The Entry Points
The series of financial crises have been intensifying over the last twenty years. In July 1997, there was the beginning of the currency problems in Thailand and the Asian Financial Crisis. The crisis led to the downfall of longtime dictator Muhammad Suharto in August 1998. As of his death in 2008, he and his family were the most corrupt of all time. But unfortunately he didn’t live long enough to see that mantle handed to the Clinton Foundation. Then there was the Russian Financial Crisis. In August 1998, the Russian currency, stock, and bond markets got plastered, just like Boris Yeltsin usually was. But the most ironic/funny? financial crisis was the blow up of Long Term Capital Management (LTCM), run by, yes, two Nobel Prize winners in Economic “Sciences”. So let’s consider the sciences…. physics, chemistry, computers, genetics, and….economics – seriously? But the most amazing factoid about LTCM was neither of those clowns “managing” the fund was Larry Summers. You’d figure that if someone were to blow up the financial world it’d be old Larry.
And the next crisis began in March 2000, when we had the top centered around the Nasdaq Dot-com Bubble, thus infecting equity markets world-wide. There were several prominent evangelists back then, who “abetted” the tidal wave of weak handed buyers. Jim Cramer was one of those cheerleaders, and 10 days from the intraday top he was still euphorically shaking his pom-poms: “We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over — and it is very far from ending.”
The biggest financial crisis (so far) was centered around 2008, but the top in global equity markets was actually in October 2007. While the top in the main culprits -US real estate, mortgages, and derivatives – was generally in 2006. And Chairman Bernanke was on fire with his outlooks for the economy, rattling off one winner after another:
In March 2007 : “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”
In October 2007: “Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.”
In January 2008: “The Federal Reserve is not currently forecasting a recession.”
So now as we enter the euphoric Trump era, there are a few minor multi-trillion dollar issues to deal with. To start with would be $1.4T in student loans, where less than half of the undergraduates are paying down their debt. While “only” 11% are delinquent loans, that number is artificially low, as the ones on deferred payment or payment plans mask the big troubles with those loans. Then there is the $1T car loan “industry”, where delinquency rates are at 7 year highs. And in the euphoria surrounding much of the housing market, more cracks, as “the Federal Housing Administration mortgage delinquencies jumped in the fourth quarter for the first time since 2006… The FHA (with $1T in loans oustanding) insures low down-payment loans and is a favorite among first-time homebuyers”. And: “the government-backed debt is the only source of mortgage availability for low-down-payment, subprime borrowers at a time when prices are rising relentlessly. A recent report from Black Knight Financial Services finds that a median-priced home now requires 22.2 percent of median income to make the necessary monthly principal and interest payments. Housing is about the least affordable it has been since 2010″.
Then in steps Donald (I Love Debt) Trump. While I voted for Mr. Trump, and it’s very early in his Presidency, it’s quite disconcerting the direction he’s going in. His misunderstanding of markets, like believing he can talk down the $ when the trend is up, and also taking credit for “his” stock bull market, are both examples. The Dow had already tripled from the March 2009 lows when he was elected. In fact, if we’re going to go there and do the moronic doling out of credit thing for the bull market, then Barack Obama gets 90% of it. There has not been one Trump supporter who has given Mr. Obama credit for the bull market, nor should they. So then who gets blamed for the next selling wave, as it’s actually normal for markets to go up and go down. As to the $, apparently everyone has already forgotten about the clowns touting the “new” US$ bull market, right into the massive 103 resistance in the $ index. I was warning two months ago to expect a correction in the $ uptrend. But the President himself was perfectly happy to take credit for the strong $, right smack into the intermediate term highs – very incompetent. But now, weirdly, he “wants” a “not too strong Dollar“. He’s not going to get his wish (yet).
And it’s very troubling to see the President encouraging more debt for government, business, and individuals. It was one thing when President Reagan was doing it 35 years ago, but it’s a light year’s difference with our current debt situation on this Planet. We were then at a secular top in inflation, and interest rates, but now it’s absurd to be encouraging more debt to just be piled on top of the mountain of old debt. Part of Mr. Trump’s argument is that Dodd-Frank is a disaster (possible) and banks are not lending. And putting aside whether Dodd-Frank is good policy or not (anything Barney Frank is involved in is suspect anyway), but here’s the actual lending situation – household debt rose by $226 billion in Q4, the most in a decade. So with inflation having bottomed, the new debt will now fuel the inflation, not the deflation anymore. There will be sort of a symbiotic relationship with debt, inflation, and rising rates. And the wage earners can not catch a break, as real earnings are going to continue to stagnate, yet we have leaders encouraging more debt. Wow.
So as we think about those other crises, with the total incompetence by the so-called leaders, the current dangerous push for more lending into a totally over-borrowed world, and the cluelessness by the Federal Reserve, is it worrisome that Janet Yellen at the Feb. 1st meeting said “she is now confident” – yes it is. And looking at those other crises, the one thing they had in common was a rush to buy US Treasuries. But what if the next crisis is actually caused by those US Treasuries themselves….uh-oh.
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