The Return of Subprime?

While everyone has been focusing on interest rates and quantitative easing programs, stories on subprime bonds and other mortgage-backed securities (MBS) are coming back in vogue.

Yes, that's right folks, Wall Street is at it again!

But first, what exactly are mortgage backed securities?

Mortgage-backed securities are financial instruments that are backed by thousands of mortgages, or loans used to purchase a property. Since subprime loans are loans made to people who have spotty credit history, financial institutions packed these loans into a MBS and offer it to its clients who will then have claims to the cash flows of the mortgage payments.

Now, for those of you who don't remember (or perhaps, don't WANT to remember), mortgage-backed securities were at the center of the financial system collapse back in 2008. The problem was that banks were writing way too many subprime loans that would later be repackaged into MBSs.

When people started defaulting on their subprime mortgages, a widespread panic took hold of the financial system. Prices of MBS's and other financial assets declined, as nobody was willing take on the additional risks.

Fast forward two years, and it looks as if investors are giving in to the risky business itch. Taking a look at some bond indexes, it seems that subprime mortgage bonds are starting to get some lovin' again!

The ABX.HE.AAA 06-02 is an index that measures the performance of 20 different types of subprime mortgage-backed securities. This particular index measures the subprime MBSs that were formed during the second half of 2006 and was originally priced at 100. After hitting an all-time of 28 cents in 2009 (that's right - the index lost about SEVENTY PERCENT of its value), it has doubled up and is currently sitting at about 58 cents.

It is heavily-followed by investors because it provides a pretty accurate representation of how investors feel towards subprime mortgage-backed securities, and even provides a glimpse of overall market sentiment. Take note that when investors are bullish, MBS bond prices should rise as investors are confident and gutsy enough to take on the risk of holding the MBS bond.

To give you an idea how popular it is, in 2007, a well-known hedge fund manager by the name of John Paulson (shame on you if you don't know him!) sold this index and made a bajillion dollars!

With the index slowly climbing, does this mean that traders have turned the risk switch back on?

Speaking of risk switch, let's take a look at the forex market's very own barometer of risk - EUR/JPY!




Looking at EUR/JPY's weekly chart we can see that the pair had been steadily climbing since October 2000 when it reached a bottom of 88.87. Around 2007, the pair started consolidating on a 1500-pip range just above the 150.00 mark. Now notice how the pair suffered a steep drop in 2008 when the financial crisis in the U.S. started unfolding. The pair fell by 5,600 pips in just 13 weeks! Heck, that's even shorter than the time it took Cyclopip to lose 2 lbs.!

What's interesting about EUR/JPY's price action lately is that is seems to have broken up from consolidation and the double bottom formation that started May 2010. In fact, the pair has already rallied by more than 1,500 pips since the G7 launched a coordinated currency intervention in March.

Wait a second... So when subprime MBSs prices dropped during the financial crisis, so did EUR/JPY. But now that MBS prices are back on the rise, EUR/JPY seems to be rising as well. Coincidence?

Hmmm... let's think this through first.

Remember, the low-yielding yen is used as a funding source by investors who want to invest in higher-yielding assets. During the crisis, investors didn't like the outlook of the market and decided to unwind their positions in risky assets. Thus, it should come as no surprise that MBS prices fell. After all, who would want to hold an asset where there was a high chance of default?

But now that the ABX index is trending higher, maybe risk sentiment is in fact improving.
If this is true, then perhaps we'll see the return of the carry trade, which could boost EUR/JPY higher. Is 135.00 out of the question? I don't know about you, but I'm definitely gonna be keeping an eye on this pair to help me gauge risk sentiment.

http://http://www.babypips.com/...urn-of-the-subprime.html

@Ceinz - I have been focussing on the AUDJPY pair. Take a look at it. I think carry trade may come back.

And this is the US index, which has tanked with all the budget fights at the US congress. Today is D-day of passing the budget and no resolution yet...
http://finance.yahoo.com...Vybg--?mod=bb-budgeting

- USD index -> http://www.marketwatch.c...ck=1&rand=629863917

In the meantime, while the $ has lost ground against the major currencies, PM (precious metals - gold and silver) are posting record highs against all currencies as well as soft commodities - food et al. The duality of the global monetary system is getting exposed, but few notice this except China
It is a pity that the KES is losing against all the majors while we have better fundamentals.

With gold and silver at record highs, that's a strong signal that indicates record inflation is well on the cards...

http://www.livecharts.co...rm/gold_price_chart.php
http://www.livecharts.co.../silver_price_chart.php

Also the curse of oil and the effects it has of the petrodollar axis that maintains the ponzi scheme that is the global monetary system we so dearly believe in is about to setup the global economy recovery 'story' into a spectacular tailspin.

http://www.livecharts.co...ent_crude_oil_chart.php - Brent oil above $120 and OPEC is nowhere in sight...?!? Keeping promises indeed. Or is it broken promises being kept...

And finally, China has raised the fuel prices for the second time this year (so it not only ERC that is doing so locally)... That makes it two quarterly periods of fuel cost hikes. If China can’t hedge against fuel costs and they’re the funding economy of the world at the moment (as stated by some 'analysts'), what do you think that means to the rest of the world?

http://en.21cbh.com/HTML...7/0MMjMyXzIwOTg0Mg.html

What we call basic needs will keep on inflating while what we call luxuries will keep on deflating. And since the global economy is heeled by consumerism that relies mostly on luxuries e.g. on how much i-pads, i-phones etc have been sold yearly, we will see another round of deflation...


Update -> Mac Faber CNBC video. Once again the lame stream media doesn't get it. But it's not their job, is it...

http://video.cnbc.com/gallery/?video=3000015563

Update 2 -> When a nation defaults, bankers are the happy lot... No wonder Andrew Jackson shutdown the central bank... The citizens should take back the streets and force a real default by buying gold and silver and that should see the bankers turn pale in shock as their money becomes papers...

http://finance.yahoo.com...nnm-3294374261.html?x=0

US gov survives shutdown by taking more debt. Currently their national debt is above 14 trillion dollars and ticking with their own Fed bank as prime debt buyers!? Foreigners are no longer interested with the gubberment bonds. So why is the $ still a reserve currency...?

In the meantime the Icelanders show the rest of the world how not to take orders from the international banksters

I like the Icelanders zeal to stand against their gubberment deals with the bankers. The people are the power & not the other way round

If gubberment or bankers screw up, they should be allowed to default or go belly up and the fraudsters paid (zero pay) in kind by the bankruptcy and not the citizenry taxes...

I hope all nations will be able to wake up one day and tell their debt inducing gubberments & banksters to shove it or shutdown...

http://www.zerohedge.com...ffs-bankers-second-time

@KK - Have you noticed silver spot is up 9% in a week?! Currently the price is $41.70 having broken the $40 resistance. It feels like a price melt up of precious metal commodities.
I wonder which international banks are still short silver like JP Morgan etc. This silver train & the Max Keiser buy silver to squeeze bankers guerilla campaign will run over the banksters

China's Trade Deficit: Reason to Worry?

Early yesterday morning, China posted its first quarterly deficit in seven years!

China recorded a 1.02 billion USD deficit in the first quarter of 2011, which is a far cry from the 13.9 billion USD surplus we saw 12 months ago. Digging into the details of the trade balance report, we'll see that imports, rather than exports, was what bogged down China's trade balance.

The combination of rising commodity prices and domestic appetite for imported goods did quite a number on China's trade balance last quarter. Quarterly imports surged 32.6% year-on-year while exports played catch-up with its own respectable growth of 26.5%.

Should we be worried?

Given the sheer size of its economy, the fact that China posted a trade deficit may be enough to send chills through investors. But if you take a moment to sit on your thinking-chair, don your thinking-glasses, and go through the nitty-gritty details of the report, you'll see there isn't actually much reason for us to be worried. With imports outpacing exports, it can be argued that China is finally rebalancing itself. This basically means that the economic giant might be in the process of becoming less reliant on exports, and that domestic demand is beginning to pick up steam!

Also, word on the street is that this deficit might actually be the result of the holiday season. Recall that in February, a few Chinese companies suspended factory operations and shipments for at least a week in celebration of the Lunar New Year.

And then, of course, there's the possibility that China is timing the report for this week's G20 and IMF meetings. Unless you've been living in Narnia for the past couple of years, you should know that China is in hot water for not allowing the yuan to appreciate at a pace acceptable to its major trade partners, which effectively makes China's exports cheaper. Now I'm not one to point fingers, but given China's record for posting a couple of red figures right before a big economic meeting, I won't be surprised if they use the trade deficit to argue for a weak yuan!

Whether the trade deficit is part of a grand scheme to weaken the yuan or just a product of seasonality though, I'm sure that over the next couple of weeks, traders will watch China closely for any further signs of weakness. After all, if the world's second-largest economy sneezes, its trade partners (basically the rest of the world) are sure to catch colds!

It's now clear that the jap nuclear accident is a chernobyl. But we couldn't tell the truth immediately since that would have nuked the nikkei market plus create massive panic in the affected areas. This would have also thwarted the massive yen intervention efforts to keep global markets on their flotilla ride to utopia.
So what have we learnt about chernobyl and now;
- nuclear energy is safe...
- eradiated jap food is good for your health
- level 7 nuke accidents kill people over time, but are very bullish for nuke shares, nikkei & global stocks due to the massive rebuilding profits to come and
- the IAEA & gubberments will always tell lies at first, but will tell the truth later, so its ok since the lie is cancelled out later by the truth.

If I were an outer space journalist sent on a reporting mission, I'd have fled Earth long ago coz its indeed a mad mad world... My report would highlight :-

- food inflation is very bullish for agri como, it doesnt matter people will die in the process, the goal is profits and nothing else.
- gubberments will always lie coz people can't stand the truth. They say the people cant think for themselves & need guidance like sheep.
- money which happens to be printed papers & cast shaped metal has more value than life itself...
- oil is also valuable than life...
- wars are very profitable to the financiers, arms biz & reconstruction biz...

Hmmm... I think I might not report this back to my outspace planet in galaxy Z since our gubberment there might not like the truth...

Think hard about it for a while...

http://www.youtube.com/w...gg&fulldescription=1

In 2008 George Bush stated that US banks' bailouts are required or it'll be the end of the world if the global money system crash lands...

In 2011 Obama says the US debt ceiling must be raise above 14 trillion dollars before July 2011 or we face a global recession...

Quite interesting that after 3 years we are on the same page i.e.
- Moral hazard of the big global banks is still intact.
- Oil is again looking to return to $150
- Global food price index is above 2008 highs!?
- National debts are incredibly fattened.
- US subprime is still underwater despite the mega bailouts of 2008.
- Global stocks some have fully recovered and some gone above 2008 highs some just below, but none above 2007 highs.
- USD index is crashing again almost at the 2008 lows as the $ is massacred.

Others can add more that they can remember.

Deja vu... Anyway why am I worried and the global economy is fully recovered even with job losses everywhere. I need to get back to the party. Some lethal hopium cocktail for me please so that I can catch up with highness asap...

http://www.msnbc.msn.com...s/politics-white_house/

And why can't we as Africa wake up & realise that we have our own economic story to BUILD, ENJOY & DESTROY @ our own pace? BRICS came up from the inside 1st...let's keep about building Thika road e.t.c & not being TOO hooked to what our neighbors to the West r doing. Infact let's keep looking East for more inspiration. Thanks YCSN...

As finance ministers convened for the biannual IMF meeting the Brazilian minister had some interesting words for US - "Ironically, some of the countries that are responsible for the deepest crisis since the great depression and have yet to solve their own problems, are eager to prescribe codes of conduct to the rest of the world."
Those are just some 'sweet' words I'd have also liked to say on such a stage.
I also like the Russian take on the Fed bank bonds program (QE2.0) of buying its own debt??! I've termed this a ponzi...

http://www.reuters.com/a...a-idUSTRE73F1TN20110416


@cde - Unless BRICs, S.America and Africa find a way to print their own money & combine their economies, the global economy model under the west still calls the shots.

1. Eurozone defaults are a reality with or without PIIGS... Global recovery
2. S&P downgrades US debt outlook to negative and many other 1st world nations... Global recovery
3. Global food inflation - Global recovery
4. Gold, Silver, metals and soft commodities (food & oil) posting multi year highs - Global recovery

And below is a pictorial of how the PIIGS have faired since the March 2009 global stimulus (bailouts) aka QE1.0 through QE2.0 and soon to come QE3.0

As illustrated by the pictorial, Greece, Ireland and Portugal CDS rates are far worse than the April 2010 eurozone Greece default scare...

Interesting times these are... Why do we go to school to learn financial skills which are not applicable in real world... It is time to unlearn the garbage they teach in these schools. And if you challenge your professor well and put him in a corner, you won't graduate since you are not system aka matrix compatible



Image courtesy of Bianco Research