Credit-Driven Train Crash, Part 1

Authored by John Mauldin via,

In 1999, I began saying the tech bubble would eventually spark a recession. Timing was unclear because stock bubbles can blow way bigger than we can imagine. Then the yield curve inverted, and I said recession was certain. I was early in that call, but it happened.

In late 2006, I began highlighting the subprime crisis, and subsequently the yield curve again inverted, necessitating another recession call. Again, I was early, but you see the pattern.

Now let’s fast-forward to today. Here’s what I said last week that drew so much interest.

Peter [Boockvar] made an extraordinarily cogent comment that I’m going to use from now on: “We no longer have business cycles, we have credit cycles.”

For those who don’t know Peter, he is the CIO of Bleakley Advisory Group and editor of the excellent Boock Report. Let’s cut that small but meaty sound bite into pieces.

What do we mean by “business cycle,” exactly? Well, it looks something like this:

Photo: Wikispaces (Creative Commons license)

A growing economy peaks, contracts to a trough (what we call “recession”), recovers to enter prosperity, and hits a higher peak. Then the process repeats. The economy is always in either expansion or contraction.

Economists disagree on the details of all this. Wikipedia has a good overview of the various perspectives, if you want to geek out. The high-level question is why economies must cycle at all. Why can’t we have steady growth all the time? Answers vary. Whatever it is, periodically something derails growth and something else restarts it.

This pattern broke down in the last decade. We had an especially painful contraction followed by an extraordinarily weak expansion. GDP growth should reach 5% in the recovery and prosperity phases, not the 2% we have seen. Peter blames the Federal Reserve’s artificially low interest rates. Here’s how he put it in an April 18 letter to his subscribers.

To me, it is a very simple message being sent. We must understand that we no longer have economic cycles. We have credit cycles that ebb and flow with monetary policy. After all, when the Fed cuts rates to extremes, its only function is to encourage the rest of us to borrow a lot of money and we seem to have been very good at that. Thus, in reverse, when rates are being raised, when liquidity rolls away, it discourages us from taking on more debt. We don’t save enough.

This goes back farther than 2008. The Greenspan Fed pushed rates abnormally low in the late 1990s even though the then-booming economy needed no stimulus. That was in part to provide liquidity to a Y2K-wary public and partly in response to the 1998 market turmoil, but they were slow to withdraw the extra cash. Bernanke was again generous to borrowers in the 2000s, contributing to the housing crisis and Great Recession. We’re now 20 years into training people (and businesses) that running up debt is fun and easy… and they’ve responded.

But over time, debt stops stimulating growth. Over this series, we will see that it takes more debt accumulation for every point of GDP growth, both in the US and elsewhere. Hence, the flat-to-mild “recovery” years. I’ve cited academic literature via my friend Lacy Hunt that debt eventually becomes a drag on growth.

Debt-fueled growth is fun at first but simply pulls forward future spending, which we then miss. Now we’re entering the much more dangerous reversal phase in which the Fed tries to break the debt addiction. We all know that never ends well.

So, Peter’s point is that a Fed-driven credit cycle now supersedes the traditional business cycle. Since debt drives so much GDP growth, its cost (i.e. interest rates) is the main variable defining where we are in the cycle. The Fed controls that cost—or at least tries to—so we all obsess on Fed policy. And rightly so.

Among other effects, debt boosts asset prices. That’s why stocks and real estate have performed so well. But with rates now rising and the Fed unloading assets, those same prices are highly vulnerable. An asset’s value is what someone will pay for it. If financing costs rise and buyers lack cash, the asset price must fall. And fall it will. The consensus at my New York dinner was recession in the last half of 2019. Peter expects it sooner, in Q1 2019.

If that’s right, financial market fireworks aren’t far away.

Corporate Debt Disaster

In an old-style economic cycle, recessions triggered bear markets. Economic contraction slowed consumer spending, corporate earnings fell, and stock prices dropped. That’s not how it works when the credit cycle is in control. Lower asset prices aren’t the result of a recession. They cause the recession. That’s because access to credit drives consumer spending and business investment. Take it away and they decline. Recession follows.

If some of this sounds like the Hyman Minsky financial instability hypothesis I’ve described before, you’re exactly right. Minsky said exuberant firms take on too much debt, which paralyzes them, and then bad things start happening. I think we’re approaching that point.

The last “Minsky Moment” came from subprime mortgages and associated derivatives. Those are getting problematic again, but I think today’s bigger risk is the sheer amount of corporate debt, especially high-yield bonds that will be very hard to liquidate in a crisis.

Corporate debt is now at a level that has not ended well in past cycles. Here’s a chart from Dave Rosenberg:

Source: Gluskin Sheff

The Debt/GDP ratio could go higher still, but I think not much more. Whenever it falls, lenders (including bond fund and ETF investors) will want to sell. Then comes the hard part: to whom?

You see, it’s not just borrowers who’ve become accustomed to easy credit. Many lenders assume they can exit at a moment’s notice. One reason for the Great Recession was so many borrowers had sold short-term commercial paper to buy long-term assets. Things got worse when they couldn’t roll over the debt and some are now doing exactly the same thing again, except in much riskier high-yield debt. We have two related problems here.

  • Corporate debt and especially high-yield debt issuance has exploded since 2009.
  • Tighter regulations discouraged banks from making markets in corporate and HY debt.

Both are problems but the second is worse. Experts tell me that Dodd-Frank requirements have reduced major bank market-making abilities by around 90%. For now, bond market liquidity is fine because hedge funds and other non-bank lenders have filled the gap. The problem is they are not true market makers. Nothing requires them to hold inventory or buy when you want to sell. That means all the bids can “magically” disappear just when you need them most. These “shadow banks” are not in the business of protecting your assets. They are worried about their own profits and those of their clients.

Gavekal’s Louis Gave wrote a fascinating article on this last week titled, “The Illusion of Liquidity and Its Consequences.” He pulled the numbers on corporate bond ETFs and compared it to the inventory trading desks were holding—a rough measure of liquidity.

(Incidentally, you’ll get that full report on Monday if you subscribe to Over My Shoulder. What you learn could easily pay for your first year.)

Louis found dealer inventory is not remotely enough to accommodate the selling he expects as higher rates bite more.

We now have a corporate bond market that has roughly doubled in size while the willingness and ability of bond dealers to provide liquidity into a stressed market has fallen by more than -80%. At the same time, this market has a brand-new class of investors, who are likely to expect daily liquidity if and when market behavior turns sour. At the very least, it is clear that this is a very different corporate bond market and history-based financial models will most likely be found wanting.

The “new class” of investors he mentions are corporate bond ETF and mutual fund shareholders. These funds have exploded in size (high yield alone is now around $2 trillion) and their design presumes a market with ample liquidity. We barely have such a market right now, and we certainly won’t have one after rates jump another 50–100 basis points.

Worse, I don’t have enough exclamation points to describe the disaster when high-yield funds, often purchased by mom-and-pop investors in a reach for yield, all try to sell at once, and the funds sell anything they can at fire-sale prices to meet redemptions.

In a bear market you sell what you can, not what you want to. We will look at what happens to high-yield funds in bear markets in a later letter. The picture is not pretty.

To make matters worse, many of these lenders are far more leveraged this time. They bought their corporate bonds with borrowed money, confident that low interest rates and defaults would keep risks manageable. In fact, according to S&P Global Market Watch, 77% of corporate bonds that are leveraged are what’s known as “covenant-lite.” We’ll discuss more later in this series, but the short answer is that the borrower doesn’t have to repay by conventional means. Sometimes they can even force the lender to take more debt. In an odd way, some of these “covenant-lite” borrowers can actually “print their own money.”

Somehow, lenders thought it was a good idea to buy those bonds. Maybe that made sense in good times. In bad times? It can precipitate a crisis. As the economy enters recession, many companies will lose their ability to service debt, especially now that the Fed is making it more expensive to roll over—as multiple trillions of dollars will need to do in the next few years. Normally this would be the borrowers’ problem, but covenant-lite lenders took it on themselves.

The macroeconomic effects will spread even more widely. Companies that can’t service their debt have little choice but to shrink. They will do it via layoffs, reducing inventory and investment, or selling assets. All those reduce growth and, if widespread enough, lead to recession.

Let’s look at this data and troubling chart from Bloomberg:

Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking.

“If more of your cash flow is spent into servicing your debt and not trying to grow your company, that could, over time—if enough companies are doing that—lead to economic contraction,” said Zachary Chavis, a portfolio manager at Sage Advisory Services Ltd. in Austin, Texas. “A lot of people are worried that could happen in the next two years.”

The problem is that much of the $2 trillion in bond ETF and mutual funds isn’t owned by long-term investors who hold maturity. When the herd of investors calls up to redeem, there will be no bids for their “bad” bonds. But they’re required to pay redemptions, so they’ll have to sell their “good” bonds. Remaining investors will be stuck with an increasingly poor-quality portfolio, which will drop even faster. Wash, rinse, repeat. Those of us with a little gray hair have seen this before, but I think the coming one is potentially biblical in proportion.

Casey Jones via Wikimedia Commons

Blowing the Whistle

As you can tell, this is a multifaceted problem. I will dig deeper into the specifics in the coming weeks. The numbers seem unbelievable. I truly think we are headed to a staggering credit crisis.

I began this letter describing the coming events as a train wreck. That comparison came up when my colleague Patrick Watson and I were on the phone this week, planning this series of letters. Patrick and his beautiful wife Grace had just come back from Tennessee, and he told me about visiting the Casey Jones birthplacemuseum in Jackson.

For those who don’t know the story or haven’t heard the songs, Casey Jones was a talented young railroad engineer in the late 1800s. On April 30, 1900, Casey Jones was going at top speed when his train tragically overtook a stopped train that wasn’t supposed to be there.

Traveling at 75 miles per hour, Jones ordered his young fireman to jump, pulled the brakes hard, and blew the train whistle, warning his passengers and the other train. Later investigations found he had slowed it to 35 mph before impact. Everyone on both trains survived… except Casey Jones.

His heroic death made Jones a folk hero to this day. Many songs told the story and even the Grateful Dead and AC/DC paid tribute decades later. (Trivia: He actually tuned his train whistle with six different tubes to make a unique whippoorwill sound. So, when people heard his train whistle, they knew it was Casey Jones.)

Right now, the US economy is kind of like that train: speeding ahead with the Fed only slowly removing the fuel it shouldn’t have loaded in the first place and passengers just hoping to reach our destination on time. Unfortunately, we don’t have a reliable Casey Jones at the throttle. We’re at the mercy of central bankers and politicians who aren’t looking ahead. They can’t simply turn the steering wheel. We are stuck on this track and will go where it takes us.

Next week, we’ll talk about the sequence of how the next debt crisis will arise, how it triggers a recession, and then $2 trillion of deficits in the US and rising debt all over the world. Which just increases pressures on interest rates and lending. And reduces growth. It is not a virtuous cycle.


karenm Sat, 05/12/2018 - 14:03 Permalink

The "Business cycle" is a lie. There was no "Business cycle" until the Central Bankers showed up. We don't need infinite growth, we need a bunch of sick psycopathic bastards to leave us alone to own and work land and trade with one another sans their fake bull shit paper.

JRobby JohnGaltUk Sat, 05/12/2018 - 14:43 Permalink

Uhhhhh, it's the composition of the lending. Agree with the "credit cycle comment" as lower GDP levels and growth rates get stifled by excessive debt service.

By composition, the analysis to look at is the loan productive or non productive.

A company borrowing money to buy back it's shares is clearly non productive. There is a lot of construction lending going on now following a severe drought in building. That is an example of a productive loan. It creates income and consumption.

But the problem is, real estate remains too expensive (bubble) in a number of markets which presents both an income opportunity and an increasing probability of a bust in higher end.

Of course there is a ton of DR Horton & Lennar type shit boxes going up and they will probably get sold to people priced out of the bubble zones.

RE crashes again in 3 to 4 years with an interval of subprime lending upcoming shortly.

People have short or no memories.

In reply to by JohnGaltUk

divingengineer Sat, 05/12/2018 - 14:05 Permalink

 The Fed is currently trying to prove that they have taken the cycle out of this.

 I think it will have disastrous consequences for the 99% of us that don’t have a direct line to interest free loans of unlimited amount. 

 To me, the real lie is perpetual growth being a necessity for this whole thing to work.

My Days Are Ge… curbjob Sat, 05/12/2018 - 19:41 Permalink

If this were 1955, there would be economic opportunity.  All local people owned and ran their businesses.  The doctor.  The pharmacist.  The insurance agent.  The gas station owner. The beer hall owner.  The hardware store man.  The lawyer.  The accountant.  The machinist.  More.

Today, everything is a cartel.  No enforcement of antitrust laws.  No opportunity for someone who will work harder and produce a better product and charge less.

Who is killing America.  The Warren Buffets.

In reply to by curbjob

Wild tree divingengineer Sat, 05/12/2018 - 15:07 Permalink

DE, that is just one of the lies told to us, by those who believe. Glory be I love the doomer weekends, even if the truth is being spoke, categorized just so can show that since it has not yet happened, that the fingers being held in the dikes don't need to be there at all.

John Mauldin has laid it out pretty well, with Casey Jones a prime example of a principled man losing his life, for no fault of his own, but to do what he could to avert tragedy. No one of his stature exist either in politics or banking. Just the opposite, as the looters dash to take off the middle class all the wealth possible before the train crash happens.

Have you thought about what happens when the credit cycle hits bottom and disappears as the junk bonds are sold at any price, and asset prices go screaming down just like a full balloon does when it is pricked? First, there becomes a shortage of credit even if rates are at nose bleed heights. Then debt laden companies start falling as real assets in the real world are sold for pennies to stop the slide to oblivion. Trucking companies and farmers share this fate. The dollar may be defaulting soon, but for a period of time as the debts hit the recession wall, the funny colored rag will enjoy a brief rally as debts are called to be settled. Oil will bounce up, way up, think about $10 gas as the middle class stop driving except for essentials. Trucking companies will sell their trucks for any price, farmers will idle their equipment as the falling commodity asset prices cannot make-up the cost of the fuel. Independent truckers also cannot carry loads at the prevailing shipping prices, so they will park their rigs and hope for a miracle. Then you will see shortages of basic commodities, and the people will start to starve. Cities will go up in flames as the entitled voice their opinion of the new world order, and their bellies.

Can't happen here, land of the free, home of the brave? We're #1, we're #1, we're #1.


Clickety-clack, clickety-clack, clickety-clack the train is on the track,

Casey Jones has his hand on the brake as we watch his back,

The wheels turn ever faster as we fail to see the opinions that morphs into facts,

Driving the engine faster to the wreck that waits patiently for us down that same track.

In reply to by divingengineer

Lost in translation serotonindumptruck Sat, 05/12/2018 - 18:06 Permalink

Dunno where your AO is currently but here in LaLa Land, the freeways are choked with the largest possible vehicles that credit can buy.

Escalades, Chargers, Mustangs, Camaros, Suburbans, Sequoias, crew cab Super Duty trucks - all flying down the road at high speed.

I have wondered “how long can this go on?” for a number of years, but there’s no end in sight...

...and “fuel efficient” doesn’t seem to be in anyone’s vocabulary.

In reply to by serotonindumptruck

SDShack divingengineer Sat, 05/12/2018 - 16:20 Permalink

A Ponzi does not have cycles. It exists in only two states... expanding or collapse. The central banks have engineered a World Wide Debt Ponzi. The only one who profits from a Ponzi are the creators. The "investors" all get wiped out, except for the really early ones that see the "investment" as too good to be true, and opt out first. This starts the collapse and the resulting wipe out is inevitable. It's why the Central Banks are doing everything to keep the Ponzi going and stomp out every threat against it. That means trying to eliminate business cycles and trying to engineer perpetual 2-4% inflation and "growth". Their Ponzi collapses otherwise.

In reply to by divingengineer

Batman11 Sat, 05/12/2018 - 14:10 Permalink

Globalisation used an economics that didn’t consider debt.

Technocrats trained in this economics were supposed to be able to run economies well, but they just presided over debt fuelled booms that led to busts.

This was to be expected.

The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.

This is what happened when it was used before in the 1920s and it led to the Great Depression.

The economics is global and so is the problem.

Everyone has been enjoying 1920s style, debt fuelled booms.

Steve Keen saw 2008 coming in 2005 by looking at the US debt-to-GDP ratio.

He has been looking at this for a long time and has now seen the same thing occurring everywhere

At 25.30 mins he has super imposed the debt-to-GDP ratios.

Why does neoclassical economics cause this to happen?

  1. It doesn’t consider debt
  2. It holds a set of beliefs about markets where they represent the rational decisions of market participants; they reach stable equilibriums and the valuations represent real wealth. 

Everyone marvels at the wealth creation of rising asset prices, no one looks at the debt that is driving it. 

Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.

An earlier neoclassical economist believed in price discovery, stable equilibriums and the rational decisions of market participants, and what the neoclassical economist believes about the markets means they can’t even imagine there could be a bubble; they think the market represents real, permanent wealth.

swmnguy Sat, 05/12/2018 - 14:54 Permalink

I figured out the housing bubble in 2003, all by myself, sitting on my porch with a notepad and calculator, drinking iced tea.

My wife and I bought a tiny little starter home in 1996 for $49,500, in a modest but safe neighborhood in South Minneapolis.  We got a very good deal but not unheard-of.  We shopped hard for months.

In 2003, for a variety of reasons, we decided to refinance.  We had an FHA first-time homebuyer floating-rate mortgage and I was convinced that interest rates would go up.  They probably should have, had the "rules" of economics been in play, but clearly they were not.  I was wrong about that.  But I also wanted to finalize an old tax debt, and the state Revenue Department had stopped talking to me because they knew I had a strong argument that I was done paying them.  They'd be forced to interfere with a refinancing, and then I'd have the lender as well as my attorney to help me force them to make a deal.  That part worked perfectly.

Anyway, our small, cautious credit union, in July of 2003, appraised our $49,500 house at $135,000, and offered us that much money.  "Buy a boat!  Take a vacation!," they advised us.  Yeah, right.  I took $60,000, to replace the old mortgage, cover the refi fees, and pay off the old tax obligation.  The lenders thought we were nuts, not taking the additional $75,000 they were willing to lend us.

Adding 20% to the overall debt, at a lower rate, reduced our monthly payment by about $20.  That made no sense to me so I had to work it out on paper.

What struck me was that my house had supposedly appreciated in value over 2.5x in 7 years.  Yet who would want to buy my house?  A young couple just like us, just starting out, or an elderly couple looking to downsize.  Who in that group had seen their income, wealth, purchasing power increase 2.5x in those 7 years?  That's when I realized a few things.  1) We're fucked.  2) Economic "Laws" and "Rules" are nonsense, because economics is really an applied form of human psychology, not a natural science subject to laws.  3)  We're really fucked.

I was about 4 years early thinking it was all going to fall apart.  And I underestimated the ability, with a completely fiat system, to simply paper over a collapse.    I managed to sell that house in 2009 for $140,000, roll it all over into the next-sized-up house, and now we've almost paid that off in full.  Supposedly this house, bought in 2009 for $220k, is now worth $330k.  It just goes on and on and on.  Nothing but cheap credit.  People's income hasn't changed appreciably since 1996, for the lower 90% of us who would be interested in these houses.  It's going to crash again, and be papered over again, because the "rules" do not apply.

swmnguy InnVestuhrr Sat, 05/12/2018 - 15:30 Permalink

In hindsight, the real discovery I made was how far into ridiculousness people will go to keep from acknowledging an unpleasant reality.

At some point a guy on Easter Island decided to cut down the last remaining trees to make rollers to move more giant sculptures into place, so the Gods would bring back, among other things, trees, so they could keep living there.

I also learned the truth of many of the things my grandfather told me about his experiences running a hardware store in Appalachia through the Great Depression.  Nothing I, or you, didn't already know.  But they're true and whenever somebody tries to tell me "It's all different now," I know immediately my leg is being pulled.  Use debt only as a tool to get something you have to have and can't get any other way.  Live below your means, at least as defined by a lender.  Understand that when you buy a house, you're really just buying a loan, unless you can pay cash in full.  Unequal information in a deal leads to unequal results. 

Stuff like that, which I saw so many of my peers decide to ignore in the 2000's, much to their later dismay when they realized house prices don't always go up, and loans come due and can't always be rolled over.

Sure, I could live more bigly.  I like my tiny little paid-off car.  I like my almost-paid-off house.  I like not having any accumulated debt.  I like knowing that my wife could lose or quit her job tomorrow, or my business could fall off 50%, and we wouldn't have to change a thing we do today.

In reply to by InnVestuhrr

South Pacific swmnguy Sat, 05/12/2018 - 20:22 Permalink

Well done, the concept of living below your means is almost a completely alien one in the younger generation I am a part of. For those of us who are too young to have learnt what you speak of above first hand, the old adage of; To be able to look into the future, one must first look into the past rings very true

In reply to by swmnguy

divingengineer swmnguy Sun, 05/13/2018 - 12:09 Permalink

How much would that $49k house sell for today?

You think it was ridiculous then, you’d puke now, $330k is not this weeks appraised value, it is last months, probably gone up since I started this comment. Who’s pay has gone up 600% in the last 10 years?

Prices are on a rocket ride, wages never move now. How long can that last? We’re going to see.

In reply to by swmnguy

the_river_fish swmnguy Sat, 05/12/2018 - 16:27 Permalink

Hardly any lessons have been learnt from the 2008 financial crisis.

Think about it,

Total Residential Mortgage Debt Outstanding in Australia: A$1.75 trillion (Up 67% since September 2008), 96% of GDP (2017)

Total Residential Mortgage Debt Outstanding in Canada: C$1.53 trillion (Up 70% since September 2008), 102% of GDP (2017)

Graphs and data here:

This is just mortgage debt outstanding. Wages/income haven't increased significantly since 2008 but asset prices have .

In reply to by swmnguy

Lost in translation swmnguy Sat, 05/12/2018 - 20:45 Permalink

“...I underestimated the ability, with a completely fiat system, to simply paper over a collapse.”

This ^ 

Arguably my greatest error/gaffe.

Left the stock market in late 2016 and cashed out of an annuity early 2017, believing, “this entire house of cards is going to tumble over, any day now.”

Took a beating in taxes/penalties/fees.

Glad Mom didn’t live to see it.

So dumb.

In reply to by swmnguy

horse cents Sat, 05/12/2018 - 15:39 Permalink

The corporate bond market may be ill, but the full faith and credit of the "United" States of America is something else all together.  Bonds are predicated on trust. Once that trust is broken investors will flee. The author is absolutely correct. The Fed leads the economy like a dog on a leash, until the dog bolts, breaks the grip of the his master, gets in a fight, is hurt and starving, then ends up at the pound on death row.

AurorusBorealus Sat, 05/12/2018 - 15:45 Permalink

Correction.  There is no such thing as a "business cycle."  All the cycles of boom and bust in modern history have been "credit cycles."  Economists have no data from any point in time before modern "credit" existed.  They have no point in time at which the datum of "credit," so called can be separated from the datum of "business," because from the Medici forward, the expansion of "business" has been accompanied by the expansion of credit and the retraction of business has been accompanied by the retraction of credit.

Modern economics is alchemy: trying to produce lead from gold by mixing theories of "essences" that have no relation to the separate, actual physical properties of the things that they study.  The application of credit has always been the alkahest, or universal solvent, that economists seek to learn to apply in correct quantities.  Like alkahest, "credit," as understood by economists, does not exist and trying to determine how to apply alkahest in the correct amounts is "fool's gold."

"Credit" is a mathematical illusion produced by the ledgers of double-entry book-keeping.  The proof of the illusion is the cycles that it creates.  Credit can boom or bust any economy, and has no effect on growth.  Technology and innovation are the engines of economic growth.  Robber barons did not create the telegraph system, the steam engine, or the railroad.  Thinkers created these ideas, and real people, with labor, built them.  "Credit" and the alchemists who study and try to correctly apply credit were irrelevant to these advances.

cwsuisse Sat, 05/12/2018 - 16:47 Permalink

Central banks blow asset bubbles to balance debt to save the system and to fend off recession. The bubbles are artificial. That means there is no true collateral. Cheap money does not only destroy the price finding mechanism but corrupts the allocation  process and promotes wrong investment decisions. This reminds me of the ZeroHedge's "on a long enough timeline" the value of (almost) all assets drops to zero. But the game can carry on as long as the FED finds buyers for its paper. If the demand falters interest rates must rise. If interest rates rise the bad investments are uncovered: "When the tide goes out....". This time because of the long period of bad investments (ask Elon) the hell will brake loose. 

Not if_ But When Sat, 05/12/2018 - 18:23 Permalink

I think this article stimulates a lot of good thoughts and posts.  But it's because the article itself is well thought out, well written, pretty original, and therefore very thought provoking which tends to bring out fine posts by the readership.

Let it Go Sat, 05/12/2018 - 19:53 Permalink

We never know what the future will bring but if it is a financial crisis liquidity is generally one of the first things to dry up and when it does cash is king.  In my line of work I do a great deal of negotiating and I have found one word people wanting to reach an agreement don't want to hear is "IF"! This is why I will never call the holder of cash stupid unless it is during a long period of massive inflation. More on this subject in the article below.

 http://Stupid To Hold Cash? I Think Not!html