Let us repeat: Financial crashes cause recessions, not vice versa. So if you are waiting for NBER (National Bureau of Economic Research) or even some unusually enlightened Wall Street economist to call recession before exiting the casino, well, get prepared for some very bad hair days.
The old fashioned sequence of causation, of course, was that stock markets don’t crash until they are triggered by warning signs, or the actual onset, of recession. But there is no mystery as to why that model has become inoperative.
To wit, the economic world today is dominated by a central bank driven regime we call Bubble Finance. Unlike during your grandfather’s industrial era heyday circa 1960, the main street economy today is not the master and consumer of finance; it is its feeding ground and victim.
Accordingly, the Fed and other central banks foster serial bubbles; the latter are the inherent product of monetary central planning.
That’s because today’s central banks unleash massive and intensifying waves of speculation by means of ZIRP and QE. The former is the speculator’s best friend because it deeply subsidizes carry trades funded on the front end of the curve.
For example, that’s what Bear Stearns and Lehman were doing—-until, of a sudden, they couldn’t roll their overnight liabilities. They were then forced to dump their longer-dated, riskier and stickier assets—good ones and toxic ones alike—at fire sale prices.
At the same time, QE deflates bond yields and inflates PEs, thereby touching off a scramble for yield among fund managers and a financial engineering driven plunder of balance sheets and cash flows by stock option obsessed corporate C-suites.
At length, bubbles reach the financial stratosphere and burst under their own weight—sometimes on the seemingly slightest provocation.
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