2023-04-03 15:31:50 ET
Summary
- The current world is a world of disequilibrium, one that has been distorted and discombobulated by government policies, supply chain problems, and other shocks.
- More and more analysts seem to be focusing upon what sector of the economy is going to collapse, and not whether a collapse might happen or not.
- This world of radical uncertainty is going to stay with us for a while.
The game right now: determine the financial sector that is going to produce the upcoming market collapse.
Rana Foroohar writes in the Financial Times :
"If you asked a few months ago where the next financial crises might emanate from, most people probably wouldn't have said regional banking."
"Rather, they might have guessed at the shadow banking sector, which has grown dramatically since the global financial crisis of 2008."
"It remains far less regulated than the traditional banking sector."
The truth is, the events since the "global financial crisis of 2008" have created, globally, a world that is in disequilibrium.
Market distortions are everywhere.
Ms. Foroohar is focusing, particularly, upon the world of shadow banking.
She writes:
"It's good that policymakers are focusing on shadow banks because I'd still bet that this is where the real nexus of risk in 2023 and beyond will lie."
But, there are many, many more potential sources of "risk" that are hiding out there in the presence of the whole economy.
Over the past year or so, I have attempted to point out these possible sources of weakness, weaknesses that have grown from an economy that was excessively stimulated through three rounds of quantitative easing before a fourth round, even more excessive than the others, was thrown into the economy to fight the pandemic.
As I have written about regularly, this latter round of Federal Reserve "quantitative easing" created a financial bubble that extended the amount of disequilibrium and distortion to the economy by an even larger amount.
This created the opportunity to write about even more specific markets, like the market for SPACs (Special Purpose Acquisition Companies).
And, then, the Federal Reserve moved to combat inflation and created a round of "quantitative tightening" that resulted in further disruption of the financial markets and the economy.
In addition, this Federal Reserve "tightening" resulted in a very rapid rise in interest rates, driving many financial assets into positions containing capital losses.
The failure of the Silicon Valley Bank is just one example of this outcome.
But, there are many more potential failures sitting on the sidelines.
And, the Federal Reserve continues to conduct its program of quantitative tightening, and interest rates are expected to move even higher.
Ms. Foroohar goes on to quote the author, Brett Christophers, of the new a new book titled "Our Lives in Their Portfolios: Why Asset Managers Own the World."
It is a book that further explains how "asset managers" have come to own "essential physical systems and frameworks,"
The process was in place before the "post-Covid fiscal stimulus plans in the U.S. and elsewhere," but it sped up once these stimulus plans were put into place.
I have written about this process for over ten years now. I refer to the process as one of "credit inflation."
Because of the continuous fiscal and monetary stimulus that was pushed into the U.S. economy in the 1980s, and 1990s, the money flowed, not into the "real" sector of the economy, but into the financial circuit of the economy.
Rather than the stimulus money producing spending on capital goods and inventories, the stimulus money went into the stock market, into the residential real estate market, into commodities, and into other "assets" that could experience price increases.
Investors transferred investment monies into funds that traced the stock market. Value investment funds lost money.
And, the investor community restructured.
Ms. Foroohar writes:
"The opening quote in Christophers' book is from Bruce Flatt, Chief Executive of Brookfield Asset Management, who says,
'What we do is behind the scenes. Nobody knows we're there."
Where an asset boom used to be open and understandable, the current environment is composed of individuals that "play" the current world of assets and asset bubbles.
With all the money that has been pumped into the economy over the past fifteen years or so, and with the "new" institutional framework that has been created, an unknown world lies out there in this radically uncertain environment.
Where the "break" is going to come from is the big question, right along with "what is the Fed going to do?"
The most important thing to note, however, is that more and more people believe that there will be a "break."
What is the sector that is going to collapse?
Of course, if more and more people are looking for "the sector," the more and more the market will be unstable, and the more and more chance that some kind of "break" will come.
And, interest rates are still expected to rise!
For further details see:
The Game Right Now: Find The Sector That Is Going To Collapse