Royal Bank of Scotland to investors: 'Sell everything'

A lot of people are the same. Some corporate entities are the same. I can't think of a sovereign that has been.

But a lot of people aren't, too. Home ownership rates are a multi-decade lows in the wake of the mortgage meltdown. In the build-up to the collapse, though, you had insane lending going on and there was a mania. The thing that caused most of those people who defaulted to no longer be in the homes they really couldn't afford? Mortgage-credit drying up.

Just with relation to the auto loan market (and it is smaller than bad mortgages were in 2007), even if a trillion dollars is A BIG problem if you have a rash of defaults. ... you have a fifth of that trillion dollar auto loan market going to people with sub-600 credit scores right now, many without verifiable incomes.

As I said, I don't think a consumer-debt related event is likely to be the catalyst that reigns things in (although it could be, because the debt does exist, and it will be a problem when the market wrestles back control over rates). But the areas of mispriced risk are manifold right now, and in the corporate and sovereign areas, they are even bigger.

 

And the guy who holds a gun to the head of the bank teller doesn't force the person to hand over the cash. It was their own decision.

After $4.5 trillion of asset purchases (an extreme measure to hijack the credit markets), in ADDITION to keeping the overnight rate pinned to zero. ... you are just suggesting that there was no need for them to take the "free" out of the credit markets. ... because it doesn't effect lenders and borrowers?

All those retirees, for example, who were looking for relatively risk-free income (that no longer exists), and have had to pile into incredibly risky junk bond funds just to live, weren't doing it because the Federal Reserve is robbing them by pinning rates at zero. They simply decided that was the amount of risk they wanted to take. ... and it's not the Fed's decision to manage their risk for them, eh?

 

Yeah, cran. ... there are treasuries. ... Oh wait, they aren't providing anyone with the income they needed (and planned for). There are AAA corporates. Oh wait, they aren't providing anyone with the income they need (and planned for). There is near-investment grade debt -- higher risk, but better return, great. Oh wait, they aren't providing anyone with the income they need (and planned for).

What world do you live in?

You have the whole world plowed into equities and junk bonds (junk bond inflows -- what has fueled corporate lending -- has corresponded exactly with the interest rate manipulation) in this environment. And now you are telling me that it was simply a choice made by what is largely a risk-averse segment of the population in normal times?

No way I will ever get an honest answer from you. ... I can barely get a substantive response, beyond calling me a name. But let's say the Federal Reserve unwound all of the debt it has bought up and keeps rolling over to drive down rates -- if they started tomorrow. And let's say they stepped away and stopped trying to control bank lending via an overnight / money creation rate.

What do you *you* think would happen: 1) In terms of where actual lending rates go, 2) In terms of all of the debt that has run up while they (and other central banks) have hijacked the credit markets, and 3) In terms of default rates, for example in high-yield debt -- and the effect on the economy, and 4) in terms of the equity markets corporations through buybacks, and people who can't find enough income have plowed into because they needed to take more and more risk to get any amount of return?

 

Your point is kind of self-evident.

People will buy 72-room mansions they can't pay for, if someone gives them a mortgage to do it. ... Of course, they will buy a new car, if they someone will lend them the money, especially when their current one is long in the tooth.

The quote from the story? What he was saying is that actual demand doesn't exist without auto loans. Demand isn't a function of, "I want -- or even need -- something!" (i.e. -- demand is unlimited) It is a function if, "I want and can afford something." (i.e. -- we love in a world of scarce resources and that drives economic decisions).

 

Yes, it really did -- at least in large part. Two things are required for the kinds of low-interest extended-term borrowing rates we have seen escalating in the auto lending business: 1) The liquidity being pumped into the economy, essentially free, that enables lenders to loan for next-to-nothing -- even to risky borrowers. And 2) A reason not to charge more for financing.

Put it in terms of you and me. Let's say I wanted to borrow money from you. If you could get extract 10 percent interest from me (because I REALLY needed the money. ... I consider whatever I am going to spend it on essential, not discretionary, so I will pay whatever I have to), would you take 1 percent interest instead?