Credit bubbles always pop. The pop is almost always amplified by rampant fraud that’s no problem on the way up, but becomes a huge problem on the way down. From Christopher Whalen at dailyreckoning.com:
During a conference call with investors last week, JPMorgan CEO Jamie Dimon made a memorable response to a question from Wells Fargo analyst Mike Mayo about the collapse of a subprime auto lender called Tricolor that cost the bank $170 million. Tricolor went bankrupt due to allegations of fraud, including double-pledging of collateral, which led lenders to halt financing.
“Mike, you should assume that whenever something like that happens, we scour all process, all procedures, all underwriting, all everything, and we think we’re okay in other stuff,” said Dimon. “But I – my antenna goes up when things like that happen. And I probably shouldn’t say this, but when you see one cockroach, there are probably more.”
Dimon’s instinct about there being more big credit problems lurking beneath the surface of the US economy is correct, but even he may not fully appreciate the scale of the threat. The collapse of auto parts maker First Brands has revealed an enormous fraud at the center of the $2 trillion market for leveraged loans. Based on losses reported so far and the numerous acts of fraud emerging, half of the leverage loan market may end up being lost to investors.
There are a growing number of examples of malinvestment in the US economy, but much of it springs from excessive liquidity supplied by the Federal Open Market Committee. Since 2008 and particularly since COVID in 2020, the Fed did too much. While classical economic theory states that reserves at the central bank do not impact prices, in fact we can see that the “ample reserve” policy first adopted by the Fed under Chairman Ben Bernanke fueled a massive increase in fraudulent activity and inflation.
The best part about the wipeout is all those best laid plans going up in smoke as we are back to the primitive?
This is a feature and not a bug.
Be not afraid.