UBS Explains Why The Next Credit Unwind Will Be Unlike Anything We've Seen Before

Tyler Durden's picture

Several weeks ago, Janet Yellen boldly declared "I don't believe we will see another crisis in our lifetime."  For the rest of us who live in reality there is little doubt that the latest Fed-fueled credit bubble will eventually burst in epic fashion and once again lay waste to the personal balance sheets of millions of Americans.  And while the timing of market collapses can never be predicted, UBS strategist Matthew Mish says there is one thing that is certain about the next credit unwind, it will be unlike anything we've seen before.

To summarize, Mish notes that unlike previous credit expansion cycles, this current one has been dominated not by traditional banks but rather by non-bank lending entities and government backed loans, especially in riskier subprime residential, auto and student loans.  Moreover, unlike traditional lenders, Government debt tends to be much slower to react to things like rising delinquency know, because it's just taxpayer money so who cares.

First, non-bank lending (as a share of net loan growth) has accounted for about two thirds of the total expansion, akin to prior cycles. However, the non-bank share has been elevated in residential real estate (at 101%), but depressed in commercial real estate (30%) versus history. Second, the role of federal credit support has been very material, with a significant 45% of net loan growth this cycle coming from government (or government guaranteed) loans. In particular, government backed loans (as a share of the debt stock) now comprise a record 63% of residential and 29% of consumer loans, respectively, up 9% and 18% from 2010. In nominal terms, non-government related net debt growth has been negative for retail loans in aggregate. Third, while the share of non-bank lending has held steady, their share of higher risk debt has increased substantially across many loan categories. Non-banks account for 58% of outstanding adversely rated (leveraged loan) commitments, roughly 75% of recently originated FHA mortgage loans, and over 85% of subprime student and auto loans.

With some exceptions (think auto and student loans), Mish notes that overall non-financial debt growth has roughly mirrored past credit cycles.

First, while US private non-financial debt growth has been weak in nominal terms vs. historical standards, debt expansion relative to economic growth has been more normal – akin to the 1990s. Anything materially better, absent stronger growth, would look more like the last cycle. In particular, the rate of corporate and consumer debt growth has exceeded that of US nominal GDP, consistent with our prior work highlighting the elevated leverage across corporations and millennial consumers.


That said, non-bank and government backed loans have taken on a much more substantial share of 'riskier' loan pools like residential and consumer debt.

Second, there has been a material increase in federal credit support to the private sector, particularly in student and residential lending. Government debt pricing tends to be non-risk based, slower to react, and subject to political (vs. economic) interests. Investors should monitor changes in credit policy closely, but expect changes in loan standards to lag delinquencies as it will likely take material losses to trigger changes in federal support. And third, ceteris paribus the better early warning signals this cycle will be those indicators that can calibrate shifts in non-bank lending standards (which will pick up higher risk loans) and in credit markets with limited government intervention (where lenders will respond to changes in risk). In our view, these include indicators like our non-bank liquidity index, high-yield credit spreads, and auto and credit card loan performance.


So what signs should you be on the look out for?

And third, ceteris paribus the better early warning signals this cycle will be those indicators that can calibrate shifts in non-bank lending standards (which will pick up higher risk loans) and in credit markets with limited government intervention (where lenders will respond to changes in risk). In our view, these include indicators like our non-bank liquidity index, high-yield credit spreads, and auto and credit card loan performance.

In summary, the next collapse in credit may come a little slower, since governments are far better than traditional lenders at burying their heads in the sand, but you shouldn't be too quick to buy into Yellen's delusions that "there will never be another crisis in our lifetime."

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DaddyPirate's picture

I wonder if the FED and SNB is waiting to dump all the futures and equities they've bought for when this N Korea thing goes down. They know they've screwed up the markets and economy with QE and low interest rates and they (Deep State including Yellan) hate Trump and can't wait to blame the crash on him. This would be a win win. Unwind part of the balance sheet, get rid of all the equities the PPT can't be caught holding, blame the collapse on Trump, and get rid of Trump via the next election or impeachment. Plus they would get to hit the reset button and not do all the crazy monetary policy the second go round. Just a thought. 

Raffie's picture

This will be ugly for sure.

Some peeps think DOW could easily burn down to the 5k mark.

GunnerySgtHartman's picture

And the PPT won't be able to stop it.

BullyBearish's picture

no, they won't stop it...they'll profit from it...

TrajanOptimus's picture

Where is the "buy gold" plug?

Or was this actually a serious article?

All Risk No Reward's picture

Exactly. It takes a special level of mental density to think that the Federal Reserve is actually trying to run an efficient economy.


"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
~Lord Acton

"Power corrupts. Absolute power corrupts absolutely."
~Lord Acton

How To Be a Crook

Poverty - Debt Is Not a Choice

Renaissance 2.0 The Rise of [Debt-Money Monopolist] Financial Empire

Debunking Money

Krugman (and each MIT economist professor - THEY KNOW AND THEY OCCULT!) is a Goebbelsian propagandist as he covers the crimes of wolves with his fake sheep suit and lisp.

Krugman to Lietaer: "Never touch the money system!"

And don't think Steve Keen is any better. He was called to the carpet for not admitting the system is a fraud when it was explained EXACTLY HOW THAT FRAUD WORKED... and he tucked tail and ran away PRETENDING he was responsive...

The Principal And Interest On Debt Myth (technically correct, but practically reveals inherent fraud as exposed CLEARLY in the comments section)

Bottom line - Steve Keen won't "touch the money system" either. He learned well from his Debt-Money Monopolist Overlords.

30 sheckels of silver over THE TRUTH.

"The best way to control the opposition is to lead it and/or finance it."
~Yours truly, based upon Vladimir Lenin's quote

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."
by: Robert Hemphill, Credit Manager of Federal Reserve Bank, Atlanta, Ga.
Source: In the foreword to a book by Irving Fisher, entitled 100% Money (1935)

Praetorian Guard's picture

Ding, ding, ding... we have a winner! Tell us Johnny, what did DaddyP win? Well, DaddyP won the chance of a lifetime. He gets to exchange 100 FRNs for 1 Bancor...


Come join us for FREE at

AlphaSeraph's picture

That would be the great deflation before the greatest hyperinflation in history. The flood of USD from abroad back into the US will cause Americans to burn their dollars in the streets. 

asteroids's picture

The thing that should terrify Central Banksters is when the plebs figure out that they have "cornered the market" in stawks. History tells us what happens when you corner the market.

Squid-puppets a-go-go's picture

if thats the case then Trump cant be seen to strike Korea first, he'd be trying to goad fatboy into striking first

aloha_snakbar's picture
I Don't Believe We Will See Another Crisis In Our Lifetime

Easy to see why she is in charge...LOL...

Rainman's picture

what she mean by ' OUR  LIFETIME ', .... ?

Yukon Cornholius's picture

My grandma said some pretty weird things too right before she died from Alzheimer's.

aloha_snakbar's picture

Mine thought she was a chipmunk...

Dangerclose's picture

Ole Yellen expects to kick the bucket soon?

Son of Captain Nemo's picture

The "NEXT" Unwind?... Was that before QE4 or after?...

And in reality what difference does it fucking make when the level of debt exceeded 8 years ago is leading your Country to start major conflict(s) repeatedly that will destroy it and not just financially!

LawsofPhysics's picture

LOL!!  Precisely why there will be no "unwind", ever. At least not in the traditional "GAAP" way of book keeping.

Herdee's picture

She might be right because they'll step in and print to infinity indefinetly until bust.

A. Boaty's picture

They have kept a fingernail grip on maintaining the status quo a lot longer than I thought they could.

RealistDuJour's picture

Simple Jack says, "Thiz time iz DIF'RUNT!"

Creepy Lurker's picture

Interesting that yesterday we had Gartman saying he's scared, and today we have ole Yellen saying 'What me worry?'

Both are contrarian indicators, so which one is right?

trueFacts's picture

...maybe yellen was just telling them she doesnt think she will be above ground a whole lot longer.

Kidbuck's picture

As long as the bulk of the former middle class still has enough purchasing power to buy rice and beans and cell phones things will continue as is. When the fed has fucked the buck until the sheep are hungry, then things collapse.

Maestro Maestro's picture

No sir,

No unwind.

Not after you betrayed everyone and everything.


No You.

taketheredpill's picture


Looking at HY market compared to 2007:

1. Years of below-trend Capex means Recovery floor will be lower

2. Government limits on Bank's Corporate debt inventory means less stink bids / buyer of last resort

3. GDP forecast used in recovery pricing will be a LOT less than 4%

4. HY ETFs didn't exist until 2007.  The advantage of the ETFs is that they are large and liquid so you can sell anytime.  Except if all the people who have bought since 2007 decide to sell in a hurry.

how_this_stuff_works's picture

"Several weeks ago, Janet Yellen boldly declared "I don't believe we will see another crisis in our lifetime."

This could be one of those moments people will reflect back on and say "Yeah, that was a sign of the top" in the markets.

falak pema's picture

Maybe Yellen lives in a reality that she and the TBTF make every day, NOW since 2008 meltdown deemed the "new normal"... by using the CBs of the global construct in smothering the so called free market--which thru irrational exuberance--aided and abetted by Greenspan and Potus' of all colours-- and the TBTF-- created this demise of capitalism in the first place.

Capitalism is at loggerheads with its own Doppelganger!

What oligarchy capitalism begat the CB now tries to salvage; and ZH has always said : its a losing game, all the while it now clairons the bugle of the Duck's incredible sleight of hand; as he brings the US down to the level of Nork.

As there is no solution that fits the increasingly delusional greed of the elites : those who created the mess and those who now ask the CBs to bridle it by scamming the middle class-- its a lose lose situation.

Until the house of cards implodes, reality will be a sand castle or a broken down windmill.

And we all play at Don Quichote.

Let it Go's picture

Efforts to justify the most recent market melt-up following the election of Donald Trump are sometimes difficult to comprehend if you are one of those already skeptical of this market. A read of the pdf file of the 2009 bestselling book titled, "This Time Is Different" did little to convince me that this time is different.

It chronicles eight centuries of financial follies in which financial meltdowns have typically followed real-estate bubbles, rising indebtedness, and gaping deficits. More on why many of us see a strong similarity between what is happening today and prior financial meltdowns that have resulted in crisis can be found below.

C9H9N's picture

The good news is that we zerohedgers are smart enough to both realize that .gov is now trying to mostly skip the bank bailouts and just directly put the slaves on the hook this next time-
and how to make some money from it. (At least I am)
Bring on #TruthDay

The C9H9N Team

turkey george palmer's picture

Oh you don't say, a default is coming? Hmm so that means hard times coz no one can buy or sell coz they are holding bad paper or worthless assets. Right. And what of the good folks who just saved money ? They should be good,right? Ooooh yeah the currency will plumet and inflation will demolish purchasing ability. Shoot!!! Now hey I got a roll of silver dimes that's worth $30 now. What's that going to be worth after all this?




Yes sir