Guest Post by Jesse
As you know I am on the lookout for a ‘trigger event’ that might spark another financial crisis, given the composition of the economy and the financial markets.
In the last financial crisis 2008, it was the failure of the two Bear Stearns hedge funds that exposed the grossly mispriced risks in mortgage backed financial assets, and the generally flawed nature of the market’s collateralized debt obligations. This led to a cascade of failures in fraudulently priced assets, and resulted in increasingly large institutional failures, including the collapse of Lehman Brothers.
One can draw some parallels with the financial crisis before that, which was the gross mispricing of risk and inflated values of internet-related tech companies that had grown to obviously epic proportions by 2000. A failure of several key tech bellwethers to make their numbers, and some negative results in the economy, showed the flaws in the underlying assumptions in what was clearly an asset bubble. And once the selling started, it was Katy-bar-the-door.
The failure of two relatively minor hedge funds was not a great event. The failure of a tech bellwether to make its quarterly numbers is not either. But their interconnectedness to the other portions of the world markets through the financial institutions on Wall Street, and more importantly, the fragile nature of the entire pyramid scheme of fraudulently constructed and mispriced risk of financial assets, caused an inherently shaky system to fall apart. What was most shocking was how quickly it happened once the dominos started falling.
The debt market in the US, with its deep ties to private equities, is probably not a trigger event, the fuse itself. But it well might serve as the powder keg that will transmit the effects of some more individual event throughout the world’s markets and economies.
The gross mispricing of risks in financial paper, again, and the lack of reform in the financial system along with excessive leverage and mispricing of risk, the fragility of long distorted markets if you will, has certainly risen to impressive levels again.
It is a familiar template of recklessness, fraud, and then reckoning. Afterward there is the usual attempt to blame the government officials which have been corrupted, and the people who have been duped and swindled. Quite often some scapegoat will be found to be demonized.
I am thinking that this time the problem will arise overseas, with the failure of some major financial institutions there. Perhaps Greece will provide the spark. Or the Ukraine, or Mideast, or something yet unforeseen. The failure of some major European bank certainly has historical precedent.
And if we do experience another crisis, do not be surprised if the moguls of finance come to the Congress through their proxies again, with a sheet of paper in hand demanding hundreds of billions of dollars, or else.
Last time it was a bail-out, which was the printing of money by the Fed to monetize the banking losses and shift them to the public. This time they are thinking of something more direct, talking about a bail-in. What if they eliminated cash, and started utilizing and redploying financial assets like savings and pensions. The uber-wealthy already have their wealth parked in hard income-producing assets and offshore tax havens. Who would stop them?
Like war, there will be an end to this kleptocratic economy of bubble economics and financial crises when the costs are borne by those responsible for it, and who so far are benefitting from it, enormously.
Tell us why you think it might be different this time. What has really changed? From what I can tell, it has not only stayed the same for the most part under the cosmetics of change, and significant portions of the financial landscape have gotten decidedly more dangerous, larger, and more leveraged.
Wall Street On Parade
Here Is What’s Fraying Nerves Among the Financial Stability Folks at Treasury
By Pam Martens and Russ Martens
June 10, 2015
On Monday, Richard Berner worried aloud at the Brookings Institution about what’s troubling the smartest guys in the room about today’s markets.
Berner is the Director of the Office of Financial Research (OFR) at the Treasury Department. That’s the agency created under the Dodd-Frank financial reform legislation to, according to their web site, “shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose,” and, ideally, provide the analysis to the folks sitting on the Financial Stability Oversight Council in time to prevent another 2008-style financial collapse on Wall Street.
Two notable concerns stood out in Berner’s talk. First was a concern about liquidity in bond markets evaporating rapidly for reasons they don’t yet “sufficiently understand.”
…Another major concern are the bond mutual funds and ETFs that have mushroomed since the 2008 crisis and are stuffed full of illiquid assets or assets which might become illiquid in a financial panic.
Read the entire article here.
Diogenes of Sinope recently studied NYC but the closest he found to an honest person was a Mafia Numbers Bookie called “Maddoff”.
The $3 Trillion Traffic Jam: “It’s About Time We Started Worrying About The Next Financial Crisis”
Submitted by Tyler Durden on 06/10/2015 14:55 -0400
“It’s about time we start getting worried about possibly the next [financial crisis],” warns BlueMountain’s James Staley explaining that, “the lack of liquidity that currently exists today, is something that people on the buy side, sell side and regulatory side need to be focused on.” In an effort to quantify just how big that ‘issue’ is, Bloomberg reports that the U.S. corporate-bond market has ballooned by $3.7 trillion during the past decade, yet, as Citi’s Stephen Antczak warns, almost all of that growth is concentrated in the hands of three types of buyers, “we used to have 23 types of investors in the market. Now we have three. In my mind, that’s the key driver.”
As Bloomberg reports, for all the concern that Wall Street’s shrinking balance sheets will fuel a liquidity crisis when investors flee credit markets, Citigroup Inc. strategist Stephen Antczak says investors may be overlooking an even bigger catalyst.
Almost all of the $3.7 trillion growth is concentrated in the hands of three types of buyers: mutual funds, foreign investors and insurance companies, according to Citigroup. That combination could lead to more selling than the market can absorb when the Federal Reserve raises interest rates for the first time since 2006, Antczak said.
“All the money is going to the same place, and when something adversely impacts one, chances are the same factor adversely impacts everyone else, and there’s nobody there to take the other side,” Antczak said in a telephone interview. “We used to have 23 types of investors in the market. Now we have three. In my mind, that’s the key driver.”
The three investor groups hold almost two-thirds of total corporate debt, Citigroup data show.
Adding to the worries, as we have discussed in detail previously, dealer inventories of corporate bonds plunged more than 76 percent in the years after the financial crisis as tougher banking regulations made it more expensive for them to hold risky assets.
“The low levels of dealer balance sheets suggest that dealers will not be willing to make purchases to offset the selling flows,” Jim Caron, a money manager at Morgan Stanley Investment Management, which oversees $406 billion, said in an e-mail. He called liquidity a “known unknown risk” for bond markets.
The world’s biggest money managers, including Pacific Investment Management Co., BlackRock Inc. and Vanguard Group Inc., have been discussing the issue as part of a Securities Industry & Financial Markets Association group. Last month, they asked the U.S. Securities and Exchange Commission to form an advisory committee to focus on liquidity — the ability to buy and sell easily without greatly affecting the price of a security.
* * *
“The size of that corporate bond market, with the lack of liquidity that currently exists today, is something that people on the buy side, sell side and regulatory side need to be focused on,” James E. Staley, a managing partner at the $21 billion investment firm BlueMountain Capital Management, said last week at a conference in New York. “If financial crises tend to happen every seven years, it’s about time we start getting worried about possibly the next one.”
In a nutshell, things are fucked up and shit. About to be way more fucked up.
“You know your days are numbered
count ’em one by one
like the notches in the handle of an outlaws gun!”
https://www.youtube.com/watch?v=Los0g9Et7Ow
“…liquidity in bond markets evaporating rapidly for reasons they don’t yet “sufficiently understand.”
This is what Martin Armstrong is talking about. Maybe the “folks” at the Treasury Department should not be so arrogant and call him.