A week ago, the Fed lowered interest rates (for the first time in over a decade) and the White House reignited the tariff war with a single tweet. Markets got nervous, prompting some to wonder if we are heading for another Lehman moment. Well, the short answer is not yet. More Fed intervention is coming for 2019.
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What happened? The markets had a tiny hissy fit. Monday’s one-day plunge in global equities was the largest since February 2018.
By last Friday’s close, the S&P had tanked by 2.8%, and by Tuesday’s close, by 5.7%. That’s a pretty sharp and quick ride south.
Tuesday saw a slight claw back as China appeared to stabilize its currency-fueled market scare. Markets, as usual, will likely rise in the near-term, as bad days are typically followed by good ones – until the debt party ends. For now, this is no Lehman moment.
So, no, the great meltdown or Lehman moment 2.0 has not begun, as there is still psychological wind beneath the wings of this rigged to fail market.
But one would otherwise assume so, if normal market conditions rather than Fed-controlled markets, were in play.
How Conditions Are Worse Than the Last Crisis
Near-term price action will depend on whether the trade war cools or gets hotter. Most fund managers are expecting increased tensions, and hence another shoe to drop. Meanwhile, the bubble-heads at CNBC are saying not to worry, don’t go to cash. In this case, they may be right, because as things get bad in reality, the Fed kicks in with more support, which we can expect by year end.
And things are getting bad.
Already, U.S. farmers (and hence U.S. debt costs) are hurting, as China stuck it to us by cutting all U.S. agricultural purchases.
So, let’s compare August of 2019 to August of 2007 and see just how much history, and eventually, a real Lehman moment may repeat itself – or, at the very least, rhyme.
In 2007, the U.S. was chugging along, blissfully ignorant of a ticking debt timebomb of D- subprime mortgages, all nicely packaged by our too-big-to-fail (TBTF) banks as A+ “asset-backed securities.”
The S&P was ripping and the Fed fund’s rate was at 5.25% – 260 basis points above inflation.
Then, suddenly, the Fed got a bit nervous as the first tremors of a mortgage debt crisis began to shake. In response, they cut rates by 50 basis points over the next 60 days, and the markets happily ripped northward once again, putting everyone at ease. (We’ll likely see the same pattern.)
But within another 30 days, the markets fell, and kept falling. That was the Lehman moment…For the next 16 months, the U.S. went into the greatest nosedive since the Great Depression as the Fed desperately cut rates by another 500 basis points until our Titanic markets hit the ocean floor lows in March of 2009 – a 57% fall.
Today, things do look hauntingly familiar to that Lehman moment, but today, the Fed is even more off its rails.
As in pre-Lehman moment 2007, markets keep rebounding with dip-buying joy (and media drivel), blissfully ignorant of a corporate (rather than mortgage-backed) debt bomb of D- borrowers living off loan extensions rather than earnings growth.
The S&P has touched record highs leading up to the Lehman moment, but today’s Fed funds effective rate, at 2.13% (rather than 5+%), is much weaker than ’07 and is just 53 (rather than 260) basis points above reported inflation.
And as in August of 2007, just before our Lehman moment, the Fed is once again getting nervous as the first tremors of a corporate debt crisis in need of “assistance” has prompted the recent 25 basis point rate cut.
The trillion-dollar question today is this… are we following the same slow path toward a debt-driven sell-off and Lehman moment, or is this time really different?
This Time Isn’t Different… It’s Worse
When the ’08 crisis and Lehman moment hit, the Fed’s balance sheet was just north of $800 billion and it had five percentage points to play with (i.e. cut) to hasten a “recovery.”
Today, the Fed’s balance sheet has ballooned to $3.6 trillion, and it has just two (rather than five) percentage points to play with – hardly enough to act as a “recovery tool” when the next Lehman moment hits.
In 2007, total U.S. government debt was at $8.6 trillion, today it’s at $22 trillion.
In 2007, U.S. consumer debt was at $2.7 trillion, which was 80% of wage income. Today, that debt number has skyrocketed to just under $16 trillion and represents a staggering 180% of wage income.
In 2007, the inflation-adjusted yield (return) on the world’s benchmark sovereign bond – the U.S. 10-year Treasury – was 2.38%. Today, that same benchmark bond, when adjusted for even dishonestly low inflation, yields a pathetic negative 70 basis points.
In 2007, none of the great nations of the world were issuing negative yielding bonds. Today 26% of the entire $55 billion tradable sovereign bond market is in the negative, and now $14.5 trillion of all global bonds have subzero returns.
This, folks, is absolutely appalling. It is a sign of distortion.
In short, as of August of 2019, and compared to August of 2007, the U.S.:
- Is more in debt;
- Its benchmark Treasury is more broken;
- Its central bank is more bloated;
- It has less interest rate and balance-sheet ammo to halt another recession, and;
- The world in which it operates (i.e. trades) is in the midst of the largest debt bubble ($250 trillion) in history, one supported by central banks who have artificially pushed sovereign bonds into negative-yielding territory for the first time in the 5,000-year history of financial record.
Ouch. This is not an ideal setting for another “uh oh” Lehman moment.
But in the wake of the 2008 crisis, it was believed that never again would the U.S. find itself in such a pickle.
The Bernanke Fed promised its emergency measures of money printing and low debt would end within a year or so.
But that was simply a fib – one of so many.
We are still in pure emergency mode, as last week’s rate cuts confirmed, only now we have just a few bullets left and are just 2.25% of rate cuts away from zero and the end of our monetary rope.
If the Fed went to negative rates, that would push us (and the global markets) over a cliff of total panic and market bleeding, a much more likely Lehman moment to follow.
The Next Trigger?
In 2008, a “Lehman moment” sparked the domino fall. Today, some fear the tariff war will do the same.
Are they right?
We’ve said many times that no one wins a trade war. Furthermore, history confirms that past protectionist measures (the 1890 McKinley tariffs, or the 1931 Smoot-Hawley tariffs) ended badly for the U.S.
But even those disastrous examples were less dangerous than the current trade war, because they were aimed at all nations – not a single nation like China, which, as much as we love to hate its duplicitous trade, market, and ethical sins, is still 40% of global GDP and thus a key player in the $17 trillion game theory playing field of a highly intertwined global and technological supply chain.
So, will this trade war spark the next Lehman moment and market drawdown?
Will it get hotter, or will the White House and China reach a nice little accord just in time for election season here in the U.S. – thus buying our country a bit more headline salvation until a Main Street recession rather than trade war pushes our market toward new lows?
Well, China’s leader doesn’t have to worry about re-election. This week, he weaponized his currency to stick it to the U.S., reminding investors that China can play dirty in this losing game.
Was yesterday’s sudden FX stabilization by China a white glove or just a card trick?
Many feel this war could easily get hotter and hence your money closer to getting burned.
And as for the Fed saving you, don’t bet on it. As we pointed out recently, the last two times the Fed used rates to “save” us, a recession followed within three months. But more printing can certainly buy more time, and we expect much more of that down the road, thus further delaying our next Lehman moment.
The White House says money is flowing into U.S. markets and that China will rot (or blink) first. Perhaps. Our pathetic, yet at least nominally positive bond yields may be a near-term and relative safe haven for foreign funds, thus buying the U.S. markets more near-term support. This is a very real possibility folks.
Time and market signals will tell.
Regardless of a trade war trigger, U.S. markets will inevitably fall/rot from within – led by a Main Street recession. That said, we expect the Fed will kick out its money printers well before year-end to buy more time–there’s a lot at stake…
Walgreens, by the way, just announced another 200 store closings, adding to a record-year of pain in our real economy – the one the bubbleheads and Fed have forgotten.
Folks, be careful out there – and stick with us as we carefully track developments in a China-U.S. showdown whose ramifications are as volatile as our markets have recently been and will certainly continue to be.
Comments
15 responses to “Is This Our “Lehman Moment”?”
- alice cintronsays:
August 7, 2019
excellent article,spot on .thanks for the warning.
- Zsays:
August 7, 2019
Do we have chance at another melt-up if the FED lowers rates several times and Trump gets the trade war stettled ???
- Robert riverasays:
August 7, 2019
Interesting analysis, do u recommend having hard cold cash on hand?
- J Thomassays:
August 7, 2019
You left out of your economic evaluation- international political considerations. Those of us who talk about them are not politicians nor so called journalists. Disbelieve this at your own peril.
The Chinese have Trump over a big barrel and they know it. Things to consider:China will win. They play the long game…no matter what the cost in the short term-check history.Forget Russia. China is the threat. China wants Trump out. He is a danger to them. China owns the Biden family & Feinstein.
No deal for Trump. Stock market crashes. Trump looses in 2020. QED.
- Bobsays:
August 7, 2019
The tariffs will contribute to the forces of recession which is due to strike some time in 2020 even though it is an election year. The Smoot Hawley tariffs and resultant trade wars turned what would have been a serious recession into the Great Depression. History may not exactly repeat but it does rhyme.
- Terry says:
August 7, 2019
Don`t you think that things being as bad as they are we will see a depression rather then a recession?
- PAUL LAMOUREUXsays:
August 7, 2019
…”THANK YOU” – FOR KEEPING “US” INFORMED….
- Sharonsays:
August 7, 2019
I love your reports. I am still confused what to do. I will be 65 this year and ready to retire. My financial advisor tells me I still need to be in a 60/40 portfolio. Most of my retirement is with a financial advisor as I left an employment after 25 years and had to roll over my 401K retirement into an IRA and I cannot pay into it so when I lose $’s I am not buying at lower values to try and offset the decline. So my account just sits there and continues to drop. It seems that all these financial advisors do is just put your retirement into funds and watch them tank which happens fast and then it takes years to build up. I have been paying into another 401K with my new employer of 8 years which are in very conservative funds And I have cash. Soon I will start living off these funds and cannot afford to take bid loses. Oh and I have an annuity that my advisor talked me into putting some of my funds in. Which I fill at this point was a bad idea. This is a long email to explain my situation. Bottom line is I do not know what to do to protect myself? I do not have years to ride all these swing out. So what does this all mean for a person like me as far as what I should be telling my advisors to do because they are certainly not going to do any proactive moves.
Thank you
- Dennis Barbersays:
August 8, 2019
Thank you again Matt for your no-BS analysis of what’s really going on. I look forward to your emails every day.
- Ray Kummerfeldsays:
August 8, 2019
Thanks Matt. What do you think about real estate, Bonds, or Gold and or Silver for a safe haven if we have a worse than 2008
Situation?
Thanks
Ray
- Adekunle Etikosays:
August 8, 2019
This is a dangerous development for the global economy and the emerging and the developing cum the underdeveloped economies of Africa and the third world will suffer it most. With globalisation, no economy will be protected from the ravaging effects, so concerted efforts should be mustered by the other Western developed economies to put pressure on the US and China to sub pedal on their trade altercation and war like tweets. AR
- Ronald Goddardsays:
August 8, 2019
Hi Matt,
Great article again. Its a pity that most people are defenseless in these strange times. Which way to go?
Big banks and corrupt government are powerful .forces.
- Melsays:
August 8, 2019
Thank you!
- Robert Taylorsays:
August 8, 2019
Thanks for the insight. What to do to protect my investments?
- Dsays:
August 8, 2019
Is there any truth to what I have been reading that if you are in cash the fed has passed laws that many consumers are unaware of that a bank can seize your cash turn you in to a share holder of said bank? Then delute your shares of the bank and your cash evaperates
