Next Subprime Crisis: Is This Going To Be As Bad As 2008

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Next subprime Crisis: Auto Bond delinquencies

Subprime Crisis

Greed and recklessness continue to govern the markets; nothing was learned from the 2008 financial crisis. Hence, history is destined to repeat itself and this might occur a lot faster than most anticipate.  Fitch states that Subprime Auto bond delinquencies are at a 20 year high.

The number of individuals who are more than 60 days late on their auto payments surged 11.6% year over year; this brings the current delinquency rate to 5.16%.  During the financial crisis of 2008, the delinquency rate peaked off at 5.04% according to fitch.  This data only serves to confirm the point we have been driving all this time; this entire economic recovery is nothing but an illusion.  The illusion is supported by hot money; take away the money and the illusion vanishes.  This is why the Fed is hell-bent on lowering rates and this is why it has pushed central bankers into a corner forcing them to embrace negative rates.

This sort of creates the impression that we held off till the end, but this was the game plan all along. Lower rates mean more hot money will flow into the markets as companies borrow even larger sums to buy back their shares, to further enhance the illusion that all is well.  By buying back their shares, they can raise the EPS without actually improving efficiency or selling more products; a perfect scam with a very high payout and almost no risk.

Subprime Crisis: Auto loan Deliquencies surging

“This isn’t an issue of whether the bonds will be repaid in full,” Kevin Duignan, global head of Fitch’s securitization group, said in an interview. Rather, it’s a question of whether investors will be faced with uncertainty that is inconsistent with high investment-grade ratings, he said.

“Our concern isn’t necessarily individual transaction performance, but how a group of mid-sized and smaller issuers could be exposed to funding risk at the same time, and which results in unanticipated consequences for investors,” Duignan said. “You could see a vicious cycle” where investors stop buying from smaller companies, which would then be forced to cut back on their servicing costs, resulting in even more loan losses, he said.

In General, investors expect some sort of trouble and they understand the risk is high and that is why they gravitate towards these investments because of the higher yield. However, the outlook changes when you actually have to take a loss. It is one thing to anticipate one and quite a different issue to having to deal with one.  If delinquencies start to surge investors could suddenly head for the exits leaving this market with no buyers.  As they say, it’s always quiet before the storm.

If you have invested in this sector then it would be best to hedge yourself by purchasing some puts; in other words, short the auto loan sector

Subprime Crisis: The corona factor

Congress passed the forbearance plan which allows individuals to skip payments for up to 1 year due to the coronavirus pandemic.  In theory, this sounds good, but what happens if unemployment remains stubbornly high. As it stands over 30 million individuals have lost their jobs and some of these will never come back.

“When Congress passed the Cares Act, it did so without either fully considering the risks it created in the housing market or consulting with the firms that would have to implement and step in on the borrowers’ behalf to advance forborne payments,” said Joshua Rosner, managing director at Graham Fisher & Co., an independent research consultancy. “The Act does not require any proof be furnished, and in fact, prohibits mortgage servicers from asking for any proof of such economic hardship.”

In fact, once this lifeline ends, the fallout could be 4X worse than it was during the 2008 financial crisis. In fact, the coronavirus pandemic could temporarily knock housing prices by 20% on a national basis. Due to the hot money being injected into the system, we expect the housing market to recover quite fast and those with cash will once again be able to purchase property at a substantial discount.  The net result is that more individuals will become net renters. the rich will get richer, the poor poorer and the middle class will be bleed dry.

Goldman Sachs seems to have a dour outlook going forward

With most of the world’s developing economies on a near-total shutdown to try to stop the coronavirus spread, Goldman sees a second-quarter GDP decline of 11% from a year ago and 35% from the previous quarter on an annualized basis.

In the U.S., the headline unemployment rate should hit 15% “and even this understates the severity of the situation” as many workers will be sidelined and not looking for jobs amid an anticipated reopening of the economy. That will accompany a GDP decline in the U.S. of 11% from a year ago and 34% on a quarterly basis, both numbers also considerably worse than anything seen during the financial crisis in 2008. Full Story
As far as we are concerned at the Tactical Investor (May 2020) we view the current situation both in the Housing and Stock market as a massive opportunity in the making.  The greater opportunity, for now, lies in the stock market as the housing market still needs to let out some steam.

Other stories of interest:

Fossil fuel’s Death; Electric cars will outsell Fossil powered Cars (March 25)

Herd Psychology states Panic & Negativity equals buying opportunity (March 25)

Green Peace Co-founder believes Climate Change is a colossal scam  (March 22)

U.S Superpower End Game: Russia & China on Gold buying Spree  (March 11)