Archive for June, 2016
Let’s talk debt today.
Readers will know that we’ve been keeping a close watch on the global bond markets for a long time now.
Contrary to what the politicians would have us believe, there has been no deleveraging after the GFC. Quite the opposite – global debt has been growing steadily by an average of 5% per year ever since 2007 and now stands at an incredible 286% of world GDP.
As I said over a year ago, I can’t think of a time when the risk to capital has been greater. And since then that risk has just increased – substantially.
Consider this: Goldman Sachs estimates that if Treasury yields were to unexpectedly rose by 1 percentage point, US$1 trillion would be wiped out of the bond market. The leverage in the system is truly unimaginable on any historical perspective.
What this means is that should the slightest hiccup in bond markets take place, investors now stand to lose much more than they did during the US housing collapse in 2008.
With the increasing likelihood of the Fed taking away the proverbial punch bowl by raising interest rates, if only for a brief period of time, I thought it would be an opportune time to have a closer look at bond markets and how they fit into the current global macro landscape.
I recently discussed this topic with Jared Dillian, the editor of Daily Dirtnap, a market newsletter for professional investors in which he blends his astute macro insights with behavioural economics, and author of a new book called All The Evil Of This World which you can buy on Amazon.
Jared started his career working for a small market maker on the Pacific Options Exchange from 1999-2000, before moving to Lehman Brothers in 2001. At Lehmans he was specializing in index arbitrage and ETF trading and was routinely trading over $1 billion a day in volume up until 2008.
It was during his time with Lehman Brothers that Jared learned to “trade macro,” trading in multiple asset classes.
Jared shared with me an interesting theory, which I find difficult to argue with, on what the US national debt policy might very well be after the election, regardless of who’s in the White House.
We also talked about Brexit and what a potential market reaction to the upcoming referendum will likely be.
And in an interesting fashion, Jared also tackled a question I’m often asked by other investors and readers of the blog. Namely, “Why can’t the Fed just keep printing money?”
Apparently the biggest banks in the US didn’t learn their lesson the first time around…
Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!
I’m sure you remember how this all blew up back in 2008.
Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.
With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.
Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.
Fast forward eight years and the banks are dusting off the old playbook once again.
Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.
Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.
At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.
I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.
But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.
In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.
The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.
In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.
Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.
[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]
Now, here’s the craziest part: the US government is in on the scam.
The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.
Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.
They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”
Because that’s precisely what happens.
The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.
This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.
You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.
Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.
No wonder the people of Great Britain are itching to rid themselves of this miserable, idiotic union.
We’ve written plenty of times about ridiculous European plans to create a so-called “snippet tax” which is more officially referred to as “ancillary rights” (and is really just about creating a tax on Google). The basic concept is that some old school newspapers are so lazy and have so failed to adapt to the internet — and so want to blame Google for their own failures — that they want to tax any aggregator (e.g., Google) that links to their works with a snippet, that doesn’t pay for the privilege of sending those publishers traffic. As you may remember, Germany has been pushing for such a thing for many, many years, and Austria has been exploring it as well. But perhaps the most attention grabbing move was the one in Spain, which not only included a snippet tax, but made it mandatory. That is, even if you wanted Google News to link to you for free, you couldn’t get that. In response, Google took the nuclear option and shut down Google News in Spain. A study showed that this law has actually done much to harm Spanish publishers, but the EU pushes on, ridiculously.
As discussed a year ago, some in the EU Commission are all for creating an EU-wide snippet tax, and as ridiculous and counterproductive as that is, the Commission is about to make a decision on it, and the public consultation on the issue is about to close (it ends tomorrow). Thankfully, many, many different groups have set up nice and easy systems to understand and respond to the consultation — which you should do. Here are just a few options:
- The EU Commission’s own consultation platform (this one is messy, buggy, and annoying, but it’s the official one).
- The site FixCopyright.eu has a well done “answering guide” that helps you through the consultation and explains the details behind many of the questions in the consultation.
- SaveTheLink.org from OpenMedia has a simple signup form that just adds your name to a letter.
- The group Allied for Startups has another good sign on letter Stop the link tax
For previously published thoughts on the EU, see: