I’ve been watching the global markets a bit too closely the last couple months and wanted to bring up a few things that I think provide some risks of causing a 2008-esque recession. I wrote this from a US-centric perspective, but I did take some global considerations in one section. I welcome any missed risks, or critique of risks listed here.
Commercial Mortgage Backed Securities Delinquency(CMBS)
The 2008 crash was caused by Residential MBS default rate of 8%. While currently the overall 60+ day delinquency (behind in payments) rate is an average of ~4%, Hotels are ~16%, Malls are ~16%, and retail space is ~9%.This poses a risk to destabilizing banks who may have to take a hit on the balance sheet as they try and recoup losses in settlement.
“Fitch's delinquency index includes 928 loans ($20.8 billion) that are currently at least 60 days delinquent, in foreclosure, REO or considered nonperforming matured”
Record Levels of Margin
Those investing in the stock market are currently running record levels of margin (847 billion) compared to the more moderate levels in years past (500b to 600b). This represents increase risk to destabilizing banks in the event that they are not able to recover the loans during a liquidation event. Examples of similar events affecting banks this year are Archegos and Greensill.
Source: https://www.finra.org/investors/learn-to-invest/advanced-investing/margin-statistics
Residential Forbearance Programs Ending
Millions of evictions could be coming with the end of forbearance protections and the end of supplemental unemployment provisions. See source link. This could literally go exactly like 2008 again, destabilizing banks, etc etc.
Overnight Reverse Repo Deposits Increasing
There might be too much cash in the market, or there might be too much leverage and rehypothecation of treasury bills as collateral for margin. Depending on the reasons, creates some negative scenarios. Honestly this isn’t one I fully understand myself, but I’m marking it down as a potential risk. I’ve included a video that attempts to explain it.
Explanation: https://www.youtube.com/watch?v=fttA-rNRYG4
Source: https://fred.stlouisfed.org/series/RRPONTSYD
Foreign Markets
The 2008 crisis started in the US, but affected the world. It’s reasonable that an event in another market could be the straw that broke the US’s back. The EU sees similar economic risks that I’ve already raised. Service oriented countries (tourism, retail) are likely at higher risk of businesses becoming insolvent. There was a downtick in 2020 due to Covid slowing courts but it is likely to increase an unforeseeable amount in the future. Easing of economic support by the central bank could exacerbate this, causing loss of jobs and defaulting on the ever increasing debt of residential mortgages (apparently the housing prices are ballooning everywhere). Margin levels and the stock market as a bubble were inferred.
Sources: EU: https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr202105~757f727fe4.en.html
Canada: https://www.cbc.ca/news/business/bank-of-canada-financial-system-review-1.6034006
The collective information in this post
If widely circulated, this post could cause enough people to liquidate their positions, triggering a domino of margin calls and liquidation of banks and/or hedge funds that are propped on epic levels of cheap cash.
I don’t know that things are going to collapse, but if ever there were a house of cards ready to be blown over by someone sneezing, IMO it feels like this is it.
Submitted May 21, 2021 at 10:00PM by plasticbiner https://ift.tt/3hLc8o7
