This Recession Started Long Before the Pandemic
In September last year the REPO market blew up.
It’s widely misunderstood that the current recession started due to a global health crisis that forced us to be locked in our homes.
I want to ensure you know what really happened, even if you don’t have a finance or economics background, so you can learn from it.
The signs of a recession were obvious in September 2019, not 2020.
While quietly sitting at home for all of September, while I waited to start a new job in finance, a few news articles caught my attention. They were all about this market known as “The REPO Market.”
This REPO market in really simple terms is where hedge funds, banks, and brokers engage in short-term lending between each other.
The reason this term “REPO” caught my attention was because it helped to signal the 2008 Global Financial Crisis. It’s a market that usually has no news and is the sleeping giant of the financial world. Here’s a brief explanation from the National Bureau of Economic Research:
By August 2007, market fears reached a critical mass that led to the first run on repo. Lenders were no longer willing to provide short-term financing at historical spreads, and repo haircuts jumped to new highs, tantamount to massive withdrawals from the banking system.
There was even a cessation of repo lending on many types of assets, and a rapid increase in the LIB-OIS spread signaled increasing danger in the interbank market.
When the rate each REPO market participant pays, skyrockets, it’s a sign of increased risk.
In September 2019 the rates in the REPO market went through the roof. The significance of this REPO event is simple:
The financial system in the US ran out of cash.
Something had gone terribly wrong. Fortune Magazine at the time wrote “the grease gun that keeps financial markets lubricated — by banks and companies temporarily trading bonds for cash and then redeeming them, usually overnight…” had stopped working. The Federal Reserve came in silently and saved the day like a Navy Seal, by injecting a lazy $75 Billion.
“Nothing to see here folks” was the message. And guess what? Most people didn’t see what had occurred.
The hardcore finance influencers on Twitter were talking about it. The people who work in finance (like me) saw what was happening too and felt our hearts skip a few beats — because a recession isn’t pleasant to watch, despite the discounts (or unless you’re pure evil and like seeing the average person do it tough and face the prospect of losing their home).
But a major bank requiring a bail-out in the overnight REPO markets was certainly a huge deal.
How does a big bank run out of cash? Well, it happened in 2008.
Why Does the Start Date of the Recession Matter to You?
That’s the big question. You’re probably not a finance geek who gets excited by all these complicated terms and different types of markets.
So, signs of a recession were already underway in September 2019 and you missed it. You saw once the health crisis started that there was going to be a global recession, but you didn’t catch it before then.
Well, you’re not stupid for missing it. It happened quietly, as all major events tend to do. The reason the date of when the cracks in the financial system started to show is important is because it leads to this question:
If you missed the date of an upcoming recession approaching quickly, what else did you miss by accident? Was everything really fine before the health crisis?
This then leads to the point of it all: is the current reality you’re looking at just one giant asset bubble? There is record unemployment and record-high stock prices. Does that make any sense at all?
Maybe you don’t invest in stocks or you don’t care about house prices. I get it. But when there is a huge bubble — like the tech stocks bubble of the 2000s — there is a wealth transfer and rising inequality between the rich, middle-class and the poor. Now do you care?
There is only so long we can live in a financial delusion that has even the most successful investor of all time, Warren Buffett, completely confused and saying this:
If you can have negative interest rates and pour out money, and incur more and more debt relative to productive capacity, you’d think the world would have discovered it in the first couple of thousand years rather than just coming on it now. We will see.
The financial universe we all operate in by having a bank account is being put to the test. Time will tell whether this recession will teach us a lesson, or keep us blind until the next inevitable recession.
Either way, bubbles can’t go on forever.
Eventually, society sees through its overconfidence and hits the reset button. This brings with it incredible hope.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.