We are certainly living in strange times. An unprecedented monetary experiment is coming to a staggered end and no one knows the potential repercussions – a plague of frogs cannot be entirely ruled out. – Telegraph UK
Just like in 2008, no one knows where the next big derivatives accident daisy chain will start. Looking back, it would appear that the collapse of Bear Stearns trigged the chain of mortgage derivatives that took down Lehman and then AIG and Goldman. It was “fortuitous” (note the sarcasm) that former Goldman was CEO Henry Paulson happened to coincidentally be the U.S. Secretary of Treasury when Goldman blew up. It enabled he and Ben Bernanke to run around Capitol Hill in order to frighten and intimidate Congress into passing the $700 TARP package that was used to bail out Goldman and enable Wall St. to pay massive bonuses that year.
Fast-forward to today. We know that the globally, including here in the U.S. financial system, the notional amount of derivatives of is larger than it was in 2008 and considerably more risky. Interestingly, the Telegraph UK wrote an article that should be seen as an ominous warning: The world’s next credit crunch could make 2008 look like a hiccup.
We’re also beginning to see continuous warnings about the severe illiquidity of the bond market. I have been doing some research on this and it’s worse than anyone outside of Wall Street bond desks understands. Your pension fund that at least 50% bonds and illiquid “alternative” assets? LOL. Good luck. The Fed, along with every other major Central Bank in the world, has created a destructive monster in the world’s bond market that makes Frankenstein look like a small, plastic Ken doll…