Tag Archives: financial crisis

Banks Are The Key To This Stock Market Decline, & The Recession That Might Follow

Summary: After years of slow economic growth and rising asset prices in America, with investment gurus and economists predicting booms & crashes, events have again taken center stage. It’s time to again pay attention to the data.  {2nd of 2 posts today}

  • Risk markets are rolling over, high-grade bonds rise on a flight to safety.
  • Broad price movements like this are seldom false alarms; something is happening to fundamentals.
  • As usual during the early stages of a crash, we can only guess at the causes. Every crisis is unique. Do not assume this will follow the 2008 script.
  • Watch the banks! Banks lead us into financial crises; their stabilization leads us out.
  • Watch the data and take incremental steps to a more defensible portfolio stance. Avoid predictions!

 

Clear vision

This is another in a series of posts about the end to the expansion cycle which began in 2009 (links at the end). We can only speculate about the details and timing, but the broad outlines slowly become visible.

Look to the center of the decline in risk prices: banks. Their stocks are falling. Prices of their credit default swaps are rising. Concerns about their solvency have spouted suddenly, like daffodils after the first Spring shower. That’s how it should be. …

Read the rest at Seeking Alpha.

 

Did anyone predict the 2008 crash? Will anyone predict the next crash?

Summary: There are many who claim to have predicted the 2008 crash. Most (or all) in fact did not foresee the banking collapse that was at its center, that expanded a commonplace downturn into the worst global downturn since the 1930s. That tells us something important about our times, and what we an expect in the future.

Expect the unexpected: fish

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“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”

— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

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An important message of the FM website is that the post-WW2 era has ended, starting an era of unpredictable events. It’s a message nobody wants to hear, ripping asunder our comfortable belief in the reliability and normality of our institutions. We see these things in the history of the 2008 crash, the worst since the Great Depression. Legions claim to have seen it coming; in fact few (perhaps nobody) predicted its nature.

I doubt the many (or anyone) will do better in the next crisis. This uncertainty is a fundamental aspect of our situation. We’re “off the map”, sailing through unknown conditions (that part of the puzzle I got right, writing about it as early as Sept 2008).

As an example of how this worked — and what we can expect in the future — a previous post looked at Steve Keen’s predictions of trouble for our financial system.  He saw the flaws in our financial system, the potentially ruinous fault lines — but not the distinguishing feature that in 2008 turned the commonplace bursting of an investment bubble into a global 1929-like crash: the collapse of banks in the USA and Europe.

Other economists, such as Nouriel Roubini, also saw the danger in broad terms, but not the fragility of the banks that brought so many nations to the brink of Depression. Many non-economists also saw it (though in less detail), such as myself (e.g., the housing bubble and unsustainable levels of debt). I doubt that the senior managers of the banks themselves saw the danger (although their blindness proved quite profitable for themselves, getting paid both to cause and clean-up the bubble).

Another prediction of the crash

Another description of a successful prediction appeared in Gideon Rachman’s review of Jonathan Kirshner’s new book, American Power after the Financial Crisis (Financial Times, February 9): “The fire of the crisis was extinguished at great cost, but ‘the firetrap remained.”

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Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine.

Summary: Today America passed an important fork in the road, an easy exit from the massive monetary stimulus running since the crash. If the economy continues its slow growth (well below the 2% stall speed) today might have been the last opportunity for an easy exit. Today also demonstrated the madness that infects us, as investors cheered the Fed’s bad news about the economy’s slower than expected growth — and bid up asset prices. This post attempts to provide a harsh but accurate perspective on our situation.

See the follow-up post: Different answers to your questions about the momentous Fed decision to delay tapering.

“Damn the torpedoes! Full speed ahead.”

— Paraphrase of Admiral Farragut’s orders at Mobile Bay (1864). A great naval leader; he would have made a terrifyingly bad Central Banker

Money Giveaway

Let’s do it every day!

Contents

  1. How did we get here
  2. It was easy. It’s always easy to get hooked
  3. About government stimulus programs
  4. About the winners
  5. Why end the fun?
  6. Pictures of the US money supply
  7. For More Information

(1) How did we get here?

The Fed balance sheet has grown from $800 billion before the crash to $3.6 trillion today, now under QE3 increasing at $85 billion per month. While necessary during the recession, this has a side effect, one found in a few other powerful medicines. We have become addicted. I (and many others) warned about this (the original brief version of this post was Dec 2009). Now we’re hooked. Unless we act soon (later this year?) probably much pain lies ahead.

See this excerpt from “Financial Heroin”, Don Coxe, Coxe Advisors, 16 December 2009:

… my father was a doctor in the Canadian Army in WWII, and served in the Italian campaign. He became greatly respected for his anaesthesia and pain management under battlefield surgery and rehabilitation conditions. He was cited after war’s end for perhaps having performed more anaesthetics under such conditions than any other Canadian doctor.

In discussing his experiences, he told me that he swiftly learned that the best — and frequently the only — reliable drug for the critically wounded was heroin. Soldiers who writhed in agony under other medications almost always responded to heroin. The problem wasn’t deciding whether to administer it: if morphine didn’t work fast, you didn’t waste time, you injected heroin.

The problem for the doctor came when the patient had begun to recover from surgery, and was receiving heroin. How quickly could the dosage be reduced and when would it be terminated? Although few soldiers were freed of heroin without experiencing pain and distress, it was necessary to take the drug away as rapidly as possible. Otherwise they would become addicts and their lives would be ruined — for soldiering and everything else.

… Zero interest rates are Financial Heroin.

This goes to the vital points, mostly misunderstood, about the massive fiscal and monetary stimulus governments have applied in response to this global recession. Government stimulus has several characteristics similar to heroin.

  1. It mitigates the downturn, minimizing the suffering,
  2. but it does nothing to fix the underlying problems,
  3. and it creates imbalances which must be removed when the economy recovers.

It’s medicine. Powerful when used correctly. But like all sharp tools it cuts both ways. Confusing first aid (emergency medicine) with long-term treatment can produce serious errors.

(2) It was easy. It’s always easy to get hooked

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