jay21 Posted May 17, 2013 Posted May 17, 2013 A couple of comments based on those replies, and then a question... 1) defaults will remain low because because interest rates will remain low for a long time 2) defaults will remain low because underwriting standards have improved and the weak credits in legacy books have been culled What constitutes a long-time? The earnings yield on S&P500 is 7% annually and the thing that threatens it (higher rates) is a long ways off according to Watsa (and the bond market seems to agree with Watsa, so he's not exactly contrarian in saying this). The trouble I see in using the Schiller P/E over the next few years is that if rates stay this low (as Watsa forecasts) for years and years going forward, then the Schiller P/E10 will begin to look a lot more benign even without a market drop. You will then need a Schiller P/E13, then a P/E 15, etc... Unless its floating rate debt, I don't get the logic of #1.
HJ Posted May 17, 2013 Posted May 17, 2013 Default's also low because people are much more cautious taking out credit. You don't see a lot of new private credit creation in the economy, everything is refinancing, with the exception of the oil & gas world. In the absence of new credit, the old credits have either already defaulted or are structured to amortize over time. Too much risk aversion doesn't really work for a society, since risk taking is a fundamental part of what propels the economy forward.
ERICOPOLY Posted May 17, 2013 Posted May 17, 2013 A couple of comments based on those replies, and then a question... 1) defaults will remain low because because interest rates will remain low for a long time 2) defaults will remain low because underwriting standards have improved and the weak credits in legacy books have been culled What constitutes a long-time? The earnings yield on S&P500 is 7% annually and the thing that threatens it (higher rates) is a long ways off according to Watsa (and the bond market seems to agree with Watsa, so he's not exactly contrarian in saying this). The trouble I see in using the Schiller P/E over the next few years is that if rates stay this low (as Watsa forecasts) for years and years going forward, then the Schiller P/E10 will begin to look a lot more benign even without a market drop. You will then need a Schiller P/E13, then a P/E 15, etc... Unless its floating rate debt, I don't get the logic of #1. Why don't you get the logic of #1? Given that defaults are low because of low interest rates, it naturally follows that continued low interest rates lead to continued low defaults. The low rates have been low for years now. The loan portfolio is seasoned such that the remaining credits in the aggregate loan portfolio is either of low rate or they are hardy seasoned credits at higher rates (the weaker credits having already defaulted).
jay21 Posted May 17, 2013 Posted May 17, 2013 A couple of comments based on those replies, and then a question... 1) defaults will remain low because because interest rates will remain low for a long time 2) defaults will remain low because underwriting standards have improved and the weak credits in legacy books have been culled What constitutes a long-time? The earnings yield on S&P500 is 7% annually and the thing that threatens it (higher rates) is a long ways off according to Watsa (and the bond market seems to agree with Watsa, so he's not exactly contrarian in saying this). The trouble I see in using the Schiller P/E over the next few years is that if rates stay this low (as Watsa forecasts) for years and years going forward, then the Schiller P/E10 will begin to look a lot more benign even without a market drop. You will then need a Schiller P/E13, then a P/E 15, etc... Unless its floating rate debt, I don't get the logic of #1. Why don't you get the logic of #1? Given that defaults are low because of low interest rates, it naturally follows that continued low interest rates lead to continued low defaults. The low rates have been low for years now. The loan portfolio is seasoned such that the remaining credits in the aggregate loan portfolio is either of low rate or they are hardy seasoned credits at higher rates (the weaker credits having already defaulted). I don't understand why there is a correlation between low rates and defaults? Is it because debt service would be low? Weren't rates considered low during 2007?
ERICOPOLY Posted May 17, 2013 Posted May 17, 2013 A couple of comments based on those replies, and then a question... 1) defaults will remain low because because interest rates will remain low for a long time 2) defaults will remain low because underwriting standards have improved and the weak credits in legacy books have been culled What constitutes a long-time? The earnings yield on S&P500 is 7% annually and the thing that threatens it (higher rates) is a long ways off according to Watsa (and the bond market seems to agree with Watsa, so he's not exactly contrarian in saying this). The trouble I see in using the Schiller P/E over the next few years is that if rates stay this low (as Watsa forecasts) for years and years going forward, then the Schiller P/E10 will begin to look a lot more benign even without a market drop. You will then need a Schiller P/E13, then a P/E 15, etc... Unless its floating rate debt, I don't get the logic of #1. Why don't you get the logic of #1? Given that defaults are low because of low interest rates, it naturally follows that continued low interest rates lead to continued low defaults. The low rates have been low for years now. The loan portfolio is seasoned such that the remaining credits in the aggregate loan portfolio is either of low rate or they are hardy seasoned credits at higher rates (the weaker credits having already defaulted). I don't understand why there is a correlation between low rates and defaults? Is it because debt service would be low? Weren't rates considered low during 2007? I'm not arguing for low rates as the cause of the low defaults. That was another poster's reply: Defaults are low because interest rates have been low for a prolonged period of time, and corporations, individuals, etc have been able to restructure their debt profile. I'm just aggregating the two replies I got and putting them together. My original remark was whether the economy is really as bad as people say if the rate of defaults is this low. I mean, people argue that if jobs are coming back it's only because they are really shitty jobs, or they argue that young people have no hope, etc... etc... So that all sounds really bad! Except the defaults are really low which indicates a low level of distress out there, not a high level.
Parsad Posted May 23, 2013 Author Posted May 23, 2013 Except the defaults are really low which indicates a low level of distress out there, not a high level. You're right Eric. The concern is when rates start to rise. Look at how Japan reacted tonight...down over 7% and yields shot up on their bonds. Just the beginning! Markets will eventually ease and incorporate the Fed's change in stance, but because there is so much "fast money" (should be "dumb money") out there, we will see some sort of correction. As rates fluctuate, risk premiums of assets will have to fluctuate. The concern becomes what is the eventual fallout from rising rates on indebted nations or financial institutions? Remember, European banks have not been restructured like U.S. banks. They've just been provided cheap access to capital. But what if the European government cannot provide that cheap access? Things will work out in the long-run, but the pain from overindulgence isn't finished for the world just yet. Cheers!
bmichaud Posted May 23, 2013 Posted May 23, 2013 What happens if Kuroda pins the entire Japanese bond market at 50 bps? He has the ability to do that - for goodness sakes he can buy ETFs - and has clearly stated he will do whatever it takes.... I don't see how a bond crisis occurs there. Currency and inflation, who knows. But they will not have a Spain/Greece/Italy-type bond crisis. I also do not see how Europe has a bond crisis as long as Draghi is in place. He has proven you don't need to print a single penny of currency in order to pin down the bond market. With the US equity market at a price to GDP higher than in 2007, some type of "crisis" will come along to knock it down. I just don't think it will be a bond crisis.
Parsad Posted May 23, 2013 Author Posted May 23, 2013 What happens if Kuroda pins the entire Japanese bond market at 50 bps? He has the ability to do that - for goodness sakes he can buy ETFs - and has clearly stated he will do whatever it takes.... I don't see how a bond crisis occurs there. Currency and inflation, who knows. But they will not have a Spain/Greece/Italy-type bond crisis. I also do not see how Europe has a bond crisis as long as Draghi is in place. He has proven you don't need to print a single penny of currency in order to pin down the bond market. With the US equity market at a price to GDP higher than in 2007, some type of "crisis" will come along to knock it down. I just don't think it will be a bond crisis. Extreme measures can have extreme consequences. If governments start to compress the spring, at some point the spring will pop back up with greater force. Government officials have to be very careful in what they are doing...no one knows what the repercussions could be. Cheers!
bmichaud Posted May 23, 2013 Posted May 23, 2013 Agreed - I'm just saying that they have unlimited fire power to stop the water coming out of a particular hole in the dyke....who knows where the water will end up going....
dolce2think Posted May 24, 2013 Posted May 24, 2013 The problem with the "unlimited" firepower is ultimately the currency depreciation and because all major currencies face the same issue - then it will be commodities that start rising. I think this is a real possibility down the road, that we will see the commodities derailing the market. Its off the radar right now, since they peaked in 2010/11 and economies are considered "weak". But they may also rise in a weak economy, because of currency depreciation. Also to note is the potential "profit peak" for the SP 500, as Hussman et al. are writing. Further, as even the US starts to slowly reign in the bugdet deficit, this is an important channel in "distributing the money" to the people. All the FEDs printing benefits only a small class of people, which may only change with a rising housing market. Thats why they focus on this so much. It will be very interesting to see the reaction once another recession hits - whether the government will start running higher deficits again. So in summary, I believe we will see declining profits, but expanding p/e multiples because rates will stay low or negative. The one stocks with steady or even still rising profits will command very high multiples. Its a stock pickers market but not for value investors - at least if you are not willing to pay high multiples.
sswan11 Posted May 28, 2013 Posted May 28, 2013 Re Japan implications: http://etfdailynews.com/2013/05/27/the-japanese-financial-system-is-beginning-to-implode/
Parsad Posted May 28, 2013 Author Posted May 28, 2013 Re Japan implications: http://etfdailynews.com/2013/05/27/the-japanese-financial-system-is-beginning-to-implode/ I love the name of the guy's blog..."The Economic Collapse Blog"...he's not biased! ;D I think Japan is a problem...we'll see what happens. Cheers!
ubuy2wron Posted May 28, 2013 Posted May 28, 2013 A couple of comments based on those replies, and then a question... 1) defaults will remain low because because interest rates will remain low for a long time 2) defaults will remain low because underwriting standards have improved and the weak credits in legacy books have been culled What constitutes a long-time? The earnings yield on S&P500 is 7% annually and the thing that threatens it (higher rates) is a long ways off according to Watsa (and the bond market seems to agree with Watsa, so he's not exactly contrarian in saying this). The trouble I see in using the Schiller P/E over the next few years is that if rates stay this low (as Watsa forecasts) for years and years going forward, then the Schiller P/E10 will begin to look a lot more benign even without a market drop. You will then need a Schiller P/E13, then a P/E 15, etc... Unless its floating rate debt, I don't get the logic of #1. Why don't you get the logic of #1? Given that defaults are low because of low interest rates, it naturally follows that continued low interest rates lead to continued low defaults. The low rates have been low for years now. The loan portfolio is seasoned such that the remaining credits in the aggregate loan portfolio is either of low rate or they are hardy seasoned credits at higher rates (the weaker credits having already defaulted). Credit is tight? I do not think so, 1-junk bond issuance is off the charts with the greatest increases in the worst credit and2- the explosion in sovereign debt is breath taking and the world is STILL relying on credit rating agencies. Japan is rated double AA. The Keynsian endgame will likely show up in Japan next ,its already happened in Greece and Cypress. I am guessing like Greece and Cyprus there are no winners only losers
PlanMaestro Posted May 28, 2013 Posted May 28, 2013 Who invented the "Keynesian endgame" hook? Must be very recent because I'm not finding hits before 2009. Kyle Bass probably? http://goo.gl/mZ2ro Not working very well lately. Japan Sovereign CDS: Japan Corporate CDS: Milton Friedman on the "Keynesian Endgame" before it was invented. http://marketmonetarist.com/2013/05/25/two-cheers-for-higher-japanese-bond-yields-in-the-spirit-of-milton-friedman/
valuecfa Posted May 28, 2013 Posted May 28, 2013 Re Japan implications: http://etfdailynews.com/2013/05/27/the-japanese-financial-system-is-beginning-to-implode/ I think Japan is a problem...we'll see what happens. That's like saying -i think hamburgers will make you fat...we'll see what happens. ;D kind of a given
ubuy2wron Posted May 29, 2013 Posted May 29, 2013 Who invented the "Keynesian endgame" hook? Must be very recent because I'm not finding hits before 2009. Kyle Bass probably? http://goo.gl/mZ2ro Not working very well lately. Japan Sovereign CDS: Japan Corporate CDS: Milton Friedman on the "Keynesian Endgame" before it was invented. http://marketmonetarist.com/2013/05/25/two-cheers-for-higher-japanese-bond-yields-in-the-spirit-of-milton-friedman/ I do not know who coined the term Keynsian end game but using the term does not indicate you are denigrating Keynes. I do not believe Mr Keynes would be supportive of Japanese economic policy. The end game in Japan if Kyle Bass is right will not result in a default in a classical sense, when it comes down to promises to voters and interest and princial payments to bond holders I believe the bond holders win in capitalist countries. The end game is a lot of seniors in Japan better like ramen noodles cuz they wil be eating them for the rest of their lives. Buying CDS on sovereign debt makes about as much sense to me as buying insurance against a large asteroid impact. I would write that policy all day long every day until the asteroid hit, then who cares. Japan seems to me to be as Kyle described a bug in search of a wind shield. The stock mkt and real estate market went to insane valuations then crashed (but no one went broke) Twenty plus years of extend and pretend have transpired in Japan while the govt. piled on debt and told the populace not to worry or to question anything. Now the central bank is leading a banzai charge to the edge of the cliff. Well if central bankers can somehow repeal the laws of physics perhaps the economy will take flight when it gets to the edge but I'm betting the anchor of 240% debt to GDP kinda gets in the way of a soaring economy.
PlanMaestro Posted May 29, 2013 Posted May 29, 2013 Well if central bankers can somehow repeal the laws of physics perhaps the economy will take flight when it gets to the edge but I'm betting the anchor of 240% debt to GDP kinda gets in the way of a soaring economy. The thing is that the 240% is debt to nominal GDP. So when you borrow in your own currency, especially when its Japanese lending Japanese, some inflation is all that's needed for the laws of physics to work.
sswan11 Posted May 30, 2013 Posted May 30, 2013 It seems to me that continued decline in the Yen is pretty certain. Anyone have any experience owning YCS (2x leveraged short yen ETF)?
rmitz Posted May 30, 2013 Posted May 30, 2013 It seems to me that continued decline in the Yen is pretty certain. Anyone have any experience owning YCS (2x leveraged short yen ETF)? It has seemed obvious for 10-20 years. Beware the widowmaker. :)
CorpRaider Posted June 11, 2013 Posted June 11, 2013 Is it just me or is the entire middle east on the verge of sectarian regional war?
obtuse_investor Posted June 12, 2013 Posted June 12, 2013 The proverbial shot is only going to be evident with hindsight. Perhaps it is Turkey. Perhaps it was Cyprus. Perhaps it was even implementation of Abenomics. Perhaps it is/was/will be something completely different.
ourkid8 Posted June 12, 2013 Posted June 12, 2013 Perhaps there is no shot at all... The proverbial shot is only going to be evident with hindsight. Perhaps it is Turkey. Perhaps it was Cyprus. Perhaps it was even implementation of Abenomics. Perhaps it is/was/will be something completely different.
obtuse_investor Posted June 12, 2013 Posted June 12, 2013 Perhaps there is no shot at all... The proverbial shot is only going to be evident with hindsight. Perhaps it is Turkey. Perhaps it was Cyprus. Perhaps it was even implementation of Abenomics. Perhaps it is/was/will be something completely different. You are probably right. You see, human brain is an excellent pattern finding machine. It is great at finding causes even there isn't a clear one.
ourkid8 Posted June 13, 2013 Posted June 13, 2013 Exactly, I am not smart enough to determine if the market will sell off or not. I look to buy undervalued companies which can compound for many years and I enjoy the ride. I would never try to time the market as it is a losers game. Tks, S Perhaps there is no shot at all... The proverbial shot is only going to be evident with hindsight. Perhaps it is Turkey. Perhaps it was Cyprus. Perhaps it was even implementation of Abenomics. Perhaps it is/was/will be something completely different. You are probably right. You see, human brain is an excellent pattern finding machine. It is great at finding causes even there isn't a clear one.
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