Before every financial tsunami, there is always a cluster of mothballed events. And this time, it has started again.
A butterfly has stirred its wings and the wind has risen from the weeds.
A coincidence or an inevitability?
The last three bubble bursts in the United States, respectively in 1990 (Savings and Loan Association crisis), 2000 (network bubble) and 2008 (subprime mortgage crisis), three bubble bursts all accompanied by moth events.
1) 1990. early 80s, the U.S. inflation rate is still very high, interest rates are also very high, but the U.S. Savings and Loan Association is an important tool for the government to implement housing policy, the Savings and Loan Association to issue loans at a fixed interest rate, the cost of capital has exceeded the return on loans. But this right to issue loans at low interest rates has allowed certain individuals in the Savings and Loan Association to make a lot of money. Individuals in the Savings and Loan Association can take kickbacks from real estate developers and buy high-risk junk bonds for profit transfer, while the black pot can be dumped on the U.S. government. Eventually, the third oil crisis erupted driving inflation expectations higher and driving liquidity tighter, ripping the veil off the problem and exposing the scandals, which in turn deepened the bubble bursting intensity. The Savings and Loan Association crisis extended over a decade and was at the time the worst crisis in the US since the post-war period.
2) The year 2000. Enron was one of the world’s largest energy, goods and services companies, and was ranked seventh on Fortune’s “America’s 500”. This was a way to get the public to pay for fake and shoddy products, thus ensuring that the company’s executives could cash in on their option awards. Thereafter the Enron scandal was exposed, which in turn deepened the stock market decline and eventually Enron collapsed.
3) 2008. After Enron, U.S. investors became so disgusted with the stock market that they withdrew from the stock market and switched to real estate (because buying houses was less fraudulent than buying stocks). This also drove up home prices, which spurred a portion of those without the ability to repay to enter the market, and loan originators turned around and were able to package their mortgages into subprime mortgage packages, which they then resold at high prices to investors who were unaware of the risks of the products. Prior to the subprime crisis, a large number of subprime mortgages were counterfeited and sold in order to earn fees. The problem then first erupted in 2007 when U.S. liquidity turned around, but was briefly stabilized again for a while with the Fed’s best efforts to bail it out before the problem finally erupted in 2008. Numerous individuals and even investment banks suffered severe losses from holding subprime mortgages. Lehman collapsed, Bear Stearns was bought out, and 2008 was the most impactful crisis since the Great Depression.
Since the dollar was decoupled from gold in 1971, the crisis has gotten bigger each time, and each time before the crisis breaks out, the mishaps always come together.
In 2021, the ten-year U.S. bond yield has exceeded 1.7%, and the moths are starting to appear again.
Korean-born hedge fund manager Bill Hwang’s highly leveraged position in Chinese stocks exploded, losing nearly 100 billion yuan ($15 billion) in one day, becoming the largest single-day loss in the history of individual investors. The incident dragged down a host of financial institutions, with a number of banks involved scrambling to sell their stocks in a smash-and-grab style in a bid to minimize their respective losses.
The moth belongs to the “known unknown”, each crisis before the outbreak, it will certainly appear in groups, but do not know where it will appear from.
A whole bunch of moths are on their way!
Where does the second inevitability come from?
Why the moths are bound to appear?
Look back at the history.
1) 1990. The third oil crisis, driving inflationary expectations, ten-year U.S. bond yields rose from 7.83% in November 1989 to 9.07% in April 1990. 124 basis points higher in five months.
2) Year 2000. Ten-year U.S. bond yields rose from 4.658% in December 1998 to 6.435% in December 1999, a 12-month increase of 177.7 basis points.
3) 2008. It was divided into three phases. 2006-2007, 10-year U.S. bond yields rose 100 basis points, as U.S. bond yields rose, the subprime mortgage problem had been exposed. 2007, the Fed increased its intervention, temporarily calming the storm. 2008 March-May, 10-year U.S. bond yields bucked the trend (Fed easing) by about 60 basis points, leading to the eventual outbreak of the subprime mortgage crisis.
Whether it was 1990, 2000, or 2008, there was a liquidity reversal.
The mothball is a companion product of the massive zero-sum game, and it will appear as long as the zero-sum game is rampant. Just wait for the liquidity reversal to rip the veil off the moths and expose them.
The only role of triple printing money
Since the 19th century, every serious recession in the U.S. has been preceded by a shift from a major deflation to forced austerity.
In 1832, the total amount of money in circulation in the United States was only $59 million; by 1836 it had risen insanely to $140 million. The value of land in Chicago increased from about $156,000 in 1833 to over $10 million, a 6,400% jump in three years. 1836, then U.S. President Jackson signed a decree prohibiting the use of paper money for real estate investment, and all land transactions had to be in gold or silver, and the legislature passed a resolution to withdraw $9 million from the major New York banks every three months starting in 1837, which severely squeezed bank liquidity and induced the collapse of the bubble. A large number of banks and businesses subsequently went bankrupt and unemployment exceeded 20%. A piece of land in Chicago used to sell for $11,000 in 1836, but by 1840, the same piece of land could be bought for as little as $100.
Friedman’s research found that in the long run, money growth was fully reflected in inflation but not in economic growth, meaning that monetary policy was ineffective in the long run. In the short run, however, the money supply is strongly correlated with the economic cycle – the money supply leads the economic cycle.
That is, when liquidity is flooded, the economic cycle is driven upward; when liquidity is forced to turn, the economic cycle is driven downward; in the long-run perspective, monetary policy is only reflected on inflation and is ineffective on economic growth.
In 2021, with U.S. bond yields climbing rapidly and liquidity clearly turning, and money supply ahead of the economic cycle, a downward pulling force on the economy has formed.
The only effect of printing money on the economy is simply to amplify economic volatility: how hard the release is, how deep the depression will be!
Four Clear Contours
Liquidity (money printing) interventions distort the short-term economic trajectory, and as money printing intensifies, so do the short-term distortions.
The financial crisis before 2008 was mostly a direct outbreak, while since the subprime crisis in 2008, the Federal Reserve intervened aggressively as never before, the short-term distortionary forces increased, and the outbreak of a round of crisis began to be divided into three phases.
The first stage is the initial outbreak of the problem; the second stage is the aggressive central bank rescue, liquidity to reverse the economic cycle, allowing the problem to stabilize briefly; the third stage is the final outbreak.
In terms of the flood of water release and the active degree of central bank intervention, the current is the absolute peak since the beginning of human history, from this point of view, only the 2008 subprime crisis has a high reference. Comparing 2008 with 2021, the three phases are particularly distinctive under the influence of the Fed’s aggressive intervention.
1) 2006-2007, 10-year U.S. bond yields up 100 basis points to over 5%, followed by problems and pressure on U.S. stocks.
2) 2017-2018, 150 basis points upward in ten-year U.S. bond yields to over 3%, followed by pressure on U.S. stocks.
3) In 2007, U.S. stocks came under pressure, the Fed quickly intervened, and from July 2007-March 2008, the ten-year U.S. bond yield went down by more than 130 basis points and the problem was held down.
4) In late 2018, U.S. stocks came under pressure, the Fed intervened quickly, and since then the outbreak has increased the Fed’s intervention, with the ten-year U.S. bond yield moving down 250 basis points from November 2018-May 2020, and the problem being held down.
(5) March-July 2008, ten-year U.S. bond yields counter-trend (Fed easing) up 60 basis points, a variety of moths concentrated exposure, followed by the complete outbreak of the subprime mortgage crisis.
(6) January-March 2021, ten-year U.S. bond yields counter-trend (Fed easing) up 80 basis points, the moths began to be exposed.
The largest high-leverage explosion in history, who would use highly leveraged funds to invest in the real? ……
Highly leveraged money wrestling in liquid markets is just a casino zero-sum game ……
When the global high intelligence is concentrated in the casino, who is willing to go for revenue creation? Only willing to create moths for harvesting ……
All the problems, are only waiting for the liquidity transfer, let the moths show up. And the dollar liquidity has been transferred, the moths also began to expose ……
Financial tsunami, has set sail!
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