Securitized credit: Where we’re going, there are no roads – Part 1

With global central banks rapidly deploying balance sheet to ease a liquidity strained market, and a US Federal Reserve Bank (Fed) balance sheet likely to hit $10 trillion, we are seeing stimulus of a 1.21 gigawatt magnitude. Sadly however, I’m fairly certain not even the flux capacitor could bring us back to where we were in January.

Though we’ve seen global financial crises before, this one certainly feels different. First of all, is it really just a “financial” crisis? Let’s start there.

Entering this year, economically speaking, we were already late cycle, but not in the same way as in 2008. Following the last financial crisis, there was heavy regulation of the banking system, material consumer protectionism, and heavy regulation of mortgage lending and securitization. As such, the consumer felt much better positioned from a debt (or leverage) perspective. The limited re-leveraging of the consumer contrasted sharply with the expansion and quality deterioration in the corporate sector. However, for the consumer, wealth inequality has been increasing, and with it a profound difference between a prime consumer (one that owned a house and had seen more income stability), and the more leveraged or the non-prime consumer (with subprime auto loans, installment debt and student loans).

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