Aside from the most important issue current before us all i.e. the human cost of the coronavirus, this has been a week for the record books in the financial markets.
To many observers it was only a matter of time before something burst the bubble of what has been one of the most overvalued stock markets in history. Many well-known market observers (specifically those not connected with brokerage firms and major Wall Street banks or the cheerleaders on financial TV) have been warning for some time that stocks were grossly overpriced with historically high valuations supported by historically low interest rates, which have been with us since the systemic collapse of 2007/2008. These low interest rates have hurt savers and forced many usually risk averse people into the speculative arena that is the stock market, while helping save the banks, which needed bailouts as a result of their speculative madness in the derivatives market prior to the 2008 collapse.
There were many warning signs such as fewer and fewer stocks making new highs as the market rose higher, increasing algorithmic trading (or what used to be referred to as program trading back in the 1980’s), larger amounts of highly leveraged derivative exposure by the big trading houses than in 2007/2008, and so on… the ramification of which we likely still haven’t seen fully play out in this current market slide.
Since September of 2019, the Federal Reserve has been pumping record billions of dollars into the repo market every day to prop up what many Fed watchers suggest is a liquidity crisis involving major Wall Street firms. How this all shakes out is for the more astute among us to figure out, but it seems obvious there is something very wrong systemically… and it did NOT start with the coronavirus, as evidenced by the Fed’s unusual actions in the repo market beginning in September 2019 and continuing (and increasing by ever higher amounts) today.
Of note, last week the indexes (Dow Jones, S&P 500 etc.) collapsed from their record highs set mere weeks ago faster than at any time in history. Deutsche Bank stock hit a new low. Deutsche Bank has huge derivatives exposure and is interconnected to other major trading houses worldwide. Oil prices crashed. Bitcoin lost 48% of its’ value in a day or so. Interest rates seem to be heading to zero (for the banks, not for us little people). The stock market had back-to-back swings of almost 10% last Thursday and Friday…the last time this happened was in late October 1929.
There is more going on here than just highly volatile stock prices. Again, look at the Fed unusual actions in the repo market started last September 2019, well before anyone heard of coronavirus. And lately on many of the worst down days for the market, the big banks and insurers have been getting hammered much worse than the indexes themselves, a potential sign of liquidity problems on the street.
This is not as simple as the 1987 crash or the bursting of the dot-com bubble circa 2000. This feels much more like the 2007/2008 when the financial system seized up. This could get much uglier.
