JasonC

Bad Mortgages Are Only the Beginning

DanTanner - investment grade credits are lying all around you offered at double digit yields for terms from 5 months to 30 years, first quality names, aren't going to be allowed to go bust, senior to all stockholders. And you can't think of any asset that will pay.

It is pavlovian conditioning and a testament to the power of recent pain to destroy the human mind.

Earth to investors - stop the imaginary inflation games and the imaginary cynicism about everything, and just find any decently run company whose word you trust, and lend to it. They are offer you once in a lifetime terms. Just take them already and we are clean through all of this.

Bad Mortgages Are Only the Beginning

PainfullyAware - I teach control theory and formal modeling generally. The Fed has properly led the signal, and its money policy moves have been flawless since 2005. It isn't following your ideological movie script, and that is why all the ridiculous bubbles the end of the world traders blew over the last 5 years are collapsing, and the only world ending is theirs.

The actual interest rates available are huge, whatever the Fed sets fed funds at. In case nobody noticed, banks are paying 10-12% to borrow at term and 4-5% short, not 2%.

OldLimey - deflation is an increase in the objective exchange value of money. It is being triggered at this time by a huge rise in the demand for money as a safe haven investment, not by transactions demand, either way. Energy prices have already collapsed, all the commodity price bubbles have collapsed or are in the process of doing so.

All the Fed had to do to bring that about was hold M1 completely flat from the spring of 2005 to the spring of 2008. It did not allow the spendable forms of money that it most tightly controls to rise along with the bubble-blown prices of the inflationary brainstormers. As a result, not one of those increases is going to stick.

Housing didn't stick, oil didn't stick, ags didn't stick, metals didn't stick. None of it did and none of it is going to. Those were all run up on huge reckless bets that any real asset would outperform any nominal debt used to carry it, no matter how absurd the price became or what relation any of it had to real incomes or real demand.

The end of the world trade bet the rent money that there was about to be a hyperinflation, but someone forgot to tell the Fed, and there wasn't any, and they all fell flat on their face.

And to unwind their stupidity, it will be deflation instead. The Fed will work to keep the nominal price level from falling too much, at the consumer level. But all the asset prices will be smashed to atoms.

And they aren't coming back.

The ridiculous pretence that all money claims are fake and any bond at any yield is worthless while any physical object at any price is worth more, was simply as wild a delusion as million guilder tulip bulbs.

Don't expect the fools who ran the whole thing to admit they were wrong, though. They will claim it will all come back, just you wait. Turn those machines back on!

But they are naked, busted, and wrong.

Bad Mortgages Are Only the Beginning

RC - worrying about inflation in the most massive deflation since the 1930s is simply illiterate.

Bad Mortgages Are Only the Beginning

Charge offs on CC rise to 5-7% of revolving credit out, annually, on which the rates charged are 15% or so on average. Pretty hard to lose money that way. But clueless permabears pretend the interest doesn't exist and only the loan losses do.

Look at the recent reports from all the major banks, and you will find their ordinary income easily covers all their charges off with enough left, even in this environment, that they are at PEs around 2 to 4. Yes, I said 2 to 4. For the best it is more like 1.7 actually.

"But wait, they recorded losses, or only narrow profits - they must have lost it all in loan losses". Well no. They took non-cash charges to add to their loss reserves, and they marked down their loans and bonds as their yields rose, despite no actual reduction in income.