Forthcoming: Q-Review 9/2022
Updates to the stages of the collapse
In December 2019, we published a path-breaking report detailing the stages of the coming economic collapse. There were:
The Onset.
The Counterattack.
The Flood.
The Calamity.
The Recovery.
While our constantly updated blog has followed the process of the collapse for the past two and a half years, developments in the world force a reshuffling of the stages.
This we will do in our new Q-Review report, published later this month. However, it’s good to remind us, how have we arrived here.
The Onset
In December 2019, we specified that at the Onset—stresses that had been building in the credit markets since the summer of 2019—would explode, shrinking if not eliminating entirely the exits from many parts of that market.
Downgrades of corporate debt in the U.S. and peripheral sovereign debt in the Eurozone would push large fixed-income investors, including pension funds, into higher-rated bonds, which would in turn lead to large-scale selling of lower-rated bonds, forcing wider spreads and even more selling.’
This moment came in late February 2020, when a sudden panic gripped investors in both credit and equity markets after a surge in reported Covid-19 cases and deaths in Italy coincided with the collapse of OPEC talks. The market rout started on the 9th of March 2020. Stock market futures crashed reaching the critical threshold of 'limit down' (-5%), the sharpest drop allowed, which meant that trading in stock market futures was stopped.
On March 16th the rates for short-term bond dealers, which cities and states often rely for their short-term financing needs, shot up. Liquidity and buyers evaporated from several key parts of the capital markets, including US corporate and even Treasury markets. Banks were forced to comply with the tighter regulatory guidelines put in place after the GFC which, e.g., set tight regulations on the balance sheet of banks.
The Counterattack
So, when the Fed slashed interest rates and announced a $700 billion asset purchase program on the 15th of March, the companies owed additional collateral on their interest-rate swaps (where, usually, some fixed and floating interest rates are exchanged). Banks needed to include these as assets on their balance sheet, but tight regulation made it impossible to increase the size of their assets. Thus, the tighter banking regulations drained liquidity from the financial markets, when they needed it the most!
There was a sense of panic. An utter collapse loomed. At the open, on the March 16th, 2020, stock markets crashed. The volatility index, VIX, reached 82.69, the highest on record. The DJIA plunged by 2997 points, the worst point drop on record, or 12.9 percent. And then, again, the authorities stepped in.
On the March 16th, the New York Fed announced that it would add $500 billion in overnight loans to the repo market. On Tuesday, the 17th, the Fed announced that it would use $1 trillion to mop-up corporate paper from issuers. On Wednesday, the 18th, the ECB announced that it would buy 750 billion euros worth of bonds and securities. On the 19th, the Fed announced that it would create a lending facility to bolster money market mutual funds. There were also massive support operations launched by central banks across the globe.
Calm slowly returned, even though, on the 25th of March, interest rates on short-term corporate debt surged to 2.43 percent above the federal-funds rate, the overnight lending rate of the Fed. This led the Fed to institute a program targeting the corporate bond markets.
By the end of May, the Fed had become THE financial markets of the U.S. It backstopped repo and U.S. Treasury markets, intervened in corporate commercial-paper and municipal bond markets and short-term money-markets, and bought corporate bond ETFs, including some speculative-grade, or “junk” corporate debt. It also launched its "Main Street Lending" program, where it provided loans to middle-market businesses. By early June 2010, not much was left of the once-magnificent “free markets” in the U.S. The counterattack was complete, for now.
Updates on the Stages
When we warned about an approaching inflation shock in March 2021, there naturally was no premonition of the massive escalation of the Russia-Ukrainian crisis to a hot war a year later.
The war has altered the stages by bringing with it very dramatic human and political elements. No one is denying the horrible sufferings of the Ukrainian people (and soldiers on both sides), but the politics around the war, i.e., sanctions, continue to turn the theatre of war in Ukraine into a global economic war.
The problem is that economic sanctions rarely work in solving geopolitical crises, but they can (and will) create massive economic and human suffering, just like they are doing now. They are also contributing to the new stage in the global collapse which we call the Crash.
We will return to the updated stages and forecast in the Q-Review 9/2022. Subscribe to learn how the crisis is likely to proceed!