Executive Summary
- The Fed's inability to recognize the true dynamics of the 2008 crisis has re-inflated a market bubble and unfairly rewarded the big banks
- More credit/liquidity cannot solve valuation/collateral crises. But that's exactly what central banks tried to do — creating today's "Everything Bubble"
- How the Crisis of 2018/2019 will differ from 2008
- Why this time, the Fed's fixes will be futile
If you have not yet read The FAANG-nary In The Coal Mine, available free to all readers, please click here to read it first. Note that this Part 2 is an updated version of a report first published in 2014.
In Part 1, we noted the eroding good options for investment capital in today's "Everything bubble" financial markets, as well as the dangerous risks that another 2008-style crisis is brewing. If markets are fractal, as argued by Benoit Mandelbrot, then we can anticipate more “once in a lifetime” crises than economists expect, and that such crises will be less predictable than expected.
In Part 2 of this report, we explain why the policies of the governments and central banks around the world that have boosted assets such as stocks, bonds and real estate to new bubble highs will cause a crisis that will be as damaging as 2008 — yet unfold quite differently, in ways the system is not prepared for.
Fighting the Wrong Battles
The outlines of the coming crisis were readily visible in 2007; the subprime domino was toppling the market for mortgage backed securities which in turn was toppling the market for credit defaults, collateralized debt obligations (CDOs) and a host of other exotic financial instruments.
Those of you who were actively following stock markets in 2007 and 2008 may recall the wild surges of euphoria that accompanied every Fed policy announcement. Stock indices shot up every time, only to falter once again as the liquidity injections failed to resolve the underlying collateral/valuation crisis.
When liquidity programs failed to fix the erosion of collateral, markets went into a free-fall.
We can anticipate that the Fed (and other central banks) will respond to a renewed collateral/valuation crisis in the same way they resolved the crisis in 2009—by buying assets directly in vast quantities. The Fed’s option of buying stocks directly (for example, index contracts or funds) is sometimes referred to as the Nuclear Option, the ultimate backstop to a global meltdown.
But the nuclear option won't fix anything, because…
The Coming Valuation Crisis
PREVIEW by charleshughsmithExecutive Summary
- The Fed's inability to recognize the true dynamics of the 2008 crisis has re-inflated a market bubble and unfairly rewarded the big banks
- More credit/liquidity cannot solve valuation/collateral crises. But that's exactly what central banks tried to do — creating today's "Everything Bubble"
- How the Crisis of 2018/2019 will differ from 2008
- Why this time, the Fed's fixes will be futile
If you have not yet read The FAANG-nary In The Coal Mine, available free to all readers, please click here to read it first. Note that this Part 2 is an updated version of a report first published in 2014.
In Part 1, we noted the eroding good options for investment capital in today's "Everything bubble" financial markets, as well as the dangerous risks that another 2008-style crisis is brewing. If markets are fractal, as argued by Benoit Mandelbrot, then we can anticipate more “once in a lifetime” crises than economists expect, and that such crises will be less predictable than expected.
In Part 2 of this report, we explain why the policies of the governments and central banks around the world that have boosted assets such as stocks, bonds and real estate to new bubble highs will cause a crisis that will be as damaging as 2008 — yet unfold quite differently, in ways the system is not prepared for.
Fighting the Wrong Battles
The outlines of the coming crisis were readily visible in 2007; the subprime domino was toppling the market for mortgage backed securities which in turn was toppling the market for credit defaults, collateralized debt obligations (CDOs) and a host of other exotic financial instruments.
Those of you who were actively following stock markets in 2007 and 2008 may recall the wild surges of euphoria that accompanied every Fed policy announcement. Stock indices shot up every time, only to falter once again as the liquidity injections failed to resolve the underlying collateral/valuation crisis.
When liquidity programs failed to fix the erosion of collateral, markets went into a free-fall.
We can anticipate that the Fed (and other central banks) will respond to a renewed collateral/valuation crisis in the same way they resolved the crisis in 2009—by buying assets directly in vast quantities. The Fed’s option of buying stocks directly (for example, index contracts or funds) is sometimes referred to as the Nuclear Option, the ultimate backstop to a global meltdown.
But the nuclear option won't fix anything, because…
