The Securities Litigation Expert Blog

This Can Only End Badly: Central Banks are Buying Equities

Posted by Jack Duval

Apr 26, 2013 3:12:16 AM

In a recent survey of 60 Central Banks, 25 percent of them have been buying equities, and most plan to start if they haven't already.  (Bloomberg)

Among central banks that are buying shares, the SNB has allocated about 12 percent of assets to passive funds tracking equity indexes. The Bank of Israel has spent about 3 percent of its $77 billion reserves on U.S. stocks.

In Asia, the BOJ announced plans to put more of its $1.2 trillion of reserves into exchange-traded funds this month as it doubled its stimulus program to help reflate the economy. The Bank of Korea began buying Chinese shares last year, increasing its equity investments to about $18.6 billion, or 5.7 percent of the total, up from 5.4 percent in 2011. China’s foreign-exchange regulator said in January it has sought “innovative use” of its $3.4 trillion in assets, the world’s biggest reserves, without specifying a strategy for investing in shares.


During the buildup of the Japanese stock market bubble in the late 80's, Japanese banks loaded up on local real estate and equities.  When the bubble burst, the banks were bankrupt almost over night.  The result is that now, 23 years later, the Japanese stock market is still down about 70 percent from it's all time high.  Now the BOJ is putting more than a trillion dollars into equities.  When this print money-buy equities bubble bursts, it will be the Japanese government that is bankrupt.

In another historical note:  in the late 1920's, Joe Kennedy got out of the stock market when his shoe shine boy started giving him stock tips - on the logic that if the shoe shine boy was in the market, there was no one left to buy.  In our age of top-down intervention, we have Central Banks getting long equities.  If Central Banks are in the market, who else is left to buy?

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Topics: bubble, investments, equity, Central Banks, Joe Kennedy, Japan

Bubble Alert - Student Loan Defaults up 36% Y/Y

Posted by Jack Duval

Mar 27, 2013 3:02:43 AM

One of the biggest bubbles in history is beginning to show signs of distress.  Reuters reports a sharp increase in Student Loan defaults.  (Reuters)  Here's your money quote:

Delinquencies have spiked in the last eight years, with about 17 percent of the nearly 40 million student loan borrowers at least 90 days past due on their repayments, a February report from the New York Federal Reserve Bank showed.

This is the sub-prime loan debacle all over again.  Lenders give loans to anyone who can fill out an application, the loans are ultimately guaranteed by FFELP, or some other government agency, creating the same perverse incentives and agency problems as with RMBS.  Which gives us the maxim of our age:

All lenders with no skin in the game eventually blow up.

For you traders out there, there is a way to short the student loan bubble.  See this Zero Hedge article on the SecondMarket platform.  (ZH)

New York Federal Reserve analysis can be found here.

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Topics: Student Loan Bubble, bubble, investments, FFELP, SecondMarket, Structured Products, fixed income

Master Limited Partnership Bubble Now Well Documented

Posted by Jack Duval

Feb 21, 2013 3:05:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

Two new reports are out documenting the bubble in shale gas and shale oil.  The first is "Shale and Wall Street" by Deborah Rogers and is published by the Energy Policy Forum.  (EPF)  The second is "Drill, Baby, Drill" by J. David Hughes and is published by the Post Carbon Institute.  (PCI)

The crux of these reports is that a bubble has formed due to: massive over-investment in shale gas extraction, heroic assumptions about shale gas and oil reserves, rapidly declining extraction rates, complex investment products used to finance the exploration, a flurry of Wall Street activity which generated large transactional fees for Broker-Dealers, and a wholesale lack of transparency.

Sounds a lot like the sub-prime bubble.

Our previous coverage of the MLP bubble can be found here, here, and here.

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Topics: Master Limited Partnerships, MLP, FINRA, shale oil, Energy Policy Forum, bubble, litigation, Senior Investors, investments, Master Limited Partnership, sub-prime, natural gas, shale gas, Compliance, Post Carbon Institute, Complexity

High Yield Debt Stats Flashing Sell Signal

Posted by Jack Duval

Nov 14, 2012 3:11:11 AM

New issue high yield bond issuance is a record highs, while non-investment grade yields are at record lows, Soberlook reports.  (Soberlook) This can only end badly.

 

 

 

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Topics: bubble, Soberlook, investments, bonds, high yield

Shale Gas Bubble Evidence Continues to Grow

Posted by Jack Duval

Nov 13, 2012 2:24:59 AM

Geological consultant and energy expert, Arthur Berman, has an interview with Oilprice.com with some frightening observations.  (Oilprice)  The most sobering may be the following:

A lot of investors from other parts of the world, particularly the oil-rich parts have been making somewhat high-risk investments in the United States for many years and, for a long time, those investments were in real estate.

Now these people have shifted their focus and are putting cash into shale. There are two important things going on here, one is that the capital isn't going to last forever, especially since shale gas is a commercial failure. Shale gas has lost hundreds of billions of dollars and investors will not keep on pumping money into something that doesn’t generate a return.

The second thing that nobody thinks very much about is the decline rates shale reservoirs experience. Well, I've looked at this. The decline rates are incredibly high. In the Eagleford shale, which is supposed to be the mother of all shale oil plays, the annual decline rate is higher than 42%.

They're going to have to drill hundreds, almost 1000 wells in the Eagleford shale, every year, to keep production flat. Just for one play, we're talking about $10 or $12 billion a year just to replace supply. I add all these things up and it starts to approach the amount of money needed to bail out the banking industry. Where is that money going to come from? Do you see what I'm saying?


Readers of this blog will know that we have been following the bubble in shale gas for a while now.  See our coverage here.

Compliance Issues


For those of you in broker-dealer or investment advisor compliance, heightened diligence as to both reasonable basis and customer specific suitability is advised. Rigorous due diligence should be prepared on these deals before being offered to any clients.  See our coverage of this here and here.

For individual customers, exposure to shale gas limited partnerships and other investments should be at very low percentages and only for the most speculative of clients.

 

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Topics: Arthur Berman, bubble, Oilprice.com, Investment Advisors, investments, natural gas, shale gas, Compliance, Eagleford

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