The Great Economic Depression of 2020: No lessons learned as central banks’ bazookas dribble or misfire

After 2008, we were promised that too-big-to-fail caused by too much debt, credit, and leverage was history. Covid-19 exposed Wall Street’s culture of “Heads I win, tails you bail me out.” That’s not capitalism, it’s extortion.

Are globalization’s new record highs a minefield-filled Potemkin village? In 2020, financial markets have set numerous records. In January, at the World Economic Forum in Davos, Switzerland, famed Bridgewater boss and fund manager Ray Dalio told a CNBC audience that “cash is trash” and encouraged viewers to “buy the dip.” Next, he went as far as to warn investors “not to sell stocks.” In February, as if on cue, every stock index obediently and euphorically rocketed to new all-time highs. If ever alarm bells were ringing to warn how stratospheric valuations fueled by twelve years of reckless central bank “temporary emergency measures” could signal a market top, Dalio’s Davos hubris certainly qualified. President Trump neatly summarized the market’s frothy top in just twelve words.

Nine days after Trump’s “raging bull market tweet,” an unprecedented collapse began that swiftly and violently turned history’s longest bull market (2009 -2020) into a bear market that sent indexes plummeting over 20 percent in less than a month–another record. The bull-to-bear collapse was quicker than both 1999 and 1929. 

In 2007, the Great Financial Crisis (GFC) wiped out Bear Stearns and Lehman Brothers. The crisis eviscerated prudent savers’ ability to earn interest. Ben Bernanke, the boss of the US Federal Reserve Bank at the time, told the world that subprime mortgage default woes “won't seriously hurt the economy.” He went on to say “subprime debt is contained.” Bernanke was wrong–very wrong. The defaults in subprime mortgages triggered the GFC, bankrupting many over-leveraged institutions despite trillions in taxpayer-backed bailouts.

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US debt crisis wasn’t supposed to happen until at least 2035. Covid-19 is rapidly pushing it closer

In 2017, Federal Reserve Boss Janet Yellen assured global markets that “the banks are very much stronger due to the Fed supervision, higher capital levels, and other measures…. We will not see another financial crisis in our lifetimes.”   

So, what happened? Since globalization, the world has not experienced simultaneous supply and demand shocks. The ‘Coronavirus shock’ ignited a liquidity-soaked tinderbox. Central bank policies have inflated asset bubbles in the stock, bond, property, and credit markets. Mandarins at the central banks reduced interest rates to six-hundred-year lows. Policies included trillion-dollar bank bailout programs and unlimited quantitative easing (money printing) as well as zero and negative interest rate policies intended to create aggregate demand. After hundreds of rate cuts over the past twelve years, have the policies worked? No, they haven’t. These policies have failed and have only helped the 0.01 percent. 

What have record low rates achieved? Corporate plunder. The rate cuts and bailouts enabled corporations to borrow record amounts of cash and to conduct massive stock buyback programs. It allowed corporations to enrich CEO compensation packages at the expense of future growth and job creation, enabled malinvestment in billion-dollar zombie corporations that are all debt without earnings, and created a record wealth-inequality gap. 

It is different this time, but not how you think. Unemployment is about to skyrocket to over thirty percent, helping to send GDP plummeting forty percent or more. The world is filled with mountains of debt and very few assets that can generate cash. As a result, central banks are panicking. The Bank of England’s new boss has promised to “do whatever it takes”–a stale Mario Draghi line that worked for the European Central Bank during the GFC but will not work now. Banks are on the ropes and their clients are going bust. A tsunami of defaults is coming. Bankers’ ‘Whatever It Takes’ bazookas are impotent and only dribble or misfire. In other words, no lessons were learned from the GFC. The recent all-time-high volumes of risky BBB, junk bonds, and leveraged loan buying that resulted from stock chasers scrambling to buy any garbage with yield was extraordinary. The Whatever It Takes strategy enabled the risk parity trade which worked until it exploded, toxic derivative products, underfunded pensions, all of which will result in catastrophic losses by Wall Street speculators. 

The lunatics are running the asylum. Money printing, unlimited bailouts, central bank manipulations and ‘buy the dip’ no longer work. Keep your powder dry and wait for the dust to settle.