Tuesday, July 19, 2011

The most important chart in the world

Want to see the next bubble? Over at FT, they have it for you - if you want to see it (click image for larger).

According to the report, between 1990 and 2006 — the year in which issuance of Asset-Backed Securities (ABS) peaked — assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent. Think about it. More than half of the world’s debt securities were, for all intents and purposes, considered risk-free. In 2006, that was nearly $5,000bn of assets.

The financial crisis had a lot to do with triple-A ratings being slapped on to subprime securities which didn’t warrant them, we know that. The report says between 1990 and 2006 ABS accounted for 64 per cent of the total growth in the amount of AAA-rated fixed income, compared with 27 per cent attributable to the growth in public debt, 2 per cent to corporate and 8 per cent to other products.

But watch what starts happening from 2008 and 2009.

The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more.

It’s one reason why the sovereign crisis is well and truly painful.

It’s a global repricing of risk, again, but one that has the potential for a much larger pop, so to speak.

Once again - the issue isn't govt revenue - it is spending. Anyone who thinks we are going to have a steady state shipbuilding budget through 2030 is, in a word; high.


ewok40k said...

And US sovereign debt crisis AND Eurozone debts crises (because each state is its own case there)are both capable of triggering the meltdown...

Anonymous said...

A couple of years back, when I was arguing against blowing cash on LCS I stated that we needed to be prepping ourselves for a budget future that would bring a Navy with only 6-7 CVNs and a concomitant drop in the number of smaller vessels.  It _will_ come to pass.  We will run out of lenders to borrow from and the political class will be able to sell cuts in military spending easier than cuts in unsustainable social programs, or large tax increases.  The army can always have soldiers shoot at cardboard boxes for practice, but us?  Navies are capital-intensive.

UltimaRatioRegis said...

So, let's raise taxes so that there can be less savings and investment, and more government spending.  Precisely the solution offered by leading economists.  Like Marx and Engels.

Like stopping the truck with the accelerator.

G-man said...

Sal, Sal, Sal.  you are sooooo old school.  Why, the market is up today 112 pts.  IBM and housing leading the charge.  I mean with 5 million home in foreclosure or default why aren't we building MORE houses to provide jobs and move commodities?  Print some more money courtesy of Ben Bernankestein, give it to the banks to "lend" to small businesses like home builders, and jobs will spring up, wages will go up, taxes will go up, and Obamanomics will lead us to financial freedom. We won't need large expensive Navy ships like CVNs and submarines and TBM DDGs as the rest of the world will implode and we alone will once again be a shining beacon of hope and prosperity for the world, and then we can get down to serious work like spending tax money to determine if gay men's penis size affects their quality of like.  Barney Fwank says this is critically important to know. The only Navy we will need will be a flotilla of Little Crappy Ships to keep the Cuban and Haitian boat people away.

We are singing "Happy days are here again" as we blissfully march under the gate that says "Arbeit macht frei". 

DeltaBravo said...

So much of economics is psychological.  Perception becomes reality.   There's little confidence going on in this country.  Because of the uncertainty of the leadership and their motives and ultimate goals people don't trust investing in ANYTHING.  That includes the ground they live in apparently.  Real estate is the canary in the well.  Although the obtuse fools in DC who are recession proof don't get it, Americans elsewhere are very very jittery.  

Where I am, it's commonly touted as one of the fastest growing job-attracting cities in the USA.  Blah blah blah.  That and 4 bucks will get me a cup of coffee.  Even here the new jobs are attracting renters, not buyers.  96% apartment occupancy.  Real estate has taken a 6% tumble at least in some previously stable/rising areas from last year's tax assessments.

That's in a supposedly GROWING economy???  People don't trust that congress will not, in its short-sighted way, get rid of the homeowner's deduction for taxes.  If they try that, the value of real estate will plummet as people's last reason to hold onto their houses vanishes.  (What... you think they're keeping their houses because they think they'll INCREASE in value someday?)  They try that, sellers will glut the market, causing prices to crash further and a new wave of foreclosures.  Why pay for the maintenance on a losing proposition when it can be the landlord's problem?  

That's just ONE area that people are familiar with, that touches them personally in the pocketbook.

This economy may be on a more precarious bubble than people know.  Woe to the person who pops it.

Just my observations. Take them for what they're worth.  I don't remember the economic outlook being this gloomy on such a universal basis for so long in my entire life.

Grumpy Old Ham said...

<span>I mean with 5 million home in foreclosure or default why aren't we building MORE houses to provide jobs and move commodities?</span>

Sure, why not?  If building houses no one is living in is good enough for the Chinese, why shouldn't we try it, too?

I just saw advertisements for two new housing developments out here in my little corner of the land of the five-sided wind tunnel.  Strange, because there's plenty of vacant inventory in the vicinity that hasn't moved in months.  Must be some more of those Obama/Bernanke dollarettes floating around...financing the construction of the rest of the house of cards...

Salty Gator said...

I listened in to the floor debate in the House today.  interesting.  The Democrats (Chakah Fatah) said that "American families don't have to balance their budgets...they borrow to buy cars, buy houses, etc.  Why should the government be any different than American families?"

I can answer that one very easily, Chakah (can I call you Chuck?).  You see, Chuck, American families can't print money and then use it to pay down their debts.  Quantitative Easing doesn't exist to the American Family.  So, while you are borrowing more from China, you are also counterfeiting money, something that we arrest normal Americans for and conduct huge international operations to prevent foreign governments from doing because supposedly it "undermines the value and confidence in American currency / debt / securities."