> It's worth noting that total GSE (MBS and debt) Securities ended Q3 2008 at $8.070 TN, having about doubled from year 2000. The government agencies were integral to the mortgage finance Bubble - fundamental to liquidity excess, pricing distortions (finance and housing), general financial market misperceptions and the misallocation of resources. GSE Securities did contract post-crisis, reaching a low of $7.544 TN during Q1 2012. Since then, with crisis memories fading and new priorities appearing, GSE Securities expanded $1.341 TN to a record $8.874 TN. Of that growth, $970 billion has come during the past three years, as financial markets boomed and the economy gathered momentum. A lesson not learned.
The vast majority of bad mortgages from the "crisis" were not GSE conforming mortgages, they were "private label" mortgages by the big banks. Moreover, a huge number of the failed GSE mortages during that era were fraudulently underwritten. Hence the GSE lawsuits that the big banks uniformly lost (actually the banks settled for billions in fines). I really do not understand what "lesson" was not learned. People buy houses. It's silly to have a cash market for such a big asset. Home loans are a thing. Having a regulated entity that provides liquidity into this market and sets minimum standards has greatly reduced transaction costs.
>...it seemed natural to presume that American finance might be subsequently humbled. Not so. American investment banks today eclipse their European rivals in almost every sense… and the financial centres of New York and Chicago continue to swell"
If you're thrown off the horse, stand up, dust yourself off, and get back on that horse.
This word "inflationism" is new to me. Interestingly there doesn't seem to be a clear term for what the US system currently is. It doesn't look like free market capitalism, but on the flip side, nobody can accuse the US of being socialist or communist.
Something is happening where the government is picking winners and losers with their inflation policies. As I enjoy repeating, new money is appearing as measured by the M1/M2 monetary aggregates, and so logically _someone_ has a very happy balance sheet.
This is the opposite of surprising and writing scare headlines betrays an extremely shallow understanding of the mortgage market. Simply put, the GSEs were created to underwrite high quality mortgages, in fact they are legally compelled to do so. That's why they exist.
There are more conforming, high quality mortgages than there were in the run up to the financial crisis. You don't hear about zero interest or liar loans any more because they're mostly not available any more. It's a good thing that those products aren't available any more. The average quality of mortgages is much, much higher. The flip side of that is that of course the GSEs have increased the size of their balance sheets: that's exactly what they were designed to do! This is like getting mad at a tree you planted for growing leaves.
I'll have to do a deep dive for this article I read out of the WSJ about how the average credit score for GSE loans is significantly higher than before. I think a lot of people are more educated and better managing their credit score than before as well as tightening of standards. I've always found it annoying how demonized MBS are because they serve a very useful purpose. When it gets into shit like synthetic CDO's and stuff that is kinda wack but whatever who am I to tell people how to use their money. MSBs only suck when the underwriting is bad or fraudulent which it was.
You’re bringing your own interpretation to the headline. I intentionally used impartial words when writing it. I just think it’s a noteworthy fact and wanted to see what HN thought about it. Noland (the author of the article) sees it as a bad thing, but that’s a different story.
The question is - if you think problems from all this are going to occur, what is the place to be in from an investment standpoint? I see a lot of handwringing but not a ton of action and advice.
The smart thing to do is liquidate your investments and keep a nice pile of cash ready to reinvest when there is a bailout. And I guarantee you there will be a bailout.
Usually you will hear news of a bailout and the president will come out and tell people everything is okay so buy buy buy!
That's what Bush said a few weeks after the 9/11. That's what Obama said on the first friday of March 2009. Before the president speaks, the FED chair will give hints as well. I'm too young to remember what happened during the savings and loan crisis of the early 90s but I'm told something similar happened.
Just buy and hold and hold and hold. Crashes tend to be short lived. Recoveries take years and years.
Of course if you are greedy/ambitious, you could try to make money on the way down as well by shorting the market. But that's for the degenerate gamblers. Don't do it as it's nigh impossible to predict when the markets will crash and you may go broke betting against the market.
>what is the place to be in from an investment standpoint?
It depends who you are and what you know really. I mean in the 08 crash ideally you'd be "John Paulson made over $15 Billion for his firm by betting against sub-prime mortgages" but it's hard to pull that off. For the average person probably life as usual but don't leverage up too much. For someone a bit more active it might make sense to sell property if you think you are at the top of a bubble and maybe rent a while. Stocks like BRKA and FFH tend to do alright both in the crashes and otherwise - run by Buffett and a Buffett copier.
The writer correctly identifies the issue as a failure of policy, not markets, so comments that markets are working seem to miss the point.
At a policy level, we are largely powerless to effect any change, simply because the numbers at stake are so huge ($8T US mortgage market, $40T global trade, $80T investment assets) and the control of these so concentrated.
But the flip side is that the Fintech opportunity is so huge, because it can exploit the same economics. Grab the opportunity to build services that offer simple value. Create transparency, empowerment, sharing... and you can do good.
GSEs may be bigger but also healthier than before. Though still a huge market, I also think the global OTC derivatives market has become smaller since 2014 (you can check some estimates at the BIS). That being said, it's 10 years after 2008 and there are plenty of signs that we're in the 3rd bubble in 20 years time.
Nosebleed valuations in tech. Second highest Shiller PE in S&P. The median PE of the S&P is higher than in 2001; so it's more broadly carried (can't find source right away).
It's also the age of the ETF, which was a good thing. Except that by now the industry may have created some real beauties. Remember XIV?
Also government bonds; as much as I love Italy, somebody bought the 10yr of that country for a 1% yield in 2016. Somebody also bought those Mexican 100yr bonds.
Even something as silly as Dogecoin's marketcap standing at $600 million suggests that the entire world is in the middle of a speculative binge.
It’s absolutely crazy bonds are being bought at negative real rates but large sums of money must be parked somewhere by huge funds. Plus they often have bond to equity to commodity to fixed asset mandates so they have to enter what they know to be money losing positions.
What's also interesting this time is the relationship between bond markets and modern ETFs.
Especially in Europe, ETFs can be synthetic. In some cases this means they're made up of generic filler material (e.g. German bunds), with some secret hobo spices (derivatives) to provide the ETF's specific flavouring.
Because of 10 years of central bank buying, all these bonds have been priced to perfection for deflationary scenarios. And as the world is mostly calibrated for small, well-announced yield changes, I wonder what an unexpected discontinuous "jerk" in yields would do to such ETFs.
21 comments
[ 0.25 ms ] story [ 52.9 ms ] thread> It's worth noting that total GSE (MBS and debt) Securities ended Q3 2008 at $8.070 TN, having about doubled from year 2000. The government agencies were integral to the mortgage finance Bubble - fundamental to liquidity excess, pricing distortions (finance and housing), general financial market misperceptions and the misallocation of resources. GSE Securities did contract post-crisis, reaching a low of $7.544 TN during Q1 2012. Since then, with crisis memories fading and new priorities appearing, GSE Securities expanded $1.341 TN to a record $8.874 TN. Of that growth, $970 billion has come during the past three years, as financial markets boomed and the economy gathered momentum. A lesson not learned.
If you're thrown off the horse, stand up, dust yourself off, and get back on that horse.
Something is happening where the government is picking winners and losers with their inflation policies. As I enjoy repeating, new money is appearing as measured by the M1/M2 monetary aggregates, and so logically _someone_ has a very happy balance sheet.
There are more conforming, high quality mortgages than there were in the run up to the financial crisis. You don't hear about zero interest or liar loans any more because they're mostly not available any more. It's a good thing that those products aren't available any more. The average quality of mortgages is much, much higher. The flip side of that is that of course the GSEs have increased the size of their balance sheets: that's exactly what they were designed to do! This is like getting mad at a tree you planted for growing leaves.
Usually you will hear news of a bailout and the president will come out and tell people everything is okay so buy buy buy!
That's what Bush said a few weeks after the 9/11. That's what Obama said on the first friday of March 2009. Before the president speaks, the FED chair will give hints as well. I'm too young to remember what happened during the savings and loan crisis of the early 90s but I'm told something similar happened.
Just buy and hold and hold and hold. Crashes tend to be short lived. Recoveries take years and years.
Of course if you are greedy/ambitious, you could try to make money on the way down as well by shorting the market. But that's for the degenerate gamblers. Don't do it as it's nigh impossible to predict when the markets will crash and you may go broke betting against the market.
Good luck with that plan
It's incredibly hard to time the market.
It depends who you are and what you know really. I mean in the 08 crash ideally you'd be "John Paulson made over $15 Billion for his firm by betting against sub-prime mortgages" but it's hard to pull that off. For the average person probably life as usual but don't leverage up too much. For someone a bit more active it might make sense to sell property if you think you are at the top of a bubble and maybe rent a while. Stocks like BRKA and FFH tend to do alright both in the crashes and otherwise - run by Buffett and a Buffett copier.
At a policy level, we are largely powerless to effect any change, simply because the numbers at stake are so huge ($8T US mortgage market, $40T global trade, $80T investment assets) and the control of these so concentrated.
But the flip side is that the Fintech opportunity is so huge, because it can exploit the same economics. Grab the opportunity to build services that offer simple value. Create transparency, empowerment, sharing... and you can do good.
Nosebleed valuations in tech. Second highest Shiller PE in S&P. The median PE of the S&P is higher than in 2001; so it's more broadly carried (can't find source right away).
It's also the age of the ETF, which was a good thing. Except that by now the industry may have created some real beauties. Remember XIV?
Also government bonds; as much as I love Italy, somebody bought the 10yr of that country for a 1% yield in 2016. Somebody also bought those Mexican 100yr bonds.
Even something as silly as Dogecoin's marketcap standing at $600 million suggests that the entire world is in the middle of a speculative binge.
Especially in Europe, ETFs can be synthetic. In some cases this means they're made up of generic filler material (e.g. German bunds), with some secret hobo spices (derivatives) to provide the ETF's specific flavouring.
Because of 10 years of central bank buying, all these bonds have been priced to perfection for deflationary scenarios. And as the world is mostly calibrated for small, well-announced yield changes, I wonder what an unexpected discontinuous "jerk" in yields would do to such ETFs.