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Trump's Next Bubble

Posted April 2, 2018 at 8:00PM

On Friday night, my wife and I had dinner with the neighbors at SteelFire, a new gourmet hamburger joint.

As I was going to flavortown on an awesome Reuben burger, my neighbor, who is in HVAC, was commenting on the vents in the ceiling. He told me he could do the job in two days for $40,000–$50,000, depending on the system they had in the kitchen. That seemed like a lot for air conditioning, but apparently it was cheap.  

Eventually the topic turned to money and retirement. My friend seemed shocked when I told him we were due for another crash.

He was all in big growth and said his 401(k) was looking good, but he did reluctantly agree that the last crash was years ago and “people forget the dog that bit them.”

Here is a long-term S&P 500 chart. Each candlestick is a quarter.

You might not think the market is going to drop, but you have to admit we are not in the first inning, or the third, or even the fifth.   

Those red lines are Bollinger bands. They outline the range of trading. You want to buy when the index price is below the bottom one and sell when it is at or above the top line.

When you toss in a “spinning top” or doji at the top of a long trend — like the trend we’ve had for the last two years — you have a turnaround signal. It’s not infallible, and there are some false positives, but it gives you an indication of where we are. A drop of 18% to 25% is probable.

Heck, as I write this, the Dow is down 700 points, so maybe it is too late to be a prophet.

Charts Are Voodoo

I like charts, but you may think they are just so much hokum or black magic. Then let's look at some other factors. What exactly has changed since 2008? Not much, except that we have more of it...

Here is a worrisome list.

The median wage is up only 5.3% since 2008. And, in fact, it has fallen for seven out of the last 11 years.

U.S. public debt has almost tripled and is now at $15.4 trillion. If you include intra-governmental debt, it goes up to $21 trillion.

The same people are rating debt. Remember all that high-rated debt that turned out to be trash? The same three firms are still at the game, bestowing AAA on all comers.

Fannie Mae and Freddie Mac still own 96% of all mortgage security insurance. You remember Fannie, don’t you? The U.S. taxpayer bailed it out with $187.5 billion in 2008.

It’s still trading. And playing games...

For instance, last year it raised the debt-to-income ceiling to 50% from 45%. It also started using black box algorithms instead of appraisals from humans.

Fannie's Fall from Grace:

Appraisal Buzz writes:

While the Dodd-Act Frank curbed issuance of liar loans, Fannie and Freddie are ushering in its equivalent for the smartphone era – call it “the black-box appraisal.”

This time around, an unspecified and growing number of loans – all backstopped by the U.S. taxpayer – will be based on algorithms and computer models, with no appraisal of the homes being put up as collateral. Similar computer models developed by Wall Street a decade ago foretold that the U.S. housing market would appreciate each year forever and ever.

As you know, housing prices are well above the past peak in many parts of the country. What you may not know is that issuance of securities backed by riskier U.S. mortgages roughly doubled in the first quarter from a year earlier.

CNBC writes:

Last year saw issuance of $4.1bn of securities backed by loans that would have been called "subprime" before the last financial crisis, according to figures from Inside Mortgage Finance, with the pace picking up in the latter half of the year. The momentum has continued into 2018, with deals worth $1.3bn in the first quarter — twice the $666m issued in the same period a year earlier...

Some deals have featured borrowers with scores as low as 500 on the 300-850 "Fico" scale, which is deep into subprime territory.

It’s Going to Get Worse

President Trump just announced the appointment of Jelena McWilliams, a lawyer from Fifth Third Bancorp, to head the Federal Deposit Insurance Corporation, known as FDIC.

Trump wants to deregulate the financial industry. This appointment will mean new rules after Congress dismantles of the 2010 Dodd-Frank Act. The new bill has already passed the Senate and will probably pass the House soon.

We don’t know the details, but we do know loans will be easier to get and enforcement on banks will be softer. Not that anyone went to jail last time...

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.


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