Passive index investing is the new mortgage crisis?

nooby_mcnoob said:
This thread has some great responses that are really making me think, thanks guys. Some things I wanted to point out though:



It's not so much that the economy is unstable, but where will the instability come from? We are somewhat all in agreement that there will be a liquidity problem in the future where the economy will lose an entire generation of consumers to debt slavery before they even hit their 20s.

@Nobert had a good set of data on the current state of student loans. These are rookie numbers: As of recently, the government was on the hook directly for 17-24 billion in loans, let's multiply that by 10 maybe to get the entire exposure in the market: 170-240 billion. How much of that 24 billion is likely to be repaid over 10 years? Quite a huge chunk. So even marking to market will give you, at most, a 50% haircut. And that's a really, really bad case. Nothing like cents on the dollar like with the GFC. I struggle to see this being a major problem in the near future.



Yes, and so in a few years, we should look out for the people who have these on their books.

Trade wars and busted unicorns are the potential catalysts. OK then. Who is exposed to unicorns? The fallout of trade wars is likely priced in.
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I have to agree that the student loan thing is a tempest in a teapot. Even if it went cents on the dollar. There's a reason the charts show % growth in various loan classes rather than $ growth. Probably single digit percent growth in real estate loans equals the entire amount of student loans.
Food for thought, what is the elasticity of the demand curve for imported consumer goods? I know someone in the import business, he's currently eating 90%+ of the tariffs. Basically Amazon, Walmart...are telling their suppliers that they have to eat the extra cost if they want to continue to do business with them. He can only do this for a very short time more before he starts passing it on or goes out of business, and most suppliers are like him, currently operating at zero or negative profit in hopes of riding this out. So, what happens when they all basically run out of money at once and go away? We run into basic goods shortages while the supplier network re-sorts itself and simultaneously run into a 25% increase in most basic consumer goods. If the demand curve is fairly elastic, that won't have a huge impact. If it's fairly inelastic, which it may very well be given the part of the income spectrum that is the major buyer of these goods, that could be a significant shock to the economy?
 
nooby_mcnoob said:
Commercial loans could fit the bill in a downturn might be too late already though Dalio was warning about it a few months back
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I think he corrected himself, and dalayed events, for another two years (?) ( going to sleep, il chech yield curve invert tomorrow , one of his indicators )

Sig said:
Probably single digit percent growth in real estate loans equals the entire amount of student loans.
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Yes,

1,5 vs 12,7

yet, catalyst (?) size was :

Screenshot_20190531-000650~2.png
 
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Sig said:
I have to agree that the student loan thing is a tempest in a teapot. Even if it went cents on the dollar. There's a reason the charts show % growth in various loan classes rather than $ growth.
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Meh! :mad: You people that talk sense bother me.

:D
 
Sig said:
If the demand curve is fairly elastic, that won't have a huge impact. If it's fairly inelastic, which it may very well be given the part of the income spectrum that is the major buyer of these goods, that could be a significant shock to the economy?
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Errrr, I like your idea, but I think you stated it backwards -- elastic demand will respond relatively more %-wise to a $1 shock, while inelastic demand will respond materially less. Helpful?
 
tommcginnis said:
Errrr, I like your idea, but I think you stated it backwards -- elastic demand will respond relatively more %-wise to a $1 shock, while inelastic demand will respond materially less. Helpful?
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Yep, what you said! Thanks for the correction.
 
I too like @Sig's idea but don't believe you'll see that drastic an impact. If Walmart and friends are getting their suppliers to take the brunt of it, the suppliers will likely tap financing while they restructure their sourcing. It's not going to take years to restructure, maybe a few months. So I don't see that happening unless all importers make the same stupid mistakes while rejigging their supplies. Walmart is not dumb. They know what their suppliers can handle to juuuuuust before the breaking point.

Remember, these tariffs aren't out of the blue. Trump has been signalling them for months. That was enough time for many companies to figure out alternatives in the meantime and I'm sure many already have.
 
Interesting thread going on over here. What I do notice is that most comments are about US domestic driving factors which could cause a next crisis (e.g. student loans). The thread title is about "passive index investing" (SPY is mentioned by @nooby_mcnoob). There no are comments yet about whether the US equity indexes are highly correlated to foreign indexes. There are multiple demographic trends happening in countries such as Japan, Europe and China which could result in a worsening of their economies on the longer run. And thus have a negative effect on those international indexes. If the US index will remain highly correlated to those international indexes, is there a chance that it will be pulled down as well.
 
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