It’s easy to talk about the credit bubble, but a picture is still worth a thousand words—or in this case millions of dollars. Below are some charts created by Houston-based Bearing Asset Management that illustrate just how crazy (and familiar) today’s market has become. As Bearing’s Bill Laggner puts it, “Complacency is near an all-time high and mutual fund cash positions are near an all-time low. Bank loan loss reserves are falling due to the illusion of credit default swaps. Everyone is writing default insurance!”
Viewing these charts in sequence, a few things jump out:
• The stocks that make up Bearing's credit bubble index (banks, brokers, homebuilders) didn’t miss a beat when tech crashed in 2000; they kept on rising and have now, despite the homebuilders’ recent weakness, hit levels comparable to the NASDAQ before its crash.
• Subprime lending has driven the latest stage of the credit bubble, which puts it on very shaky ground indeed. From Bearing: “32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000; 43% of first-time home buyers in 2005 put no money down; 15.2% of 2005 buyers owe at least 10% more than their home is worth (negative equity); 10% of all home owners with mortgages have no equity in their homes (zero equity); $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.”
• Instead of a single isolated bubble, there has been a series of rolling bubbles, with new ones forming to replace those that burst. Each, in other words, is part of one mega-bubble that’s fueled by an ongoing flood of new dollars.
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