A Good Guess About the Trigger of Our Next Crisis
Talking about crisis at the moment appears excessive. With stock market indices hitting all-time highs and the economy humming along smoothly, albeit a bit weakly, "crisis" isn't in the financial lexicon these days.
Indeed, a reasonable interpretation of the strong February price action in stocks after the shakes of January tells us that the current bull market should continue for long time to come, possibly even years - until evidence proves otherwise. It's not something to sneeze at, especially in light of the pessimistic current floating out there. Do you hear people talking about "getting in" to the market? I don't. Are your friends yapping about hot stock and investment ideas when you get together. If so, I'm not hearing it from my friends. The lack of buoyant, unreasonable optimism doesn't smack of a market top. It's only when everyone's jumping in with both feet that major tops usually occur. If the lack of optimism, or "irrational exuberance" as Alan Greenspan famously noted in 1996 is our key gauge of whether the market is topping or not, then the market ain't topping yet.
But as in all things related to trends, especially market trends, whether rising or falling, it's important to look beyond the obvious, even the reasonable - if for no other reason than the fact that people are notoriously unreasonable, or, if you prefer, irrational. In that light, we note this story in the Wall Street Journal:
Indeed, there's hardly any qualification required for students to get "financial aid" in the form of loans, just as the only requirement for getting financing, either in the form of a loan or a lease, for your auto is pretty much fogging a mirror. As for "securitization," that's when Wall Street firms buy these shaky loans and package them into some product that they then sell to institutional and individual investors, claiming that lumping this junk together somehow makes the investment less risky. Naturally, that's what's being done with the plethora of junky student loans and auto loans.
As these pools of junk grow, a potential credit "event" becomes inevitable. The failure of such securities to meet their promised payments may begin a series of events that lead to crisis. But, frankly, that likely lies in the future somewhere. The relentless rise of the stock market, without the hint of irrational exuberance, offsets our worries about any near-term crisis stemming from rogue student or auto loans.
Normally, we'd leave it at that. Except that now we've got the phenomenon of HFTs (high-frequency traders) and loose money. The HFTs' computer trading driven by algorithms creates wild swings that distort traditional methods of measuring and monitoring trends. And the loose money causes investors to engage in bad investments - an economic phenomenon known as "malinvestment." The most obvious examples of this would be the enormous stock buy-backs in which corporations continue to engage. Buying back their stock supports, even elevates, the price of a company's stock, something from which executives who hold options derive great financial benefit. And borrowing massive amounts of money to boost these buyouts simply leverages that process. Apple serves as perhaps the biggest current example of both buying back stock and borrowing massively, but many corporations pursue these strategies.
To sum up the flies in the ointment of the otherwise rosy picture of continued rising stock market is this: 1) If HTF activity sufficiently distorts traditional trend monitoring methods, we may be closer to a crisis than other evidence suggests; and 2) If stock prices are boosted by corporate buybacks exacerbated by borrowing, we have the element of leverage (borrowing) added to the phenomenon of manipulation in the form of financial engineering (buybacks), classic bubble-blowing action that continues until that unknown and unexpected moment in time when the bubble bursts.
So there's our best guess about what the trigger of our next crisis might be, as well as our hedged view of when such a crisis might occur: It will take the form of a credit crisis, and we really don't know whether it's coming sooner or later.
Indeed, a reasonable interpretation of the strong February price action in stocks after the shakes of January tells us that the current bull market should continue for long time to come, possibly even years - until evidence proves otherwise. It's not something to sneeze at, especially in light of the pessimistic current floating out there. Do you hear people talking about "getting in" to the market? I don't. Are your friends yapping about hot stock and investment ideas when you get together. If so, I'm not hearing it from my friends. The lack of buoyant, unreasonable optimism doesn't smack of a market top. It's only when everyone's jumping in with both feet that major tops usually occur. If the lack of optimism, or "irrational exuberance" as Alan Greenspan famously noted in 1996 is our key gauge of whether the market is topping or not, then the market ain't topping yet.
But as in all things related to trends, especially market trends, whether rising or falling, it's important to look beyond the obvious, even the reasonable - if for no other reason than the fact that people are notoriously unreasonable, or, if you prefer, irrational. In that light, we note this story in the Wall Street Journal:
Americans are for the most part taking on new loans carefully, yet a rise in late payments on two fast-growing types of debt—auto and student loans—suggest some consumers could be getting in over their heads.We could focus on other items, but these two may be the most evident right now. After all, we've talked about the growth of auto loans as well as student loans. And if you remember, the reason for the extraordinary growth mirrors the reason that sub-prime loans fast and furiously in the early 2000s: loose underwriting (virtually non-existent to be accurate) and securitization.
Indeed, there's hardly any qualification required for students to get "financial aid" in the form of loans, just as the only requirement for getting financing, either in the form of a loan or a lease, for your auto is pretty much fogging a mirror. As for "securitization," that's when Wall Street firms buy these shaky loans and package them into some product that they then sell to institutional and individual investors, claiming that lumping this junk together somehow makes the investment less risky. Naturally, that's what's being done with the plethora of junky student loans and auto loans.
As these pools of junk grow, a potential credit "event" becomes inevitable. The failure of such securities to meet their promised payments may begin a series of events that lead to crisis. But, frankly, that likely lies in the future somewhere. The relentless rise of the stock market, without the hint of irrational exuberance, offsets our worries about any near-term crisis stemming from rogue student or auto loans.
Normally, we'd leave it at that. Except that now we've got the phenomenon of HFTs (high-frequency traders) and loose money. The HFTs' computer trading driven by algorithms creates wild swings that distort traditional methods of measuring and monitoring trends. And the loose money causes investors to engage in bad investments - an economic phenomenon known as "malinvestment." The most obvious examples of this would be the enormous stock buy-backs in which corporations continue to engage. Buying back their stock supports, even elevates, the price of a company's stock, something from which executives who hold options derive great financial benefit. And borrowing massive amounts of money to boost these buyouts simply leverages that process. Apple serves as perhaps the biggest current example of both buying back stock and borrowing massively, but many corporations pursue these strategies.
To sum up the flies in the ointment of the otherwise rosy picture of continued rising stock market is this: 1) If HTF activity sufficiently distorts traditional trend monitoring methods, we may be closer to a crisis than other evidence suggests; and 2) If stock prices are boosted by corporate buybacks exacerbated by borrowing, we have the element of leverage (borrowing) added to the phenomenon of manipulation in the form of financial engineering (buybacks), classic bubble-blowing action that continues until that unknown and unexpected moment in time when the bubble bursts.
So there's our best guess about what the trigger of our next crisis might be, as well as our hedged view of when such a crisis might occur: It will take the form of a credit crisis, and we really don't know whether it's coming sooner or later.
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