Let's begin by assessing what is the same now relative to 15 years ago. Eerily, back then as well as now, the Fed was almost solely focused on inflation. At their September 2008 meeting they didn't raise rates, but they didn't cut them either. In other words, it was a "pause" meeting. Sound familiar?
The transcript for that meeting contains 129 mentions of “inflation” and five of “recession.”
"As late as August 2008, “there were no clear signs that many financial firms were about to fail catastrophically"
Sure.
By August 2008, many financial firms had already failed, BUT most of them had been taken over by larger banks. Therefore, markets and pundits were not panicking. Similarly, this year, all of the firms that have failed got bought by larger banks AND were fully backstopped by the FDIC. Note the magnitude of unrealized gains that remain on U.S. bank balance sheets AND the massive liquidation volume. As two major negative divergences.
Meanwhile, current bank exposure to commercial real estate is 3x subprime:
Among the differences however is the fact that the U.S. housing market has not fully cracked as it had back in 2007. Which is what we see in the chart below. Here we see that this decline resembles the initial decline off the top (red line) in 2007.
Notice that in 2007 as the housing market rolled over, the unemployment rate rose. Whereas this time the unemployment rate remains at a 50 year low. Are we to believe that this time correlation will be different? That is the bullish point of view - a new permanent plateau for over-valued asset prices while rate hikes implode the middle class.
Fed policy, I mentioned above, is widely expected to be a likely pause next week. However, overall this Fed is still behind the curve on inflation relative to the last cycle.
Here we see that when the Fed paused in 2008, inflation took off. This time if that happens, inflation will head back to 8%.
Which means that we are always one too-strong data point away from meltdown.
Another key divergence is the fact that the Fed is currently reducing their balance sheet. I believe that the Fed balance sheet is the primary source of today's inflation - mostly asset inflation. As we see, the balance sheet has only come down a small amount relative to where it was pre-pandemic. The current Fed policy of raising rates on the middle class while keeping the asset bubble inflated, is a disaster waiting to happen.
It's merely a temporary plateau of rampant idiocy.
Of course I've mentioned China many times as the locus of global collapse. Unlike 2009, China is in no condition to lead the world out of depression. This time, that country is leading the world INTO depression.
In summary, this week we learn that Americans have never been wealthier AND child poverty is soaring.
September 11, 2023:
Anyone who doesn't see this coming, won't be bragging about it in the future.
