possibly guaranteed by the government).
If you think of money-in-your-account as actually a debt the bank owes you, then it becomes quite clear that banks don't create money any more than lending money to a friend creates money. And there is a sense in which it does - lending money to a friend results in your friend having money and you having an asset (an IOU from your friend) that you expect to be able to use at some point in the future, so there is a sense in which the sum total of wealth has increased by the value of the IOU.
Isn't it a multiple instead of a fraction? Banks are required to keep in reserve a small percentage of the actual amount being lent, which means that they can lend a multiple of the money they take in.
https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...
http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_...
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Banks, just like all institutions have to account for their money, hence the reason they employ accountants.
Those accountants all use the same accounting rules, rules that were in fact invented many centuries earlier by the monk, Luca Pacioli.
Those rules form the basis of double entry book keeping, which boils done to a very simple rule that for every credit there must be an equal debit.
What you are describing does not follow that rule because you are saying one credit can result in many other many other credits.
What you describe reads more like a pyramid scheme than a banking system.
You are confusing two things about money creation: which entity decides to create the money, and which one carries the book-keeping entry that creates it.
In the US system, it is member banks that decide to create a loan. The money that is loaned is some combination of their own deposits, and money lent them by the Federal Reserve. The details of how much money they need to keep on deposit, how much is "their own", and how much the Fed provides are governed by FR rules.
So, it is indeed banks that make the individual decision to create money by giving a loan. The FR is merely the book-keeper for that decision and the rule-maker for how the system at large works.
Oh, and last, it is the US Treasury that actually prints currency. But we're all talking about the more abstract concept "money".
[0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
The issue was that the banks held this debt, which means when there was an issue, they would become insolvent, which would lead to a financial crisis like the great depression, which is why government intervention was needed.
$1.2T of outstanding debt is high, however, not very relevant without knowing who the debt holders are. And as the article states, the primary big banks aren't overly exposed to this debt.
Additionally if the debt isn't leveraged on top of the outstanding loan amounts, again the damage from a potential crisis in this area will be very contained.
As the article states a lot of this exposure sits with private equity funds and hedge funds, which would result in very little impact to the average citizen if there were an issue.
In regards to the Michael Burry comments about fraud, that was specifically related to a bubble. That one of the surest signs of a bubble is out right and rampant fraud. This is critical because when a bubble occurs it means that mass hysteria sets over the general population as neighbors see people "dumber" than them making money. This leads to rampant speculation across the board, which then leads to bad actors committing fraud. They commit fraud because the incentives are high to make a quick buck.
A loosening of debt requirements, while a bad idea, doesn't qualify as fraud. There also isn't general speculation that is associated with a bubble, which was one of the main ingredients for the housing mortgage crash as well.
So while there maybe an issue here if defaults occur those issues will be very contained. There maybe some hit to the general financial markets, but nothing even remotely close to what occurred with the housing crisis.
This is basically the equivalent of saying that any debt that shows loosening guidelines and floating APR is the same thing as the housing crisis, which isn't accurate.
That reads like a description of SV. Mass hysteria - check (eg. BTC, shitty startups)! "dumber" people making money - check! rampant speculation - check (eg. Uber IPO valuation of 120B, bay area shacks going for millions)! Actors committing fraud - check (eg. Theranos, Zenefits)!
So can we say that SV is in a bubble, maybe confined to the tech sector?
Bubbles gain steam by being accessible. The more people that get involved, the larger the bubble becomes. It isn't a ponzi scheme, but acts like one in many ways.
ICOs were well on their way to becoming a bubble, but being pegged to the price of cryptocurrencies, the bitcoin bubble popped before the ICO bubble really took off.
But if you look at the ICOs there was rampant fraud. Basically people writing white papers, with no real companies or products, and then raising millions of dollars. Very similar to the dot com bubble.
SV in and of itself creates a tremendous amount of value. Sure there are some spectacular failures, and some questionable investments, but overall there is value that is created. Without getting into any morality discussions, but purely looking at revenue, profitability, return to investors, companies like Uber, Facebook, Twitter, Airbnb, Tesla, and so forth have created tremendous shareholder value.
When you some a "stupid" app raise $5MM it really isn't much considering how much these other companies have raised, the revenue they generated and so forth.
So SV is definitely not a bubble per say. You could make the case that some valuations are inflated, but that is a sign of the macro market where SaaS companies are enjoying their largest revenue multiples ever, but if that corrects there will be a rest of perhaps 30-50% in market cap, but no where near total collapse.
Additionally these companies do have underlying products, services, benefits, and revenue.
You could say there is hype, over valuation, and so forth, but we aren't anywhere near bubble territory.
e.g. South Sea Bubble, Railway mania, .com etc
Facebook yes, but how many of the others have paid any dividends to shareholders? Even these "success stories" seem to have valuations that are based mostly on speculation; plenty of investors have made money but they could have just been selling to "greater fools".
The problem with the housing crisis was that the ratings agencies were committing fraud and so where the banks.
The ratings agencies were simply labeling too much risky debt as non risky.
While, the banks were committing their own fraud by taking less than triple AAA debt, packaging it together, and then saying that if you buy pools of B debts, because they are separate pools you are de-risking, so different B-rated debt pools should be rated as AAA because they are "de-risked".
So in this case as long as the ratings aren't fraudulent, the risk is properly stated and understood, then repackaging and selling is fine.
The second piece, which was really where the problem became "too big to fail" was that each one of these debt packages were doing resold through insurances 10 to 100x, so the total outstanding liability was not the original debt, but something like 100x the actual debt.
Again, if that isn't the case here, then any debt holders will just have to deal with whatever defaults occur, but if hey are PE and hedge fund firms that own half of that debt, this won't be felt across the broader economy.
The subprime crisis was precipitated by a lot of people taking out mortgages with either blatantly or coerced false income information in their mortgage applications on homes that had inflated values. Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments.
Leveraged loans at 7x ebitda are still less leverage than someone taking out 90% LTV mortgage (90% LTV can be thought of as 9x leverage against your equity). Companies usually also have more flexibility to increase their income, or decrease their expenses compared to an average person. And mortgages have required amortization where as most levered loans to my knowledge are interest only.
All in all, unless a significant % of companies taking out levered loans are submitting fraudulent financial filings, this is nothing like the subprime crisis.
Whereas what, companies would never utilize non-standard accounting methods or falsified or exaggerated earnings reports or forecasts?
Also, it was not really single family home owners that defaulted in mass. Investors, even those with prime credit ratings, were much more likely to default than non-investors when prices fell.[8][9][10] https://en.wikipedia.org/wiki/Subprime_mortgage_crisis
People talk about subrime morgages as if they meant poor people. However, largely it was people buying up large numbers of homes and then strategically defaulting that caused the real damage.
The subprime mortgage crisis is in fact an excellent example of systemic fraud which happened in the US, fraud committed by ratings agencies (AAA CDOs) and banks (autosign). The system was corrupt, and probably still is - the incentives are all wrong.
Banks didn't care because they were going to sell off the mortgage and they didn't care about the underlying stability of the loan
From where I'm from, physical collateral is valued more highly than paper collateral that can go to zero if such a companies earnings per share are already less than 0…
Although the companies with these levered loans are a lot smaller than S&P 500 companies.
[0] https://www.marketwatch.com/story/heres-the-shocking-truth-a...
Netflix isn't an S&P 500 company?
What actions do companies have available to them which consumers do not with regards to income or expense management??
Public companies have the capability of selling treasury shares, and also diluting all shares and selling the newly minted shares
Public and also closely held companies also have the capability of offering new corporate loans on specific revenue streams
Finally, both public and closely held companies have a greater timeline. They issue 5-10 year loans in a good market and low interest environment, pay low amounts of interest for several years during a bad market, and then issuing new loans in a good market again.
And of course, bankruptcy not affecting the cash finances of any particular person in the company, or that individual's ability to acquire new credit. While the company entity itself takes the temporary reputational hit.
Money flowed freely b/c the mortgages didn't matter. It was the ability to bundle the mortgages and leverage them that fueled low-standards and drove much of the lending frenzy.
>The subprime crisis was precipitated by a lot of people taking out mortgages...these people were no longer able to make their mortgage payments
No. Again, mortgage debt alone was a mere fraction of the problem. Those loans were levered up many multiples through CDOs and other exotic instruments, which was the real problem.
In 2008 there was a lot of effort made to blame poor people/subprime debtors. But, it's been covered ad nauseam since then, so it's kind of surprising to hear someone still making those claims in 2019.
But, that's the not the predominant issue for many reasons, some of which are embedded directly in your statements. For example:
>rated on the assumption that the borrower's default rates were consistent with historical default rates
Why would they be rated as such if the viability of the underlying mortgages was not, in aggregate, consistent with those that produced the historical rates?
That alone tells the story.
The derivatives drove the outsized lending which ballooned the number of riskier subprime mortgages in the first place. Then, the many layers of leverage just exacerbated the problem.
At the end of the day, increases in subprime loan defaults could have been weathered. The derivatives were responsible for turning a containable downturn into a full-blown crisis.
>derivatives were created and rated on the assumption that the borrower's default rates were consistent with historical default rates.
The historical information was wrong because the issuer of the subprime loans hid bad loans given to people with thin credit histories.
People who work in risk and compliance NEVER get promoted to the top because they are cost centers, and prevent other people in the company from getting that huge payoff.
It was a cop out though. I think no one in the banks thought to challenge that. Now they do but previously they didn't
Also, most leveraged loans (i.e. institutional term B loans) require de minimis principal repayment in addition to interest (1%/year).
This article describes some of the addbacks in more detail (scroll down to the section entitled "EBITDA add-backs and other adjustments"): https://www.hoganlovells.com/publications/the-evolving-ficti...
Yes but this was exacerbated because it wasn't as many people as what you said seems to suggest.
The investment banks were so highly leveraged on the collateralized debt that it only took 7% of the mortgage holders missing payments at once to bring down the whole financial system.
This suggests that the vast majority of people lying can actually be trusted to make payments, and would prefer to not be shut out of the credit system.
https://www.chicagofed.org/publications/profitwise-news-and-...
It is easy to make fundamental predictions in finance. It is impossible to predict timings.
> Once home prices stopped going up as much and interest rates started increasing, these people were no longer able to make their mortgage payments.
When was the last time you looked at the Case–Shiller index?
People assume that the least risky debt (sometimes called super-senior) is worth its face value. The problem is that when things go wrong, investors lose confidence in the valuation of the debt. And suddenly a bank with say $1T of super-senior debt finds it is only worth $100B on the open market. And that means that the bank doesn't have the assets to back the loans it has made - so has to raise money by selling things. Selling things when you are in trouble is never a good idea, as you are forced to accept a discount. So you now have the market flooding with cheap assets (say securities), which then drops the value of the securities that other banks hold - which gives them problems in backing the loans they have made. Then they have to start selling.
And that's how a financial earthquake begins...
Do the companies you mention have decent revenue, even if they also have debt?? Your situation is one many of our customers would love to be in.
Odd a business would struggle to get something that small.
It being that small is part of the problem.
Your potential ROI for a 10k loan with anything resembling a normal rate is pretty small. There's not much money to be made, which means there's little incentive to take risks.
And then they'd have to teach him that those tiny loans are how they grow / maintain their business with the local businesses, and farmers. They're small but doing things efficiently, safely (risk wise), but also quickly is how they gain the locals trust and loyalty.
Big banks show up and are all "naw we don't do that" and just don't catch on with the locals.
At least in the areas that their branches operate it has been effective for decades, the locals in those areas really like local banks, other places maybe not so much.
So if I've got 10k to loan, I'd rather loan it to some poor sucker that I then own, rather than to a business that might disappear tomorrow.
People, you can hassle them forever.
Kinda sad how that is.
The mortgages of 2008 were to the real problems, the sudden lack of liquidity in the markets for trading them was. Sure, some mortgages were hurt, and the housing market went down, but the problems with those securities were illiquidity brought on by the difficulty in valuing the derivatives. Corporate debt is somewhat easier to price, because disclosure is better/easier.
Still. I am not rushing out to invest in these securities now...
Can you please elaborate and/or provide a source? I’d like to learn more.
For me the whole situation is really scary.
Inflation Deflation
[1] https://www.cnbc.com/2018/12/10/goldman-sachs-warns-of-a-sha...
[2] https://www.reuters.com/article/uk-global-forex/dollar-falte...
[3] https://www.zerohedge.com/news/2018-10-30/corporate-debt-bub...
[4] https://www.bloomberg.com/news/articles/2018-11-19/corporate...
[5] https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s...
[6] https://seekingalpha.com/article/4225847-corporate-bond-mark...
--edit--
I also find it amusing, in an ironic sort of way, how the Austrians get a bunch of flack for not accurately predicting future events when large parts of their economic theory is based upon not being able to predict future events.
A more interesting question to ask is why we shifted from the student loan crisis to corporate debt as the very-definite-hiding-in-plain-sight cause of the impending crash.
(Full disclosure. Not an economist)
The great depression seemed to have ~5-8 primary causes to it. These causes came from many different directions and converged on a single year (or handful of years) in time. Since then, the recessions we've had have seemed to have occured due to a single or unitary primary cause. That is, they did not seem like the convergence of a multitude of quite distinct causes. A problem here is how fine a line you draw between separate causes. On one interpretation, there was a convergence of a multitude of causes leading up to 2008. The only thing I will say here is that the multitude of causes for 2008 seem much fewer in number and distinctness than 1929, and our present situation feels more similar - in that way - to 1929 than 2008.
If it’s this week it will go something like this:
1. People realize that they aren’t getting their tax returns because of the shutdown and it has an outsized effect because consumer savings rates are low. Market wobbles.
2. Treasury issues short term debt at high yields and long term debt at low yield yields Thursday, market crumbles Friday.
3. Fed meets next week to discuss the debt window and if they need to slow down QT or go back to QE. They don’t know. Market goes volatile.
4. Government shutdown ends at first sending stocks up. Then key economic data releases showing consumer spending is going to be weak because real wages were down.
Anyways, it’s more likely we’d have to see a couple of blue chips go bankrupt first like a big state utility company or a classic old American tech company.
When (not if) the market crashes again, it will happen MUCH faster than previous crashes due to increasing automated trading and general speed of news. Expect a flash crash within minutes instead of days. And, if there is a halt in trading it will crash even faster.
The last recession started at the end of 2007 yet we didn't really start feeling it until well into 2008.
Financial collapses are more like earthquakes. You never know when they will happen. But by the time they happen, it's too late to get ready so you better be ready to avoid a major disaster beforehand.
https://www.nasdaq.com/investing/glossary/l/leveraged-loan
FT offers a more technical view of the phenomenon. Yesterday:
https://www.ft.com/content/64c9665e-1814-11e9-9e64-d150b3105...
Disclaimer: This is a terrible idea. Don't do it.
Edit: Explanation because i'm getting downvoted. I live in Utah. Our prices have increased quite a bit in the past couple years. The first bit of increase was justified by the increase in high paying tech jobs, but then sellers got greedy. We're currently in a stalemate where nothing is selling because sellers want unrealistic prices. That's not a bubble, that's a market correction.
I don't know your real estate market, but real estate seems to be in a bubble basically world wide.
A bubble can easily predicted when looking backwards. Regarding the future: The Case–Shiller index does not make current US real estate prices look like a bargain.
I believe it should be going up (more people?), so how would you use it to argue US Real Estate prices are high?
> ...but then sellers got greedy. We're currently in a stalemate where nothing is selling because sellers want unrealistic prices.
Technically...buyers make the market. Without a willing buyer it's all just wistful thinking.
The real question is if the prices are truly unrealistic or are they necessary to ensure the seller isn't losing money on the deal?
So now sellers are wanting the prices that houses sold for in the spring, but there just aren't enough buyers out there that can stomach that. And certainly not enough salaries out there that can stomach that.
Everyone wants to get paid, but no one wants to pay.
Since ones in power have more control, the top end up keep getting paid more, while the lower ends keep getting paid less.
One example would be equity firms.
They buy a firm with borrowed money, and in order to pay back the loan, interest on the loan, AND make a profit, they apply the expensive knowledge learned from fancy MBA schools (that charge bucks) and lower cost and increase profit. And lowering cost always means paying less to employees. And increasing profit means charging more.
Little do the super rich realize, that soon enough there will be no middle class to buy their stuff/services. And eventually the rich/superrich can only sell stuff to each other, while us peasants watch on smartphones from our slums using youtube service and enduring all the ads since we can't afford the $20/month to hide the ads...
/sarcasm
Edit: Not the quote I was looking for, but maybe pithier: "The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop." Beckoning Frontiers, Marriner Eccles
Edit: Here's the one I had in mind, written by Fed Chair Eccles in 1933:
"It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment."
- https://www.nakedcapitalism.com/2011/09/marriner-eccles-on-t...
> "Communism? Hell no! ... This plan is the only defense this country's got against communism."
His was less of a "using poor people is helpful to the rich" argument than an "abusing the poor is going to create violent revolution", but both arguments stem from the same source. The cynic in me says that lines like these were easier to sell back when the idea of automating most of workforce wasn't quite so real. If the rich people of the future can get everything they need and want by owning technology - through patents, tech investments and physical technology for self-defense, why would they care if the rest of the country can play the poker game with them? If they have enough chips, why not just trade them among themselves forever? There will be nothing left to gain from letting other people buy-in significantly and there is no significant risk from refusing them.
A place I used to work brought in a new GM who, after nearly a year of attending meetings and taking notes without contributing anything of any perceivable value, made his grand proclamation of how he would build the company into a mega-profitable mega-corp:
He would reduce expenses (by screwing the employees).
And increase profit margins (by charging customers more).
And increase earnings (by making more sales).
Genius! No wonder he got paid the big bucks.
This, mind you, was at a company which built mining equipment. During the end of a massive slump in the ore market for the types of mines they serviced. At a time when the two major customers had both publicly announced 30%+ reductions in projected outlay for equipment.
And no, it didn't work.
All of this ties into candidacy announcements for 2020 presidential elections, and people are doomsday prepping for that one, since the ground is going to shake no matter the outcome, this time around.
Stocks are currently over valued: see Nobel prize winning economist's CAPE ratio.
[1] https://www.nytimes.com/2014/01/22/business/economy/the-cost...
The public is put upon to absorb losses but is never issued the gains made.
It goes on to claim revenues that make up the difference in the stated amounts.
However, I don't see them say these figures are inflation-adjusted. 2018 dollars are roughly worth 83 cents in 2008 terms.
More importantly, those Propublica stats cover only TARP and the Fannie Mae / Freddie Mac bailouts. It counts the fake "profits" on the GM bailout[0] but not the losses on the losing end of the GM reorganization split[1], serving to bail out union pension plans.
[0] https://hubpages.com/politics/Obama-General-Motors-GM-Tarp-B...
[1] https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reor...
When systemic risk is realized, those who took too much risk take with them much bigger number of people and businesses that had nothing to do with it. For example, you might not be able to withdraw your money, or completely profitable manufacturer can't get a operating loan to buy materials to make a products with high demand.
Guess what happens then.