Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Commentary

Two Big Financial Stories You Need to See

“Insanity: doing the same thing over and over again and expecting different results.”

Albert Einstein

There are two big financial news stories that everybody should be paying attention to right now that are being ignored by the mainstream media.

The first and perhaps most bothersome is the massive increase in something called portfolio loans on Wall Street. Basically, a portfolio loan is a hard money loan in which all or part of a person’s investment portfolio is used as collateral. The idea behind this arrangement is that the loan will be paid off as the value of the securities or equities in the portfolio increase.

The problem, of course, is what happens when the value of the stocks in the portfolio falls. In particular, what happens if there’s a major bull market? Large numbers of investors could find themselves in a position where they could not pay off all those loans.


It is easy to see why Forbes blogger Joshua Brown calls this “Rich Man’s Subprime.” Like subprime meltdowns, these loans could easily melt down and bring down a lot of investors with them. To make matters worse, many of the biggest banks, including Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Wells Fargo Advisors (NYSE: WFC), and UBS (NYSE: UBS) are heavily into this business.

One big player is Morgan Stanley, and Brown included a frightening quote from a Morgan Stanley wealth advisor turned high-priced loan shark in his piece. Here’s what Reuters wrote about this lending: “For every dollar of client deposits, Morgan Stanley makes just 55 cents of loans, far less than the 70 to 80 cents that rival banks make in their brokerage businesses. Its profit margins are weaker than other major brokerages.”
(Borrowers) Unsecured Loans_male

He also noted that banks are now big paying bonuses and commissions to the wealth management advisors who write the loans. Sound familiar, folks, like the operation of mortgage banks around 10 years ago?

It looks as if we’re about to repeat the same madness over again with similar results. One has to wonder how long before this lunacy spreads to the rest of America and average people join in on the stupidity. Perhaps the next frontier of investing is borrowing against your retirement savings.

In another fascinating development that shows how fast the world is changing, Microsoft (NASDAQ: MSFT) has become the latest big company to start accepting Bitcoin payments. It has teamed up with Bitpay to accept the crypto currency for payment in its Windows Store and for Xbox Games, Xbox Music, and Xbox Video. There will be a limit of $5,000 in Bitcoin payments.



This could be a real game changer, folks, because Bitcoin is more than just an electronic currency. It is an investment vehicle similar to an ETF or a share of stock. This could greatly increase Bitcoin’s value and respectability. One has to wonder just how long paper currency can survive with Bitcoin being accepted by major corporations.

A combination of Bitcoin and digital wallets like Apple Pay, PayPal, and Venmo could spell the end of the need for government issued money. To make things more complicated, corporations are now in a position to issue their own money. I have to wonder if governments will sit back and let that happen.
(Borrowers) Unsecured Loans_male

The existence of next generation payment mediums like Bitcoin and market-based lending like portfolio loans will make for extreme economic volatility. Nothing, it seems, will stay the same in today’s economy of destruction.