You can short or buy puts on high yield ETFs, such as HYG and there are probably some others. However, unless you know what you're doing, and have risk management, it's probably not advisable to hold longer duration short positions. The market may ultimately go down, but in the mean time, you'll be losing money and may not profit very much when it ultimately does go down.
The short squeeze in HYG over the past few weeks is insane, up nearly 6%. It had moved +/- 1% all year up until then. You’d have to hold through price moves like that.
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.
> 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.
Whereas what, companies would never utilize non-standard accounting methods or falsified or exaggerated earnings reports or forecasts?
Sure companies will and can do that, there has been pretty good history of really large companies committing financial fraud. However, I don't think there ever has been systematic fraud in the US, unlike with subprime mortgages
When you just look at companies that fail, it ends up looking a lot like systematic fraud.
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.
Fraud was cited as a major factor contributing to the S&L crises. In companies it tends to be in the form of Control Fraud where insiders fleece the corporation.
You probably mean systemic fraud, because there has been plenty of systematic fraud.
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.
Are you really sure there's no systematic fraud? The US is pretty corrupt as far as checks and balances on financial dealings goes, I wouldn't be surprised if this became another one of those "who could have known".
>a lot of people taking out mortgages with either blatantly or coerced false income information
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.
The derivatives were created and rated on the assumption that the borrower's default rates were consistent with historical default rates. Of course that was not the case, and losses became multiples higher, and blew up derivatives that were highly levered. However, derivatives didn't cause the losses, borrowers defaulted!
Well, sure, we can play the chicken-and-egg game and posit that if they'd never defaulted, the house of cards would've remained standing.
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.
You're saying the same thing. If the underlying lone is precipitated by blatantly or coerced false income information then that was the problem. CDOs are simply derivatives that derived their value from those miss rated loans. So yes it was poor people, but it was also the people way to willing to give those people loans at rates way larger than they should of for financial instruments.
The people employed by the banks were complicit. It's that simple. If Jane Doe applies to buy a $1M home, and no one checks her credit and sees that she already has 3 other similar properties, whose fault is it? Passing the buck on due diligence is such a cop out. It's like a drug dealer justifying his actions; "Hey if I don't sell it to her, someone else will."
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.
Thats hard because you can easily blame that on consumer credit rating agencies like Equifax. Because their number doesn't weight length of credit repayment. So if you only have had any debt for 1-3 years you can have the same score as someone who has had debt for 10-30.
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
The definition of "EBITDA" keeps getting looser each year, so the true leverage is likely somewhat higher than you'd expect by just looking at the max leverage a credit agreement permits.
Also, most leveraged loans (i.e. institutional term B loans) require de minimis principal repayment in addition to interest (1%/year).
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…
most companies also have hard assets, e.g. inventory, real estate, IP, equipment, etc. If you're ok with paying 15x P/E which is the average S&P P/E, then 7x leverage isn't so bad...
Although the companies with these levered loans are a lot smaller than S&P 500 companies.
Leverage agaisnt hard assets != leverage agaisnt equity (which you were talking about), and we're talking about individual companies P/E. Everyone cannot hold an index (if everyone does so, there is no incentive to weed out bad companies), some of which are good about not including neg eps companies in the P/E caluclation [0].
no it's not, and I know the two are different definitions. However, what I'm saying is that a 7x 1st lien leveraged loan against a company that is trading at 14x P/E is essential 50% the market value of the company. Of course, the hard assets of the company is probably a lot less than that.
For example, if you're GM and a lot of cars aren't selling you can shut down factories, repatriate assets, do stock buybacks, increase automation and more. If you're a person whose major asset is a house if you can't sell the house for enough to catch up on your debts or get a way better job. What can you do.
File for Chapter 11 bankruptcy. This gives the company some time to get things under control to pay off its creditors. Or if it's a GigaCorp like $GM, $F etc go complain to the politicians and hope they do something, although seeing how dysfunctional things are with parts of the US Government itself shut down, a good outcome is unlikely.
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.
> 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.
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.
15 - 20% of subprime borrowers defaulted on their mortgages. That's a lot of people! Imagine, 1 in 5 of your neighbors defaulted and were foreclosed upon. This is not suppose to happen.
Thanks, yes thats a lot. I'll double down on what I wrote as the CDOs contained a mix of all borrowers of all levels of credit worthiness. It is likely we are agreeing on our stats, but I will concede that the subprime variant therefore can't be reliably trusted to make payments, just as the models predict.
I think the reason why this is a story that is causing a lot of interest and outrage is that Soros was right! Sandberg, Zuck and co, instead of reflecting on what was actually happening, and investigating the issues that Facebook was causing, or was being used for, chose to try to play defense and attach the people and organizations that were criticizing them. If Facebook was serious about becoming a "good" platform, then it would have acted sooner. Instead, we can look back and say that they pretty much only care about growing revenue and did not care too much about these issues, until they because front and center after Trump was elected. There is probably some sexism towards the over criticism of Sandberg over Zuck. But at the same time, Zuck was more hands off while hosting facetime live from his backyard, and traveling around the US, and proclaiming how great Facebook was, while Sandberg is suppose to be the day to day operator. I think Zuck deserve a lot of the same blame for this, as the CEO and the founder.
makes sense, wondering why it took so long to roll out this feature, isn't this one of the original uses that Zuck had in mind when he created Facebook?
Yea, it's a shame. I couple of years ago, I ordered a pizza in BTC. It was odd, because the price of the pizza in BTC would swing up and down while in the payment time window. It was also cool. Now it's no longer cool, it's become a money grab for some and a huge bummer for a lot of people who got in in December with they end of year bonuses. The innocent fun has disappeared and transaction fees an times have gone way beyond buying a pizza.
just because someone put in a bid, it doesn't mean that the owner of the assets have to sell to the highest bid. In this case, why does the owner have to sell to Thiel just because he has the highest bid?
gawker's remaining assets are being auctioned off by a bankruptcy administrator.
if you're selling your own property because you want to, you can set whatever terms you want, but when you go into bankruptcy because you can't pay your debts (the judgement against you, in this case), you're no longer in full control of what happens.
that said, it looks like the bankruptcy administrator is trying to block thiel's purchase, and maybe there's some grounds for that, unrelated to the interests of the previous owners.
why are transaction costs so high? I thought one of the selling points was that the transaction cost is negligible because miners main incentive comes from mining new bitcoins?
That used to be true, until the network started hitting the "block size limit". That's the combination of two design features:
1) The mining difficulty automatically adjusts to keep the rate of new blocks down to about 1 every 10 minutes.
2) There has always been a 1 MB limit on how large a block can be.
For a long time, #2 didn't matter, because all blocks were much smaller than 1 MB. But about a year ago, transaction volumes finally rose enough that all blocks since then have been at the max. That means that rather than just taking up marginal bandwidth and disk space, transactions are directly competing with each other for the limited space in each block. That's caused transaction fees to skyrocket.
The question of whether the max block size should be raised has been extremely controversial in the bitcoin world, and the "bitcoin cash" fork was primarily focused on this question.
Transactions take up space on the chain, and the chain only writes at about 1.6 kBps (1MiB every 10 minutes). People therefore must compete on fees to be included on the chain.
Because there is not enough of space for transactions in mined blocks, you can't fit all which means people that pay more will have higher chance to get their transaction into the block.
No. The amount of miners isn't tied to how many bitcoins exist, or how many transactions are happening.
Maybe you're thinking of how when more people are mining, it becomes harder to mine. This is because there is a global fixed rate of Bitcoin creation. Every 10 minutes, 12.5 new bitcoins come into existence. Miners are effectively competing for the chance to be the one to receive those new bitcoins. If mining becomes unprofitable, then some miners will drop out, causing it to become more profitable for those remaining. Miners don't set prices or rules; price affects profitability which either causes more miners to mine or some to drop out.
There's a finite number of bitcoins, fewer and fewer bitcoins are being produced over time by design. There can only be 21 million bitcoins, and the majority have already been mined. So the reward just for completing a block (not including the transaction fees) has been steadily decreasing, and that's not even taking into account that more and more miners means it's harder to get that reward. Thus the trend is going to be towards increased transaction fees.
No, transaction volume and congestion is the thing that drives transaction fees up.
If transaction volume (and fees) stayed constant, then as the minting rate goes down, there will be a lower reward for blocks, and some miners will drop out of mining because it's not profitable for them. Miners dropping out will lower the mining difficulty, so the remaining miners will get a bigger cut. The system finds an equilibrium. Mining profitability only affects the mining difficulty and miners themselves (and the amount of resources necessary for a 51% attack, but as long as that remains obscenely high then the specifics don't really matter in this discussion).
... so bitcoin is doomed as a real currency as the prices are only going to get higher and people are not going to pay a $5 transaction fee for a $10 product.
How is the bitcoin community rationalizing this seemingly inescapable mathematical failure?
Scalability and de facto centralization was always going to be the slow death of Bitcoin,from the size of the blockchain, ASIC miners (which locked out people who couldn't afford to build warehouses of them, creating a centralized market of people who can actually mine coins) and transaction fee. Its too soon now to say that Bitcoin is dying but it certainly will at the current rate, when? Who knows but it's got pretty severe design flaws that I think weren't properly considered in development.
The transaction fees won't grow forever. Generally speaking, they just need to be high enough that miners can turn a profit. What that amount is, I don't know.
And the fact that there's a limited number of transactions that can be processed in a single block, and competition between miners to validate transactions as quickly as possible, complicates things.
What keeps the transaction fees from growing forever? If only a certain amount of transactions can be processed when a coin is mined then that means that competition will only grow as bitcoin becomes more widely used. This competition will raise prices yes? Because if you don't have a high bid then you won't get included when the coin is mined. And since coin mining becomes slower and slower over time that means that less windows of opportunity exist for even greater numbers of transactions. It certainly seems like this issue will only get worse unless there's some other factor I don't know about.
That's not really the answer. The answer is that there are more transactions being broadcast than there is space in the blocks to accommodate them. Thus creating fee pressure.
