Mortgage debt will probably not be a problem in this cycle. People have this bias to remember most recent event, but it's rarely the same thing twice in a row: https://imgur.com/a/0dT7iHK
And frankly with the amount of outstanding US govt debt and underfunded pension & healthcare liabilities the USD may either get dethroned and devalued or sent into the negative interest rates purgatory like Japan is currently living in. Japan cannot possibly ever raise rates, at 2% rates 100% of their tax take will go towards paying the interest on their 250% national debt.
Add to that the history of Smoot-Hawley and the general outlook of the 1930s ...
There definitely seems to be motive and opportunity on the housing side though right? Student debt among other things is high and not many 25-35yo people are buying houses but there's a lot of cash chasing returns. These mortgage backed securities are always seen as a reliable way to make a buck but nobody is questioning the market because "It'll never happen the same way twice".
Is there a reason why Japan shouldn't monetize the debt? The usual explanation is that it would cause inflation, but I'm not sure how that works for government debt that trades near 0% anyway. It's a tradeable store of value that you can trade 1:1 for money, so might as well be money?
Bernanke was pitching them this idea. He suggested the Japanses government issues zero-coupon perpetual bonds and the BoJ buys them. Ha, ha, "bonds".
As crazy as this sounds I think it makes sense - just admit honestly that the situation is fucked up, monetize, generate stagflation and eventual normalization.
It seems like I'm missing something basic. I would like to understand when the inflation happens and where it comes from. More money chasing fewer goods, sure, but if we already have too much of a money-equivalent, why aren't bondholders chasing goods with it already? And, clearly there isn't any inflation.
It seems like demand should have increased when the government sold the bonds and spent the money.
You and everybody else. Japan's current situation seems to stump most economic models.
I wonder if there's something about culture and having basic survival needs met. Most economic models assume effectively unlimited long-term demand: as productivity grows and people in existing sectors are thrown out of work, they will find new things to do, and the people who have reaped the financial rewards of productivity growth will find things that they want to spend money on, creating new jobs for the previously unemployed. What if this doesn't happen? What if instead of using money as a means to an end, people use it as the end itself, effectively treating it as a scorecard to be maximized without spending it? And what if on the other end, instead of people finding new ways to obtain money, they opt out of the economy instead, creating alternate games (literally - video games are apparently the main extra-economic outlet) to play. With basic survival needs taken care of by parents, there's no forcing function that makes them participate in the economy. You'd get a reality that looks fairly similar to our actual reality, in Japan and increasingly in other developed areas of the globe.
>What if instead of using money as a means to an end, people use it as the end itself
This line got me thinking about so many things from my own life. You opened my eyes to another view point I had missed for the past 10 years. I am truly thankful to you for posting this comment.
I would be really grateful if you can let us know your thoughts that if interest rates go to zero, would the asset prices continue to increase to infinity?
I've thought about negative interest rates specifically at length, and I can't imagine a situation where they don't lead to a chaotic breakdown in capital markets or even a currency collapse. The problem is in the compounding: normally there's a negative feedback loop against borrowing too much because you have to pay back more than you borrowed, and if you don't, you go bankrupt and can't borrow any more. With negative rates, there's a positive feedback loop: the more you borrow, the more you make in profit, so everybody is incentivized to borrow as much as they possibly can, nobody wants to pay anything back, total debt increases to infinity, and with it the amount of money in circulation and asset prices also increase to infinity. Additionally, the most profitable sector of the economy becomes borrowing money, so all productive work stops and people focus on financial gains.
This is pretty much the definition of hyperinflation, so there's a template for what happens here, but not in the developed world.
I suspect that a lot of the demand for Bitcoin is also driven by fear of this scenario. In the world above, the incentive for savers is to simply not play in the established financial world; they'll take their savings and put it in assets that are not rapidly going to zero. If only there were a transferrable currency that's deflationary by design and immune to manipulations of supply & interest rates...
> I would like to understand when the inflation happens and where it comes from. More money chasing fewer goods, sure
It comes from weakening the perceived future security of the currency, which reduces demand for it; once you monetize fiscal needs, your currency is perceived as one more at risk of being devalued to monetize fiscal needs, which itself devalues it.
So it's all about perception? The Bank of Japan has been trying to credibly promise 2% inflation for a while and failing [1]. Maybe if they monetized some of the debt, people would take them seriously?
Japan however is shrinking in population and missed the whole baby boomer generation for obvious reasons. Without the population growth, they can't grow their GDP to get their debt levels in a reasonable range.
But on the flip side, being unable to pay the interest on your debt and also being unable to show any sign of growing the economy enough to fix its structural weakness has the same effect. It at least seems like an either/or situation at this point.
So if the USD becomes weak, who out there could be in a position to become stronger? I don’t see any candidate. Euro growth is weak. CN bookkeeping’s suspect...
IMO Americans are biased to overweight this. It doesn't matter as long as China can keep up appearances better than other countries for long enough. Investors will happily invest in a bubble believing that they are smart enough to get out before everyone else if things go south.
Bad bookkeeping doesn't keep the NBA and Activision from kowtowing to China, I don't see why it would keep people from investing there either.
One of the many Buffett-isms is to only make investments where, if the market were to close for five years, you'd sleep well. It is that premise that shapes my investing theses relating to China.
1. Yeah plenty of non-Americans think this too, _maybe_ if you said “westerners” it’d be defensible, but it’d still be wrong.
2. The nba & activision are selling goods to China, or maybe they put a little money into real assets to reach that audience. They’re not investing in Chinese financial instruments which is what the entire thread is about
I don't see the distinction. If they have Activision, Apple, Tesla and Disney as customers why wouldn't banks, financial markets and investors trust them? I would argue they already do, I highly doubt China has trouble floating debt or attracting foreign investment right now.
Why would investors not want to invest in a country that flush with liquid cash? I don't see how this is an argument that investors wouldn't see China as desirable.
By all means, investors want to put money into China. It’s the amount of money you want to put into an immature market that is the question. And that’s not a dig and it’s not jingoistic, it’s just a fact, when you run a large market for over a century you kinda build solid foundations that can’t just be replicated on the spot. China’s market developing is a great thing but it’s just too young to seriously think it’s ready to be a reserve currency today.
Americans aren't the only ones to overweight the shady monetary policy in China, and as a result it'll not become the defacto standard like the US Dollar is, as long as that shadiness remains.
Such as who? I agree with GP and still think this is biased projection. Factors such as growing trade control over APAC and a middle class larger than the population of the U.S. only speak in favor of the Yuan. Also, what you call shady currency control can be viewed as a be a signal of ensuring stability.
If the USD is stronger than it should be, what should happen is that the USD becomes weaker, that is, that every other currency becomes relatively stronger. None of them need become the new "stronger than it should be". They can just all move up relative to the dollar.
India, still a youngish population compared to China but with 1.4 billion people and still rapidly developing. Also helps they're strong in service industries, deliverable to the world.
I grew up in India and have family in India. India is not ready for PRIME TIME not in my life time.
It's complicated, its nation of nations. Still caste is a still is strong basis of political patronage. It has come a long way, but has long way to go!
India's Navy is a joke, Airforce is a flying junkyard and Army is an amalgam of bad ideas, and pension commitments.
I do not see India going anywhere. India has been hope of Asia since 1950s, and it will remain that way into 2050!
Queue the ZeroHedge style conspiracy theories and watch the sparks fly. That idea of a dethroned dollar is interesting, any thoughts at was is likely to take over? The Euro?
Consumer debt (auto loans/credit cards) spooks me more than corporate debt, since that's the tentpole that's kept up spending with stagnant wages. Auto loans are especially sketchy, it's way too easy to buy a car you can't afford.
Going through mortgage application now, they grill the shit out of you on every little detail of your life now. They're aware of the last crash, and have done a lot to compensate.
On the other hand, I recently sold a house that received a lot of offers. Only one person actually had the down payment money. Everyone else's loans were approved, but most were people were coming with low cash and lower income than I would have expected. Some looked like irresponsible loans to me.
When I was a whippersnapper 15% down was considered pretty low. These days you can get pre-approved with less than 10% down and no validation that your downpayment isn't a loan itself. Kinda crazy.
Why would I tie up funds in a mortgage where I can make more in the market with those funds? Just have to make sure I actually put my funds into the market, heh...
This was in Colorado. The market's hot, and I think that's in part because people are afraid that Colorado is going full California on real estate. They want to get a piece while they still can.
When you sell a house and the buyer is paying via mortgage, do you get paid cash by the mortgage company in full (the purchase price) at once, or do you receive a monthly amount from the mortgage company that sums up to the house price you sold for?
Why would you be involved in their loans at all, if you're the seller of the house? How would you know what they were putting as down payments or what their incomes were?
I was given the information to help base my decision on which offer to accept. The idea is that the better qualified buyer has a better chance of actually closing. I thought it was a little strange as well. Each of my offers came with details about their financing, and in a few cases, the buyer's income information.
I was one once, they may sort of be right. Gold will never become a "standard" again, but it could be extremely useful for preserving wealth from one standard to another.
Gold has always been touted as a hedge against inflation, it's not, it's a hedge against financial system instability, inflation being a major symptom of such instability.
Since around 1970 (US leaves the gold standard) gold has slightly outpaced inflation according to the US BLS inflation calculator [0].
Calculator thinks $6,000/kg => $41,000/kg, actual price $6,000/kg to $48,000/kg. That makes sense because 'true' inflation (consumer goods + assets) probably outpaces official inflation (consumer goods only).
Gold can't exactly get more or less valuable over time. It is a rock. We have no practical uses for it.
Gold can't exactly get more or less valuable over time. It is a rock. We have no practical uses for it.
My impulse to point out that it's a very useful metal is tempered by my surprise that only 10% of gold production goes to applications where gold does something other than look golden or just exist as a physical store of value. It seems a little silly. Gold mining is quite destructive; environmentalists should fly around the world, giving speeches on the worthlessness of gold, but where's the glamor in that?
Yeah, it would have lots of uses if we had industrial quantities of it.
> Gold mining is quite destructive; environmentalists should ...
If it makes you feel better, it is common for gold to be found as an enriched layer sitting on top of a copper deposit. So a big chunk of gold mining isn't gold-for-gold's sake, it is something mined on the way to a much more practical substance - copper.
Actual gold mines doing environmental damage are a thing (cyanide ahoy!) but the footprint is small and hopefully not important.
I'd put my bets on student loan debt. The push for forgiveness is so strong, there must be some other force at play--something more than just pandering to millenials.
It's more than just pandering to millenials. This is also about pandering to Academia.
Depending on how the student loan bubble bursts, it could wind up with a number of institutions being forced to shut their doors, or make large cuts to staff/programs/etc.
Student loans are basically a variable tax to attend college. There should be a relief valve of pay like 10% extra in taxes until the principal is paid off. People paying interest on the loans can get a tax deduction for the interest as well (it actually makes no sense to have interest on the loans because that interest is going back to the Feds in 90% of cases).
that's also what they said about residential mortgage debt in 2007. never underestimate the bankers' ability to use one large batch of shitty loans to back an even bigger batch of them.
> Mortgage debt will probably not be a problem in this cycle.
Disagree if you consider that many people are getting mortgages on overvalued properties at or near market peaks now, and in another significant downturn those could easily be underwater by 15%-50%. The same thing happened widely in the prior real estate bust in many trendy areas, leading to many foreclosures.
I only see this happening in exploding tech markets like SF, where the impact would honestly be minimal - some people might have to downsize but we wouldn't see mass unemployment or homelessness/crippling debt like after 2008.
FTA: "There are more than $27 billion of outstanding bonds backed by non-qualified mortgages now, a small fraction of the approximately $10 trillion mortgage-bond market. In 2007, there were around $1.8 trillion of bonds backed by loans to non-prime borrowers."
I'm gonna need to see a lot more than a tiny fraction of investors / loan makers dealing with non-QM bonds before I'd say that 2007-era silliness has come back.
This looks a lot more like some banks filling in the gaps in the QM market than anything else.
The crisis was caused by lying about the kind of risk hidden in collateralized bundles of debt. That doesn't seem to be an issue this time. It's just about the inherent dangers of lots of people moving in to homes they can't afford to pay for.
I'm a founder and have been getting spammed hard-core lately for small business loans. There are many companies offering 5-6 digit business loans and revolving lines of credit to basically anyone who can fog glass, and there are salespeople and spammers pushing them. I'd say I average 2-3 e-mails or cold calls per day. Feels like they're trying to stuff loans down my throat.
I've spoken to other founders and small business owners and they say similar. I've also heard anyone who can fog glass can get a car loan.
It reminds me a lot of how people were being basically nagged and cajoled into taking out huge mortgages in the early 2000s. There seems to be a lot of demand again for debt mystery meat to make debt sausages.
Many people are warning about the growth in corporate credit, even Jerome Powell admits that it's not rosy there. Fully 45% of BBB rated bonds (lowest and largest in investment grade spectrum) should be junk rated today if judged by leverage ratios alone:
And then you have non-systemic but ridiculous things like Brex which issues credit on revenue data alone. Revenue is meaningless, Moviepass had great revenue. And those robocalls you're mentioning. Try a Google search on "revenue based credit" on a mobile phone from the US and read what are the ads saying ...
Sure, just like mortgage loans are based on things like credit score and income. I just don't see any sign they're checking much. Reminds me of mortgages in 2003-2007.
> Fitch says such documentation may offer only partial verification, and these borrowers could have unstable income because, for example, they own small businesses.
This sounds more like "small business owners are underserved by QM products and more risk-tolerant investors are filling the void," much more so than the "it's 2007 all over again" tone of the headline and parts of the piece.
Investors knowingly chasing risk with these junky bonds is perfectly fine. In 2008, investors were defrauded by ratings agencies and bond creators who masqueraded junk mortgages as gold plated, at massive scale.
Chasing yields in the age of efficiency is going to lead to another global hangover that defies common finacial wisdom, guaranteed.
Business models that exploit consumers seem to be some of the only plays with any movement or staying power during the current innovation wave, but prosperity fueled by debt can only go so far.
We'll see how the "decade of sustainability" (2020-2030) pans out, but if greed turns to desperation, its definitely going to get messier/wreckless/more complicated.
> The strength of the housing market has helped support the bonds for now. Home-price appreciation has slowed over the past year, but the average U.S. house value still rose more than 2% in August from a year earlier, according to S&P CoreLogic Case-Shiller data....
It's odd when articles like this don't specify whether the increase they're reporting was inflation-adjusted or not. It makes a big difference. If not inflation adjusted, then 2% represents almost no increase given the trailing 12 month CPI change of about 1.7%.
> Lenders have bundled more than $18 billion worth of these loans into bonds this year that they then sold to investors...
Compare this to the ~$17 trillion of mortgage backed securities that existed prior to the financial crisis. $18 billion is peanuts, and hardly a systemic concern.
Risky mortgages and delinquencies were only a problem because:
the lenders* themselves had borrowed too much
the lenders didn’t know they had borrowed so much
the ratings agencies were not judging the merit of the investments that lenders had invested in
*by lender I mean the ultimate party reliant on payments from the mortgage borrower
much was done to add transparency and safeguards to that specific issue, so just because lending standards are loose again doesn't mean there is systemic incestuous exposure to losses and collateral calls to the world’s most financially important institutions
It didn't really, it sold off initially because it was "up", people sold winners in order to cover losses and gold was one of those winners. It didn't peak until 2011 at around $1900 and had risen from it's lowers in the early 2000's.
Up to 2006 gold was priced less than $20,000/kg and after 2010 it has never dropped below $35,000/kg.
Anyone who had any large % of their wealth in gold felt & feels very, very clever. Saying 'tanked' is appropriate for day-trader thinking but for investors (which in my book implies return periods of 5-30 years) looking to preserve wealth they'd barely notice.
The problem is that gold is not a hedge against market risk, it’s simply (mostly) uncorrelated to equities. If you’re specifically trying to mitigate the possibility of a large market downturn, gold isn’t necessarily going to help you at all. Instead you should look into assets that have a negative correlation with equities. Bonds are a good choice but are more strongly correlated than they once were with the market. Or you could go witb some sort of portfolio insurance: VIX futures, index puts, or whatever. I personally wouldn’t recommend them though because they are almost always a rip-off (more natural buyers than sellers).
On the otherhand, if all you’re looking to do is lower your volatility, gold isn’t a bad choice. Whenever you diversify into different investments you alwaya reduce volatility as long as the correlation is less than one. Though if that is your goal, maybe consider investing in many different metals, as well as crypto.
At least for me, there's not a huge gap between "all the other investments crater to the point that my 10% in gold is useful" and "oh boy looks like things are collapsing now", if that makes any sense.
It’s a very risky bet for sure. But there is a very small possibility central banks will go back to gold standard to instil confidence during a Great Recession when markets fall by 50+% in a very short time.
Personally, I'd take central banks heading back to the gold standard as a massive signal that things were about to get worse, not better. It'd be like having your oncologist suggest enrollment in a phase-one study - they aren't doing that because the outlook of a patient in a phase-one study is good, but because the alternative is worse, and now they're reduced to trying for a hail mary.
Gold is able to support entire global GDP and also growth. It all depends on the price. With current gold price a return to gold standard would be a disaster and would bring on the greatest recession of our lifetimes.
But at about 10k price gold standard starts to make sense. The idea is that during the next big crises central banks will have no tools to use (we are close to 0 in the US and in negative rates across the world) to support a recovery so a radical move will be needed to bring back confidence in the financial system.
A return to gold standard at a much higher gold price (calculated based on the world GDP and GDP growth) would be a very drastic move central banks could go for if situation got very dire but it might be the only choice they will have since we haven't really normalised the financial system after the 2008 crises and during the next crises we will be at 0 interest rates.
And if there is a choice between 556 nato rounds and going back to gold standard and returning back to some sort of stability for the world economy, gold would be much preferred to the anarchy and shots being fired.
I'm not saying that a return to a gold standard couldn't work - just that I think it would be extremely unlikely to work. And I'd greatly prefer "move to gold standard" over "society collapses", too. It's just I don't think I get to choose.
You could have asked the same question when last Great Recession was unfolding and Lehman was going under. I believe that central banks will find a way to prevent a really bad scenario from happening.
I have only been investing for 2 years I am currently 32. So I think most investors wouldn't mind me keeping my stocks but I saw my mother and father loose hundreds of thousands of dollars back in 09 and I am not about to bite that bullet.
Take advice from someone who has been investing for the past 10 years and has made ridiculous money while these perma-bears are still poor.
You can’t time the market. Keep buying stocks like they will continue to go up, at the end of the day, if the market crashes and values tank, it’s no big deal. Keep holding your stocks, they will recover, in fact buy while everything is super cheap. If you would have bought back in 09-10 when everything was cheap you would have made mad money like me.
If you are hoarding cash right now, do so with the intent to buy in the next major crash, whenever that is.
Just keep investing, entering at age 30 you are late to the game and need to make up for lost time.
You don’t “lose” until you sell, even if your parents lost value in 09 they would have recovered it all and more after a few years.
It seems like this time around, everyone's on edge about a coming crash, and they've already cashed out a good amount, with intent to buy back in when everything's on sale. Wouldn't this have the effect of turning a would-be crash into a minor correction, because there'll be so many people ready to buy?
I'm one of these people that's sitting on more cash than stocks at this point, by about 4x, but I'm starting to question this choice.
Wasn't that more or less a societal collapse situation? I'm not sure that almost any investment vehicle is going to be reliable through two world wars.
since jan 2 2019 S&P 500 is up from 2510 => 3074 so if you read a doom porn article and liquidated on 12/30 you missed out on insane growth spurt
this is no different. you have to factor in potential lost growth when you go risk averse mode; it's against our loss aversion bias but has to be done when thinking long term.
I think the general trend has been an increasingly healthy stock market since around 09 correct? That was 10 years ago, how much longer can this balloon rise? Currently I am about 70/30 stocks/bonds perhaps I should just stay put considering I really don't know.
don't take this personally, but you don't sound ready to invest in stocks.
losing huge amounts of money is going to happen. there's nothing you can do to avoid it, other than not invest in stocks. the tradeoff is that it always comes back higher.
being risk averse will actually cost you hundreds of thousands of dollars in the long term. research cFIRESim and plug the numbers in yourself: the portfolios most likely to survive long retirements with money left are those with higher stock %s (i'm talking 90% plus).
you can't get enough growth with materially high bond %s to survive long periods of withdrawing. satisfying your risk averse reptile brain will actually generally lead to you drawing 100% of your savings down, which isn't great if you aren't earning via something else.
if you are interested in material long term growth, e.g. enough to outpace inflation, you have to accept the fact that you will lose enormous amounts of cash virtually overnight. your other options are to lose your wealth due to inflation/aversion to risk. it's regrettable, but that's the situation we are in with targeted 2%+ inflation.
So you just hope to god that nothing bad ever happens in your life that would require you to pull your money out? That sounds incredibly foolish to me considering the chances of something going terribly wrong in your life are incredibly high. People get diagnosed with brain cancer every single hour of every single day. Better hope it doesn't happen when the markets down I guess.
If somebody could tell you when, they would be able to massively profit from this. Current thought from finance industry are leaning towards a crash next year, but I don't think anyone would bet the farm on it.
There are still risks. The money to pay for the 2008 recession was ultimately assembled from taxpayers and people who hold their savings in fixed income (like bonds) who have basically just lots purchasing power for a decade; especially relative to stocks.
Depending on the exact strategy it might go well or poorly.
Anyone that tells you to pull all of your money out of stocks and into another asset is an idiot. Bonds have outperformed stocks in the past few years. You missed the ride, just average down if stocks suffer any serious correction.
Corporate debt may be: https://imgur.com/a/b54hMSg
And frankly with the amount of outstanding US govt debt and underfunded pension & healthcare liabilities the USD may either get dethroned and devalued or sent into the negative interest rates purgatory like Japan is currently living in. Japan cannot possibly ever raise rates, at 2% rates 100% of their tax take will go towards paying the interest on their 250% national debt.
Add to that the history of Smoot-Hawley and the general outlook of the 1930s ...