{"id":32618,"date":"2016-01-27T03:27:14","date_gmt":"2016-01-27T02:27:14","guid":{"rendered":"http:\/\/www.w-t-w.org\/en\/?p=32618"},"modified":"2016-01-27T03:27:52","modified_gmt":"2016-01-27T02:27:52","slug":"32618-2","status":"publish","type":"post","link":"https:\/\/www.w-t-w.org\/en\/32618-2\/","title":{"rendered":"Relationship Between Subprime Mortgage Crisis and Oil Price Plunge?"},"content":{"rendered":"

Tracey Allway writes: \u00a0Is there a relationship between the\u00a0subprime mortgage crash and the disorderly fall in the price of oil.<\/p>\n

Created in January 2006 and consisting of a basket of credit default swaps (CDS) tied to the welfare of subprime mortgages, it allowed a bevy of investors to bet on the future direction of riskier home loans and helped inflate the massive amounts of leverage tied to the U.S. housing bubble. More recently it played a starring role in the film version of Michael Lewis’s\u00a0The Big Short<\/em>\u2014when protagonists\u00a0Christian Bale, Steve Carell, et al.\u00a0are tracking their bets against the U.S. housing market, they are\u00a0tracking the ABX.<\/p>\n

Fast-forward to today\u00a0and Bank of America analysts provide an update to their previous thesis, which was that the downward spiral in the price of oil was shaping up to look a lot\u00a0like the negative trend that engulfed the subprime space circa the year 2007.<\/p>\n

Here’s what they say:<\/p>\n

The pattern of the decline in the price of oil that began in mid-2014 is remarkably\u00a0similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index\u00a0that referenced subprime mortgages and, ultimately, the U.S. housing market (Chart 1).\u00a0The ABX history suggests that oil will see more declines in the next couple of months\u00a0and find a floor somewhere in the low 20s in the March-April time frame. Both the\u00a0duration of the decline (1.5+ years) and the scale of the decline (100 neighborhood\u00a0starting price down to the sub-30 neighborhood) are similar.\u00a0Given that both housing\u00a0and oil prices were fueled to spectacular heights in the two periods by massive credit\u00a0expansion, it\u2019s probably more than just coincidence that the respective \u201cbubble\u201d\u00a0bursting patterns are so similar.<\/strong><\/p>\n

Consider how things tend to work. Denial on what constitutes fair value is a big\u00a0component of bubbles, on the part of both market participants and policymakers. When\u00a0perceived \u201cbubbles\u201d burst, markets take their time in steadily shredding views of the\u00a0perception of fundamental value, as prices move lower and lower. Along the way, many\u00a0will cite \u201ctechnical factors\u201d as the cause of the decline, which in some way suggests the\u00a0price decline may not be real when in fact it is all too real. In the end, the technicals\u00a0drive the fundamentals, as credit flees and borrowers go bust, and a feedback loop\u00a0lower kicks in.\u00a0Lower prices beget accelerated selling, as asset owners need to raise\u00a0cash. It could be margin calls or it could be producer selling needs, it doesn\u2019t really\u00a0matter: the selling becomes inevitable and turns into forced selling<\/strong>.<\/p><\/blockquote>\n

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\n
Source: BofAML<\/div>\n<\/figcaption><\/figure>\n

The point here is not that oil is necessarily the new subprime crisis per se\u00a0but that the recent action in the price of crude resembles nothing if not the\u00a0bursting of a bubble<\/a>\u00a0and the sudden realization that the asset has been overvalued for too long. More worrying for oil investors will be BofAML’s\u00a0idea of forced selling. As Flanagan notes: “The\u00a0systemic margin call of 2008 seems to be back for now, albeit to a far lesser degree.”<\/p>\n

.<\/p>\n","protected":false},"excerpt":{"rendered":"

Tracey Allway writes: \u00a0Is there a relationship between the\u00a0subprime mortgage crash and the disorderly fall in the price of oil. Created in January 2006 and consisting of a basket of credit default swaps (CDS) tied to the welfare of subprime … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-32618","post","type-post","status-publish","format-standard","hentry","category-finance"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/posts\/32618","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/comments?post=32618"}],"version-history":[{"count":2,"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/posts\/32618\/revisions"}],"predecessor-version":[{"id":32620,"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/posts\/32618\/revisions\/32620"}],"wp:attachment":[{"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/media?parent=32618"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/categories?post=32618"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.w-t-w.org\/en\/wp-json\/wp\/v2\/tags?post=32618"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}