Financial Crisis: Ten Years Ago, the World Changed

Ten Years Ago, The World Changed

A rolling crisis born of decades of mistakes finally erupted across the US financial landscape approximately ten years ago, with each month of that year highlighting a new and more ominous dilemma for US markets.

The Financial Crisis of 2008 goes by many names – The Great Recession (which doesn’t capture the magnitude of all that happened during this time), the Banking Crisis (which unfairly blames banks alone for the collapse) – any number of “titles” will most likely not provide an adequate description of what took place.

Exactly ten years ago during this month, July of 2008, the financial industry saw massive upheaval and government action which would have been unimaginable just a few years before.  But a lot had already transpired … decades of bad government policy and unwelcome government intervention into the marketplace had already distorted US real estate markets.  And now, 2008 saw the crisis unfolding almost nightly on the cable business channel.

  1. October 2007 –  Official beginning of the recession; Florida real estate market collapsing.
  2. February 2008 – Bush signs into law a tax rebate bill, and increases FHA loan limits and lowers down payment requirements as loan borrowing/lending is rapidly declining.
  3. March 2008 – Bear Stearns, with substantial exposure to mortgage backed securities, was bailed out by the Fed and eventually forced into a sale to JP Morgan Chase.
  4. April/May 2008 – Through the “Term Auction Facility,” the Federal Reserve lent a then record $150 billion to investment banks; the Fed Funds Rate was dropped for the third time that year – to 2%.
  5. June 2008 – Fed bank loans break the record again, lending $225 billion to distressed banks with massive loan losses from defaulting real estate.

And then, the calendar turned to July …

By now it was fairly evident that the traditional method of allowing banks and financial companies to file bankruptcy and/or reorganization had been disregarded, and throwing tax payer money at the failing institutions was the preferred method of stemming the tide of the crisis.  No one, however, was prepared for the events that occurred in July.

**The two BIG July 2008 events which headlined the ongoing financial crisis of that year:

  1.  “Secretary Paulson asks Congress for a $25 billion bailout of Fannie Mae and Freddie Mac”: Looking back, the numbers seem so small compared to the gargantuan debt and bailout numbers we have seen since.  However, at the time, it was a body-blow to the stock market.  Street guys knew (A) if the Feds were moving in it was probably already too late; and, (B) it was not going to be enough.  Instead of stabilizing markets, it rattled them further, and set the stage for what would become inevitable – the complete nationalization of the Fannie and Freddie marketplace.
  2. “IndyMac Bank failure … depositors angry”: In a prelude of what would come in the fall, IndyMac Bank was a mid-sized regional bank and the first traditional bank failure of the year (Bear Stearns being an investment bank and financial services company).  At the time, FDIC insurance only covered $100,000.00 of a person’s bank deposits (the crisis would lead to reforms later that would include an increase in FDIC coverage up to $250,000.00).  Angry depositors pushed the local police force to the brink, as they demanded access to the bank and access to their accounts.  The televised events spurred widespread fear of further calamity with other banks throughout the country.

IndyMac Bank failure … depositors angryIndyMac Bank failure … depositors angry

 

Many more dominoes were still to fall in that fateful year of 2008.  August and September would not be kind to markets, nor to many of the nation’s oldest and most famous banking institutions.  At the onset of the Federal takeover of Fannie and Freddie, and the beginning of traditional depositor bank failures in the Midwest, the public remained largely unaware of the declining stock market………most advisors were simply saying it was “time to buy” as stock prices fell.  “Buy low, sell high” – a long standing mantra on Wall Street – proved disastrously wrong over those remaining months in 2008.

Ten years ago was proof in our lifetimes that what goes up must come down, and many times we are too late in taking action to protect our hard-earned money.  Make sure you are not too late when the next downturn becomes a market collapse.  Call now for safe and simple principal protection products for your investment portfolio. (877) 912-1919

Downward Pressure on Stocks

Downward Pressure on Stocks

The last few weeks we have discussed geopolitical chaos and their impact on the market.  This week is no different. What is unique about the era we are living through is that social media and 24-hour news cycles have not made things more transparent, but in fact quite the opposite – more confusing and harder to understand.

But what is not hard to understand is that you can manipulate the market with government intervention, but ultimately, what goes up must come down.   At some point, supply will exceed demand, and “risk appetites” become “risk aversion.”

Three major variables remain in play that can hurt US markets.  Everyone knows there are not just three  variables impacting markets, and many other positive events remain in place.  But when considering safety of principal once you have a sizable portfolio to protect, any variable that increases market downside risk has to be weighed heavily.

I. 3 Major Variables That Will Put Downward Pressure on Stocks:

  1. “Trade War with China is brewing”: This week stocks were weakened by threats from President Trump to levy 10% tariffs on more than $200 billion in Chinese imports, substantially upping the ante from the original 10% tariff on $50 billion in Chinese imports.  One US trade official stated in Reuters that “China was vastly underestimating the President’s belief in stopping unfair trade practices.”
  2. “Tech regulations are tightening”: The FANG’s—Facebook, Amazon, Netflix and Google—have driven the market for several years now.  Many analysts believe things are about to change.  While the current administration has regularly cut regulations across the board and have been credited with much of the deregulation helping with economic expansion, that has not been the case for the tech stocks.  Aside from record earnings, there is an expected flurry of regulatory action with the tech giants, especially with the most recent issues regarding personal privacy.  Many are advising caution for the investing public.
  3. “Political uncertainty here and abroad”:  Southern border crisis … rising gas prices … German government in turmoil … Italians voting for conservative government … failed states in Latin America … aside from the trade wars listed above, the world in chaos remains a constant risk for markets here in the US.  Portfolio’s tied to US multi-nationals run the risk of quick downturns, but most likely, stocks will continue to fee downward pressure thanks to a combination of all of these events.

Stock prices have been immune to geo-political events for years now … or have they?

Fourth quarter of 2015 was particularly gruesome for markets thanks to Chinese currency manipulation.  There were major drops in the spring of 2010, the fall of 2011 and the fall of 2013 … we need not revisit the three major corrections over the last 20 years as examples we have discussed so many times.

There are some positive trends.  We have mentioned them previously and they include things like extraordinary earnings reports, full employment, and record revenue.  The market, while having a tough week, remains at unprecedented highs!

But when you review the data and take Fed rate hikes into account, there is significant downward pressure on stocks. It would also be wise for investors to consider principal protection as a responsive strategy to such pressure.  The fact that there is so much news pointing in both directions confirms the point:  we don’t know when to grab the falling knife.  Trying to time the market has a predictable outcome, and it is usually bad.

Call now to speak with a Ty J. Young advisor about protecting your portfolio from market losses. 877-912-1919

Global Diplomacy: Trump & Kim Jong Un

Global Diplomacy: Chaos Never Looked This Good

In keeping with the theme of a planet in chaos, watching this past week with two major global summits was something to behold.  Yes, the planet is in disarray, but for America, chaos never looked so good.  Thriving markets … full employment … growing economy … and now, we could see peace on the Korean peninsula.

Not so fast!  We have seen this movie before.  North Korea has made lots of promises over the years and simply been lying the whole time.  Rising GDP could be impacted by trade conflicts with allies and partners.  On the surface we see progress, but we also could see disruptions occurring as well.

So, what is the good and the bad that we can gather from the G7 meeting in Canada, followed by the historic summit between President Trump and the leader of North Korea – Kim Jong Un?

At first glance, the media has painted the conflict between the US and our trade partners as existential, and the President’s uncouthness as a roadblock to more agreeable negotiation.   As for the North Korean summit – hard to put that one in a bad light, but also more difficult to believe North Korea can be trusted to keep its word on anything it agrees to.

So, the good and the bad, the pros and the cons, of two very important global meetings with America’s friends, and a dangerous longtime enemy …

I. The good results from this week’s global diplomacy:

  1. “We stood for fair trade”: “Tariff” has become a prominent search engine term in the last two years, and it dominated the discussions at the annual G7 summit in Quebec. Most of our allies do benefit from protecting their domestic industries at the expense of US producers.  We do not have a free trade market between our allies – we have a protected market for some, and an open market here in the US.  The imbalance may not be as burdensome as Trump claims, and America protects some of its own industries, but our position of “fair trade” is the right one even if the messenger is not well liked.
  2. “Zero-tariff offer was a masterstroke”: Offering a “zero-tariff” trade regime was a masterstroke, even if few countries will agree to it.  And that is the rub –  protecting domestic industry is the primary political objective of our allies, NOT trading freely.  Ironically, if the other G7 countries took us up on it, they would benefit greatly, since tariffs are not a significant benefit to our allies as non-monetary barriers to the marketplace.  The Europeans, Canadians and Japanese benefit far more from quotas, environmental regulations and other forms of restrictions than just slapping a tariff on a US car.  If they agreed to our offer, they would still hold the upper hand while giving the US some political wiggle room.  It is not our President, but the other G7 countries, who do not seem to be making the most intellectually honest decisions when it comes to global trade.  That is not what you will read in the mainstream media.
  3. “North Korea comes to the table”: Decades of threats, negotiation, more threats, less negotiation … ALL came to head as the President met with the leader of North Korea.  It was the first time since the cease fire ending the Korean War that the leaders of these two countries have met.  North Korea may be backwards, the supplicant to China, and no bigger than the state of Mississippi – some of the many reasons previous administrations would never have granted a meeting.  But now they are a nuclear power, and the playbook has changed.  Denuclearize the peninsula, or even better, pull the North from their client status with China, and you are talking about globally historic events on a grand scale with few modern parallels.  It was just a meeting, but the perhaps the first positive steps to very big things in the near future!

 II. The bad results from this week’s global diplomacy:

  1. “Fighting with Allies may not help us long-term”: Yes the Canadians changed the terms of the communique without advising us, and yes there is a global trade imbalance between America and her allies, but when you’re the “biggest bull” at the table, you don’t have to publicly respond to every slight … it can be seen as a sign of weakness. Furthermore, the trade imbalance is oftentimes a reflection of our ability to consume more than everyone else, which is not a sign of weakness, but of strength.  In general, you don’t need to be in public fights with allies while facing a resurgent Russia and adversarial China.  We have bigger fish to fry.
  2. “Zero-tariff offer is a non-starter for the G7”: As shared above, despite his verbose nature, and un-diplomatic way of treating friends, his underlying position is correct:  we do not exist in a world of free trade, we live under a managed trade system that is balanced against US interests.  In 1945, it made sense as rebuilding the world to be an effective bulwark against global communism was the highest priority.  That world ended in the early 1990’s.  Our allies will not accept a zero-tariff regime since it would hurt them more than it would hurt us.
  3. “North Korea got a concession but offered nothing much new in return”:  Saying they are committed to a denuclearization of the Korean peninsula – which would also mean South Korea – is nothing new.  And to have Trump unilaterally end US wargame exercises without anything in return was not, on the surface, a win for US interests.  Yes, we got three prisoners released, which was a welcome moment for family, friends and the entire country, but there is not much “there, there” to what Trump obtained from the summit.

There are several steps critical to success in North Korea – and they are Reaganesque in nature:  1)  Any agreement will require a “trust but verify” process;  2)  That process would include American inspectors with unfettered access to disclosed – and undisclosed – sites, basically the opposite of what took place in the JCPOA (Iran deal);  3) the historical record of where any fissile material, plutonium, scientific data….any and all records of where nuke info and material has been transported outside the county;  and, 3) written assurances to improvements in the human rights conditions for the people of North Korea.

Global diplomacy went in some surprising directions this week.  Trade will go on, but the Korean peninsula will be a long-term fix … if it is fixable.  Most interesting is that markets seemed unaffected by all of the news.  Fed rate hikes are probably a greater threat than the “global chaos” we see around us.

Either way, it sure is better to be protected from market downturns than exposed to market risks.  Call Now to speak with an expert Advisor at no cost or obligation! 877-912-1919