A Number of Sectoral Credit Bubbles Become Evident
We have previously argued that the current inflationary echo boom (a boom with clear 'depression undertones' it should be added) is more diffuse than the previous two bubbles were, which were clearly concentrated in specific industries (namely technology and housing). This is still the case; the current echo boom is somewhat broader. Nevertheless, there are several areas in which the effects of the credit expansion have become decidedly manifest. One such area is the boom in student loans, a topic which Ramsey has discussed in some detail previously.
To the student loans debate we would add that the education sector is one in which the effects of the Fed's massive money supply inflation are most clearly visible. Prices are rising at breathtaking speed and have done so for some time. It is no wonder therefore that student loans are skyrocketing, as average real incomes have declined over the same period.
The cost of college tuition in the US, via – click for better resolution.
Mean family incomes, nominal, adjusted by official CPI and adjusted by 'corrected' CPI, via our friends at nowandfutures.com (the corrected CPI tries to adjust for the under-reporting of price increases in the government's official statistics) – click for better resolution.
The student loan bubble is also a prime example of malinvestment. What people get in return for paying these inflated tuition costs is simply not worth it. Many no longer find jobs in their designated fields, as the severe boom-bust cycles the economy has suffered courtesy of the Fed have abruptly shifted demand for specific labor in entirely different directions. Never before have so many college graduates been employed in minimum wage jobs because they can no longer find a job corresponding to their particular skill set. Not surprisingly, record amounts of student loans are delinquent as of today.
However, there are also other sectors in which credit bubbles have become evident. One is the bubble in margin lending at the stock exchange. Here is a recent chart of NYSE margin debt:
Margin debt at the NYSE has soared to the highs last seen at the top in 2007, via sentimentrader – click for better resolution.
Along similar lines, issuance of corporate 'junk' debt has reached new record highs, and even 'toggle bonds', a.k.a. 'PIK' (payment in kind) bonds are back. These bonds give the issuer the choice whether to pay interest in cash or by issuing even more bonds. They are essentially a kind of Ponzi scheme, and yet, investors are flocking into these securities in their desperate 'hunt for yield'.
An Explosion in Sub-Prime Lending
Another area where a credit bubble has formed is the sub-prime car loan business. Reuters has published a special report on the topic. What is so surprising to us is that Reuters has decided to correctly name the perpetrators: namely the Fed. The report is entitled: “How the Fed fueled an explosion in subprime auto loans”. A few excepts:
“The Fed's program, while aimed at bolstering the U.S. housing and labor markets, has also steered billions of dollars into riskier, more speculative corners of the economy. That's because, with low interest rates pinching yields on their traditional investments, insurance companies, hedge funds and other institutional investors hunger for riskier, higher-yielding securities – bonds backed by subprime auto loans, for instance.
Lenders like Exeter have rushed to meet that demand. Backed by Wall Street banks and big private-equity firms, they have been selling ever-greater amounts of subprime auto loans in the form of relatively high-yield securities and using the proceeds to fund even more lending to more subprime borrowers.
Expansion of the subprime auto business was chronicled in a 2011 Los Angeles Times series. Since then, growth has continued apace. Consider that in 2012, lenders sold $18.5 billion in securities backed by subprime auto loans, compared with $11.75 billion in 2011, according to ratings firm Standard & Poor's. The pace has continued so far this year, with $5.7 billion of the securities issued, compared with $4.4 billion for the same period last year, according to Deutsche Bank AG. On Monday alone, three deals totaling $1.6 billion of subprime auto securities were announced by Wall Street banks.
To make up for the risk of taking on increasing numbers of high-risk borrowers, subprime auto lenders charge annual interest rates that can top 20 percent.
Critics of the Fed say the growth in subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets – junk bonds, subprime mortgage securities, and others. The yield chase delivered big windfalls to some Wall Street firms and hedge funds holding securities that soared in value. But so much money has flowed into these assets, the critics say, that the markets for some are beginning to resemble the housing boom in the run up to the financial crisis.
"It's the same sort of thing we saw in 2007," said William White, a former economist at the Bank for International Settlements. "People get driven to do riskier and riskier things."
A bust in the subprime auto market wouldn't have consequences nearly as devastating for lenders, investors or the broader economy as the housing bust did. Securities underpinned by subprime auto loans, estimated at about $80 billion between 2006 and 2012, are a fraction of the $1.6 trillion in mortgage-backed products Wall Street created between 2006 and 2009, according to S&P data and the Financial Crisis Inquiry Commission, created by the U.S. government to analyze the financial crisis.
And whatever its faults, the Fed's program, consistently supported by most members of the central bank's policy-making body, has helped pull the U.S. economy out of recession and boosted the stock market to record levels.”
We want to briefly comment on two of the points highlighted above. First of all, the fact that sub-prime lending bubble in car loans is 'not as risky as the mortgage credit bubble was'; that is no doubt true, but as noted above, sub-prime lending for cars is only one of several new credit bubbles now underway, if an especially egregious one.
Secondly, the sentence that begins with “whatever its faults”, which argues that, hey, central planning is working after all! All those wise men at the Fed support money printing, and the 'data' have gotten better, so they are obviously right!
This idea – 'just let the central planners work, they will fix everything' – is a widespread propaganda meme that is repeated over and over again. It overlooks the simply fact that inflationary policy always has 'feel-good' effects at first. Let us not forget, the argument that the Fed's inflationary policy was the correct choice was made from 2004 to 2007 as well, as house and stock prices rose. Everything seemed to be going well, and yet, today it should be clear even to the more slow-witted among us that it was not 'worth it'. Why then do so many people apparently hold that 'this time, it's different'?
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “New Fed-Induced Credit Bubbles”
Most read in the last 20 days:
- A Historic Rally in Gold Stocks – and Most Investors Missed It
Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right? Successful stock market investing in two simple steps Photo via slideshare.net As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him: Thirty years ago, at an investment conference, there was a scalawag analyst...
- Gold and Negative Interest Rates
The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
- Why is the Stock Market so Strong?
Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
- Cultural Marxism and the Birth of Modern Thought-Crime
What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
- Gold Stampede
Stampeding Animals The mass impulse of a cattle stampede can be triggered by something as innocuous as a blowing tumbleweed. A sudden startle, or a perceived threat, is all it takes to it set off. Once the herd collectively begins charging in one direction it will eliminate everything in its path. Better get out of the way... stampeding bisons Photo credit: Surface Niusance The only chance a rancher has is to fire off a pistol with the hope that the shot...
- Russian Aggression Unmasked (Sort Of)
Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time: “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
- US Economy – Ongoing Distortions
Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below: A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge. Wholesale...
- Getting it Wrong on Silver
Erroneous Analysis of Precious Metals Fundamentals We came across an article at Bloomberg today, talking about silver supply troubles. We get it. The price of silver has rallied quite a lot, so the press needs to cover the story. They need to explain why. Must be a shortage developing, right? At first, we thought to just put out a short Soggy Dollars post highlighting the error. Then we thought we would go deeper. Here’s a graph showing the price action in silver since the...
- Political Pundits, or Getting Paid for Wishful Thinking
Bill Kristol - the Gartman of Politics? It has become a popular sport at Zerohedge to make fun of financial pundits who appear regularly on TV and tend to be consistently wrong with their market calls. While this Schadenfreude type reportage may strike some as a bit dubious, it should be noted that it is quite harmless compared to continually leading people astray with dodgy advice. To answer the question posed in the picture with the benefit of hindsight: not really.... (look...
- Running Mate Turns Into Fall Girl
Odd Couple While checking on the US primaries a few days ago, we came across a piece of news informing us that pretend candle-swallower Ted Cruz had picked Carly Fiorina as his “vice-presidential running mate”. Our first thought upon hearing this was “WTF”? The match made in heaven... two loooosers find each other. Photo credit: AP It's not so much that he's picking another “loooooser” as The Donald would put it...the real absurdity of it is that...
- 100 Years of Mismanagement
Lost From the Get-Go There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse. But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves. The scalawag himself. Keynes provided governments with the...
- Bank of Japan: The Limits of Monetary Tinkering
Damned If You Do... After waking up on Thursday, we quickly glanced at the overnight market action in Asia and noticed that the Nikkei had tanked rather noticeably. Our first thought upon seeing this was “must be the yen” - and so it was: June yen futures, daily – taking off again - click to enlarge. Given the BoJ's bizarre plan to push consumer price inflation to a 2% annualized rate within [enter movable goal post here] years, Mr. Kuroda cannot be overly...