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They Crashed the Economy in 2008. Now They’re Back and Bigger Than Ever.
"All this has happened before and will happen again..." - Cylons (2004 reboot series)
They Crashed the Economy in 2008. Now They’re Back and Bigger Than Ever. Wall Street expects to sell more than $335 billion in asset-backed debt this year. Remember that conference in ‘The Big Short’? It just drew a record 10,000.
Thanks for the link. Dumb question….. Are these items what are broadly called “Securitized” in bond funds. Like 21.93 % in VBMFX? Or a whopping 49.40% of the highly regarded Dodgeand Cox Income Fund. I know I should not worry because the current regime will be sure to closely supervise the pigs at the trough. HAHA. And if they don’t the SEC will be on the case. If the SEC still exits next week.
Thanks for the link. Dumb question….. Are these items what are broadly called “Securitized” in bond funds. Like 21.93 % in VBMFX? Or a whopping 49.40% of the highly regarded Dodgeand Cox Income Fund. I know I should not worry because the current regime will be sure to closely supervise the pigs at the trough. HAHA. And if they don’t the SEC will be on the case. If the SEC still exits next week.
I'll defer to an experienced FI investor for detailed response, but for me, when I look at a FI fund, or a fund that has FI, anything that's 'collateralized' or 'securitized' (ABS, MBS, CDO, CDS, etc) always gets closer scrutiny in my book
Just read the latest edition of The Four Pillars of Investing by the good Dr. Bernstein last night. He takes on pass on Junk, Corporates and I am sure Securitized mystery meat.
Noted in Barron's - Economy: Atlanta Fed GDPNow is projecting economic contraction for 2025/Q1 of -1.5% (real) vs +2.3% previously, while Piper Sandler switched to -2% from +2% previously.
"Are these items what are broadly called 'Securitized' in bond funds. Like 21.93 % in VBMFX? Or a whopping 49.40% of the highly regarded Dodge and Cox Income Fund."
The Dodge & Cox Income prospectus from 12/31/2024 indicates 48.7% of total assets were Securitized. The breakdown is below.
Thing to remember about securitized debt is that there are only 2 genuine AAA credits in the US - JNJ and MSFT, but thousands (millions?) of AAA securitized credits.
US Treasury are rated AA+ by S&P and Fitch, Aaa by Moody's (that may also change this year).
But there are tons of manufactured AAA tranches of securitized credit. Basically, an average rated portfolio can be sliced-and-diced in tranches of AAA, AA, A, BBB,...,equity tranche. Wall Street collects fees from this too, so they love securitized credit. Investors are lured by few extra bps yields.
But if the underlying portfolio fails for any reason (market action, fraud, etc), the house of cards can come collapsing down. Having raised this concern, the agency MBS, etc are fine. AAA securitized is fine too.
"But there are tons of manufactured AAA tranches of securitized credit. Basically, an average rated portfolio can be sliced-and-diced in tranches of AAA, AA, A, BBB,...,equity tranche. Wall Street collects fees from this too, so they love securitized credit."
This is essentially what occurred preceding the GFC. A bunch of low-quality mortgages were sliced-and-diced into tranches which were subsequently rated much higher by the credit rating agencies. The "Big Three" credit rating agencies—Standard and Poor’s, Moody’s, and Fitch Ratings—did a fine job! Were any meaningful regulations implemented to significantly reduce the vast conflicts of interest inherent in the credit rating agency business model?
And don’t forget that President Musk called Social Security a Ponzi scheme. Not that he was the first to say this but he is not beholden to voters or anyone else.
"But there are tons of manufactured AAA tranches of securitized credit. Basically, an average rated portfolio can be sliced-and-diced in tranches of AAA, AA, A, BBB,...,equity tranche. Wall Street collects fees from this too, so they love securitized credit."
This is essentially what occurred preceding the GFC. A bunch of low-quality mortgages were sliced-and-diced into tranches which were subsequently rated much higher (AAA, AA, A) by credit rating agencies. The "Big Three" credit rating agencies—Standard and Poor’s, Moody’s, and Fitch Ratings—did a fine job! Were any meaningful regulations implemented to significantly reduce the vast conflicts of interest inherent in credit rating agency business practices?
This time it's different because:
Wall Street is once again creating and selling securities backed by everything—the more creative the better—including corporate loans and consumer credit-card debt, lease payments on cars, airplanes and golf carts, and payments to data centers. Once dominated by bonds backed by home mortgages, deals now reach into nearly every cranny of the economy.
And it's only going to get better if they can sucker, entice retail investors into private debt markets too.
Not sure with so many expecting a rerun of 2008 if that is a possibility. Black swans come out of nowhere not when it seems to be the consensus, I have been hearing for 15 years or longer about the demise of the junk bond market because of the “debt wall”. Still waiting. Going into this year the pundits were all onboard that the 10 year at 5% was a sure thing because of tariffs, etc. Now suddenly 4% is in sight. Because of Trump’s affinity for crypto, bitcoin was suppose to be the place to be in 2025. We see how that has worked out YTD. Opinions get you nowhere. I would be dead broke working as a 78 year old security guard at the local nursing home if I traded based on my mostly incorrect opinions over the years, Investing/trading is counterintuitive. What seems logical and well thought out and researched doesn’t always pan out in real time. As for CLOs, especially the below investment grade, after being “the” trade the past two years they are suddenly way behind the pack in a year with so many bond funds on pace for double digit gains. Sorry for the rambling.
I am a bit bummed mentioning the unassuming, rarely mentioned, but stellar tight rising channel bond fund CBRDX. From emails I received far too many said thanks we are joining the party. Yikes, never a good thing. Hope I didn’t jinx it.
From Wharton - Why Collateralized Loan Obligations Will Not Cause the Next Financial Crisis
From Clarion Capital - Collateralized Loan Obligations (CLOs), which use corporate debt instead of mortgages, performed well through the financial crisis; it remains a vibrant market today.
From Wealth Management - Unlike CDOs, which collapsed during the housing crisis, not a single AAA CLO has defaulted since the inception of the asset class 30 years ago
From Lord Abbett - We think CLOs are particularly effective for balancing fixed income portfolios because both the credit orientation and the floating rate feature help diversify the rate exposure that is often the most dominant risk in most fixed income portfolios.
From VanEck - Don’t mistake CLOs for CDOs—CLOs invest in senior secured loans and have built-in risk protections that have been tested through two major market crises.
From PineBridge - Among even sophisticated investors – and certainly in business press coverage – the complexity of collateralized loan obligations (CLOs) creates a sense of wariness. All too often, people confuse them with a similar sounding security: collateralized debt obligations, or CDOs.
"Collateralized" = betting, not investing, what? I am also reminded of the S & L crisis in the '80s or was it the early '90s? The bad guys will always find a way around the regulations; but that does not mean we should forget about regulations completely. And some things should never be.
@yogibb said, Noted in Barron's - Economy: Atlanta Fed GDPNow is projecting economic contraction for 2025/Q1 of -1.5% (real) vs +2.3% previously, while Piper Sandler switched to -2% from +2% previously.
@Sven, Atlanta Fed GDPNow provides a real-time estimate of the GDP. Normally, 2025/Q1 GDP would be released few weeks after the quarter-end, initial reading and then subsequent revisions - so, Spring/Summer.
But it's concerning that Atlanta Fed's and Piper Sandler estimates for 2025/Q1 GDP have changed to negative from positive - those are big swings for GDP.
But the discussion then will be is it just 1 negative quarter on technical tariff factors, or more serious - recession is defined as negative GDP for 2 successive quarters. That won't be known until Fall.
@ Junkster, flows into CBRDX have been modest since we discussed it a while back. So I think the secret is safe. Anything with a whiff of ESG is out of fashion anyway.
Actually, CBLDX has modestly out-performed CBRDX over the time period I have held both of them; and the flows have been more robust.
I don't expect a replay of 2008. I also don't expect the equity markets to remain at current values forever. I don't know how bonds will perform in the next recession. I don't think anyone does. But I sure hope MNHAX, CBRDX, and CBLDX don't have many tranches of golf cart leases. Sometimes being unfashionable can keep one relatively safer in unraveling markets. And I note that their allotments to securitized debt are modest despite the euphoria being reported from SFVegas.
GFC played out slowly and there were plenty of signs all around you because at the root of it was driven by bad housing loans. All the securitization was just building castles and in that case out of sand. It is also possible the anticipation of a crisis could itself be a crisis for the economy. The biggest challenge to any investor currently is uncertainty as was recently expressed by some of the investing legends.
Uncertainty = too wide a range of outcomes or excessive tail risk.
The above is not relevant for traders.
@junkster, please keep us posted about the state of national park(s) you and your buddies personally see, even if you always go on the same hike.
@yogibb, thank you for the pertinent information. I’m not familiar on the methodology/data FED uses in forecasting the quarterly GDP. Two sources provided similar negative numbers and that is concerning. Last time GDP went negative was during COVID pandemic in Q12020, and it was rough on both the economy and the investors.
If other geopolitical conflict escalates, all bets are off.
No problem when you can move the variables around when necessary.
Fiddling with the data will come back to bite them in the a** at some point, especially if they start to believe their own kool-aid(1). For years I've said you couldn't trust Chinese economic reports b/c they fiddled the figures, and lo, crisis after shock.
And if the data-fiddling isn't enough, they've always got a Sharpie or three lying around for such situations....
(1) like only trusting/reporting/acting on 'certain' polls that show good numbers, thinking they are accurate reflections of reality. (Biden did that, and FOTUS certainly does.)
BTW, notice how FOTUS hasn't spoken much about the stock market lately? I thought he was swearing up and down that the late-2024 run-up was because folks were 'excited' to see him return to power. And now, silence. Interesting how that works, eh?
A good thread that quickly went into the ground based on politics from the usual suspects. That's the easiest thing to lead you doing the wrong action. I never based my holdings on politics or predictions. I have been collecting over the years many predictions, especially bad ones, that were wrong for months and years.
A good thread that quickly went into the ground based on politics from the usual suspects. That's the easiest thing to lead you doing the wrong action. I never based my holdings on politics or predictions. I have been collecting over the years many predictions, especially bad ones, that were wrong for months and years.
Comments
Noted in Barron's - Economy:
Atlanta Fed GDPNow is projecting economic contraction for 2025/Q1 of -1.5% (real) vs +2.3% previously, while Piper Sandler switched to -2% from +2% previously.
It will work until it doesn’t.
If the govt bails banks out each time, there are no consequences to fear.
Could a watchdog government agency similar to the CFPB be helpful with banks behaving badly? Hmmmm.
Or a whopping 49.40% of the highly regarded Dodge and Cox Income Fund."
The Dodge & Cox Income prospectus from 12/31/2024 indicates 48.7% of total assets were Securitized.
The breakdown is below.
Asset-Backed: 5.3%
------Auto Loan: 1.0%
------Federal Agency: 0.0%
------Other: 0.3%
------Student Loan: 4.0%
CMBS: 0.2%
------Agency CMBS: 0.2%
Mortgage-Related: 43.2%
------CMO & REMIC: 5.0%
------Federal Agency Mortgage Pass-Through: 38.2%
Fannie Mae, Freddie Mac, and Ginnie Mae securities comprise the Federal Agency Mortgage Pass-Throughs.
These are pretty, pretty, pretty safe.
https://connect.rightprospectus.com/DodgeandCox/TVT/256210105/NCSR?site=Funds
US Treasury are rated AA+ by S&P and Fitch, Aaa by Moody's (that may also change this year).
But there are tons of manufactured AAA tranches of securitized credit. Basically, an average rated portfolio can be sliced-and-diced in tranches of AAA, AA, A, BBB,...,equity tranche. Wall Street collects fees from this too, so they love securitized credit. Investors are lured by few extra bps yields.
But if the underlying portfolio fails for any reason (market action, fraud, etc), the house of cards can come collapsing down. Having raised this concern, the agency MBS, etc are fine. AAA securitized is fine too.
This is essentially what occurred preceding the GFC.
A bunch of low-quality mortgages were sliced-and-diced into tranches
which were subsequently rated much higher by the credit rating agencies.
The "Big Three" credit rating agencies—Standard and Poor’s, Moody’s, and Fitch Ratings—did a fine job!
Were any meaningful regulations implemented to significantly reduce
the vast conflicts of interest inherent in the credit rating agency business model?
No worries... Musk will use his own mega-fortune to rescue Trump's gummint if the whole thing crashes (again).
Sure thing. (Please forget that you heard that here first.)
Wall Street is once again creating and selling securities backed by everything—the more creative the better—including corporate loans and consumer credit-card debt, lease payments on cars, airplanes and golf carts, and payments to data centers. Once dominated by bonds backed by home mortgages, deals now reach into nearly every cranny of the economy.
And it's only going to get better if they can
sucker,entice retail investors into private debt markets too.I am a bit bummed mentioning the unassuming, rarely mentioned, but stellar tight rising channel bond fund CBRDX. From emails I received far too many said thanks we are joining the party. Yikes, never a good thing. Hope I didn’t jinx it.
From Wharton - Why Collateralized Loan Obligations Will Not Cause the Next Financial Crisis
From Clarion Capital - Collateralized Loan Obligations (CLOs), which use corporate debt instead of mortgages, performed well through the financial crisis; it remains a vibrant market today.
From Wealth Management - Unlike CDOs, which collapsed during the housing crisis, not a single AAA CLO has defaulted since the inception of the asset class 30 years ago
From Lord Abbett - We think CLOs are particularly effective for balancing fixed income portfolios because both the credit orientation and the floating rate feature help diversify the rate exposure that is often the most dominant risk in most fixed income portfolios.
From VanEck - Don’t mistake CLOs for CDOs—CLOs invest in senior secured loans and have built-in risk protections that have been tested through two major market crises.
From PineBridge - Among even sophisticated investors – and certainly in business press coverage – the complexity of collateralized loan obligations (CLOs) creates a sense of wariness. All too often, people confuse them with a similar sounding security: collateralized debt obligations, or CDOs.
"What is and What Should Never Be:" LED ZEPPELIN.
https://cnbc.com/2025/02/28/the-first-quarter-is-on-track-for-negative-gdp-growth-atlanta-fed-indicator-says-.html?&qsearchterm=negative%20GDP
Is it why the yield curve is inverted this week ? 1 and 3 months T yield over 4.32% vs 4.24% of the 10 years T note?
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202502
But it's concerning that Atlanta Fed's and Piper Sandler estimates for 2025/Q1 GDP have changed to negative from positive - those are big swings for GDP.
But the discussion then will be is it just 1 negative quarter on technical tariff factors, or more serious - recession is defined as negative GDP for 2 successive quarters. That won't be known until Fall.
This is something to watch. https://fred.stlouisfed.org/graph/?g=1E6eR
Actually, CBLDX has modestly out-performed CBRDX over the time period I have held both of them; and the flows have been more robust.
I don't expect a replay of 2008. I also don't expect the equity markets to remain at current values forever. I don't know how bonds will perform in the next recession. I don't think anyone does. But I sure hope MNHAX, CBRDX, and CBLDX don't have many tranches of golf cart leases. Sometimes being unfashionable can keep one relatively safer in unraveling markets. And I note that their allotments to securitized debt are modest despite the euphoria being reported from SFVegas.
Uncertainty = too wide a range of outcomes or excessive tail risk.
The above is not relevant for traders.
@junkster, please keep us posted about the state of national park(s) you and your buddies personally see, even if you always go on the same hike.
If other geopolitical conflict escalates, all bets are off.
No problem when you can move the variables around when necessary.
And if the data-fiddling isn't enough, they've always got a Sharpie or three lying around for such situations....
(1) like only trusting/reporting/acting on 'certain' polls that show good numbers, thinking they are accurate reflections of reality. (Biden did that, and FOTUS certainly does.)
BTW, notice how FOTUS hasn't spoken much about the stock market lately? I thought he was swearing up and down that the late-2024 run-up was because folks were 'excited' to see him return to power. And now, silence. Interesting how that works, eh?
That's the easiest thing to lead you doing the wrong action.
I never based my holdings on politics or predictions.
I have been collecting over the years many predictions, especially bad ones, that were wrong for months and years.