When we look back at the 2008 crash, the fatal turn in a market that experienced serious turbulence for the better part of a year was Bush permitting Bear Stearns, an old brokerage firm, to fail in March of 2008. For the crash we are presently experiencing—and it is very much a crash (and it could end in a recession or depression)—is the moment Trump's Surgeon General Jerome Adams celebrated his boss's health and ability to work without sleep and, more importantly, Adams's refusal to say how many Americans had been tested for the deadly strand of the coronavirus, COVID-19. What this revealed to the market is the White House's strategy for handling the crisis, which is to hide the extent of the virus's impact from the public in the hope that it will reduce panic and restore confidence in the markets. This plan, however, has one serious flaw: it deprives the market of the information it needs for speculators to make their bets on the future. If the true extent of the pandemic was known, then they could make the needed adjustments.
Surgeon General Jerome Adams is in his 40's and insists that 73 year old trump is healthier than him.
And he refused to say how many people have been tested for the coronavirus.
We can't even trust the goddamn Surgeon General, folks.https://t.co/xCIRPQDiuF
— BrooklynDad_Defiant! (@mmpadellan) March 8, 2020
The day after the Surgeon General's appearance on TV, the Dow Jones Industrial Average (the leading market indicator) fell nearly by 8 percent. That is, by the way, a world record. There are no centi-billionaires anymore. And the big question remaining is: Will Trump's administration change course in time to prevent a full recession, or not? And if we do go into a recession, or even a depression, will we see COVID-19 as the "black swan" that the second-rate economist Nassim Nicholas Taleb made famous in 2008?
Wikipedia on Taleb's black swan:
The theory was developed by Nassim Nicholas Taleb to explain:
The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
The psychological biases that blind people, both individually and collectively, to uncertainty and to a rare event's massive role in historical affairs.
So, basically, the markets are crashing because of an event that could not be foreseen and has made the future unknown. Some have argued that nothing of the kind (a black swan) happened with the crash of 2008. There were no surprises. The markets simply followed a pattern that was well described even in the 1970s by the first-rate US economist Hyman Minsky. It was not a black swan, but a Minsky moment. The markets crashed because they were empty of all caution and became a vast Ponzi scheme with a large number of speculators borrowing to pay interest on money they borrowed to buy bets. The markets today, March 9, 2020, are only re-injecting the system with big doses of caution. This is the crash, and if completed, it will lead to the first stage of the cycle, which I call confidence (Minsky calls the hedge stage)—the next is exuberance (Minsky calls the speculative stage), the third is frenzy (Minksy's Ponzi finance).
The first two stages occurred under Obama; we entered the third the day Trump won the White House. The Ponzi moment was fueled by three developments. One, the removal of anything like moral hazard upon Trump's election. Two, corporate buybacks, which, for sure, expanded under Obama but exploded under Trump. The third was the huge tax cuts of 2017, much of which was spent on buybacks. The moment all three developments were spent, around the fall of 2019, is the moment when the market for repurchase agreements (the repo market) suddenly froze. The reason why this market exists is to free banks from their capital requirements. Meaning, it's a scam (also known as shadow banking) to avoid the kind of regulation that stabilizes markets but often at the cost of the kind of rapid, short-term growth the super-rich desire.
The feds stepped into the repo market and began supplying cash. But the funny thing about this operation is, it's not, as the mainstream business papers and blogs often put it, greasing the machinery of the markets; instead, it's just pumping money directly into insolvent banks and financial institutions. Or, put another way, it's quantitative easing (QE). And the reason we can be certain of this is the debts on the feds' books are growing again (they stopped around 2014, when Obama ended the first round of QE).
What this means is that an exotic policy tool used to re-inflate the value of markets after the crash of 2008 was used not after but before a crash. This plan worked, but it also has increased the fragility of the markets and their dependence on public cash, which is politically unpopular (this is why most do not know about the great repo market crash of 2019 and its estimated $900 billion bailout). In 2008, Bush had to beg Congress for cash. In 2019, Trump did no such thing. He just the took the money from the public and gave to the banking system.
Then the virus made its appearance in China. Then it went on cruise ships, then popped up in a Christian community in South Korea, then it went to Iran, where it has killed prominent politicians, and Italy, where it has shutdown city after city. Finally, it arrived in Kirkland, a city in the Seattle area. This triggered a selloff on Wall Street that's darkening the only bright spot on Trump's otherwise scandal-ridden presidency. But is COVID-19 a black swan? An unknown event? The problem is black swans can only be secondary. But many see them (and for political reasons, want everyone to see them) as primary—meaning, as the leading cause of a crash. In this way, a black swan is simply a ruse. The press and mainstream economics can blame them (the big surprise) and not how the markets operate or are regulated.
The problem is that the system as it is (sky-high in debts) has little to no shock absorbers because they require regulation, and regulation, as Wall Street never fails to tell us, hurts economic growth, and if there is no growth in the economy, then there will be no growth in the job markets. None of this is at all true. The economy does not need to function in this way. And black swans are as real as unicorns.
ALL THE WARNING SIGNS WERE THERE FOR MONTHS.
Don't let them feed you the nonsense that this was a black swan. The virus isn't the cause, it is the accelerant.
From last July: https://t.co/pZl363yMFa pic.twitter.com/Aq6MJxBzMC
— Pomp 🌪 (@APompliano) March 9, 2020