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At last year's World Economic Forum, there was a panel titled "The Next Financial Crisis", and while many different potential causes were considered, the most p
by arawde 8y ago
At last year's World Economic Forum, there was a panel titled "The Next Financial Crisis", and while many different potential causes were considered, the most prominent one is definitely corporate debt, especially emerging market debt that is dollar-denominated. [0]
Much of the concern in markets right now seems to stem from the idea that as the Federal Reserve tightens credit, both through raising interest rates and through unwinding its previous QE programs, there will be a significant impact on companies that have borrowed at lower interest rates. Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default.
If you're a country which borrowed in dollars, the tightening of US monetary policy will often lead to a change in exchange rates that makes it more expensive to pay back debt. Coupled with a global economic slowdown resulting from a trade war, and things start to look nasty wherever you look.
[0]: https://www.youtube.com/watch?v=1WOs6S0VrlA https://www.youtube.com/watch?v=1WOs6S0VrlA
- pmorici 8y agoThinking about this reminded me of the line from the movie "The Big Short" where Michael Burry says one of the indicators of the coming crisis was an increase in the rate of fraud. Juxtapose that with what feels like an uptick in white collar fraud these past couple years. ie: Theranos, Fyre, 1MDB, numerous crypto token related scams.
- darawk 8y agoThat's interesting though i'm not sure that's the right kind of fraud. The fraud Bury was referring to was related to mortgage lending, both on the part of the borrowers (fraudulent documents supporting income, etc.) and on the part of the immediate lenders (the banks / lead generators for mortgages). The comparable type of fraud here would be businesses inflating their assets or income streams to acquire bank loans that they couldn't otherwise qualify for. It may be that that kind of fraud is on the rise, but I don't think the examples you cited (with the notable exception of 1MDB) are instances of it.
- zippy5 8y agoIt's not causal, it's symptomatic. People tend take bigger risks, even criminal ones, when they have less to lose or less to gain. It's an interesting proxy for economic desperation.
- darawk 8y agoThat's an interesting perspective that I hadn't considered. I'm not sure if it's right though. You think it's symptomatic of desperation? I don't think of the lead-up to the 2007 financial crisis as a particularly desperate time for most people.
- danans 8y agoOne interpretation is that for many who took on debt they couldn't support, it was a desperate attempt to continue a lifestyle that wasn't possible for them any more due to changes in both the global and local economies, aided by technology, which resulted in the reduced value of their labor.
- nopassrecover 8y agoIs it possible there is greater scrutiny during times of economic downturn leading to greatest discovery of fraud?
- kamaal 8y ago>>The fraud Bury was referring to was related to mortgage lending To be frank, I guess the parent was talking about general fraud trends. It will be a little disingenuous to suggest the same set of events have to repeat for it be classified as fraud. For eg, these days start ups with no way of turning in profits, but raising billions in debt could be suggested as a fraud eventually.
- the_watcher 8y agoBurry refers to hard numbers - the rate of fraud was increasing. "What feels like an uptick" does not mean the rate has actually increased (I don't know if it has or not, but an uptick on reporting about fraud is not an actual uptick).
- your-nanny 8y agowasn't theranos fraud committed for much longer than a couple years?
- rco8786 8y agoYou lost me at “feels”. Need more than 4-5 anecdotes to determine if fraud is really upticking.
- pembrook 8y agoFraud and scams are the second oldest profession. Nothing about theranos or fyre or crypto is unique to this time other than the social media-as-fuel component. If you’re trying to say that corporate bonds are going to tank the economy, you’d need to find an increase in fraudulent issues. This is not the case—-the corporate bond market is highly regulated.
- nipponese 8y agoAccredited investors getting burned is not same as a national policy of grey zero loan restrictions, and the crypto was mostly retail investors using their Vegas money. You have to remember that it wasn't loan fraud that broke Wall Street's back in 2008, it was the the unregulated derivatives market of uncalculated risk... and that risk still exists today. https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp https://www.investopedia.com/ask/answers/052715/how-big-deri...
- sn41 8y agoTheranos, from reading Bad Blood, seems to be fraudulent science with financial fraud as an inevitable effect. Also, it seems to be drawn out from 2011.
- seppin 8y ago> If you're a country which borrowed in dollars All of Latin America, pretty much
- nickles 8y ago> Much of the concern in markets right now seems to stem from the idea that as the Federal Reserve tightens credit This became much less of a concern in late December, when Fed Chair Powell acquiesced to plummeting equities markets and declared a pause on rate hikes, emphasizing the data dependence and lack of a preset course for Fed policy. These statements signaled a shift in tone from the 'dots' published after FOMC, which indicated further hiking and a median expected neutral rate around 3% [0]. > both through raising interest rates After Powell's comments, expectations for rate hikes have diminished. Looking at 30-Day Fed Funds Futures, you can see that the market is pricing in ~1 more rate hike before the Fed reverses course [1 - chart][2 - source data]. > unwinding its previous QE programs It remains to be seen how aggressively the Fed will continue unwinding, but I'm curious how much balance sheet the Fed will actually be able to unwind. They've been rolling off ~50B in UST per month [3], starting from ~4.5T. For perspective, the Fed's balance sheet was ~800-900B prior to the GFC. There's reasonable concern that the Fed may not be able to reach pre-QE levels. The money stock appears to exhibit response to the Fed's balance shit reduction [4], which will not help foreign borrowers. > Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default. It looks like loans have been refinanced such that the bulk of them mature in 2021 or later [5], giving issuers some breathing room for the time being. [0] https://www.cnbc.com/2018/12/19/fed-dot-plot-december-2018.html https://www.cnbc.com/2018/12/19/fed-dot-plot-december-2018.h... [1] https://imgur.com/a/43Gt8si https://imgur.com/a/43Gt8si [2] https://www.barchart.com/futures/quotes/ZQ*0/all-futures https://www.barchart.com/futures/quotes/ZQ*0/all-futures [3] https://www.cnbc.com/2018/11/29/the-fed-is-still-tweaking-its-balance-sheet-unwind.html https://www.cnbc.com/2018/11/29/the-fed-is-still-tweaking-it... [4] https://imgur.com/a/RA62s4e https://imgur.com/a/RA62s4e [5] http://www.leveragedloan.com/us-leveraged-loan-maturity-wall-nothing-see-2023/ http://www.leveragedloan.com/us-leveraged-loan-maturity-wall...
- freefolks 8y agoThis is true that many/most loans have already been refinanced. 2015-2017 europe was the hot bed for refinancing and anyone credit worthy has already done so. It's a good time for the fed to pull liquidity out of the system. If they do not then CLO hotbed would eventually just move to South America which is mainly risky energy companies.
- drieddust 8y agoI don't have econonic background but I understood why banks are allowed to print the money and give it to businesses. If amount of money is fixed, then this problem will go away on its own. Human nature is not relible and if allowed humans will overspend and subsequent default. As Taleb puts it, executives at these companies don't have "skin in the game". Increasing shareholder value short-term is lucrative especially when their own compensations are tied to short-term stock value gain. Another part is lack of progress in executive education. While engineering as a discipline have constantly improved by introspection. No such thing have happenned in business management area. It's all about maintaining the status quo and appearing in controls even when they are nowhere near it.
- jussij 8y agoBanks don't print money. Federal Banks print the money, which basically means it's the government printing the money. > If amount of money is fixed, then this problem will go away on its own. There was a time when this in was in fact the case. It was known as The Gold Standard and it basically required governments to back up their currency with an equivalent amount of gold. The Gold Standard ended when it was abandoned by the USA. Basically the USA did start to print money and they didn't have the gold to backup that printing press.
- acornax 8y agoBanks don't literally print money but they do create it when they issue loans.
- kiriakasis 8y agothey do not create money, they are lending you someone else savings or money created by the federal reserve.
- orbifold 8y agoThat is incorrect, they only are required to own a fraction of the loans they give in assets. When a bank lends someone money, they create that money https://en.m.wikipedia.org/wiki/Money_creation https://en.m.wikipedia.org/wiki/Money_creation.
- HillRat 8y agoPlus bad corporate paper is a highly-correlated procyclical problem, which will be extremely not-fun when the economy starts seriously slowing (especially since the government shot their fiscal stimulus arrow with the tax cuts and the Fed is still trying to get enough headroom to not have to worry about the “pushing on a string” problem they encountered in the ‘08 crash). Not going to be a fun year or two ahead.
- nipponese 8y agoI think you mean commercial paper.
- mobilefriendly 8y agoOnly about 15% of the deficit is from the tax cuts, the rest is over-spending.
- onlyrealcuzzo 8y ago100% of the deficit is from over-spending or from under-taxing depending on how you look at it...
- maximente 8y agotwo months into fiscal FY2019, medicare had taken in $34B and spent $129B fiscal FY2019 CMMS spent $270B - a 24% increase YOY therefore, it seems disingenuous to equate taxation with spending, there's just no way to arithmetically catch up. edit: accidentally put medicaid instead of CMMS
- gisely 8y agoWhat do you mean arithmetically? Simply increasing taxes to without attempting to reduce spending growth might not be a good long term strategy, but it not like the laws of arithmetic prevent it. Whether we could raise tax revenue 24% is different question than whether we should.
- ellius 8y agoThis episode of Odd Lots entitled "Why the Eurodollar Might Be Ground Zero for De-Globalization" is a great listen: https://itunes.apple.com/us/podcast/odd-lots/id1056200096?mt=2&i=1000422769534 https://itunes.apple.com/us/podcast/odd-lots/id1056200096?mt...
- deleted 8y ago[deleted]
- kaycebasques 8y agoI see that the podcast features Jeffrey Snider. You might be interested in his extensive series on Macro Voices [1] called Eurodollar University. [1] https://www.macrovoices.com/edu https://www.macrovoices.com/edu (scroll to bottom)
- thoughtstheseus 8y agoAlso changes in the deductibility of interest expense under the new tax law.
- ttul 8y agoRisk has already come off - I am seeing it in private equity. If you run a startup and burn cash, have your plan B ready to go when the shit hits the fan. https://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation https://www.slideshare.net/eldon/sequoia-capital-on-startups...
- nickles 8y ago> Risk has already come off Are you able to elaborate on the derisking you've been seeing?
- ttul 8y agoAngels pulling out last minute because they are worried about their stock portfolio. Investors withdrawing from a levered strategy because of the same concern.
- deleted 8y ago[deleted]
- anonu 8y agoMany companies are laying off right now...
- nickles 8y agoRespectfully, that's not the sort of color I was hoping for. Instead, consider evidence of derisking as exhibited by recent moves in HY OAS [0]. [0] https://fred.stlouisfed.org/series/BAMLH0A0HYM2 https://fred.stlouisfed.org/series/BAMLH0A0HYM2
- azernik 8y agoPerhaps, but when it's industry-wide it's often a good leading indicator. My previous employer's only layoffs ever were in 2008, when one of their investors (I believe A16Z?) sat down the founders of their portfolio companies and told them to cut down, because the crunch was coming. These are companies whose management is in very close personal contact with the capital markets, and so often make decisions very quickly in response to what's going on there.
- pishpash 8y agoThere isn't going to be any more tightening, sorry to say. The yield curve is flat out to 30 years. 5-year breakeven inflation has come down to 1.67%, way below the Fed target. Unless the Democrats rev up government spending again, which they can't until at least 2020, 2.5% is where this cycle peaks. So much for the secular bond bear market: the pattern of ever looser credit cycles remains.
- C1sc0cat 8y agoExcessive debt has damaged Debenhams and killed some retailers in the UK.