Let me preemptively say “f*ck off” to the MIT economics grad students who are going to respond with “it’s nowhere near the same thing! The repo market stuff is standard practice, there’s no change to anything, you don’t understand finance!” Seriously, f*ck off.
I turned bearish in the summer of 07 when I saw Jim Cramer famously freak out at Bernanke’s possibility of further rate increases. People love to shit on Cramer, but that episode was really seared in my mind as an admission that things were starting to fall apart. (Cramer probably now knows better than to have such honesty with the public about financial conditions. He’s probably been told not to spook the markets).
In the summer 07, markets were still booming and recession was nowhere in sight. However, the housing market started to slow and then decline in price (similar to recent declines in Seattle and San Francisco and some other markets). In summer 07, there was chatter about whether we’d get more Fed rate increases, very similar to the kind of chatter we heard around December 2018.
A few months later in September 2007, the Fed reversed course and cut rates, similar to the Fed’s reversal and cut in July 2019. But they continued to reassure is that the economy was very strong and that recession was unlikely.
In 2009, it was declared that the recession actually began in Q4 2007 – right around the time of the first Fed rate cut, right around the time the market hit all-time highs. Bernanke testified to Congress that there was no hint of recession – right as the recession was starting.
Then in late 2007 and early 2008, there started to be news stories about mortgage losses at Countrywide Financial and Bear Stearns. That some hedge funds were blowing up, that banks were suddenly writing down $2B at a time.
What did it mean? What were these losses? Were things contained? What does it mean when a hedge fund blows up? It was confusing as f*ck. No one knew what it meant.
That’s where we are now. What does this repo stuff mean? Why aren’t banks lending to each other? Is it normal? It’s normal. No, it’s not normal. Is it the Chinese? Is it a foreign bank going under???
The confusion and Fed actions we had in late 07/early 08 are similar to the confusion and Fed actions we see today.
However, the market didn’t really collapse until 6 months later, once Lehman went under. We even got a late spring rally after Bear Stearns collapsed, and it looked like we were on our way back to all-time highs!
History doesn’t repeat, but it often rhymes. It’s now just a question of when the shoe will drop…