2008 Again?

The so-called recovery is built on sand, and as stock markets climb and climb, and more traders and investors turn bullish, we come ever-closer to a new 2008-style collapse.

Markets have already gone far, far higher than many expected on a drift of reinflationary central bank liquidity. Yesterday the DJIA hit a new post-2007 high:

fredgraph (14)

The same day, it was revealed that the big Wall Street banks are gambling again with billions and billions of dollars of clients’ funds. Goldman Sachs are back to pre-crisis-style profits. Again and again — from the LIBOR scandal, to MF Global, to the London Whale, to Kweku Adoboli — the financial sector has illustrated that it has learned very little from 2008, and is still practising many of the same hyper-fragile ponzi finance practices that led to the subprime bubble and the 2008 collapse.

Soaring markets, and soaring speculation. Big finance using loopholes to speculate bigger and harder. Mainstream financial journalists becoming more and more complacent about the “recovery”.

We’ve been here before. Isn’t repeating the same behaviour and hoping for different results the very definition of insanity? 

I don’t know exactly how the next crash will occur — although there are many potential ignition spots including a severe trade or energy shock, or a Chinese real estate and subprime meltdown, or a natural disaster, or a new Western financial crisis.  I don’t know when the next crash will occur, or how high the markets will climb before it does (DJIA 36,000 maybe? That would be hilarious).

But I know that if markets and regulators continue to repeat the mistakes that led to 2008, we will be back in a similar or worse hole soon.

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74 thoughts on “2008 Again?

  1. The system is working EXACTLY as it is designed to work. The few who run it are making fortunes and they could care less how it ends, only that they get their profits out before the next crash.

    Remember, these are BANKERS we are talking about, people who have been loathed for EVER!.

  2. Agreed. With the government providing ‘insurance’ for everyone to take much more risk (put everything into equities), and basically also eliminating all other options, this equity mkt will keep going up. And yes, such continuous upward movement barely backed & supported by fundamentals will make the drop a very costly one. What is worse is that consumption has begun to come up again even though wage growth has remained stagnant. Household debt is rising once again, but this time, even with some growth in jobs (based on BLS figures), the state of employment is not even close to support growing household debt. But in the meantime, we might as well go along for the ride, but hedge our bets a bit more as the equity mkt goes higher.

    • Yes, do what I did in 2000 when fresh from college I thought using Credit Card debt was a sure way to make money in a rising tech market. It worked very very well until it did not!

      That was one important lesson!

        • @ Aziz: “I look forward to the market going up MOAR so MOAR of these newly bullish mini-Weisenthals turn up to argue with me. It’s fun.”

          Me too, it challenges me to think outside the square, see my post below.

  3. Jesus man it is NOT the same as 2008! What sheer ignorance and utter misunderstanding of charts and such. Where were Fed liquidity injections and monetizations pre 2008 vs. today? Describe the PE and fundamentals float up leading up to 2008 vs today? Look at interest rate distortions 2008 vs today. ETC ETC ETC. Merely pointing to a DJIA chart and stating the simplistic above is, well, simplistic. We could go on like Japan or crash harder or, or, or, or? But extrapolating from one chart is amateur, as is ZH posting this. Thx.

      • “The issue is not P/E.

        The issue is systemic corruption and ponzi finance.”

        Re: P/E — have you compared DJIA PE circa 2008 vs. today? I suspect not.

        Re: corruption and ponzi finance — are you saying 2008 is comparable to today? bc if you are, then it does make sense why you would reference above chart and offer such simplistic post.

        cheers.

        • Yes. US equities look expensive compared to other markets.

          Regarding ponzi finance, I am saying 2013 is considerably worse than 2007 or 2008. All the old culprits are playing Martingale again, with one difference — massive extra liquidity.

        • VD, if somebody arrives at the emergency room in 2008 [with four blocked coronary arteries] because they have been pigging-out on french fries, and in 2013 because of onion rings, does the substance of the matter really differ?

          Although this system of debt-money, counterfeiting, fraud, theft, and all the rest can take an infinite number of forms, the essence remains the same.

        • Good luck BTFD!

          Keep in touch and remind us of how your portfolio survives in 10 years. Until the system is honest, transparent and built on innovation and real products, I will stick to conservative investing.

          And BTW, the DJIA is not inflation adjusted, so it is human nature to think the graph will go higher, especially when using inflated money supply to dilute it. It is a Salesman’s trick.

          The internet is too pervasive now. 10 years ago,only a few people found alternative blogs. People could be hoodwinked into investing retail. Now there are too many blogs that are negative. I know I search constantly for positive blogs that justify the market melt up. None! So where is the mad retail rush going to come from?

          The CNBC show is for people in the market who are hoping. It is a gamblers show.

          It really is different time. Only when it crashes, the retail investor will find so many negative blogs and they will panic harder than they did in the past. Watch the redemption from Equities to cash or “safe investments”. It will such a panic they will “suspend” the market to “protect” it. Nobody will know where they stand.

          Mark to Market that!

        • Good luck, BTFD!

          I look forward to the market going up MOAR so MOAR of these newly bullish mini-Weisenthals turn up to argue with me. It’s fun.

        • I remember in 2004, when the market was doing really well and ramping up the P/E was about 20. How come it did not predict the 2008 collapse.

          I agree we may see more money to be made in 2013-15. In 2008 at the peak of pessimism, I did not see the money printing train coming, green shoots speech, QE etc etc.

          This is the basis of Bernanke’s theory of averting the Depression 2.0. It seems to be pulling of very well, but what happens if inflation rises, and they have to raise rates. Is this the same as 2007, when they felt inflation was a threat? Is it going to skim the 401K’s again.

          Do not assume people are Benevolent.

  4. Granted the fed is doing a lot to try and get the economy working but it is my belief these actions will fail. The 2008 crisis did occur when the fed took the punch bowl away, the question is will they do it again.

    Here is a good article about the 99% being unable to live with congresses compromises. They are very expensive.

    http://www.theburningplatform.com/?p=46625

    Here is a quick excerpt.

    Our entire economic and political system is a farce. The American people are being played by the powerful interests that provide them with an illusion of choice. Both parties serve the interests of their masters and the fiscal cliff show and debt ceiling show are a form of reality TV to keep the masses alarmed, fearful, and believing there is actually a difference between the policies of the ruling class. The charade has played out in its full glory in the last few weeks with Obama convincing the masses he had stuck it to the rich, while in reality the working middle class got it good and hard when they got their January paychecks. This chart details the tax changes that went into effect on January 1.

    • ” The 2008 crisis did occur when the fed took the punch bowl away, the question is will they do it again.”

      Precisely! At the time I could not understand why they increased rates, but now with the new revealed Fed minutes, they though inflation was coming.

      Yeah right!. Almost if they deliberately engineered this crash. Who would have known they would do what ever it takes to reinflate the bubble. Would have been a good buying opportunity if you were connected to this Cabal. How many 401K investors panicked at the bottom and sold out with heavy realised losses? A good friends mother did and I am sure there were others. Her poverty is the Fed’s cronies gains.

      Shake the tree and collect the ripe fruit. Let the plebs climb the tree and get scratched.

  5. I think as soon as anything close to big is in danger, it will receive an immediate bailout – so a crash like 2008 is unlikely imo. But bigger and bigger bailouts would be needed, supported by more and more money printing, until there can be no more… (perhaps when the masses become too hungry and revolt). Anyway this kind of “economy” is clearly unsustainable. When it comes to an end, who knows how difficult will it be…

    • The Fed can inject money to calm markets in a purely psychological crash. If you have a real physical problem, like a war in the middle east, or a war in East Asia, or a natural disaster, the Fed can do very little. If we got one of those problems, all of the old fragilities will come to the surface once more.

      • I don’t know where the threshold is, but as the amount of QE continues to pile on, I expect that the psychological value you refer to will diminish. Go too far and we could find ourselves at the event horizon.

  6. It was obvious four or five years ago that even as the crisis — crises — developed, that the aim of the ruling class was merely to put back everything the way it was before, at the expense of the working class (most of us). That has more or less been done, and things are proceeding as could be expected. That is, there will be another crash and a worse one in the not-too-distant future. It is evident that the present political system is unable to generate and gather support for alternatives because it is dominated by the same people who dominate the financial system. The question is what to do about it.

  7. The Fed is really incompetent: “The demand for mortgage securities was so great then that underwriting standards had been ignored. As 2007 progressed, it became clear that many homeowners were likely to default on these loans, among others.

    The pernicious effect came from information fog as investors and bankers did not know where the losses resided. As a result, many institutions pulled back from lending. This process crystallized into a full-blown crisis in the fall.”

    http://www.marketwatch.com/story/feds-nightmarish-year-of-2007-comes-into-focus-2013-01-18

    I would have to agree with this. Whilst working in a Finance Company, and warning about potential issues a recession could have on the portfolio (Bigger losses than modeled) I was assured by the Management responsible that all will be OK.

    This Finance Company was absorbed by the parent bank during the GFC.

    When business gets to big, the chain of command loses reality with the ground. The Fed is even worse at understanding the conditionson the ground.

    From an aeroplane the ground looks the same, but the muddy road is actually quicksand when walking on it.

    • When business gets too big, the chain of command loses reality with the ground. The Fed is even worse at understanding the conditionson the ground.

      This is a good heuristic. Not always true, but very often.

    • Bring a bale of marijuana, ten pounds of cocaine, three thousand Quaaludes, a hundred kegs of beer to a high school senior class party, and how is that going to end?

      Similarly, you give the most deplorable moral examples of human beings on the planet the ability to create money out of thin air, and exactly how is that going to end?

      This is not that hard, folks!

  8. “Excellent analogy, impermanence.” Are you adjusting for costs and subsidies of “eater” “producer” et. al.? Didn’t think so. Also, is the eater insured in 2008 vs 2013? What are input prices for the different foods? How about asking serious questions and making germane comparisons? Didn’t this so…

    • None of these are really relevant points. Fast rising market confidence plus ponzi finance is a recipe for disaster. I don’t care if the disaster hits tomorrow or in five or ten years. The Fed has had almost unlimited resources to robustify the U.S. economy, and has succeeded in fragilising it even more by giving a backstop to the most corrupt and dangerous elements.

      • “None of these are really relevant points.” Exactly. Neither is stating based in DJIA chart, “2008 Again?” It could be 2018, 2020, 2013.5, etc. etc. etc. again and again but 2008 is VERY different from TODAY.

        • I’m not basing anything on a DJIA chart. I’m basing my entire argument on the behaviour of the financial sector. The chart is just some colour to illustrate how bullish markets have gone.

        • Fragilising just means to create fragility.Hating on Taleb pretty fashionable right now, though. Let the DJIA run up another 2 or 3,000 points and hating on Taleb will become uber-fashionable. Pretty amusing for me.

        • Fragilising is not a word. It means nothing. Making the random seem non-random and vice-versa, now that is really something. Glad you amuse yourself.

        • Structures can be graded on their integrity. To fragilise is to make something more fragile. The modern global financial system is extremely fragile, and it has been made more fragile through liquidity backstops for its most cantankerous and self-destructive parts.

    • Again, using the ER analogy, when the patient arrives with no pulse, no respiration, pupils dilated, you really don’t overly concern yourself with their in-grown toenail on their left big toe.

  9. Maybe it was a central banker pigging out and saying there’s no such thing as inflation as they land in the ER with most excellent insurance plan paid for by taxpayers? Yeah, brilliant analogy LULZ!

    • Bankers are at the top of the ‘something for nothing’ food chain, so they will do whatever they have to to this end. Sometimes you have to play by the rules, and sometimes you can make the rules yourself.

      Whatever the case, the saying, “make hay while the sun shines,” was obviously coined for these pathological sub-human sociopaths.

    • I really value your contrarian input. See my posts and explain to me where I am wrong being so pessimistic. I like to be reminded of other views that are positive in this economy.

      Is it the Shale Gas revolution, actual economic conditions improving in the US (As opposed to dodgy websites peddling doom), easy credit, growing consumer confidence due to job security (Their company seeing better sales, less firing rumours going around)

      Thanks

    • WB reminds me of British royalty, people who have done little but taken advantage of the way it is to the absolute maximum extent.

      Can you imagine living off of other people LITERALLY like a king!! And wouldn’t you like to have just five minutes to chat with some of these folks and ask them how they figure that there “good fortune” can end well?

      • WB did some solid things much, much earlier in his career, buying into decent undervalued companies and reaping the rewards. I think his net worth has probably shot up a lot recently because of his holdings in bailed out companies whose prices have been reinflated. In that sense, he has been treated like royalty, invited to buy junk assets at a price floor, which are then massively reinflated by acts of state. Grotesque, in a way.

        • Solid things? These are parasites who produce nothing but heartache for those must live at the other end of the spectrum.

        • I think history will reflect on WB and find that he may have not been statistically outside the average investor, when factoring in the longer term time horizon, the regular and reliable stream of revenue that can flow into funding the investments, and lately the size of positions allow more active role in management, purchasing arrangements (e.g. BAC), and tax rulings (e.g. directly influencing policy, or in ability to mount a high powered legal defense against the IRS – as with aircraft leasing).

          In particular, the combination of long time horizon and steady stream of investment funds allows a more forgiving model of investing, and one that is very hard for other individuals to follow. Individuals will not be able to replicate his “feat” as they don’t have the “forever” time horizon (thus are hit with tax consequences more significantly – e.g. for liquidating a retirement savings over remaining life years). Nor can they be assured of an income that they can save from (i.e. not nearly to the same degree an insurance company can), which allows for smoothing of mistakes and ups and downs of the market.

          I’d like to see a study that considers these things.

          IMHO, his one genius move was to recognize that he can leverage an insurance company to invest for his own long term benefit…a tremendous advantage!

          Oh, and if he did not have that, and was subject to the tax rates he purportedly supports on cap gains and dividends, I doubt his results would be as “outstanding” as they appear today.

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        • At one point one of my older mailboxes was getting up to 80,000 spam messages per day; about one per second. I believe most of them now come most immediately from hacked PCs on botnets, so it is difficult to know who is actually originating it. I have read that something like 95% of all email is spam.

  13. Oh, my bad, I was criticising Frances Capola and I thought maybe you don’t like criticism of other bloggers on your site…if so, please just say :)

    • Criticism of other bloggers’ work is encouraged. Criticism of other bloggers themselves is not encouraged. Feel free to post your criticisms of Frances’ work.

      I think the issue my spam-filter may not like is that you keep switching usernames, but using the same IP address.

  14. ps i have msgd Professor Charles Goodhart your latest article asking his thoughts -ill update you, obviously, if he’s kind enough to reply :)

  15. Who says they’re hoping for different results? Wash, rinse, repeat.

    Now is a good time to be bullish. Eat, drink, and be merry, for tomorrow we die.

      • The trend is your friend, and the proof is in the P/L statement. If you knew in ’02 that housing would go kaboom, wouldn’t you ride the bubble to the moon – anyway? The party will end, no doubt, and there will be hangovers in the morning, but right now it still seems pretty early.

        When people are scared, that means they haven’t bought yet. Bullish.

        Of course, I might just lose my ass, but I’m throwing my chips in with the big boys bankrolled by big daddy Ben.

        • If you knew in ’02 that housing would go kaboom, wouldn’t you ride the bubble to the moon – anyway?

          No, even less so than with stocks. In a relatively illiquid market like housing, that can turn at any time, it can be very difficult to get out. In 2002 I would have been (and was, up to my liquidity constraints) buying things I found genuinely exciting — precious metals, AAPL, farm land. The only one of those I’d get out of now is AAPL. In terms of stocks, riding this pony is risky as hell. We’re already at 13,000 — you missed the train. If you wanted to do this you should have done it in 2009-10. Maybe we’ll get to 14,000 and crash, or maybe we’ll get to 20,00 or higher. I don’t know, but the worm may turn very quickly and liquidating your gains may prove difficult.

        • I agree with momentum investing, the problem is the ride up is a great feeling, and the slap in the face comes very quick if you don’t pull out early enough.

    • That was a good strategy in 2008. If I knew then what I knew now I would have BTFD X 10000 Leveraged ETF.

      Now it looks too stretched and the retail is getting in. I am contrarian now. But if it does collapse, what will they do? Print again? I honestly do not know how this can be solved.

      The only solution is total system reset, and appropriation of the 0-1%’s wealth

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  17. http://www.zerohedge.com/news/2013-01-20/market-can-only-ignore-fundamentals-so-long

    @”falak pema:

    the increasing divide between contrarian sites and the MSM is getting wider as mentioned earlier.

    We are now talking about the end of the NEW Normal and the inflexion into THE BIG TURN :

    Prepare For The End Of The ‘New Normal’ – Business Insider

    The debate between perceived market fundamentals and status quo fundamentalists behind QE CB posturing goes on.

    Obviously both groups have an ideological agenda, with a different interpretation of perceived trade offs between central planning cause and market effect.

    Get Pop corn bowls or gold coins piles ready, as all agree that 2013 will be tipping times one way or the other.”

    Agreed.

    • While I agree that the Fed actions have been massively distorting, the ZH article gives five US Macro vs S&P 500 charts at various snippets of time.

      It gives a selected context to make its point, but if you look closely, the US Macro (red, RHS scale) zero point lines up with different S&P numbers (blue, LHS scale). On three charts they are maybe “close”.

      The time points between the charts mostly do not overlap, so there appears to have been significant (non-predictive?) movement in those time periods between the charts.

      No doubt there is correlation, but do we really need someone to game the charts? Why not show us one chart for the entire time period, or show us charts with consistently matched scales?

      Take the US Map Deja Vu chart. The chart shows

      The last two charts are the most interesting. The US Map Deja Vu chart matches the pattern of “degree of surprise” for 2010 through to current on three 12 month lines. But a quick eyeballing of the S&P 500 chart below it (2008-present) shows that the US Map surprise curve does not match market behavior – the timing of any dips and magnitude of the dips do not match.

      The long positions vs the S&P 500 seems the most interesting take away from the ZH post.

      But, this all leaves the question of how do these sets of patterns match up with past “recessions/depressions”?

      We already have a MSM that is selective with their facts and telling us how wonderful everything is. We don’t need someone being equally as selective to make the case how bad it is look even worse.

      I have no doubt that there will be a major correction (perhaps catastrophic). However, articles like the ZH one ought to be more rigorous.

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  20. I think this is the best explanation of the Derivitives Market: From Zero Hedge (Cranky Old Geezer):

    http://www.zerohedge.com/news/2013-01-24/faber-shiller-%E2%80%9Cyou-keep-your-us-dollars-and-i%E2%80%99ll-keep-my-gold%E2%80%9D

    cranky-old-geezer-

    “$700T? Explain that number. How can that number even be possible?

    Simple. Derivatives are a type of insurance …loosly speaking.

    There’s no limit how much derivative “insurance” can be sold when sellers never have to worry about paying off.

    It’s really just an accounting gimmick to make balance sheets look better. Underperforming assets can be “backed” with derivatives and presto, they’re full value again. For accounting purposes anyway.

    Without derivatives most Wall Street balance sheets would be dripping red. Horribly insolvent. Derivative “insurance” makes those balance sheets look wonderful.

    It’s not just Wall Street. Everybody is doing it. State govts, county govts, city govts, school districts, water districts, and all manner of corporations of all sizes.

    Derivative collapse somewhere down the road? Nope, not gonna happen. Two reasons:

    a) “credit events” have been outlawed more or less. We saw that when Greece defaulted on some of their bonds. Bondholders were forced to take steep haircuts, but no “credit event” was ever declared.

    b) Fed is now backing all $700 trillion of Wall Street derivatives. If there ever was a “credit event”, Fed would pay off those derivatives with fresh new printed currency …or its digital equivalent, aka ctrl-p, you know, like they did with AIG, $180 billion.

    Imagine what would happen if Fed suddenly had to conjure up …oh, say… $100 trillion to pay off a bunch of Wall Street derivatives. It would collapse the US dollar overnight. Instant currency collapse.

    Nobody should be concerned about derivative collapse.

    Everybody should be concerned about currency collapse.”

    I agree with this.

    • I agree about the Fed’s likely reaction and the ultimate consequences. But if $100T collapsed, I would think it would net out to much less than that, as different firms started furiously swapping IOUS. Assets would be wiped out, but wouldn’t liabilities too?

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