Guest Post: The Latest Bubble?

Tyler Durden's picture

From John Aziz of Azizonomics

The Latest Bubble?

Subsidies encourage the type of behaviour they are subsidising.

And the Federal Reserve’s QE Infinity is subsidising the market for mortgage backed securities by taking them out of the market at a price floor.

Unsurprisingly, the market for mortgage-backed securities is near all-time highs:

And Wall Street is doing some wild and wacky things.

UBS has just launched a 16-times-leveraged MBS ETN. The ETN, called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle 8x leveraged to mortgage-backed securities.

The idea appears to be that with the Fed acting as a buyer-of-last-resort that prices will take a smooth upward trajectory and that 16:1 leverage makes sense for retail investors as a bet on a sure thing.

Of course, back in the real world, there is no such thing as a sure thing. As Pedro Da Costa recently noted, banks are sitting on the proceeds of MBS purchases, rather than passing on the money to customers in the form of lower interest rates. As the New York Fed’s William Dudley recently noted:

The incomplete pass-through from agency MBS yields into primary mortgage rates is due to several factors—including a concentration of mortgage origination volumes at a few key financial institutions and mortgage rep and warranty requirements that discourage lending for home purchases and make financial institutions reluctant to refinance mortgages that have been originated elsewhere.

Those leveraging up on MBS might want to consider the implications if the Fed were to change its QE3 transmission mechanism — a transmission mechanism that William Dudley is willing to admit is broken — and buy other assets instead of MBS. Without a buyer of last resort with a printing press, prices would seem to be at current levels unsustainable. And those junk MBS products that the market is leveraging up on now in the hope that the Fed will buy them all will be left out in the cold. Such an event would bad news for anyone leveraged 16:1 on MBS.

But such an event would be an ingenious pump and dump, shifting the burden of junk MBS off Bulge Bracket balance sheets and onto the books of not only the Fed — which has already sucked up huge swathes of toxic junk — but also small-time speculators looking to book leveraged gains, but who end up taking the hit.

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GetZeeGold's picture



It's just a little leverage......I can handle it.

machineh's picture

We know, Ben.

That's why insiders call it the UltraBernank ETN.

idea_hamster's picture

I think it's hysterical that this 16x thing's ticker will be MORL -- as in the MORL of the story is 16x + bubble = ripped-off-face.

Or maybe it's just short for MOR[e cow bel]L....

French Frog's picture

What could possibly go wrong with a sure-bet thing, regardless how leveraged it is?


cowdiddly's picture

Exactly wht I have been looking for. A paper investment where I can lose money 16 times faster. Where do I sign.

LongSoupLine's picture



That's crazy talk Tyler.  We as a responsible financial world leader have learned our lessons in the areas of housing and it's overleveraged risk products.

fonzannoon's picture

It's even easier. I see guys selling "non traded reits" all the time. They keep blowing up one by one and yet they just keep getting sold like hotcakes. People are stupid.

youngman's picture

I knew the New York boys would invent new games to play in the Casino.....

Mercury's picture

Leveraged ETF/ETNs are a joke no matter what the underlying.

Find the inverse 2x Leveraged Mortgage REIT ETN and short both.

StandardDeviant's picture

This turkey just started trading yesterday, so unfortunately there's no option chain yet; else a cheap bearish ratio backspread could be fun...

nmewn's picture

lol...think I'll take out a second mortgage and bet the farm on it ;-)

rsnoble's picture

I see they are still concerned about a possible "recession" in Greece. LOL.

What is a recession anyway? God forbid anyone had a Depression, that must be the end of everything for sure.

fonzannoon's picture

What a putz.

Jeremy Epstein, a 20-year-old Adelphi University student studying exercise science and communications, led off the night's questions, asking the candidates for reassurance that he will find meaningful employment after graduation. He said Wednesday he still considers himself uncommitted but would vote for Obama if the election were held today.

"Gov. Romney went into a discussion about manufacturing jobs," Epstein said. "I don't think people in college like me are looking for that kind of job right now."

He admitted he was in awe when Obama looked directly at him. "I felt like he was saying he wanted a bright future for me, that he was talking about the youth of America."

Griphook's picture

I have no doubt that Obama has in mind a very bright future for Mr. Epstein.  Very bright indeed.  Some would even say it glows.

ZeroAvatar's picture

Is he going to guide Santa's sleigh?


(Kinda tough to do with all the brown-nosing)

LongSoupLine's picture

randomly selected participants in audience...

randon, my ass!  It couldn't be more obvious even if his name were Lefty Leftinstein.

fonzannoon's picture

"exercise science and communication" and not interested in manufacturing anything. Romney should have laughed his ass off and said "next question" if he was the real deal.

machineh's picture

"exercise science and communication" and not interested in manufacturing anything

Maybe he can get an SBA loan to open a yoga studio with scented candles.


PUD's picture

The one word that never fails to boil my blood is "investor" There is no such thing. Everyone is a speculator. You buy a stock you are entitled to nothing (save any dividend) and your "hope" of gain comes from a greater fool paying you more than you paid the last fool. There is no god given metric of value in a stock. It is worth only what the next idiot is willing to pay. Stocks move up or down purely on flow of funds...more money in or out. This has been aided by gov through the years via scams like IRA's and 401k's designed to funnel savings into financial assets so the banks can extract their cut. You might make the case that if you bought an IPO you truly are an "investor" but anyone who buys a stock outside of that scenario is nothing but a gambler dependent upon demographics and expansion of money supply/inflation to drive his hopes of riches.

LongSoupLine's picture

Everyone is a speculator.


It's worse than that.  70% being HFT means it's just a scalping operation.  Flow baby, flow!

Seer's picture

Mmmm-u-s-t (grunt), plaaaay ZEE Ponzi...

rsnoble's picture

And really all these so-called investment vehicles are nothing more than people piling on bets. You aren't investing in shit, oh wait yes you are. Trick is pulling out in time. Ha ha, I said pull out.

ziggy59's picture

..and what can possibly go wrong?

bigbwana's picture

The global banking system is controlled by the Illuminati. Specifically created to bring the world to its financial knees. Came oh so close.  But they failed.  Thanks to the Galactic Federation (Google). Demand Full Disclosure and Peace and Abundance will soon be ours.

Broccoli's picture

So if the underlying MBSs decline by 6.25%, poof, vaporized. Probably happen way before that as the creditors start issuing margin calls. The Bernank sneezes and poof, vaporized.

I don't know about you guys, but I live by a simple investing rule of thumb. God himself is not a safe enough investment for 16x leverage. Our large banks are just great proof of that rule, insolvent zombie kleptomaniacs.

adr's picture

So I should refinance, wait for the loan to be sold, and then stop paying so I can cause a 16x leveraged loss on the books somewhere?

Cool. Just look at the power homeowners have now. Not paying can cause 16x the pain.

Of course the big banks know that and so does the Fed. The 16x loss will jus go on the Fed's shadow book, never to be seen again.

ATM's picture

The thing is riskless at 32x leverage.

It will do nothing but go up and we should all thank UBS for being nice enough for starting it.

Ben Bernenke, the God mentioned earlier, has stated he wants housing prices and other financial asset prices to rebound, and by God he will make them rebound!

While all of you naysayers sit around and scratch your heads wondering why this new housing bubble wont pop, others will be whistling Dixie with 16x leverage on an asset guaranteed to go up - in nominal terms.

Super Marco's picture

Buying toxic assests with tax payers money. Classic.

steve from virginia's picture


Good grief! Any bank has a 'printing press' and can produce infiinite amounts of loans. Banks will buy MBS as the Fed has their backs.


Fed backing is a guarantee that a loan will be made, not actual loans. The Fed cannot be the country's only lender, for it to pretend that is is ... suggests the rest of the economy has shut itself down.


... maybe it has.

Whiner's picture

Where can I buy these units on 2X margin without having my account re-hypothecated? Well, maybe one but not two rehypos would be okay.

falak pema's picture

funny money has only ONE religion : bubbles! 

Broccoli's picture

They should go for broke. Lehman was at least 40:1 and all their executives made out like bandits.  Someone should offer a 3x ETF that seeks to track the performance of this 2x ETF which tracks the performance of an 8x Index. Result, 48x and big bonuses!

ZeroAvatar's picture

Just put it all on "00", spin the wheel, and face the music. 

barroter's picture

Love the products they want to sell you.  The contract is full of legalese on how  they can NOT pay you what was promised or how they can dip their hands into your profits.

The brochure is much more colorful, fun to read and are full of happy promises!

Rat King's picture

This article could end up being correct that investors will experience losses, but the argument is flawed. Although 16 X leverage is incredibely risky, and will likely result in losses for most retail investors, this ETF is not a "play" on rising MBS prices. This ETN is not a play on MBS it is a play on MREITs. QE3 is debatably negative for MREITs as rising prices and dropping yields hurt the spread earned by these businesses. If MREITs have to lower payouts as a result, investors will sell off the sector in an attempt to "front run" dropping dividends. ZeroHedge recently ran an article on this very fact .

Moreover, and MBS bubble, doesn't necessarily hurt MREITs. If the Fed changed the target of QE3 from MBS to another security, and MBS yields began to gradually go back up, this could be good for the MREIT sector as their business model becomes more profitable again. If MBS drastically shot up, this would be much more difficult for the MREITs to manage, but no one knows what the future will hold for this scenario. In other words, this is a risk.

MBS may be in a bubble, but MREITs are not. Check the chart of iShares Mortgage REIT ETF (REM), the ETF has not overtaken the highs of 2011 and is way below pre financial crisis levels.


Downtoolong's picture

16:1 leverage makes sense for retail investors as a bet on a sure thing.

And, of course, with money so cheap, you might as well borrow 100% of what you need to make the investment too. Then you can't possibly lose, especially if you can borrow even more when it comes time to pay it back.

Hey, is that Dick Fuld up there in the front of the line to get in?

topspinslicer's picture

Can I buy it in my margin account?