Who could forget the stock market crash of Monday, October 19, 1987? Twenty percent of equity value wiped out in a single day. Stunning! And there was nothing to precipitate it. No Pearl Harbor. No 9-11. No spectacular institutional default.
Nothing. Notta. Zip.
At the time I was someone who recognized the possibility of a crash event. Unfortunately, though, I did not forecast the timing of its unfolding. Those who did obviously made a ton of money. What can I say? I was quite green then.
I have learned a lot about the stock market over the past twenty years. For example, there are ways you can objectively assess when financial risks are elevated. You can reasonably evaluate the strength of various vested interests. And you know what they say. Money makes the world go 'round.
Today, this money largely is created out of thin air using a whole lot of leverage (i.e. debt) employed in a gigantic scheme to manufacture AAA-rated securities through private credit markets. Of course, this is the game that recently broke down.
Suddenly a systemic threat looms large. As such, the U.S. Federal Reserve has been forced to change its name to the Bank of JP Morgan/Chase.
I have been reading how U.S. corporations over recent weeks have been able to float record amounts of debt. This capacity had been significantly constricted during the credit market crisis first precipitated by the sub-prime mortgage market meltdown. However, with Wall Street's virtual take-over of the full faith and credit of the U.S. government, credit market confidence has begun to recover. Corporations now are better able to roll over their debts and, apparently, they are doing so in record amounts.
This same sort of threatening circumstance developed in 2002. Indeed, even as corporate capacity to float debt was beginning to recover the stock market at the time was decidedly falling apart.
That year, unlike 1987, I had forecast the negative turn of events in the stock market. Likewise, I also recognized the significance of corporations inflating their balance sheets with new issues of debt. With this "fix" in, the "floor" under corporate finance was stabalized, and so it was no surprise when the stock market soon afterward regained its legs.
The greatest flood of liquidity since Noah subsequently commenced. It was this accomplishment alone that was largely responsible for levitating the global financial system over recent years.
Of course, this unleasing of wildcat finance came at a price. One consequence only made the inevitable day of reckoning loom ever larger. And come it did about a year ago when Bear Stearns began its death spiral.
Obviously, the capacity of private credit markets to create money out of thin air through the issuance of all manner of debt-related securities — the essence of American wildcat finance — has since been severely impeded. Likewise, not even those facilities recently instituted to gain U.S. government backing of the unimaginable volume of credit Wall Street generated over recent years ensures a resumption of "business as usual." In fact, Wall Street as we have known it probably is finished.
You see, the Bear Stearns take-down likely signals the commencement of a new phase of free market finance. Call it the Age of the Feeding Frenzy. Such is the nature of vulnerability baked into the cake. It is the natural result of delaying the inevitable.
Which brings us to the present moment and news that corporations have been able to float record amounts of debt over recent weeks. Surely, not all are in a position to gain unfettered access. Surely, many a corporate balance sheet over recent years has deteriorated precariously. These, then, have been made likely targets of take-downs that might prove remarkably similar to events leading to the demise of Bear Stearns.
Thus, we might just have the makings of an economic and stock market environment eerily similar to 2002. That's the year a record volume of U.S. corporate bankruptcies was recorded. That is also the year the stock market tanked, only to find legs and decidedly reverse higher.
In conclusion, then, I would make the case for a pending stock market mini-collapse, only to be followed by what might best be termed a melt-up.
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