A hidden index-fund crisis?

The hero of Michael Lewis’ post–financial crisis best-seller The Big Short is warning investors about a new bubble created by index funds, said Reed Stevenson in Bloomberg.com. Famed asset manager Michael Burry said he sees parallels between the flood of money into passive funds and “the pre-2008 bubble in collateralized debt obligations (CDOs), the complex securities that almost destroyed the global financial system.” Burry says such funds “are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages a decade ago.” Just as CDOs let investors think they could buy into the housing market without looking at the health of the underlying mortgages, index funds have allowed investors to skip the process of analyzing companies and price risks. Many of the largest index fund are pouring money into bigger companies that are underperforming. At some point, says Burry, the flows will reverse, “and it will be ugly.” Times. American Express’ Pay It Plan It program “allows cardholders to pay off large purchases over several months for a fixed monthly fee” that the company says “would always be the same as or better than the cost of interest.” Citibank and JPMorgan Chase have also begun offering similar “fee-based” payment or loan options. The plans generally let cardholders carry a balance while still getting a grace period on interest for other purchases.