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Home / Business / Why is a bomb ticking like the one that blew the markets in 2008?

Why is a bomb ticking like the one that blew the markets in 2008?



It's already a banner year for stocks. If we could just shut it down in the next 10 months, we'd look at the double-digit returns of the S & P 500

SPX, + 2.29%

for 2019.

No complaints with this kind of annual performance.

Unfortunately, that does not work that way, and of course there are many things that could go sideways before ringing in 2020. One of the risks could come from a known source: leveraged loans. Read: Indebted loans are in uncharted territory and that's a big risk, says Moody's

In our call of the day Satyajit Das, a former banker Once celebrated as one According to the 50 most influential financial figures in the world, we could face a bomb similar to the one that exploded on the market a year ago a year ago.

"The financial markets have short memories," Das wrote in a statement for Bloomberg over the weekend. "They have recently convinced themselves that collateralized loan obligations (CLOs) are much safer instruments than the collateralized debt obligations or CDOs they rely on and have helped trigger the 2008 crisis. They are wrong and dangerous. "

CLOs are similar to CDOs, combining multiple loans into synthetic, bond-like assets. It's a weird stuff, but basically CLOs are set up to make the lever for a debt portfolio safer. Instead of mortgages, subprime loans and other bonds, CLOs package CDOs in corporate loans and consumer loans such as auto loans.

"Nevertheless, many risks remain," Das warned. "How secure CLOs are or not depends on several factors: the credit quality of the underlying loan ̵

1; as measured by default risk and the extent of loss on default – and the correlation between loss and loss within the company's portfolio. "

There are currently $ 700 billion worth of global CLOs outstanding, with more than $ 100 billion in new issuance annually, similar to what we saw in the infamous 2008 subprime CDOs.

"There are too many parallels to 2008 for comfort. & # 39;


Satyajit Das

That said, many aspects of the risks are not fully understood. For example, the credit quality of loans bundled in most CLOs is below investment grade and borrowers are heavily in debt, increasing the risk of higher losses.

"Investors believe the portfolios are safer because they are diversified," he wrote. "However, compared to mortgages, the portfolio of corporate loans usually consists of fewer and larger loans, which increases the concentration risk. Leveraged loans are very vulnerable to economic conditions, and defaults can be correlated, with many loans having problems at the same time.

As we saw earlier, the nasty unwinding process can quickly get out of control in the face of a downturn.

"The risk is that CLOs generate negative feedback loops," Das said. "Falling prices, rising spreads and narrower credit availability are causing credit markets to settle. Tighter lending will affect the real economy, offset losses, trigger sales and price declines. "Then the fear of contagion set in," he continued, as the financial position of the banks was called into question and the depositors would not finance the banks.

"In 2008 there are too many parallels for comfort. Investors, many with uncertain expertise and weak holdings, have increased their exposure to seeking higher returns, "Das warned. "As in its predecessors, this speculative episode incorporates a euphoric escape from reality and a blindness to ever-increasing risks."

It seems as if "blindness to risks" as stocks move into Monday's session are ready for a nice start to the week.

The Market

The Dow

DJIA, + 0.12%

S & P

SPX, + 0.29%

and Nasdaq

COMP, + 0.40%

are all higher at the beginning of trading, helped by the discussion that a trade agreement could be just around the corner. Investors are not too interested in gold

GCH9, -1.01%

this morning, at prices around 0.8%. Rough

CLJ9, + 1.97%

has gone up and the dollar

DXY, + 0.33%

does not seem to be interested in Trump's calls for a weaker dollar over the weekend. For more information, see Market Snapshot.

Overseas Markets, Asia

ADOW, + 0.03%

showed a positive performance, led by a strong rally in Shanghai

SHCOMP, + 1.12%

during Europe

SXXP, + 0.40%

sneaks up higher.

The buzz

Lyft filed his IPO papers on Friday, and now is the time to bring rival Uber to the market, which could be the upshot. First, they talked to potential investors on a roadshow and had the opportunity to define their role in the ride business as a company that is gaining on a larger competitor. Lyft plans to list under the ticker "LYFT".

Elon Musk lit Tesla

TSLA, -2.16%

Fans on Sunday afternoon when he tweeted about an upcoming revelation of the new Model Y. In subsequent tweets, he said: SUV is about 10% larger than model 3, so it costs about 10% more and has a slightly lower range for the same battery "and that" detailed specifications and pricing and test drives are provided in Y. "[19659003] Valley

VALE, -1.98%

Chief Executive Officer Fabio Schvartsman and other top executives of the Brazilian mining giant stepped back under pressure from the authorities to signal that investigators are tackling the company's lead following the fatal collapse of a company

When Alexandria Ocasio-Cortez continues to be criticized for her "Green New Deal", New York's Democratic Congressman made new headlines at the weekend because she was hit by an unlikely voice: a former president of Greenpeace, Canada.

The Graph

See if you can see the trend in this snapshot of last month's most powerful ETFs, as seen on Stockcharts.com.




Yes, the list is completely dominated by Chinese funds led by this ETF

CNXT, + 3.52%

. Commodities also developed quite well.

The Quote


Bloomberg

Senator Rand Paul

"I can not give the President the authority to spend money that was not used by Congress. We may want more money for border security, but Congress has not approved it. Taking these checks and balances away is a dangerous thing. "- Senator Rand Paul in a speech to nearly 200 republican officers and supporters of Western Kentucky University.

The Economy

There's a lot of data chewing this week, with the headlining in the form of the February employment report at the end of the week. We will also get new home sales and housing on the way. On Monday, car sales will leach throughout the day. The construction expenditures for December are to be published at 10 o'clock (east). Fed Chairman Jerome Powell will speak at the Stanford Institute for Economic Policy 2019 Economic Summit on Friday.

The stat


Reuters

That was & # 39; s.

40% – This is the percentage of voters in the latest NBC News / Wall Street Journal poll that say they would vote for Donald Trump again next year. "As long as these economic figures look like this, an incumbent president remains in the race," said a GOP pollster about the results.

The Tweet
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