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What does it mean if the "debt bubble" bursts?

edited 30 November -1 at 1:00AM in Savings & Investments
58 replies 75.8K views
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  • eskbankereskbanker Forumite
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    You mean the long winded and mind numbingly dull answer which goes off piste?
    Everyone's entitled to their opinions about that but my point was more about those who choose not to debate it in an adult way but simply spew silly uninformed rants instead....
  • reeacreeac Forumite
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    I've always wondered why anyone would buy up bad debts but I suppose they get mixed up with more respectable loans and then get given a fancy name and lots of advertising mentioning fantastic returns so ultimately punters "invest" in them.
  • MalthusianMalthusian Forumite
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    Bad debts (meaning those on which the borrowers have already defaulted) are typically bought up by debt collection firms. They are not packaged up and sold to retail investors - you are probably thinking of sub-prime loans (those on which the borrowers have not defaulted, but have a higher risk of doing so) prior to the credit crunch.

    A "bad debt" is not a loan that you will never get back, the term for that is "written off". It only means the borrower hasn't paid it back yet even though he has gone past the date he agreed he would.

    The reason debt collection firms buy up such debts is because they think they have a better chance of eventually getting the money back than the seller. Say someone owes me £100 and the date for repayment has already passed. I think my chances of ever seeing the money again are somewhere around 10%, so I value this debt at £10. A debt collection firm, however, may rate its chances of recovering the debt at 20%, because it's willing to spend time hassling the borrower with demand notices and phone calls and taking them to court, things that I may lack the expertise or the inclination to do. So it will value that debt at £20.

    They can therefore buy the debt at £15 and both of us will be happy as I've got £5 more than I was expecting and the debt collector will expect to make £5 on average. Of course, the chance is still high that it will never get the money, but if it buys ten such debts for a total of £150 then it will expect to lose its money on the 8 that never pay up and make £200 from the 2 that eventually do, for a total profit of £50.

    The reason people buy up bad debts is that they have more inclination to do the dirty work of debt collection than the people selling them. And because they have a different risk/return profile to the seller; they will be happy for some debts to never be repaid as long as they make it up on the ones that are, while the people selling the debt may prefer the certainty of a reduced payment now over the slim possibility of a bigger payment in the future.
  • edited 26 July 2017 at 6:50PM
    ThrugelmirThrugelmir Forumite
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    edited 26 July 2017 at 6:50PM
    Bad debts get written off as are irrecoverable, i.e. debtor has gone bankrupt. Any possibility of a recovery of any sort makes the debt doubtful. For a business time is the biggest issue. Without a dedicated collection team chasing a debt, potentially for years, simply isn't economic.

    A business will build future losses due to bad debts into the pricing of their products. Recovery of even 10p in the £ isn't so bad. As it's also cash in the bank. Which from a finance houses point of view can be lent, thereby generating further profit.
    “An investor who has all the answers doesn’t even understand all the questions.” - John Templeton
  • DiggerUKDiggerUK Forumite
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    Debt, as I said previously, only becomes a problem that bursts, when the servicing of that debt can no longer be carried out. When these debt bubbles burst, the point of no return is usually some distance behind the final collapse.
    Anyone who has read, or seen, 'The Big Short' will realise that the maths only disclosed what was going to happen. That bubble burst well beyond the tipping point.
    This article by John Stepek of MoneyWeek should get you all considering going short..._
    http://moneyweek.com/why-are-share-prices-so-high-because-investors-are-daft/
    I am not now, nor have I ever been, a Financial Adviser.
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  • ColdIronColdIron Forumite
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    MoneyWeek :)
  • edited 30 March 2018 at 1:36PM
    bowlhead99bowlhead99 Forumite
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    edited 30 March 2018 at 1:36PM
    ColdIron wrote: »
    DiggerUK wrote: »
    This article by John Stepek of MoneyWeek should get you all considering going short..._
    http://moneyweek.com/why-are-share-prices-so-high-because-investors-are-daft/
    MoneyWeek :)

    Stepek's doom-mongering articles last month included
    "Have we already seen the top of the market?"
    "The hidden risks of a becalmed market"
    "Why now is the time to invest defensively"
    So, he is not much of a bull is he.

    You can flick back through his article history to see that he (like everyone else at Moneyweek) does like to sensationalise. Opening pages at random from his article lists, back in the first week of Jan it was:
    "Will this bull market end with a whimper - or a catastrophic bang?"
    Last May 2016 it was
    "This scary chart suggests a crash might be around the corner"
    June 2015
    "When will the US stockmarket bubble burst?

    The US stockmarket has looked expensive for a long time. But now, the warning signs suggest we're near a tipping point. John Stepek explains why"
    Then a great schizophrenic run for four weeks in 2013 with the headlines a week apart being:

    22/8/13 Markets are overreacting to the Fed - time to go bargain hunting [:)]
    27/8/13 Beware! Markets look vulnerable- here's how to protect yourself [:(]
    03/9/13 Britain's fresh boom will lead to a bigger bust [:(]
    10/9/13 Why you should be investing in stocks right now [:)]

    From that flipflopping if you stopped there you would be an investor in stocks by mid September, right? But then in October it was, "Why rising interest rates threaten some of your favourite stocks", and November "The best way to bet on another crisis in the eurozone".

    Moneyweek is garbage. They produce so many sensationalist articles that whatever happens, five years later they'll be able to say "and remember back in [month, year] we [recommended you to / warned you to] do [x/y/z], you should take our articles seriously because we had many articles calling it exactly right".

    Conveniently forgetting all the other months (or other articles the same month) calling it exactly wrong.
  • DiggerUKDiggerUK Forumite
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    bowlhead99 wrote: »
    Stepek's doom-mongering articles last month included So, he is not much of a bull is he.........

    This thread was asking what it means "when the debt bubble bursts" Could you at least waffle about that.

    Stepek is a hack, but at least he gives some thought as to the signs to watch out for..._
    I am not now, nor have I ever been, a Financial Adviser.
    'Forward to the British Spring' 'Viva Wikileaks'
    Justice for Harry Dunn
  • bowlhead99bowlhead99 Forumite
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    DiggerUK wrote: »
    This thread was asking what it means "when the debt bubble bursts" Could you at least waffle about that.
    The answer - in the context of how the original phrase had been used when it was suggested to the OP in the thread they mentioned in post #1 - was already given in post #2. And in some follow up posts, others have expanded for other interpretations of what might be meant by a debt bubble bursting in common parlance.

    So, there is no need to waffle more about what the phrase "debt bubble bursting" means. It's already covered, we no know what the phrase means, and the thread can close and had been silent for a fortnight.

    Except you decided to reopen it to post about an article from Stepek talking about whether shares were overvalued relative to corporate profit margins, which doesn't really answer the original question here about bonds, does it? You're probably not the best person to demand that someone who *has* already answered the original question, goes back on track.
    Stepek is a hack, but at least he gives some thought as to the signs to watch out for..._
    One could contend that he doesn't give much thought as to the signs to watch out for, as he writes sensationalist headlines for any type of data, often taking contrary positions about what the data means on alternate articles, with a bias to negativity. The point is not to take much notice of what moneyweek write, as they are a clickbait sensationalist magazine slapped together by hacks, imho.

    Of course with such a scattergun approach to reporting interesting or useful financial information they will say some sensible things from time to time. But most readers won't be able to distinguish those nuggets of wheat from the chaff - and rather than reading the articles and shorting everything it might be better to skip such articles entirely because of the low bar they have previously set for themselves.

    The articles are often re hashes of existing stories.

    THIS WEEK there is SOME NEW DATA that SOMEONE HAS SAID means SOME TYPE of ASSET COULD or MIGHT or WILL, DEFINITELY or PROBABLY, either CRASH or BE A GOOD TIME TO BUY IT.

    Buzzfeed for people who think they know finance.
  • DiggerUKDiggerUK Forumite
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    bowlhead99 wrote: »
    ....in the context of how the original phrase had been used when it was suggested to the OP in the thread they mentioned in post #1 - was already given in post #2.
    And many forum visitors and members, will still be puzzled as to why a long winded post#2, which gave a fairly decent explanation of why bond prices flim flam around, became the basis for a sticky, despite the fact that it didn't answer the original question.

    The answer to that question is short and sweet. 'Debt bubbles burst when the debts can't be repaid' Those type of debts come about when easy money is available by the bucket load..._
    I am not now, nor have I ever been, a Financial Adviser.
    'Forward to the British Spring' 'Viva Wikileaks'
    Justice for Harry Dunn
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