The 2008 crisis was just a warm-up.
The 2008 crisis was a banking and equities crisis. In the simplest terms, investment banks, leveraged to the hilt with garbage mortgage derivatives, became insolvent and began to collapse.
This collapse triggered a selling panic throughout the financial system as every financial entity questioned the quality of the assets backstopping its derivatives trades. The derivative market was over $700 trillion at the time. So just about every major global bank had broad exposure to this market. The
Federal Reserve and other Central Banks dealt with this issue by cutting interest rates to zero, opening emergency lending windows to needy banks, and engaging in Quantitative Easing.
The goal was of these strategies was to instill confidence in the banking system once again. However, by trying to prop up the big banks, the Fed has created an even bigger bubble than that which existed in 2007.
I’m talking about the BOND bubble.
With interest rates at zero, banks, financial institutions, and investors began to chase yields. This meant hundreds of billions of dollars worth of capital flowing into bonds of all different levels of risk.
When money poured into bonds, the bonds rallied, pushing their yields lower. This in turn meant more capital flowing into even riskier bonds as investors, still seeking yield, had to turn to riskier investments to obtain a significant return.
The end result? The bond bubble is so massive that it’s even hard to wrap one’s head around. Consider that:
1) Bond yields for many European countries are at multi-CENTURY lows.
2) US Treasury yields have only been lower TWICE going back to 1790.
3) Japan’s Government bonds now have negative yields.
We all know that most sovereign nations are bankrupt. But the “flight to yield” is so powerful in the system today that yields are negative in real terms. This is absolutely extraordinary.