It will start in the market for corporate finance.
Synthetic CDO's - the instrument the eptomized the 08 crash - are back, several hundred bllion were issued last year and issuance this year is way way up. The issuers and buyers are saying it's OK because the underlying debt is company debt not mortgage debt. Which just proves there is no limit to human folly.
Just as the housing market in the mid-oughts became infected with crap subprime loans, often using eumphemistic names ("Alt-A"), the corporate debt market is experiencing the same in the form of the wildly overextended "leveraged loan" market. The latter is just a euphemism for privately arranged loans, often for companies or issuances that are too weak or sketchy to secure regualar junk bond finance. That is now a $1.4 trillion market, and still growing but looking increasingly wobbly. "Covenant light" loans - also a prominent feature of 08 crisis toxic loans - are very common in this market.
The immediate backdrop is the 1st Q GDP report - a strong headline number that concealed a significant slowdown in personal income growth and demand. The GDP numbers were driven primarily by a sharp increase in company inventories - i.e. companies were ordering and buying, but not selling so much. If the inventories can't be sold or have to be discounted to move it will mean a slowdown in future quarters. If corporate revenue slows the money won't be there to service the piles of company debt and the synethic crap derivatives piled on top will collpase.
Trump despite appearances isn't a complete dummy. He has been through many macro cycles before and knows intimately what happens at the end of a late stage up cycle, i.e. where we are know. He knows a downturn is going to come and likely fairly soon - his entire strategy is to stave it off until after the '20 election. Hence the ridiculous unfunded tax cut, to keep Wall street money circling the chairs without stopping the music. But Presidential control is limited, it's quite likely we could see a break in the next 12 months.
If that happens, expect a full frontal assault from the White House on the integrity and independence of the Fed, will all he vigour that twitterstorms, Fox News and Russian bots can bring to bear. Things could get real ugly, real fast.
What does Junior have to do with this?
Quote from: The Minsky Moment on May 05, 2019, 01:10:18 PM
If that happens, expect a full frontal assault from the White House on the integrity and independence of the Fed, will all he vigour that twitterstorms, Fox News and Russian bots can bring to bear. Things could get real ugly, real fast.
We're already seeing the start of that. Trump and Pence are saying the Fed needs to cut rates and while GOP Senators shot down the loons Trump nominated, we'll see how they act as we get closer to a downturn.
Should we sell everything and buy gold?
Quote from: Admiral Yi on May 05, 2019, 04:11:47 PM
Should we sell everything and buy gold?
[Ed Anger]
No coffee cans, guns and K-rations.
[/Ed Anger]
I am heavily in cash atm, just waiting.
Quote from: crazy canuck on May 05, 2019, 05:05:58 PM
I am heavily in cash atm, just waiting.
Write a help note on a receipt slip and pass it through the slot when someone next uses the machine.
Quote from: mongers on May 05, 2019, 05:20:21 PM
Quote from: crazy canuck on May 05, 2019, 05:05:58 PM
I am heavily in cash atm, just waiting.
Write a help note on a receipt slip and pass it through the slot when someone next uses the machine.
Not sure what that means.
Quote from: crazy canuck on May 05, 2019, 05:51:28 PM
Quote from: mongers on May 05, 2019, 05:20:21 PM
Quote from: crazy canuck on May 05, 2019, 05:05:58 PM
I am heavily in cash atm, just waiting.
Write a help note on a receipt slip and pass it through the slot when someone next uses the machine.
Not sure what that means.
You're stuck in an ATM.
Quote from: mongers on May 05, 2019, 05:20:21 PM
Quote from: crazy canuck on May 05, 2019, 05:05:58 PM
I am heavily in cash atm, just waiting.
Write a help note on a receipt slip and pass it through the slot when someone next uses the machine.
:D
:lol:
Minsky moments are features, not bugs, of the system.
Quote from: Monoriu on May 06, 2019, 12:32:55 AM
Minsky moments are features, not bugs, of the system.
Have you taken macro mono?
Damn!
This reminds me: is there any site/blog you'd recommend that's good for reading financial news/opinions without either the treasury optimism of the big ones or the tinfoil lunacy of the little ones?
We cannot afford to bail out the economy a second time.
Quote from: Valmy on May 06, 2019, 08:11:51 AM
We cannot afford to bail out the economy a second time.
Why not? Deficits don't matter.
Quote from: Tamas on May 06, 2019, 07:50:56 AM
Damn!
This reminds me: is there any site/blog you'd recommend that's good for reading financial news/opinions without either the treasury optimism of the big ones or the tinfoil lunacy of the little ones?
Financial Times is pretty good, not cheap though.
For pure Federal Reserve watching, Tim Duy's blog is the gold standard (get it?): https://economistsview.typepad.com/timduy/
Quote from: Valmy on May 06, 2019, 08:11:51 AM
We cannot afford to bail out the economy a second time.
Also can't afford not to, that's the problem.
Quote from: The Minsky Moment on May 06, 2019, 09:26:45 AM
Quote from: Valmy on May 06, 2019, 08:11:51 AM
We cannot afford to bail out the economy a second time.
Also can't afford not to, that's the problem.
Which is what makes it such a great idea for the biggest fish to pursue such relentless risk-taking. They can't lose.
Quote from: Tamas on May 06, 2019, 09:57:58 AM
Quote from: The Minsky Moment on May 06, 2019, 09:26:45 AM
Quote from: Valmy on May 06, 2019, 08:11:51 AM
We cannot afford to bail out the economy a second time.
Also can't afford not to, that's the problem.
Which is what makes it such a great idea for the biggest fish to pursue such relentless risk-taking. They can't lose.
That's one of the things I've always wondered. What you say is true about the institutions per se, but is it true for the individuals that ran them into the ground? It's a honest question... were the managers of the subprime crisis punished for their recklessness? And I don't mean "punished" as in "jail", more like, lost their jobs, nobody wants to touch them with a bargepole, found themselves in a worse personal position than before... ?
Quote from: Tamas on May 06, 2019, 09:57:58 AM
Which is what makes it such a great idea for the biggest fish to pursue such relentless risk-taking. They can't lose.
I'm not sure to whom you refer to as the "can't lose" types. Stockholders can and do lose, big time. The executives also. Who is left? Low-level employees?
Quote from: grumbler on May 06, 2019, 10:46:39 AM
Quote from: Tamas on May 06, 2019, 09:57:58 AM
Which is what makes it such a great idea for the biggest fish to pursue such relentless risk-taking. They can't lose.
I'm not sure to whom you refer to as the "can't lose" types. Stockholders can and do lose, big time. The executives also. Who is left? Low-level employees?
Executives get fat options if they win, and don't have to pay them back when they lose. Sure, they may lose their job, but when their job pays them obscenely for taking reckless risks with the public's money, that's not a big downside risk.
With very few exceptions, everyone lands on their feet.
David Duncan was the partner at Arthur Anderson over the Enron account. He pled guilty to criminal charges (extremely rare for an auditor to get hit with a criminal conviction), but after his firm was acquitted (didn't do them a lot of good since it went bankrupt post Enron), he withdrew his plea.
So what happened to the man most responsible for the Enron account that brought down an accounting firm with 85,000 employees and admitted to shredding workpapers?
https://www.linkedin.com/in/david-duncan-8b249b56/
He went on to be CFO of a pipeline company.
Quote from: DGuller on May 06, 2019, 10:52:48 AM
Executives get fat options if they win, and don't have to pay them back when they lose. Sure, they may lose their job, but when their job pays them obscenely for taking reckless risks with the public's money, that's not a big downside risk.
I agree that there are enormous perverse incentives in a system whose guarantor is disinterested in protecting the investment, but "they may lose their job" is a far cry from "they can't lose."
Quote from: alfred russel on May 06, 2019, 11:04:47 AM
With very few exceptions, everyone lands on their feet.
[snip of a single anecdote about a single guy who ratted out his bosses]
One guy isn't "everybody." Some guys and gals might find another job, but even if this is the case, you can't argue that they "can't lose." Even the guy who is the poster child of "landing on their feet" in your example isn't making a million a year any more.
"Lose" should be evaluated compared to outcomes free of perverse incentives. If your golden parachute is worth more than honest employment free of lemon socialism, then I'd say you can't lose.
Quote from: grumbler on May 06, 2019, 11:18:23 AM
One guy isn't "everybody." Some guys and gals might find another job, but even if this is the case, you can't argue that they "can't lose." Even the guy who is the poster child of "landing on their feet" in your example isn't making a million a year any more.
He definitely lost, prior to Enron if he wanted to be a CFO, he probably could have been in the running at a fortune 500 company making multi millions a year. The counter argument is that if wasn't willing to play loose and fast with the rules he wouldn't have gotten the opportunities to move up the ladder and would have been just another mediocre accountant (like me! :) ). It also isn't certain that he didn't make in excess of $1 million a year - that isn't out of the question for a pipeline CFO.
My point isn't that he didn't lose in the Enron collapse--he certainly did. My point is that even after being at the epicenter of possibly the biggest scandal of our lifetimes, he is still much better off than the vast majority of us.
If you think that I cherry picked one example--I have been following this guy for a reason. I'm an accountant that used to audit public companies (eventually I joined one and am no longer an auditor). We'd talk about having to do a good job to avoid jail--but ultimately it never happens.
But look into it yourself. Pick a major scandal. The CEO and CFO plus a few other major players may get in serious trouble and jail time (Enron having more than normal). Go a click lower to them in the org chart--the people at the table when the strategies were devised and the people responsible for implementing them. Google where they are now. Some may have retired, but those that keep working will almost invariably ended up in a solid position.
In major scandals, the CEO and CFO with perhaps another person or
Perverse incentives. :lol:
Our CEO sold millions in stock before it fell 85% due to his actions. I will be really surprised if he sees the interior of a jail. Why wouldn't everybody else do like him?
Quote from: crazy canuck on May 05, 2019, 05:05:58 PM
I am heavily in cash atm, just waiting.
I'm probably a bit more brash, though thinking I should put trailing stops (maybe about 10%) on everything to be safe.