Lehman Brothers’ failure was THE event that became the historical tombstone for the Global Financial Crisis (GFC).
As with much of history, reading about the past is quite different than living through it. This week’s events surrounding the UK currency and bond market, as well as their pension system, struck me as an important milestone in the current cyclical recessionary bear market.
Having lived through, breathing, sleeping, and tasting the GFC period, the timeline is seared into my memory. I will share my memory in the hopes of providing context for how many things typically ‘break’ or go wrong as the cycle turns.
November 2006 - there is a market ‘event’ in Dubai over Thanksgiving weekend
December-January 2007 - subprime CDO’s ‘crack’ and start to go down significantly
February 2007 - the Chinese stock market crashes 9% overnight in a single trading session, with that day ending up marking the peak in the US bank index (BKX), which subsequently declines by over 85%
June 2007 - Bear Stearns fixed income-focused hedge funds blow up
August 2007 - Quants blow up and the banking system seizes up, causing the Federal Reserve, who had just stated their concerns about inflation 3 weeks prior in their July meeting, to cut interest rates to try and stop the panic
October 2007 - S&P 500 peaks after a virtually straight-up rally after the initial Fed rate cut
January 2008 - SocGen melts down on Martin Luther King Day and central banks once again swoop to the ‘rescue’
March 2008 - Bear Stearns reaches the precipice and the US government pushes a sort of shotgun wedding to JPMorgan Chase, which triggers a sharp rally into May 2008, with the S&P 500 peaking less than 9% below its October 2007 high.
June 2008 - the big and supposedly ‘decoupled’ emerging market of Brazil finally peaks and begins to rollover
July 2008 - WTI oil price peaks at over $147 per barrel and the first GDP report for Q2 2008 is released with growth positive and accelerating over the Q1 report
August 2008 - rumors of Fannie Mae and Freddie Mac being insolvent become ubiquitous
September 2008 - a LOT happens! Fannie and Freddie are taken over by the government, TARP vote fails, then is passed, and markets really meltdown, with the segments of the market which has been resilient joining the ‘party’ wholesale.
October 2008 - S&P 500 bottoms at 839.80 temporarily on October 10th and rallies 25% in 3 days
November 2008 - S&P 500 bottoms temporarily again on November 20th at 747.78 and proceeds to rally over 26% through January 6th
March 2009 - S&P 500 bottoms at 666.79
That was written completely off of memory, with the exception of looking up exact index levels and calculating the % moves. I have not confirmed the exactness of my memory, so maybe some of the timeline is inaccurate.
I have not mentioned the following, because I honestly cannot remember when they fit in the timeline:
New Century going bankrupt
Countrywide going bankrupt
Washington Mutual going bankrupt
Merrill Lynch being taken over by Bank of America
Wachovia being taken over by Wells Fargo
The Reserve Fund money market fund ‘breaking the buck’
Auction rate securities blowing up with a lot of retail investors unable to access their ‘cash’ for months.
I am sure there are many others I am forgetting! During this entire timeline, governments and central bankers attempted to intercede and stem the tide of cyclical forces being unleashed.
This cycle is further complicated by the fact that much of the ‘fun’ is occurring outside the US. So far, we have seen:
The ‘buy button’ being taken away in response to the GME melt-up to protect the ‘system’
Nickel spike in price causing a near-insolvency of major institutions
European natural gas and electricity markets going parabolic
Japanese yield curve control and the yen going down enough to cause BOJ intervention
Events in the UK this week.
That list seems kind of light given that the first synchronized global recession in over 40 years is unfolding with global central banks STILL tightening and with inflation remaining elevated.
Prepare to have your memory seared - I suspect this is the Clubber Lang part of the timeline and the cycle’s “gotta a lotta mo” in store for us.
It's good to remember how chaotic nature in which the GFC unfolded. The fed pivot back to reducing rates and QE, won't be the end of this crisis. The return of "low rates" and QE may give temporary relief but will be sending us back to the zero bound. The concept of zero interest should be an anathema to the Central Bankers yet they are drawn to it like moths to a flame. I view that zero bound as something like a black hole, as interest rates approach zero, economic reality distorts. I don't know if the Central Bankers go that far again, but watching the BOJ and BOE, it seems that they have no choice when the world governments are so grossly over levered. One off ramp could be if all the Central Bankers of the World agree upon a massive global monetary reset of some type (debt jubilee?). At any rate, we are in the early innings of this economic crisis and because this one is began when we were at the zero bound, it is likely to go on much longer as in many years and have many more twists and turns along the way. Thanks Kayfabe for the reminder that this crisis is likely to take a long time to play out, and that as investors we need to have thoughtful conservative capital preserving strategies.