The Effect The Current Subprime Loan Crisis Has On Global Markets

The Effect the​ Current Subprime Loan Crisis Has on​ Global Markets.
Dear Fellow-Investor.
Why is​ it,​ that this subprime loan crisis has such a​ rippling effect on​ many sectors of​ the​ economy?
Why are even companies outside the​ USA also affected by the​ U.S .​
mortgage crisis?
In the​ last 7 days I​ received lots of​ emails from my subscribers asking me questions like these,​ and I'd like to​ take the​ opportunity to​ explain what this housing,​ mortgage,​subprime loan,​ credit crisis - whatever you​ want to​ call it​ - and the​ present situation is​ all about.
Between 2002 and 2004 the​ interest rates in​ the​ United States were as​ low as​ never before .​
At least as​ far as​ I​ can remember .​
I'm not that old yet! the​ effect of​ such low interest rates was a​ real-estate boom in​ the​ U.S .​
often financed with so-called subprime loans .​
These are loans given to​ borrowers who do not qualify for the​ best market interest rates because of​ their deficient credit history.
Subprime lending encompasses a​ variety of​ credit instruments,​ including subprime mortgages,​ subprime car loans,​ and subprime credit cards,​ among others .​
The term subprime refers to​ the​ credit status of​ the​ borrower (being less than ideal),​ not the​ interest rate on​ the​ loan itself.
But banks didn't worry too much about this because interest rates were low and simultaneously,​ real-estate prices were rising continuously in​ the​ 90's.
So back in​ 2002/2004,​ anyone that could count to​ 3 was given a​ loan .​
Many people in​ America were suddenly able to​ afford expensive single family homes and other kind of​ real-estate that they couldn't before.
But in​ 2018 the​ U.S .​
interest rates had tripled and now,​ especially the​ subprime borrowers couldn't pay their monthly installments anymore .​
So more and more of​ these subprime loans started to​ crumble.
But that's not all .​
Some banks and other financial institutionals converted millions of​ these subprime loans into bonds .​
These were then sold for billions of​ dollars to​ banks,​ insurance companies and mutual funds that assumed this to​ be a​ secure investment because bonds usually are .​
That's why they're also considered a​ safe haven in​ stormy times.
And not only were these bonds sold to​ U.S .​
institutionals,​ but International ones too .​
You see,​ in​ a​ nutshell,​ everyone invests everywhere .​
America invests in​ Europe,​ and Europe invests in​ America,​ etc,​ etc.!
So you​ can imagine what happened when these loans started to​ crumble and the​ practice of​ converting them into bonds backfired .​
It all swept over the​ borders of​ America into other countries as​ well .​
The German industrial bank IKB invested 13 billion dollars in​ these bonds and now they are looking at​ a​ $5 billion loss.
For years this subprime game turned out all right and gigantic amounts of​ cash were invested into real-estate in​ Florida,​ Delaware or​ Texas by U.S .​
and international equity markets .​
No one thought that so many borrowers would go broke at​ the​ same time.
According to​ the​ U.S.Federal Reserve,​ loans of​ up to​ 100 billion dollars could bounce .​
At the​ same time,​ this seems to​ just be a​ drop in​ the​ ocean considering the​ effect it​ could have on​ international capital markets.
These bad loans could be the​ biggest single risk for the​ global economy .​
In the​ past,​ many in​ America spent their money stout-heartedly thus,​ stimulating and cranking up the​ economy .​
Their houses became worth more and more and banks literally threw loans at​ customers with low interest rates.
This could all backfire now putting a​ lot of​ pressure on​ the​ U.S .​
economy,​ because the​ money that was spent so generously is​ now being held back .​
Also because borrowers that are now up to​ their ears in​ financial troubles can't spent anymore money because there simply is​ none left to​ spend .​
This,​ in​ turn,​ takes a​ lot of​ liquidity out of​ the​ markets.
Also companies and corporations that have nothing to​ do with the​ current real-estate turmoil are drawn into the​ subprime crisis .​
If they want new capital from banks,​ they have to​ pay higher interest rates as​ an​ additional premium for risk .​
Or,​ taking things into extremes,​ they won't get a​ loan at​ all making it​ difficult for companies to​ grow,​ especially if​ a​ company wants to​ merge with another which often costs billion of​ dollars .​
This all drops out now thus,​ reducing earnings and profit outlooks.
And there's another,​ equally bad effect on​ all companies .​
whether attached to​ any real-estate or​ not .​
Hedge funds bought these converted mortgage bonds by the​ millions and very often using margins i.e .​
buying on​ borrowed money .​
And now they are sitting on​ a​ huge heap of​ losses and debt .​
In order to​ pay back those debts they have to​ sell stocks,​ commodities and other equity .​
And this obviously pushes prices down .​
Also stock prices .​
It's like a​ chain reaction.
And that's basically the​ reason why the​ markets around the​ world are in​ such shambles right now.
Back at​ the​ trading floor,​ for Bullish trading the​ best hope for continued long trading is​ in​ turnarounds and bounce backs .​
Rather than hold your breath and open new long trades why not take the​ Bearish pat and trade puts or​ stand on​ the​ side lines for a​ time?
Is my trading bias still Bullish? in​ the​ short-term no .​
In the​ mid and long-term,​ yes .​
So I'm definitely not opening any new long trades right now .​
But in​ the​ future,​ we'll be looking at​ plenty long trade opportunities .​
That's the​ good side of​ it​ all!
Yours in​ Successful Trading,​
Ricky Schmidt

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