Why a bomb like the one that blew up the markets in 2008 could turn out right now
It has already been a banner year for stocks. In fact, if we could just stop all of this for the next 10 months, we would be looking at double-digit returns on the S&P 500 SPX,
Nothing wrong with this kind of annual performance.
Alas, it doesn’t work that way, and it goes without saying that a lot could change before the bell rings in 2020. One of the risks could come from a familiar source: leveraged loans.
Lily:Leverage loans are in uncharted territory and it’s a big risk
In our call of the day, Satyajit Das, a former banker who was once hailed as one of the 50 most influential financial figures in the world, says we may be facing a similar bomb as the one that exploded in the market ten years ago.
“Financial markets have short memories,” Das wrote in an opinion piece for Bloomberg during the weekend. “In recent times, they have come to believe that secured loan bonds (CLOs) are much safer instruments than the secured debt bonds, or CDOs, on which they are based and which helped precipitate the 2008 crisis. are wrong – and dangerously.
CLOs are similar to CDOs, in that each one bundles multiple loans together to create synthetic bond-like investments. It’s a bit wonky, but basically CLOs are designed to be a safer way to increase leverage on a debt portfolio. Instead of mortgages, subprime and other loans, in CDOs, CLOs repackage business loans and consumer credit, such as auto loans.
“Nonetheless, many risks remain,” Das warned. “Whether or not CLOs are safe depends on several factors: the credit quality of the underlying loans – as judged by the risk of default and the extent of loss given default – as well as the correlation between default and losses within the portfolio. ”
There are currently $ 700 billion of CLOs circulating around the world, with annual new issues of over $ 100 billion, similar to what we saw in the infamous subprime CDOs in 2008.
“There are too many parallels with 2008 for more comfort. ”
Das said many aspects of the risks are not fully understood. For example, the credit quality of the loans pooled in most CLOs is lower than investment grade and borrowers are heavily indebted, increasing the risk of higher losses.
“Investors assume that portfolios are safer because they are diversified,” he wrote. “Yet compared to mortgages, business loan portfolios tend to be made up of fewer and larger loans, which increases concentration risk. Leverage loans are very sensitive to economic conditions and defaults can be correlated with many loans experiencing problems simultaneously. “
As we have seen before, the misfeed can get out of hand at warp speed when slowing down.
“The risk is that CLOs create unfavorable feedback loops,” Das said. “Falling prices, rising spreads and tighter credit availability will freeze credit markets. The credit crunch will fuel the real economy, triggering losses, sales and price declines. This is when the contagion of fear kicks in, he continued, as the banks’ financial situation is called into question and depositors refuse to fund the banks.
“There are too many parallels with 2008 for comfort. Investors, many of whom have uncertain expertise and little holding power, have increased their exposure in search of higher returns, ”Das warned in his op-ed. “This speculative episode is integrated, like its predecessors, with a euphoric escape from reality and a blindness to the risks which continue to increase.”
Looks like ‘risk blindness’ is about to spill over into Monday’s session as stocks brace for a strong start to the week.
The Dow DJIA,
and Nasdaq COMP,
are all higher at the start of trade, helped by rumors that a trade deal may be imminent. Investors are not too fond of US gold: GCH9
this morning, with prices down around 0.8%. US gross: CLJ9
is rising and the dollar DXY,
doesn’t seem to pay attention to Trump is calling this weekend for a weaker dollar. Find out more in Market Snapshot.
Overseas, ADOW Asian markets,
, for the most part, achieved a positive performance, driven by a strong rally in Shanghai SHCOMP,
, while Europe SXXP,
also grows higher.
Lyft filed its IPO papers on Friday and is now poised to beat rival Uber in the market, meaning Lyft could be the first to speak to potential investors on a roadshow and at have the opportunity to define its role in the burgeoning carpooling industry as a company gaining ground over a larger competitor. Lyft plans to register under the symbol “LYFT”.
Elon Musk launched Tesla TSLA,
fans on Sunday afternoon when he tweeted about an upcoming reveal of the new Model Y. In the following tweets he said: “The Model Y, being an SUV, is around 10% bigger than the Model 3, so it will cost around 10% more and will have a slightly lower range for the car. same battery ”, and that“ Detailed specifications and prices will be provided, as well as Y-testing. ”
Chief executive Fabio Schvartsman and other top executives at the Brazilian mining giant have resigned following pressure from authorities, signaling that investigators are focusing on leadership of the company after the deadly collapse of one of its dams.
As Alexandria Ocasio-Cortez continues to be criticized on the right for her Green New Deal, the Democratic New York MP made headlines over the weekend for being criticized by what would seem an unlikely voice: a former President of Greenpeace Canada.
See if you can spot the trend in this snapshot of top performing ETFs from last month, as spotted on Stockcharts.com.
Yes, the list is completely dominated by Chinese funds, led by this CNXT ETF,
. Commodities fared rather well.
“I cannot vote to give the president the power to spend money that has not been allocated by Congress. We might want more money for border security, but Congress didn’t allow it. If we remove these checks and balances, it is a dangerous thing ”- Sen. Rand Paul, in a speech to a crowd of nearly 200 Republican officials and supporters at Western Kentucky University.
Lots of data to chew on this week, with headlining in the form of the February Jobs Report through the end of the week. We will also have new home sales and housing starts along the way. As for Monday, car sales are piling up throughout the day, with construction spending for December due to be released at 10 a.m. EST. Also note, Fed Chairman Jerome Powell will speak on Friday at the 2019 Stanford Institute for Economic Policy Research Economic Summit.
40% – This is the percentage of voters in the latest NBC News / Wall Street Journal poll who say they will re-elect Donald Trump next year. But “as long as those economic numbers look like this, it still keeps an incumbent president in the race,” a GOP pollster said of the results.
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