IAUM - Weekly Commentary: Asian-Crisis-In-Reverse Feel
2025-05-10 03:25:27 ET
Summary
- Markets have rallied, financial conditions have loosened, and debt markets have reopened.
- Crisis dynamics take fateful turns when perceived safe and liquid 'money' succumbs to a crisis of confidence and panic.
- Today's Treasury market behaves differently, fitting considering Treasury securities inflated from $4.5 TN to end of 2007 to the $28.1 TN 2024 close.
- Recent 'swaps' market turmoil provides additional key evidence of serious market structure issues.
Sure got the old neck stuck out this time. Markets have rallied, financial conditions have loosened, and debt markets have reopened. I'm not dissuaded. The great Bubble is in trouble.
It was 15 months from the June 2007 (subprime eruption) mortgage finance Bubble piercing to the cataclysmic 2008 crisis. Over that drawn out "process," crisis dynamics at the "periphery" ebbed and flowed as they gravitated toward the precious "core." Aggressive rate cuts and various measures somewhat impeded the process, yet nothing could alter the reality of Trillions of suspect debt, egregious speculative leverage, and associated fatal market structure issues (i.e., derivatives and the "repo" market). There was no rectifying acute financial and economic fragilities that had accumulated over the Bubble period.
Crisis dynamics take fateful turns when perceived safe and liquid "money" succumbs to a crisis of confidence and panic. Historically, bank runs triggered acute financial and economic crises. In September 2008, it was a panicked run on "money," more specifically Lehman Brothers and Wall Street "repo" liabilities.
Today's crisis dynamics have key differences from 2008. In general, market-based mortgage Credit had a significantly outsized role in total system Credit going into 2008. This created latent vulnerability to the reversal of speculative flows and deleveraging, along with an associated tightening of market financial conditions. At the same time, the "core" was underpinned by rock solid perceptions of "moneyness" for Treasuries, Federal Reserve Credit, and the dollar more generally. The robust "core" afforded Washington extraordinary crisis-fighting capacity that should no longer be taken for granted.
In one respect, today's Credit dynamics seem more robust. Massive fiscal deficits ensure system Credit growth remains dominated by the expansion of "core" Treasury securities. This, at least initially, insulates Credit expansion from the type of "risk off" market dynamics and reversal of speculative flows that doomed the mortgage finance Bubble back in the second half of 2007. Relative stability at the "core" initially stalled crisis dynamics that erupted at the "periphery."
But there is today an important caveat. This cycle's egregious excesses - over-issuance, speculative leverage, and Credit debasement - have flourished at the "core" - especially within Treasury and agency securities markets. Moreover, there are serious issues associated with another key "core" Credit component - Federal Reserve liabilities. After ending 2007 at about $900 billion, total Fed assets today weigh in at $6.7 TN.
System stability today lacks the paramount underpinnings provided by a strong foundation. Ending June 2007 at 72.5, the dollar index rallied to a high of 88.5 on November 21st, 2008. From September 2007 to late October 2008, the Fed slashed rates 425 bps to 1%, but the dollar index rallied 10% during that period. And from June 2007 highs (5.30%) to the end of October 2008, 10-year Treasury yields sank 135 bps. Yields collapsed as the Fed cranked up QE, ending the year at 2.21%....
Weekly Commentary: Asian-Crisis-In-Reverse Feel