Could subprime crisis II play out as the Federal Reserve keeps hiking rates in a steepening recession?

Goldman Sachs has just fired 3,000 banks, which is a clear sign that the top ten investment banks in the world are fretting about a potential tsunami of bad loans.

Indeed, the subprime crisis could have begun with an investment bank, Goldman Sachs at the epicenter. 

Goldman Sachs was the same bank that made a fortune in the last subprime crisis in 2008, which collapsed Salomon Brothers and triggered a financial crisis and a Great Recession from which we never recovered.

Subprime Crisis II
S&P 500 returns 2019

“the subprime crisis could have begun with an investment bank, Goldman Sachs at the epicenter”

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In a piece entitled, Recessional Denial, December 2022 it was written, “Recession denial will trigger a worse housing bust than 2008,” as the Fed denies that the economy is in recession and that hiking rates at below core inflation rate will tame inflation.

Is there any way of taming consumption when the savings deposit rates and bond yields remain in deeply negative territory when factoring in inflation? So, holding cash or a promissory note to receive a bundle of cash with yields, which is a bond, is like trying to move forward on a fast downward escalator. Frankly, with grocery hyperinflation in the region of 50 to 100%, households are better off saving in bags of rice, coffee, and wheat.

100 USD, or the equivalent in 2022, January, buys half as many groceries in January 2023. Could another historical currency crisis, triggered by another implosion in the debt market be on the cards? 

Recession

“Recession denial will trigger a worse housing bust than 2008”

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Stars are aligning for a subprime crisis 11

The market for high-risk bonds, with the highest yields, has become illiquid in the backdrop of a recession and rate hikes. 

As a wave of layoffs smashes the economy in the first quarter of 2023, households, already weakened by the worst cost of living crisis in a generation, will be faced with survival choices, heat their homes, buy food, or service their home, auto loans.

In this hunger game scenario, tapped-out households will choose to default on their loans, thereby triggering subprime crisis II.

“Banks are offloading the so-called hung debt, even at steep discounts,” according to the Bloomberg piece, written in the ‘Recession Denial’ article. 

“Goldman Sachs reported profits down a whopping 60%” – Wealth Training Company

The big banks are preparing for a subprime crisis, loan defaults

Goldman and Morgan Stanley are setting aside funds for loan default in a backdrop of collapsing profits. 

Goldman Sachs reported profits down a whopping 60%, and Morgan Stanley reported a 40% drop in profit from a year ago. 

Further cost-cutting and layoffs in banking could be coming. 

But here is the red flag that subprime crisis II is underway;

Goldman Sachs reported that its 4Q 22 provisions for credit losses surged 183% to $972 million.

With a subprime crisis II underway and the big banks clocking up huge losses, will that be enough pain for Fed chair Powell to pivot?

Squealing club members could make the Fed head pivot then the rest is a fairytale. Out comes the inflation is cooling fairytale and greenwashing that eating bugs is cool, shower less, give up your cars, and live in a pod. Everything is awesome.  

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