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This Is Another "Subprime" Waiting To Blow
Submitted by Bill Bonner via Bonner & Partners,
This is getting interesting again.
If it is just “volatility,” as Wall Street’s shills in the press maintain, it will probably pass soon. Everything will be okay. Back to routine imbecility before the end of the month.
But if these whipsaw movements are heralding a bear market, U.S. stock prices could be cut in half… or more.
And they may not recover for 10 to 20 years. (Catch up on the details of our bear market forecast here.)
Bull or Bear?
Which is it? Bull or Bear?
No one knows, of course. But it looks to us as though the whole shebang is getting ready to collapse.
So far, the correction has trimmed $12.5 trillion off the value of global stock markets. There are a few reasons for stocks to go back up… and many reasons why they might want to go down further.
The 2008 global financial crisis was centered on mortgage debt. There was too much of it that couldn’t be repaid. When the value of the collateral – homes – headed down, the bubble popped.
Today, consumers have about the same amount of debt. But now the excesses are in auto loans and student debt.
As you can see below, total auto loans stood at about $781 billion in 2007. Today, they’ve topped $1 trillion.
And student loans have more than doubled over that time to $1.3 trillion.
Again, the collateral is falling in value.
- Used-car prices fall, as leases expire and more used cars hit the market.
- As for student debt, the “collateral” is the earning power of the person who borrowed the money.
And here’s a hint of what is happening to that. According to the Center for Immigration Studies, all of the net gains in jobs since 2007 have gone to immigrants – both legal and illegal.
And the vast majority of those jobs have been gained in the hospitality industry – waiters, greeters, busboys, etc. (low-wage jobs).
That’s why student loan default rates are soaring. The “collateral” isn’t as good as lenders thought it was.
A Mountain of Maturing Debt
But today, we’re going to look at corporate debt, which has risen to $5.2 trillion from $3.2 trillion in 2007…
As we’ve been reporting, C-suite cronies have been taking advantage of the Fed’s ultra-low rates to borrow money… buy back shares in their own companies… and pay themselves fat bonuses as the remaining shares go up in price.
(When corporations buy back shares, they cancel them. This automatically raises the earnings per share of the outstanding shares and increases their value.)
But that scam could be about to come to an end. Reports the Financial Times:
With a $4 trillion mountain of debt maturing over the next five years, corporate America’s reliance on cheap cash is about to get tested.U.S. corporate treasurers have rushed to lock in cheap borrowing costs in advance of the expected rate rise, refinancing more than $1 trillion each year between 2012 and 2014, according to Standard & Poor’s.
Tighter borrowing conditions will mark a turning point in the recent debt binge. Companies have had easy access to cash to write checks for multibillion-dollar takeovers, to fund buybacks and dividend strategies – all welcomed by investors as share prices rallied off 2009 lows.
But as rates turn higher, investors may see the flip side of cheap financing. Analysts warn companies will begin defaulting in greater numbers, particularly in the energy sector, which has found itself in the line of fire as commodity prices languish.
Rotting Fruit
You will hear from the talking heads that America’s corporate sector has never been in better shape.
But like a peach, the fruit never looks better than just before the rot sets in.
Here’s what really happened…
Thanks to a generous Fed, since the financial crisis hit, companies have been able to borrow at interest rates so low you need to get on your hands and knees to find them.
And they used much of this borrowed money to boost their share prices via buybacks.
Hey, presto! The trick is done right in front of our eyes.
Stock prices rise. And as stock prices rises, companies’ debt-to-equity ratios – which show how much debt they are using to finance growth relative to the value of their shareholders’ equity – improve.
The companies may have more debt… but they have a higher share price to justify it.
When the mortgage debt bubble blew up in 2007, it was the weakest segment – subprime – that detonated first. It will be no different in the corporate sector.
Here’s the FT again, on subprime corporate debt:
Moody’s and S&P warn that defaults are likely to increase in the coming years as interest rates rise, a concern echoed by bond funds such as Pimco.Analysts with S&P expect defaults among junk-rated U.S. companies to hit 2.9% by June 2016, nearly twice the rate in 2013.
Moody’s list of companies rated B3 with a negative outlook or lower – its lowest rating rungs in the “speculative” space – eclipsed 200 for the first time since 2010 in July.
Corporate earnings have started to plateau this year. And share prices are no longer steadily rising as they have been since the last bear market bottomed in 2009.
What happens when lenders are no longer willing to extend credit to corporations?
We know exactly what happens – because it happened twice before in this century.
In the run-up to the 2000 and 2008 stock market peaks, stock prices rose… and the fruit looked juicier and juicier.
Then credit collapsed… stock prices plunged… and things headed back to a more normal situation – until the feds got in on the act again.
Our advice: Eat the peach now.
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Burn MF Burn
Continuing the progression, next is subprime payday loans.
We will see Student Debt Forgiveness before Obama leaves the white house. We have a generation of folks who are doing the right thing and getting a higher education and we can't stand by and do nothing.
We may see it, but it is purely a vote buying exercise.
No chance, debt forgiveness = asset vaporization. Who holds those "assets"....
what't that term bankers use to prevent forgiveness.........moral hazard?
Uncle Sam. It is Obama's exclusive right and duty to relieve the odious debt burden from the next generation of American entrepreneurs and investors.
I am sure President Drumpf will declare war on college kids and bring back private run debtors prisons.
doing the right thing and getting a higher education
Degrees in basket weaving, SJW studies, and advanced partying will not be in demand. And then there is getting educated on the 'net. Anyone who goes to college for most things is a chump. Any parent that encourages it is a child abuser.
I had a minor in advanced partying , and to be honest the social skills i learn there have gotten me everything good in my life. that and what I learned in kindergarten.
This is going to be interesting since things look to be going south way too early in the election cycle. The wrong questions asked at the wrong time could really screw up the DC gravy train, and the one thing you can rely on is the politicians throwing literally anybody under the bus to save their jobs......
I remember when Bush II was running against Gore he was talking about the economy being on the verge of a recession and that he would lower taxes for everyone to keep the recession shallow. He was accused of "talking down the economy". Anyone else remember that? Has any of the current candidates mentions the "R" word on the campaign trail? If they have I have not heard it though I have to admit I have not been paying that much attention to what this crop of boot lickers have been saying.
It will get interesting when Yellen makes this statement:
""Monetary policy can’t solve the problems we face," warns German finance minister Wolfgang Schaeuble"
The FED has gone to extremes to offset screwed up policy out of DC. To the point they are out of amunition and can't stop to reload before the next wave hits. Congress will blame the FED. Next week will be interesting. If the FED doesn't raise rates, I'm just not sure how long the rally will last before "oh, shit" sinks in.
anyone watching avp this a.m.? lulz
Cherry picking data?
leases expire causing more used cars ... but used cars don't expire?
student debt supposedly is future productivity ... just like past student debt is today's productivity.
But there are more cars on the market increasing supply.
Shhh they didn't take econ101, atleast the supply demand price curve part.
"but used cars don't expire?"
What does that mean? So what? New cars are following up right behind the used cars only to be sold on cheap credit and then those cars become used cars and on and on. Then when the real problem is realized, that there isn't enough demand from qualified people who have jobs and savings to keep the ponzi going then and only then will the car companies stop making cars. But the FED and the US.GOV wants GDP even if they have to print money out of thin air to get it, then we go through the whole cycle again except this time people like you who don't get it will finally get it.
And thats just cars. Student debt, SS, MIC, etc and on and on. Our whole economy is an illusion. It will crash, people will pull their heads out of the food trough and discover that they have been lied to for a long time. Well I am too optimistic. Most people wont pull their heads out of the food trough or their asses at all. Blue pill anyone?
you should stand behind an EBT user whose card gets denied. That is an example of SHTF. If only I knew how to upload video
Buy used, pay cash. It's not really that difficult but then, I presume too much.
But the FED and the US.GOV wants GDP even if they have to print money out of thin air to get it, then we go through the whole cycle again except this time people like you who don't get it will finally get it.
The Fed is just our MOE manager. They are using a flawed process. Their "printing of money" is not the issue. That is just the part of the process where "trader's promises" get "certified". Those certificates are what we call money. They enable simple barter exchange over time and space. On delivery, the certificates are returned and destroyed.
The problem is with defaults. When the trader fails to deliver, those certificates must be reclaimed through like interest collections.
One particular class of deadbeat traders is "all" governments. They "never" deliver on their trading promises. They just roll them over ... and that is default. Further, they grant themselves the lowest interest loads so the defaults are never recovered.
The result, by the relation: INFLATION = DEFAULT - INTEREST, has been an average 4% leak over the Fed's 100 years of existance. This has been financing the government. "That" is the problem.
They've already taken them. Years ago.
When there's students taking PHd's in Librarian Studies - you know it's a bad lone from the start...
Collateral is funny math whenever auto loan is concerned, unless the collateral is something else like real estate.
I like peaches.
There's a song about that performed by...Black Swan?
Try this: https://www.youtube.com/watch?v=wwyXQn9g40I
CEO's are made up of baby boomers. Thats all you need to know to see where this is headed.
Moar Bichez!
I'll take two.
There's the bad debt and there's the derivatives stacked on top.
James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.
Losses from sub-prime - less than $300 billion
With derivative amplification - over $6 trillion
"It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world" (pg 404, “All the Presidents Bankers”, Nomi Prins)
They could steal our houses last time. This time nothing left to steal. Those over priced educations are long gone from their brain cells ..... Oops !!!!
Ah but interest rates won't rise anytime soon....
"That’s why student loan default rates are soaring. The “collateral” isn’t as good as lenders thought it was."
WRONG, the lenders didn't and don't care how good the "collateral" is because the loans are taxpayer guaranteed. THAT'S the problem and why college costs have risen at a rate much greater than inflation.
I would bet a crisp $100 FRN that the vast majority of people "buying" new cars/trucks do not know what it's total cost is, and forget about depreciation.
They do know one thing though..."How much a month"
Auto dealers love it!
Student loans are a lost cause, college is big, big business and well sold. The eager student will sign anything, hook line and sinker.
A PREDICTION...Half a Crash on Friday 9-11-2105 ends at closing bell..Finishes Crashing 9-14-2015..probably before Noonish.
First concrete prediction I have ever read on ZH.
BRAVO!
I wonder if they are going to try and hold things together somewhat until after the pope visits around the 23rd......seems to me, the pope visiting is very important to the satanic banksters. I dont think they want a distraction. Just guessing. AFTER the pope talks, then all bets are off. keep your powder dry.
cound't resist - apologies for theumm language :)
https://www.youtube.com/watch?v=8aI9k06dGpg
lenders of students' loans dont care for the collateral, they just want people indebted as fast as possible, it s this way by design.
Student Loan Debt Forgiveness ROFLMAO!!!!
Does one cut ones own dogs leash?!?
ahahah, collateral? Most cars lose 50% of their value the second they leave the lot, and on a student loan there is no collateral at all. How do you repo 4-7 years of drunken partying?