The Great Contraction: Part 5 - The Schism
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.
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.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.