It is almost impossible to predict the next crisis. So people like Jim Rogers call for a crisis every few months and then they can say “look I told you”. That is not the point. Let us see what wrong things the big lenders are doing in the USA and how it could lead to a crisis.

  1. In the sub prime crisis of 2008 loans were given to NINJA – no income, no jobs kinda people and that back fired.
  2. Now it is the turn of the automobiles. Car loans are being given with very poor checks – exactly how Home loans were given
  3. The Educational Loan / College plans are again huge, and people who are qualified are not able to find jobs.

all this has happened because

a) money has been made very cheap and inflation was low – thus the threshold required in debt is low.

b) as money is cheap lenders can lend to anybody at low rates without worrying about the ‘rate’.

c) by doing this, they risked the capital.

Same thing is happening now. Equities have hit an all time high, the FED is not raising rates, – but inflation is raising its head. With increasing inflation if the FED raises interest rates, some of the mistakes will hit home. The chicken will come home to roost!

The US may very well be in the state where they move from euphoria to financial crisis. The move can be rapid – in an inter connected world, the gilt and AAA maybe the only refuge. This looks familiar to the housing crash, when large institutional investors lost billions of dollars on supposedly “safe” bond investments. All this just because some CEO was calling for more disbursements, and in a rising markets all lending looked smart. It is actually the laziness—and euphoria—of loan processors who were more concerned with closing a loan FAST than making the right loan.

In 2007, it was houses. Today, it’s cars. Today it could be educational loans. The results could be the same.

Luckily in India interest rates are still high and the poor quality of assets is not in the retail books. The government has to tackle the NPA.

I have been speaking to NBFC – they are happy with the slow growth of loans. They are more interested in the REPAYMENT of loans. Unlike the PSU banks. The govt’s refusal to ‘recapitalize’ banks is awesome, and they should let these banks struggle for money. To me it makes sense. It also means that the Yashwant Sinhas and others will cry about ‘poor private investments’. We never had private investments – it was just the banks funding the so called ‘private investments’. Look at GMR, GVK, ADAG, JAYPEE, …what was private about their investing?

The Indian market runs the risk of falling due to international reasons. Be careful, that is all. Not predicting a fall like Yashwant Sinha!

 

 

 

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  1. Car loans are of really small amount compared to home loans. So it will need millions and millions of car loans to go defunct for crash. Moreover car loans are short term (5-6years) vs home loans which are generally in 20-30 years range.

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