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How to spot the next crisis

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Rodney Cowitt.

WT Economist

All assets are overpriced, because of government policies to prop them up to favor those who hold them at the expense of those who might want to buy them. The rich and the old hold them. The young might want to save and buy houses and stocks, but they'd better not. Generation Greed is out to steal whatever future they have left.
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When the dog whistle will occur for everyone to get out, who knows? And who knows what it will be? That isn't the issue.
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Younger generations are poorer on average. So all else equal, they will pay less for houses and stocks, or not buy them as older generations sell. Unless the U.S. is just gradually sold off to the Chinese and the Russians, who will somehow continue to rely on the U.S. for consumer demand once it has neither wage nor capital income.
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The standard debt service to income ration for a conforming mortgage loan with Fannie and Freddie used to be 25 percent for the mortgage, and 30 percent for overall debt. But to day, the conforming DTI is 45 percent, to push young people to bid up the cost of Generation Greed's houses and impoverish themselves. And no one talks about it.
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https://www.housingwire.com/articles/40382-fannie-mae-raises-debt-to-inc...
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I take that back. With Trump in they are up to 50 percent. ECONOMIST! REPORT THIS. THIS IS A GOVERNMENT POLICY.

zeldason

1) Watch for wacky asset prices:
‘‘A diamond-encrusted human skull created by artist Damien Hirst has sold to an investment group for £50m ($100m). The platinum cast of an 18th Century skull is covered in 8,601 jewels. It is thought to be the world's most expensive piece of contemporary art”. BBC News, Aug 30, 2007
2) Watch for a takeover frenzy:
“About 86% of ABN Amro's shareholders have accepted a 71bn euro ($98.5bn; £49bn) offer to clinch Europe's biggest ever banking takeover.” BBC News, Oct 8, 2007

Salguod

Then lets assume market participants understand a higher degree of risk is present and flight to quality ensues? Treasury prices will appreciate and down goes the yield structure neutralizing the Fed's stated intentions of increasing interest rates. So, one way or another, interest rates will stay low, like it or not.

guest-aawewljl

Wherein lies the problem is that banks and institutional investors have a lot pressure on them to find yield and too few places that are actually offering it. That leads to extremely competitive pricing and terms being offered to the issuers that in normal business cycles would never fly. Accordingly, most loans today are "covenant lite"--meaning that if the issuer suffers any sort of hardship, the bank has little recourse to bring them back to the table and renegotiate the terms of the agreement.
I suspect that once the bull run ends, companies defaulting in cyclical industries will spark another depression (albeit not as severe as '07) because the length of the current bull run has allowed these companies to command terms that are not only unprecedented, but downright irresponsible of the lenders.

Sina63

Low interest rates over long period of time created an unprecedented asset misallocation. I believe, sooner or later, a couple of lower quality bonds start to default (because of mismanagement, not bad economy) and the domino effect begins.

Pen's Mightier

Too much higher prices in the short run not supported by the fundamentals of firms/industry/sector/economy and false expectations are bubbles which might correct anytime...

Hominem te memento

Interesting article but highly generalized.
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Corporate bonds didn't all of a sudden get riskier after the crisis; it was the rating agencies who finally understood the risks involved as well as the public holding them more accountable, which shifted the ratings. So the exact same bond prior to the crisis might have an A rating, where today it would command an A- or BBB+.
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This may help explain in part why the markets are not compensating the bondholders as they were before - because, in effect, it is a very different market.