Today marks the 13th year since the global monetary system began its collapse into what would be known as the Global Financial Crisis and leave the world in what I'd say has been a silent depression. Why we have seen such little (or no) economic recovery since then is because August 9th, 2007 wasn't just the start of a recession, it was a fundamental schism in the global monetary system and the moronic, self-enthralled central bankers have never fixed, even addressed, nor realize what the problem even is.
What happened on that day? Just a minor increase in the 3-month LIBOR rate, but it confirmed the nightmare sitting on the back of the mind of the global banking sector. It signaled that not only was dollar-denominated liquidity in the offshore money markets was drying up, but that the Federal Reserve doesn't actually have control over the short-term rates. Almost immediately the primary lenders in the offshore markets tightened completely and less than 6 months later global trade was almost entirely non-existent as a result.
Yes, subprime mortgages played a key role, but it was merely a catalyst to make things worse, and the reason the CDOs were getting filled with junk in the first place was due to the need for investment grade dollar-denominated collateral, which itself was an issue because the Eurodollar futures market (LIBOR derivatives that act as "money" to finance like 95% of global trade) had been exploding in size. The bond market had actually been signaling something was wrong for over a decade before it was triggered (falling bond yields meant dollar liquidity risks during a period of rapid expansion of the theoretical money supply).
Why the system hasn't recovered is pretty straight forward if you're not close minded to anything other than these completely backward Keynesian economic theories like the central bankers are. Basically, the Central Banks aren't really central. The global monetary system is based around private banks. They are the ones that create the money through credit and lending, so no matter how much QE the Fed does the shortage will continue to remain and reek havoc on the global economy. The reason it's broken is because the private banking system, since that fateful day in August of 2007, knows that there is a dollar shortage and that there are fundamental flaws clogging the capital flows through the money markets and have decided to tighten their lending, downsize, and look for returns in other areas such as the derivatives market.
Initially, the financial institutions were accepting of Ben Bernanke's QE and the possibility that maybe it'll work, but less than a year later in 2010 the European Sovereign Debt Crisis all but ended any thought along those lines. It's entirely psychological, and while the sheepish population and financial media eat up all the crap Bernanke, Yellen, and now JPow say, the people at the center of the monetary system just don't buy it. Since then the banking sector has shrunk and turtled, knowing what troubles lie ahead, but that is the actual reason for why there's been no recovery, and why there won't be any recovery for this most recent GFC. The general consumers were left unemployed and broke, and their behaviors shift towards saving and passive investing. Companies can't get efficient funding and people aren't spending, so corporate earnings haven't increased in almost a decade, which is why many turned to public funding through stock shares. It's also why the corporate bond market is the most important thing in the world to the Fed right now, as it was the epicenter of the financial meltdown in March, and lenders tightening almost entirely over the last couple months - so much so that the IMF had to issue a grave warning last week - that a collapse of that last line of finance for our business sector could send us into a deep global depression. That's really why the Fed pushed the boomers and pension fund managers into that market and started buying a couple billion for themselves.
As for stocks, the market has always been pretty disconnected from the economy since the 1930s and mainly prices itself based on "signals" and such, which has been much more apparent with the growth of ETFs and passive investment. What the equity markets need to worry about is more liquidity crunches (offshore repo market quarter-end bottlenecks) that trigger massive liquidations like it did in 2018 and again in March. Watch the Ted Spread, Corporate bond spreads, credit spreads, Eurodollar futures, bond yields, etc.
very good... very good level...
I am not saying i am an expert but i follow these matters quite well usually ... but I think your post will require a second reading. :)
kaxo1
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@guibl, To be fair, I am quite horrible at explaining pretty much anything
I wish it were that simple. Trump’s corporate tax cuts were actually kinda necessary due to the half-decade long drought in consumer spending and private funding. For a bit there in 2017, after the emerging market mess (dollar shortage was the cause again) settled, it looked like recovery might be on the table with bond yield curves steepening, but then we saw another repo market bomb go off in 2018 and caused the yield curve to invert once again. It’s hard to say for sure, but the massive equity rally with those hiccups that form the megaphone was most likely a result of several different things in my opinion: large amounts of capital inflow from foreign accounts due to the strengthening dollar and thereafter subsequent liquidations during those repo bottlenecks, massive growth in the derivatives market with option dealers bidding up prices, the risky short-volatility strategy craze, huge growth in passive investment ETF money flow that allows fund managers to bulk-buy wholesale company stock which arbitrarily increases valuations and destroys price-discovery, and eventually the retail stock and option bubble that started in December 2019
ProfitHarvest
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Fun read! I think the only thing you're missing in all this is how the Tax Cuts for the Wealthy Elite spurred unprecedented corporate stock buybacks that drive over-inflated stock prices (hence the massive megaphone).
Basically they just juiced the system as much as they possibly could hoping it would be enough to make it through 2020, doing their best to ensure a 2 term R presidency.
They might have gotten away with it too if it wasn't for that pesky COVID-19!
merkd1904
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Great post.
Alexxx321
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hey kaxo1, do you have another update for us? I love your work! Finally after one of the truth and it belongs :)
I am not saying i am an expert but i follow these matters quite well usually ... but I think your post will require a second reading. :)