Tag Archives: The Big Short

Bank Loans Take A Dive: It’s The Economy, Stupid

I am compelled to correct a report posted on Zerohedge about the cliff-dive going on in commercial, industrial and consumer loans. The report in ZH suggested the plunge is connected to two possibilities: 1) this one from a Wall Street sleazebag from Barclays: “it is possible that companies have shifted from the loan to the bond market, and are selling more bonds to lock in cheap financing before rates rise, while not encumbering assets with issuing unsecured debt;” and 2) political uncertainty connected to Trump.

The first possibility could have some small amount of legitimacy except that if you parse through all the data available at the Fed, you’ll see that bank credit has plunged across the entire spectrum of U.S. business (I used size of loan as the proxy). Smaller businesses do not have access to public credit markets and thus the first explanation is the typical apology for a negative economic report that we would expect from a Wall Street con-artist. Furthermore, some people are forgetting that this decline of bank loans could be down to the fact that there are now more options for people to get loans. More people are looking into loans like the smaller Auto Title Loans as a way to get quick money rather than look to the banks for help. This is happening all over the world, with Swedens using snabblån utan UC to help when they are looking for some quick cash and others using payday lenders. The second possibility is part of the anti-Trump narrative found in the fake news reports coming from the ignorant.

“It’s The Economy, Stupid”

That quote was created by James Carville as one of Bill Clinton’s campaign slogans in 1992. Those words ring even truer today. A primary example is the restaurant industry numbers discussed above. “Hope” and “confidence” do not generate economic activity. And “hope” is not a valid investment strategy. A better guide to what’s happening to economic activity on Main Street is to see what banks are doing with their lending capital. I borrowed the two graphs below from the @DonDraperClone Twitter feed (click to enlarge):

Commercial bank lending is a great barometer of economic activity. For more information on secured commercial lending, go to this website. It could help you if you’re the sort of business looking for financial assistance to help with growth. The top graph above shows the year over year percentage change in commercial and industrial loans for all commercial banks. You can see that the rate of bank lending to businesses is falling doing a cliff-dive. These are primarily senior secured and revolving credit loans that sit at the top of the capital structure. If bank lending is slowing down like this, it means two things: 1) the ability of businesses to repay new loans is declining and 2) the asset values used to secure new loans will likely decline. Most companies now are opting for small loans with loan companies and not banks, such as https://xn--sm-ln-nrac.com/. In fact, it is highly probable that the tightening of credit by the banks is a directive from the Fed. Yes, the Fed. Despite its public commentary suggesting otherwise, the Fed knows as well as anyone that the economy is tanking. This is why the Fed can’t hike rates up to a level that would bring real interest rates up to at a “neutral” level (using a real price inflation measure, Fed Funds needs to be reset to at least 6%, and likely higher, to get the real rate of interest up to zero).

The only reason the Fed might “nudge” interest rates higher next week is for credibility purposes. Everyone knows inflation is escalating, which makes it difficult for the Fed to keep interest rates so close to zero. In addition, a rate hike now, even though it will be insignificant in magnitude, will give the Fed room to take rates back to zero when the public and Congress begin to scream about economy.

The second graph shows the year over year percentage change in auto loans. The implications there are fairly self-explanatory. Auto sales are slowing down because the “universe” of potential prime and subprime rated car buyers, new and used cars, has been largely exhausted. In fact, with the default rate on subprime auto loans beginning to hit double-digits, the next phase in the automobile credit market will likely be credit implosion crisis.

The above commentary was an excerpt from the latest issue of the Short Seller’s Journal.

A Bearish Signal From Housing Stocks

The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th. 30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st.

Interestingly, the Dow Jones Home Construction index has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year:


The graph above is a 1yr daily which compares the ROR on the SPX with that of the DJ Home Construction Index. I use the DJUSHB because it has the heaviest weighting in homebuilders of any of the real estate indices. As you can see, the DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. You can see that, while the volume in the DJUSHB spiked on December 5th, it’s been declining steadily since then. The SPX volume spiked up on December 5th and has maintained roughly the same daily level since then. Note: volume often precedes price direction.

Here’s another interesting graphic sourced from the Mortgage Bankers Association:


The data is through December 2nd, as mortgage application data lags by a week. As you can see, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks. So, if you want to sell mortgage note it is worth doing thorough research before you do.

A report by Corelogic was released today that asserted that foreclosures had fallen to “bubble-era” lows. This is not unexpected. Historically low rates have enabled a lot mortgagees who were in trouble to defer their problems by refinancing. Unfortunately, the Marketwatch author of the article did not do thorough research – also not unexpected.

As it turns out, mortgage delinquency rates are quickly rising:

Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen “unexpectedly” by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume – Short Seller’s Journal – December 11, 2016

Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared
64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.

Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop. Short Seller’s Journal – November 13, 2016

Finally, I saw an idiotic article in some rag called “The Sovereign Daily Investor” that was promoting the notion that another big boom in housing was about to occur because of a surge in buying by millennials. Unfortunately, the dope who wrote this article forgot to find data that would verify proof of concept. On the other hand, here’s actual data that applies heavily to the millennial demographic:

The Fed reported on Wednesday that household debt had hit a near-record $12.35 trillion led by new all-time highs in student loan debt ($1.28 trillion) and a new all-time high in auto loans ($1.14 trillion). 11% of aggregate student loan debt was 90+ days delinquent or in default at the end of Q3 2016. Fitch has projected that it expects the subprime auto loan default rate to hit 10% by the end of the year. At the time of the report, it was at 9%. – Short Seller’s Journal – December 4, 2016.

The point here is that the millennial demographic is overburdened with student loan, auto loan and personal loan debt and with pay day loans constantly rising, homeownership is becoming a challenge for these people. In addition, it’s becoming increasingly hard to find post-college full-time employment that pays enough to support the cost of home ownership, especially with the mortgage payments associated with a 3% down payment mortgage. This means that more homeowners are looking to loan companies similar to Happy Loan in Calgary for their lending needs. This is the dynamic that has fueled the rental market boom (and soon the rental housing bust).

Speaking of which, Blackstone, the largest player in the buy-to-rent game, quietly filed an IPO of its housing rental portfolio about a week ago. If Blackstone thought there was more value to be squeezed out of its portfolio – i.e. that housing prices and rents had more upside – it would have waited longer to file. I’m sure that Blackstone would love to get this IPO priced and its equity stake in this business unloaded on to the public before the market cracks.

The housing market data tends to be lagged and extremely massaged by the mofst widely followed housing data reporters – National Association of Realtors and the Government’s Census Bureau (existing and new home sales reports). The reports from these two sources are highly unstable, subject to big revisions that go unnoticed and entirely unreliable. But the fundamental statistics cited above will soon be filtering through the earnings reports of the companies in the DJ Home Construction Index. I would suggest that the market has already sniffed this out, which explains why the DJUSHB is diverging from the S&P 500 negatively in both direction and volume.

The Short Seller’s Journal is a subscription-based, weekly publication. I present in-depth detailed data, analysis and insight that is not presented by the mainstream financial media and often not found on alternative media websites. I also present short-sell ideas, including recommendations for using options. Despite the run-up in the broad market indices, there’s stocks everyday that blow-up. Last Restoration Hardware plunged 18% after reporting its earnings. You can subscribe to the Short Seller’s Journal by clicking on this link: SSJ Subscription. It’s monthly recurring and there is not a minimum number of months required.

Fox Business Goes Full Retard: “Stocks Stabilize”

All morning Fox Business has had a green banner posted that exclaims, “stocks stabilize.” So down 5% in two days followed by a 2.7% bounce in a little more than 1 day of trading is defined as “stabilizing?”

How about the fact that the S&P 500 was down 3.7% on Monday yet the VIX was down 8%?The only way the VIX can drop like that when the stock market is falling off a cliff is if the Fed is shorting VIX futures in large quantities.   This theory is confirmed by the fact that the VIX futures shot back up after the NYSE closed on Monday, which can only be explained by after-hours short-covering.   Let’s have a look at the trading log at the NY Fed to see what it was doing on Monday…

Yesterday’s spike up was accompanied by extremely low volume.  The most heavily shorted shorts on the NYSE were the ones that were up the most on a percentage basis.  Clearly this bounce is a hedge fund short-covering squeeze engineered by the Fed.

While the Fed can manufacture upside movement in the S&P 500 and Dow, it is helpless to prevent big sell-offs in certain sectors and stocks within those sectors.  Nike (NKE) is down 18% from its 2016 high after reporting a big miss in revenues and orders last night.  The entire retail sector as represented by XRT is down nearly 19% from its all-time high close last July.   This action reflects collapsing retail sales – a clear signal that the economy is in a recession, notwithstanding the highly  manipulated GDP data.

Several homebuilder stocks are well below their 1-yr highs from last August. Despite appearance of “healthy” housing market per the extremely manipulated housing data coming from the National Association of Realtors and the Government, the housing market is finally hitting a wall after being heavily stimulated by the Fed and the Government, with copious amounts of Taxpayer dollars.

When Freddie Mac and Fannie Mae roll-out zero downpayment mortgage programs for lower income “buyers” and when the NAR is spending millions lobbying for credit-relief for debt-riddled college grads, it is a clear sign that desperation has engulfed the housing industry.   If the Government has to intervene in the housing market to the extent that is has since 2009, the housing market is anything but “healthy.”

Gold is hitting 18-month highs today because the gold market “smells” Central Bank desperation.  It was clear from Draghi’s speech yesterday that the Central Banks are entering the final stage of the currency war:  money supply hyperinflation.   If you think the purchasing power of your after-tax disposable income is shrinking now, come report back in six months and tell me how it feels.

The Central Banks have painted themselves into a fatal corner.  If they don’t hyperinflate the money supply, the markets will collapse.  As the markets collapse, it will accelerate the ongoing global – including and especially the U.S. – economic collapse.   At some point the situation will become completely unmanageable.  At that point the stock markets will collapse and gold/silver will go parabolic.

More On Housing – 2008 All Over Again

This commentary is from a subscriber to my Short Seller’s Journal:

The 3% down loans seem to have brought in a lot of first time buyers into the market. I live in the east bay area of California, which is more affordable than San Francisco, or the South Bay area but still painfully expensive nonetheless. Rents are now the same as a mortgage payment on a home in the exurbs.  So a lot of people seem to be buying for this reason. They only look at the monthly payments but overlook the fact that when financial markets seize up and the music stops, you could be left holding the bag on a hugely upside down mortgage and can’t get out of a 30 year commitment by selling.

A friend of mine, who is a borderline novice in financial matters, just bought a home. He has meager savings and has jumped on the 3% down bandwagon. This is the guy who until I told him to pay off his credit card balances because of the usurious interest rate, had no clue the damage they were doing to his finances.   He was making minimum payments on them because he wanted to build up his savings –  I explained to him how by earning 0.01% interest and paying out 18-24%, his savings were getting depleted every month.

The Bottom line is people who are not too financially savvy are being lured into the housing market by the banks. I don’t know how long this 3% crap has been going on, but it seems that Banks are desperate and looking for newer segments of people to swindle.

Everyone has probably seen the report on NYC high end real estate posted in Zerohedge – LINK.  While the suburbs in Denver are still hot because of the huge influx of people moving here from California,  I’m seeing the same price cuts and inventory build-up  in Denver that is described in the ZH piece.  I get listings on just one central Denver zip code. Yesterday alone i received two price changes of 5% on listings over $850k.The inventory in that price segment is bulging.  Over the weekend I was hit with more than 20 new listings and price cuts all across the price spectrum.  I have received six more today – 1 new listing and five price reductions.

Now that the NAR is begging the Government to give debt-bloated college graduates even more debt to buy a crappy starter home, I can smell the desperation to keep the housing market’s “gerbil” running on the wheel.  But the gerbil is like a meth-addict that has been overdosed for too long with near-zero interest rates and recklessly lascivious Government mortgage subsidies.  Like the gerbil, the housing market is about to seize up and re-collapse.  It will be an event that is much more horrific than what occurred in 2008.

The mining stocks are one economic convulsion away from from more than doubling in value.  –  “Hal,” long-time friend/colleague

The Economy Is Tanking – Inflation/Obamacare Attacking The Middle Class

The economic reports continue to show an overall rate of deterioration in economic activity down to levels – in general – comparable with the 2008-2010 period.  Freight transportation activity is part of the “nerve center” of the economic system.   The latest data from Cass shows a rapid decline in both freight shipments and expenditures that began in mid-2014:

UntitledAlthough shipments ticked up from April to May 1.3% – attributable to seasonality –  year over year shipments for May dropped nearly 6%:Untitled

As you can see, expenditures plunged 10.1% year over year.  North American freight shipments reflect all economic activity at all levels of the economic system across a broad spectrum of industries.

Retail sales reports going back to December 2014 are signalling economic stress at the household level:   “During normal economic times, annual real growth in Retail Sales at or below 2.0% signals an imminent recession. That signal basically has been in play from December 2014, based on industrial production, retail sales and other indicators), suggesting a deepening, broad economic downturn” (John Williams, Shadowstats.com)

This financial stress at the household level is beginning to show up in credit delinquencies and defaults.  Last Tuesday Synchrony Financial reported an unexpected spike in its credit card charge-off rates:  Rising Credit Card Defaults.   As I’ve detailed in prior posts, auto loan delinquencies and defaults are beginning to accelerate.  I’ve covered a couple of credit and credit-related companies in my Short Seller’s Journal , one of which is down 18% since I featured it on March 20th. This is a remarkable fact given that the S&P 500 is up 1.5% in the same time-frame.   When the stock market rolls over, this stock will drop at least 50%.

Although the latest retail sales report last week showed a small gain month over month, the unexpected gain was fueled almost entirely by the rise in gasoline prices.   The Government CPI report does not show much inflation, because the Government goes out of its way to not measure inflation.

The Government’s methodologies used to hide real inflation have been dissected ad nauseum by this blog and many others over the years.  Instead, I wanted to share a write-up a friend and colleague of mine sent me which elegantly describes the truth about inflation and Obamacare and the affect both are having on the average American household:

There’s a huge disconnect between the Government CPI report and true inflation. May wholesale gas prices were flat while the Commerce Dept reported that May gasoline sales for retail sales purposes went up 2.1%. Implies 2% usage higher which might tie in with how, with lower gas prices earlier this year there was the shift to the lower mileage bigger vehicles, or could be more driving.

However, April gas prices according to CPI were up 8.1% but wholesale prices were up more like 14% in April. So the CPI price increase is 57% of the futures price increase. Apply the “lower inflation” to revenues driven by inflation and that’s how GDP gets overstated.

There a lot of moving pieces in the data charade. CPI is reported later this week (June 16th) and it will be interesting to see whats reported for gas. I looked at this a few years ago and found stark inconsistencies between the price level used by the Government in its CPI index vs wholesale gas prices, which are futures based.

The other issue is in food. This is where the CPI index substitution comes into play that John Williams (Shadowstats.com) talks about. My own index includes “outside skirt steak” which is approaching $20 a pound, where I used to pay $5-7 a pound a few years back. So we actually bought/substituted rib eyes at 10 bucks a pound. From an inflation perspective, if that got into the counting, I reduced my inflation by 50% (we later bought hamburger meat at Sams for 2.79 a pound so in the month we cut out our personal CPI on meat by 85%-although we moved to lower quality products). Another issue was cereal–which I used to buy regularly at Walmart early this year at $2.50 a box and it’s now $3.30 a box (32% price inflation).

So, what’s the point?

The point is that there is getting to be some serious inflation in food and somehow its not showing up in the Govt data. In addition, with all the variability with sales and type of stores and how the GDP, Jobs or CPI surveys are created–less than scientific, the government can drive whatever reporting outcome it wants and it’s virtually impossible for anybody to follow.

Regardless of how gasoline pricing is showing up for various Govt reports, between the higher cost of gas and food, and lower earnings in general, people are getting more and more stretched especially as healthcare, education and housing costs go much higher.

This latest retail sales report did confirm home improvement is now declining (big ticket items and durable goods), which had been one of the few bright spots in retail. I am also guessing that there is a shift in overall spending to necessities. The huge increases in Healthcare premiums is pretty significant for a family along with co-pays and deductibles. Practically speaking the middle class is getting attacked. There are not enough ultra-high income earners who can carry the economy.

The S&P 500 made another failed run at an all-time high earlier this month.  If the Fed was not aggressively preventing any down-side momentum from gripping the stock market, there would like be a stock market crash.

The U.S. financial and economic system is inching toward an abyss that is much deeper and darker than the abyss into which it plunged in 2008.



Conspiracy Truth

What the Fed did, and I was part of it, was front-loaded an enormous market rally in order to create a wealth effect.  –  Richard Fischer, former Dallas Fed President on CNBC (via Zerohedge)

It is absolutely mind-blowing that this statement by a former Fed bank President did not get widespread coverage by the entire financial and general news media.  This is a senior Fed official admitting that the Federal Reserve rigged the stock market.   Stop and think about for a moment.   Blogs like this one have been asserting for well over a decade that the Federal Reserve rigs the stock market.   Here is a former insider – a high-level former insider – stating in a public forum – that the Fed rigged the stock market to go higher in order to “create a wealth effect.”

And boy did it work.  The wealth effect was created by a transferring a few trillion from the middle class venues of stock market investment – pension funds, IRAs, etc – to Wall Street and the corporate insiders who have been dumping their shares into this market.  There’s plenty of hidden avenues of transfer. Consider that your 401k or your public pension fund is probably about 20% allocated into private equity funds. Those funds have fueled a tech bubble of unprecedented size in Silicon Valley.  Hundreds of billions of wealth have been “extracted” as the p/e firms invest at absurdly high capitalization rates and the insiders partially cash out.

The transfer is not quite complete.  When the stock market crashes again, all of the middle class avenues of stock market exposure will collapse in value but the elitists will be left sitting on piles of wealth that they removed from the markets.  This is wealth that came from your retirement fund or from your overpaying for a home.

How is it at all possible that this extraordinary admission from Richard Fisher is not on the front page of the Wall St Journal, New York Times, Washington Post, Barron’s, etc?  THIS is an example of the factors causing the collapse of the United States.

Everything thing that was a factor in causing what happened in 2008 is even more of factor now. It’s just a matter of time before it all blows up.  – from my podcast interview with Phillip Kennedy of Kennedy Financial

Our discussion includes the movie, “The Big Short,” the housing market, Fed policy and the precious metals market.  I explain why I believe that the precious metals sector represents an opportunity of a generation.

I think what the Fed wished it had done is start raising rates earlier so that they would have room to lower rates now and try to stimulate things. But I think the ability to stimulate the system with monetary policy – I think that ship has sailed…

Here’s The Primary Reason The United States Is Collapsing

I was reading Jim Quinn’s latest piece – This Time Isn’t Different – which I highly recommend by the way, and a quote from John Hussman grabbed my attention:

The answer is straightforward:  as the bubble expanded toward its inevitable collapse, the role of Wall Street was to create a massive supply of new “product” in the form of sketchy mortgage-backed securities, but the demand for that product was the result of the Federal Reserve’s insistence on holding interest rates down after the tech bubble crashed, starving investors of safe Treasury returns, and driving them to seek higher yields elsewhere.

I have a big problem with that assertion because it implies that investors had no choice but to move the money they managed into highly risky investments in order to obtain high yields.  But investors did, do and always have had a choice.   While it may be true that earning a high enough return to satisfy the ignorant greed of the public required taking insane investment risks, the alternative was to heed the true underlying fundamentals and stay in cash or move into physical precious metals bullion.  No one was putting a gun to investors’ heads and forcing them to play Russian roulette with financial landmines.

Several famous hedge fund managers liquidated their funds and returned their investors’ money.  A good friend of mine closed down his investment advisory business because he refused to put his clients’ money into the stock market even though he received calls every day from clients insisting that he buy stocks.

The protagonists in “The Big Short” were portrayed as feeling guilty about making a fortune off the demise of others.  But the “others” who lost were people who made bad decisions.  While Wall Street did its best to bamboozle the public, there are plenty of people who avoided making bad choices because they took the time to educate themselves in order to avoid making what were obviously going to turn out to be bad decisions.

The United States is collapsing politically and economically because the populace has enabled it to fail by choosing to conduct their lives in ignorance.   This video, for me, encapsulates the essence of the problem:

Profit From The Greed And Stupidity Of Others

History is about to repeat itself.  The tide of liquidity is slowly drifting out and this cycles frauds and scams will reveal themselves soon.  Look to companies that rely on the capital markets to fund their growth as Wall Street is a willing accomplice in looking the other way due to the fees collected.  – Enron Memories:  A Cautionary Tale

I would again urge everyone to go see “The Big Short.”  I plan on going to see it again.  The on-screen rendition is that powerful and well-acted.   It explains in “layman” terms what happened.  For those who put their thinking cap on, the movie explains why what happened is happening again – in a re-packaged form.

While everyone is focused on Amazon’s news report that it added 3 million subscribers in the 3rd of December and had record package shipments this holiday season, causing the stock to pop up despite the sell-off in the S&P 500, I am focused on the truth.  Of course AMZN had 3 million Prime subscribers right before Christmas.  Why?  AMZN was offering a one-month free trial to Prime.  If you had not shopped yet for Christmas and had 2-day free shipping dangled in front of you – for free – of course you’re going to sign up.

Let’s see the “churn and burn” rate for the people who have subscribed to the free-trial promotion.  I can guarantee you that AMZN will not publish those numbers.

Record shipping?  Economic theory teaches us that when something has no cost, demand is infinite until saturated.  I know people in NYC who bought toilet paper and paper towels from AMZN because free delivery is cheaper than taking a cab to the grocery store.  And who wants to schlep big armloads for grocery supplies around the streets of NYC?

Markets become irrationally overvalued because, in general, people have a tendency to overprice “hope” and “optimism.” It’s human nature to deny the negative side of reality. As a result, the market tends to “under-price” the probability of a negative outcome. This dynamic presents opportunity for those willing to examine the truth.  – Short Seller’s Journal

What is missed on this is that AMZN loses money on its Prime membership business.  It has admitted this.  But the push up in the stock price greatly benefits Jeff Bezos, as he automatically unloads 100,000’s of shares every month.

I will have a lot more to say about AMZN and the retail sales report out from Mastercard later this week.  I have had added a new feature to my Short Seller’s Journal called “Quick Hits,” which presents a short term, short-scalp trading idea.  The idea presented in this week’s report is down $1 (1.3%) already.  The put option suggestion is up 40%.  I believe this idea has at least another $1 of downside before Thursday’s option expiration. Click on this link to to subscribe:   SHORT SELLER’S JOURNAL.

This week’s report also presents what I believe to one of the best ways to short the corporate and mortgage bond market, especially the high yield market.

“The Big Short:” 2008 Repackaged Into 2016

History, with all her volumes vast, hath but one page.  – Lord Byron

“The Big Short” is a must-see movie.  Adapted from the Michael Lewis’ non-fiction book, “The Big Short: Inside the Doomsday Machine,” it brings to life Walls Street’s fraud-infused world of credit default swaps (CDS) and collateralized debt obligations (CDOs, which were at the center of the collapse of the housing market and the financial system in 2008.

Now that Ben Bernanke has “successfully” saved our system from its demise (sarcasm intended), it’s easy to bury the past and disremember the degree of fraudulence and criminality that had engulfed mortgage and housing markets.   It still blows my mind and angers me to think that people like Angelo Mozilo not only never went to jail, but they were never properly investigated for their role in fomenting the biggest fraud – up to that point in time – in history.

The movie brought back a lot memories for me.  I used to pour through the financials and the footnotes to the financials of several of the mortgage companies and banks that underwrote the bulk of the fraudulent mortgage securities.  I had concluded that all of the big banks plus Countrywide, if forced to mark their mortgage holdings to market or sell them at market, were technically insolvent.   They were all sitting on the ticking time bombs of home equity loans, CDO inventories and the wrong side of credit default swaps (in the movie we meet the people who bet against the mortgage and housing markets by taking the other side of the credit default swaps sold to them by Wall Street).

I remember sending my analysis of JP Morgan, Bank of America and Washington Mutual to several business publication editors and journalists, including Al Lewis (one-time editor of the Denver Post business section,  nationally syndicated journalist and multiple appearances on cable financial news networks), the Wall Street Journal, Bloomberg News and many other publications.  My work, which proved to be correct, was completely ignored.

Ironically, the big housing bubble was not the first appearance of massive mortgage fraud in this country.   When I was a junk bond trader in the 1990’s, there was a mortgage company called Cityscape.   The company had a 12 3/4% coupon junk bond outstanding and I just so happened to be the housing sector trader.   I started examining Cityscape’s financials and business model when the bonds began trading at a discount to par (it’s usually a sign something is wrong when a high coupon, senior secured bond begins to trade at a  high double-digit yield to maturity).    I remember uncovering the same type of fraud with Cityscape that became accepted standard business practice with Countrywide, Wash Mutual, Merrill, Lehman, etc.

Unfortunately, underpinning what has been craftily marketed to the public as a housing “recovery” is nothing more than an “echo” housing bubble inflated by an “echo” mortgage bubble.  The blatant disregard for the assessment of credit worthiness, and the financial fraud embedded in the mortgage underwriting process, that occurred during the big bubble years was never fully cleaned up – it was merely covered up.

The term “subprime” has been erased from the mortgage credit assessment lexicon and, instead, replaced with terms like “3% down payment borrower.”  The U.S. Government, via Fannie Mae, Freddie Mac and the FHA is now guaranteeing mortgages with effective negative equity in them at closing.  Buyers can use borrowed cash and/or seller non-cash “give-backs” in lieu of a bona fide down payment.  There are now private funds which underwrite even riskier mortgages, which now include interest-only and adjustable rate options.

Just like the first time around, many of these mortgages end up in “collateralized” investment trusts.  Now they are called “bespoke opportunity tranches” instead of CDO’s. Not only that, several big brokerage firms, like Merrill Lynch, underwrite mortgages which use the margin equity in the homebuyer’s stock account as the down payment.  Imagine what will happen to these mortgages when the stock market finally cracks.

The homebuilders themselves are offering 0% down payment financing as part of the incentive package being used to entice buyers.   Many of these mortgages will be sold off to Wall Street, which will repackage them into higher yielding investment trusts and derivatives cesspools.  The criminal banks will re-market them with fat commissions to yield-starved pension funds and high net worth stool pigeons.

Those who do not remember the past are condemned to repeat it  –  George Santayana.

Wash, rinse, repeat.  Just like the big housing/mortgage bubble, the current echo bubble is sitting on top of a foundation of financial dynamite.  The fuses have been lit.  It’s not a question of “if” but of “when” the bombs will detonate.

Perhaps one of the finest directorial features of “The Big Short” was watching the players who made huge bets against Wall Street as they waited in a state of torture for the mortgage market to collapse while Wall Street’s web of fraud, market manipulation and propaganda was used to hold up the mortgage market.   Sound familiar?  The movie skillfully weaves in the fact that Wall Street fraudulently mis-marks the securities it creates in order to fleece investors on both sides of a trade AND to keep its own balance sheets fraudulently marked too high.

I witnessed this dynamic first-hand in 1990’s. If you think Congressional reform “fixed” this problem, you better review what is happening currently in the junk bond market.   Bonds marked in the 90’s are all of a sudden trading in the 20’s.  This occurrence will not be confined to the triple-C and single-B segments of the corporate bond market.   At some point in the near future this will be a standard feature in the mortgage bond market – just like in 2008.   And as the rug is pulled out from under the mortgage market…