Market Insight


When J.P. Morgan (the man) was called to testify before Congress about the "money trust" and asked to explain why some firms received credit and some firms didn't, he famously explained that the first test of any loan was the character of the man borrowing the money.  The first thing is character, before money or property or anything else. A man I do not trust could not get money from me on all the bonds in Christendom.

Today, not only have our bankers lost all concern for character, these online, peer-to-peer lending companies were actively seeking out subprime customers. It's insane. And it's unbelievable that investors would have bought these packaged loans.  

How did this happen less than 10 years after the subprime mortgage crisis? It happened because the Fed and other central banks around the world drove interest rates on virtually every asset so low that investors became desperate for yield. Any financial asset that could generate yield could find a buyer between 2010 and 2016. Subprime auto loans. "Junk"-rated corporate bonds. Subprime student loans. And, apparently, even subprime online personal loans.

For most of the last 40 years, our political leaders and their puppet economists have preached that the key to economic growth is the expansion of debts and more spending. Just this morning on CNBC, I heard Larry Summers – the former Treasury secretary under Secretary Clinton and former president of Harvard – criticize Trump's plan to eliminate estate taxes (the "death tax") by saying that ending it would incentivize people to save money, which would reduce economic growth.

Meanwhile, no human being has ever become wealthier by spending. Not a single empirical example. And no society has ever raised itself out of poverty except by carefully saving.  But the most powerful economist in the United States – the former president of Harvard University – believes that encouraging the formation of private capital is an impediment to economic growth. He argues for more government spending and the creation of even more government debt.

These policies, which have been favored by Democrats and Republicans alike, have seen our country replace one debt bubble with another for most of the last 40 years.  We've seen this happen in our economy on a regular basis for a long, long time.

In the early 1990s, the bubble was in savings and loan institutions. In the late 1990s, it was in telecom bonds and internet stocks. In the mid-2000s, it was subprime mortgage debt. Today, it's "junk" bonds, subprime auto, student loans, and, almost unbelievably, subprime online lending.

It's all unwinding, just like it always does. The only question left is... how many of these bubbles and busts will you have to live through before you learn how to take advantage of them?