>Doug asks:
>
>>[Negative amortization mortgages strike me as a symptom of a
>>serious credit bubble; here's some more evidence. So Jordan, is a
>>torrent of Caa paper nothing to worry about either?]
>
>I'm not sure where you're headed with this; my points about negative
>amortization, I think, stand unchallenged by you.
Which points are those? I say it's absolutely mad to take out a variable rate mortgage that puts you more deeply in the hole with each early payment at a time when interest rates are near 40-year lows and house prices (measured relative to income) are at or near all-time highs. You say it doesn't matter because...well it worked for you 10 or 15 years ago?
> In the next chapter of shifting the subject, you'd like my opinion
>on the latest proliferation of junk bonds. I frankly love to see
>junk hit the streets, because it usually means that everyone's crazy
>idea can get funded. I couldn't care less if some speculator loses
>his shirt by investing in risky credit.
I don't have much sympathy for people who buy this crap. Nor do I have much sympathy for the Italian dentists who bought the Argentine bonds that are now in default. But there are systemic risks. The jobless recoveries of the early 90s and 00s were in large part caused by the bursting of speculative bubbles. With the Fed now raising rates, the kinds of credit exceeses we're building up now could be the seed of more systemic troubles in the near future - before we've fully gotten over the last bubble hangover.
>>Typically most bonds rated that low when they are issued default
>>within a few years. Consider the class of 1998, the last year large
>>quantities of such bonds were sold. More than 40 percent of the
>>bonds defaulted within three years, and by now 74 percent of them
>>have done so.
>
>And the 26% that didn't more than made up for it.
Huh? Returns on the other 26% were large enough to offset losses on the 74% in default? Risk premiums aren't anywhere that large - and now they're about as small as they've ever been.
To show you that I'm not hung up on prudence, if I had a bundle I'd buy some of the stuff in default. But not the original issues.
>So I guess you're getting around to this:
>
>>"Never before," said James Grant, the editor of Grant's Interest
>>Rate Observer, "have junk-bond investors been paid so little for
>>risking so much."
>
>And never before have so many people owned their own homes, and
>never before have we seen so much credit card debt out there; never
>before have so many people been fed by so few farms. Is this a
>'problem' ...?
You're mixing up trends & cycles here. Sure, economic growth means that most variables are going to be at all-time highs. But things like ratios (e.g., risk premiums and house price/income ratios) don't grow to the sky; they behave pretty predictably in fact. Same thing with interest rates, which also follow a cyclical script. They're heading higher right now, and when rates rise, all the skeletons pop out of the closet, including ones you never thought existed.
Doug