Money and Finance

Links

Kyle Bass on Wall Street Week (video) (LINK)

Mutual Fund Observer, January 2016 (LINK)

Hussman Weekly Market Comment: The Next Big Short: The Third Crest of a Rolling Tsunami (LINK)

Over the holiday, we went with a group of friends to see The Big Short, based on the book by Michael Lewis about the global financial crisis. The film is deeply critical of Wall Street and weak banking regulation, most of which I see as valid. The one thing missing was that the film didn’t clarify why the mortgage bubble emerged in the first place, which I would have liked Margot Robbie to have mentioned while she was explaining mortgage-backed securities in the bubble bath.

The answer is straightforward: as the bubble expanded toward its inevitable collapse, the role of Wall Street was to create a massive supply of new “product” in the form of sketchy mortgage-backed securities, but the demand for that product was the result of the Federal Reserve’s insistence on holding interest rates down after the tech bubble crashed, starving investors of safe Treasury returns, and driving them to seek higher yields elsewhere.

See, the Fed reacted to the collapse of the tech bubble and the accompanying recession holding short-term rates to just 1%, provoking yield-seeking by income-starved investors. They found that extra yield in seemingly “safe” mortgage securities. But as the demand outstripped the available supply, Wall Street rushed to create more product, and generate associated fees, by lending to anyone with a pulse (hence "teaser" loans offering zero interest payments for the first 2 years, and ads on TV and radio hawking “No income documentation needed! We’ll get you approved fast!”; “No credit? No problem! You have a loan!”; “Own millions of dollars in real estate with no money down!”). The loans were then “financially engineered” to make the resulting mortgage bonds appear safer than the underlying credits were. The housing bubble was essentially a massive, poorly regulated speculative response to Federal Reserve actions.

The current, obscenely overvalued QE-bubble is simply the next reckless response to Federal Reserve actions, which followed the global financial crisis, which resulted when the housing bubble collapsed, which was driven by excessively activist Federal Reserve policy, which followed the collapse of the tech bubble. As my wife Terri put it “It’s like a rolling tsunami.”

Richard Duncan warns of weak credit growth ahead for 2016 and 2017 (LINK)

Between 1952 and 2008, every time US credit growth (adjusted for inflation) fell below 2%, the United States went into recession. During that period, the ratio of total credit to GDP rose from 150% to 380%. In other words, credit growth drove economic growth; and when credit did not grow, neither did the economy.

...Credit growth looks likely to fall back below the 2% recession threshold next year. If the Fed’s inflation forecasts are correct, then credit growth (adjusted for inflation) could fall to 1.6% next year and to only 1.0% in 2017.

[And if you want to subscribe to Richard Duncan's Macro Watch newsletter, you should also still be able to use the coupon code 'valueinvestingworld' to get 50% off.]

- Links
Yuval Harari on EconTalk (LINK) Related book: Sapiens: A Brief History of HumankindWhy Americans Don’t Trust the Fed - by Roger Lowenstein (LINK) Related book (comes out tomorrow): America's Bank: The Epic Struggle to Create the Federal...

- Hussman Weekly Market Comment: Topping Patterns And The Proper Cause For Optimism
Link to: Topping Patterns and the Proper Cause for OptimismNotes to the FOMC The following are a few observations regarding Dr. Yellen’s testimony to Congress. The objective is to broaden the discourse with alternative views and evidence, not to disparage...

- How Do You Say “minsky” In Mandarin? - By Christopher Pavese
Wikipedia defines a Minsky Moment as, “a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation...

- Harper's - Clouded Title: The Gross Illegality Of Mers
Via The Big Picture (PDF of the article posted HERE, for the time being): At the heart of the clouded-title problem is a Virginia-based company, recently much in the national news, called Mortgage Electronic Registration Systems. MERS was created in 1995...

- Credit Crisis - Robert Rodriguez, Fpa Funds
To begin with, I believe FPA Capital Fund and FPA New Income are well structured to weather this credit-crisis storm. FPA Capital stands with nearly 43% in liquidity that we believe should help it withstand the crisis and provide us with the necessary...

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