Systemic financial risk is higher now than it was in 2008. From Jim Rickards at thedailyreckoning.com:
Each crisis is bigger than the one before. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.
This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008.
Today, systemic risk is more dangerous than ever. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.
To understand the risk of contagion, you can think of the marlin in Hemingway’s Old Man and the Sea. The marlin started out as a prize catch lashed to the side of the fisherman Santiago’s boat.
But, once there was blood in the water, every shark within miles descended on the marlin and devoured it. By the time Santiago got to shore, there was nothing left of the marlin but the bill, the tail and some bones.
An even greater danger for markets is when these two kinds of contagion converge. This happens when market losses spillover into broader markets, then those losses give rise to systematic trading against a particular instrument or hedge fund.
When the targeted instrument or fund is driven under, credit losses spread to a wider group of fund counterparts who then fall under suspicion themselves. Soon a market-wide liquidity panic emerges in which, “everybody wants his money back.”
This is exactly what happened during the Russia-Long Term Capital Management (LTCM) crisis in 1998. The month of August 1998 was a liquidity crisis involving broad classes of instruments. But, the month of September was systematically aimed at LTCM.
I was right in the middle of that crash. It was an international monetary crisis that started in Thailand in June of 1997, spread to Indonesia and Korea, and then finally Russia by August of ’98. It was exactly like dominoes falling.
LTCM wasn’t a country, although it was a hedge fund big as a country in terms of its financial footings.
I was the general counsel of that firm. I negotiated that bailout. The importance of that role is that I had a front-row seat.
To continue reading: The Threat of Contagion
An example fromSimon Black: Italy Finance Minister Rejected–>Global Financial Panic
” This is one of the most critical lessons of all: whatever causes the next major downturn can be something completely obscure and unpredictable. And no one realizes it until it’s too late.”
https://www.sovereignman.com/trends/three-critical-lessons-from-europes-recent-mini-meltdown-23704/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=201861_italy_down
I’ve never thought financial crises were initiated by something, either obscure or prominent, any more than the first cascade of snow initiates the avalanche. Rather, the avalanche generally occurs because a strata is unstable, usually due to melting. In the same way, the underlying strata for financial crises is invariably an excess of debt relative to assets and income streams. Did the collapse of two Bear Stearns’ hedge funds in 2007 cause the subsequent financial crisis? Not at all, it was just the first snowball rolling down the hill. If it hadn’t been Bear Stearns it would have been something else, given the excesses, particularly in the mortgage markets, but other markets as well. Because overall debt is higher now than it was then, the financial system is more concentrated, and central banks are still near the zero bound with bloated balance sheets, another, far more severe crisis is inevitable. I have no idea what trickle of snow gets the avalanche going, but it is assuredly coming.
I’ll post the Simon Black article.