Worse Than 2008-Style Crash

 

Worse Than 2008-Style Crash

Few things the market loves more than a panic. 

Before the market rally this week, the S&P 500 posted its longest streak of continuous quarterly losses since 2008. 

The financial media is looking for risks everywhere. 

History says they’ll find their story too. 

Throughout the 2010s there was a new crisis every year. 

Remember the Flash Crash of 2010?

PIIGS?

The U.S. debt ceiling crisis of 2011?

Peak oil?

Time wrote in 2013 about the impending Financial Crisis of 2014. 

You get the point. 

Throughout it all we were in the heart of one of the greatest bull markets in history. 

Since then, nothing has changed. 

The market likely won’t see another 2008-style collapse (later on why it could be something different, but much worse than that). 

And we have one of the few major money managers – one who saw 2008 coming and made billions from it – to explain why.

 

This Is NOT 2008, But...

John Paulson is one of the most successful hedge fund managers in history thanks to the 2008 housing crash. 

His firm, Paulson & Company, famously bet big against housing in a big way. 

By purchasing “insurance” against mortgage debt securities, Paulson was able to profit exponentially when the housing bubble burst and the value of those mortgages collapsed. 

His firm made a reported $15 billion in profits from the one single trade. 

He literally wrote the book on it in “The Greatest Trade Ever.”

Paulson spotted the risks in the banking system and figured out a way to exploit them. 

And it started with an in depth knowledge of banking. 

He recently did an interview with Bloomberg to reveal a lot about the current state of U.S. banks.

In John Paulson on Frothy US Housing Market: This Time Is Different he said:

 

Well the financial market, the banking system and the housing market are much different today than in ‘06 and ‘07. 

The underlying quality of the mortgages today is far superior. You don’t even have any subprime mortgages in the market…

And the FICO scores are very, very high. The average is like 760. And the subprime, they were averaging 580-620 with no down payment. 

That’s a major point right there.

The U.S. mortgage securities market is valued at $9 trillion. 

Its current strength is a good sign another 2008-style liquidity panic is not coming.  

But it gets even better. 

Paulson went on to explain how the U.S. banks are much better positioned today:

[The] other factor is the banks at that period were very highly leveraged. The average capital in your major banks was about 3%.

All the assets have to do is fall 3% and your equity is wiped out. You go into default.

Today, the average bank is probably 9% equity, the systemically important banks are 11%-12% equity. So almost between three and four times as much equity as before. So we’re not at risk of a collapse today in the financial system like we were before. 

The banking system is much better positioned today than it was in 2008. 

Housing prices can go down. And they know. 

It’s not nearly the unforeseen risk that it was back then. 

In fact, it’s safe to say it is an extremely foreseeable risk to the point it’s not the biggest risk investors are facing today.
 

This May Not Be 2008, But It Looks Like 2001

This is all why we continue to not predict a 2008-style collapse. 

Sure, it would attract more attention. 

But it’s not the way to go. 

Instead, we see the risks of something far more sinister to unsuspecting investors. 

That is a slow, steady, and brutal bear market like 2001 to 2003. 

The current market environment is looking like straightforward bubble deflation. 

Although this time it’s most everything instead of just tech stocks. 

And it’s much more like another major historical market event that’s still not too late to get prepared for it. 

Make moves with that in mind and you’ll make it through it all just fine.