[An impending crash] About the issue that the current situation closely resembles the pre-Liaman (Reiman) era.
Koyama Keizo here.
“The current situation is
strikingly similar to what happened before the Lehman Shock.”
“If a financial crisis occurs this time as well, its impact will
be far beyond the Lehman Shock.”
Now, more than ten years since the Lehman Shock, it is said by analysts, investors, and various market participants
that we are in a situation where another financial crisis could happen at any time,
which is not strange.
Dealers, investors, and various market participants are sounding strong warnings.
• Leverage loans
• High-yield bonds
• CLOs
are particularly problematic, but…
One thing we can say is,
“as long as human desire exists, financial crises will recur.”
That is the market’s truth.
“As long as making money is the priority, many people will
pursue immediate gains selfishly,
causing the market to inflate excessively, bubbles to form,
and financial crises to occur, over and over.”
A financial crisis will occur sooner or later,
and history proves it.
The question is the timing,
and whether the present situation
really resembles the pre-Lehman Shock era,
and whether a crisis can emerge soon at a level far surpassing Lehman.
From this time, I’d like to share
such a theme with you.
There will be some complex topics and jargon, but
I will explain each one carefully,
so please compare past financial crises with the current situation
and make use of them in your investments.
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Everything began with the dream of a “dream home.”
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To compare the present and the past,
first,“Why did Lehman Shock happen?”
Let’s reflect on that historical background.
As mentioned earlier,
the root of financial crises is
always “human desire.”
Behind Lehman Shock, too, there were powerful desires.
One of them was
the desire to own a home,“to own a home.”
“A dream home”is a phrase that stirs emotions.
However, Americans’ sense of values is
slightly different from the Japanese,
and buying a house is not as special a thing there.
“If you’re going to live there about three years, buy it,” is
the American mindset.
Behind this is that in America home values do not tend to fall easily,
meaning it’s better to buy than rent.
Nevertheless,
there were people who believed they could buy a home with the magic of America.
That was,“subprime loans.”
In Japanese, it’s sometimes called a “sub lender,”
and the word “sub” means “lower,”
so a “subprime loan” means
“loans to those below the prime clientele.”
“Loans for people with low creditworthiness.”
In terms of annual income, these loans targeted people roughly
below 3 million yen per year.
Even if income is low
or social credit is low
they could borrow money,
and those “subprime loans”
began to appear anew around 2003.
Subprime loans themselves
had existed since the early 1980s,
but their market share was not large.
However, in 2003,
the prime mortgage market hit a ceiling,
and loan companies thought,
“we must look at other segments too,”and new subprime loans began to appear.
Then from around 2004 they began to gain a large share.
Behind this, for example,
“At first you only need to pay interest, and later you start paying the principal.”
This was,
the appearance of favorable subprime loans.
Even if they were favorable,
the burden would steadily grow,
so from a normal sense you would worry
that you could not pay it back in the future.
Yet reason does not beat desire.
The truth is that many people couldn’t even afford to buy a home
or had no expectation of rising income,
yet many low-income people
tell themselves they can borrow,
and they start taking subprime loans.
The trend of the times also pushed them along.
Back then, housing prices in the United States were rising.
When you bought a home,
its value would soar,and that was the state of affairs.
So
“If you buy a home now, its value will rise,
and you can use that increased value as collateral to refinance.”
Many believed this and
felt secure when taking subprime loans.
Also,
the fear of missing out on the rising housing prices
made many hurry to buy.
In stock trading, when prices rise smoothly,
the fear of missing a chance leads people to buy at irrational timings,
and they end up buying at the high,
which often happens.
Many people felt,
“When will I ever buy a home if not now?”
and they started taking out loans one after another.
Even those who were initially risk-averse
began to feel compelled when friends with similar incomes owned homes,
and they could not restrain themselves.
However, the world is not that forgiving.
In 2007, housing prices began to fall.
This became a major problem.
Refinancing became impossible.
Of course, you could not repay the loan on your own.
As a result, with housing prices stopping their rise,
many people could not repay their loans, and problems mounted.
This was the beginning of the collapse.
Let’s briefly summarize so far.
Around 2003,
new subprime loans appeared,
and many low-income people, driven by a desire for a home,
took out dangerous loans, relying on rising home prices.
But when housing prices stopped rising,
many could not repay their loans…
leading to Lehman Shock.
This time, I have written critically about the desires of low-income borrowers who took on dangerous loans,
but
don’t you think the loan companies bear responsibility for enticing them?
Yes, loan companies were greedy and malicious.
Furthermore, after they gave out the loans,
they did not bear the risk themselves and profited handsomely.
So,
in the next part, I will discuss what loan companies were doing behind the scenes to persuade low-income people to take out loans.
What happened in the past,
and what is happening now,
are matters investors cannot ignore,so please continue to read next time as well.
I sincerely hope you can profit from investing
in a stable way.
Keizo Shimoyama
