Bailing Out - the Hoard Trade

My cousin the bond trader emailed today after the bailout bill failed and said the only trade left was to HOARD.

The situation is truly confounding. In principal, I'm against the federal government taking crap assets off the financial services companies (and paying a premium to do it). I am also leery of Republican scare tactics and the way they use doomsday scenarios to push legislation. I am also confident that if there was a reasonable solution to the crisis - it would not be sourced out of the W administration. Add it all up and it leaves me in the same camp with the ... House Republicans - WTF?!?.How did I end up there?

Net/net: Hoarding may not be such a bad call.

I think the underlying dynamic that is coming to bear is the steady increase in income inequality in the US - which has been a persistent trend over the last 30-40 years. Check the Gini Index 1913-2004



People in society at large can sense the inequality gap and so broad political support for a bill like the banking bailout is non-existent.

Another interesting historical  chart to look at is Total Debt to GDP ratio 1920 to Present:

So you can see that as inequality rises - so does total debt i.e. I want to live like Paris Hilton but I don't have the cash so I'll borrow to pay for my day spa/SUV/vacation in Vegas/McMansion etc. etc.. This debtor consumerist posture coincides with low interest rates, pick your payment loans, NINJA loans - the predatory lending all feeds on the rise in inequality and voila massive financial crisis.

If you look at those two charts and extrapolate forward- based on the fact that the former highs in both charts occurred at the start of the Great Depression - you can see hoarding is not a bad call.

Or maybe personally bailing out and moving the family to New Zealand - but then they have big earthquakes there...

Comments

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