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1/5, a standard paradigm of major financial crisis
The 2008 financial crisis developed from a secondary crisis, from "unobtrusive risks" to "big things not good", from "escalation of events" to "response escalation", from "crisis seems to be controlled" to " black swan event ", is a standard paradigm of major financial crisis in .
A lot of works and film and television works on the 2008 financial crisis are numerous. The review of this article focuses on U.S. stock Investors' reactions to the escalation of events , and they will also use the perspective of God and switch between two perspectives.
In terms of time, this crisis lasted nearly two years, spanning the tail of an bull market and a complete bear market. For most of its time, investors hovered between "Is the crisis over?" and "Is the crisis over yet?", and the real collapse was only two months.
It shows the common problem of complex systems and the contradictory evidence of human nature. I believe that such a crisis paradigm will be repeated around us again and again in the future, which is also the significance of such review.
2/5. Past experience is unreliable
According to the stock market's response model to the crisis, I divided the financial crisis in 2008 into three stages: subprime mortgage crisis stage, financial crisis stage and black swan stage . These three stages represent a certain feature of major financial crises.
April 2, 2007 was the starting point of the "sub-prime mortgage crisis". On this day, New Century Financial Company, the second largest subprime mortgage institution in the United States, filed for bankruptcy protection. However, before and after this, the Nasdaq rose for six consecutive trading days without any impact. In the following three months, the Nasdaq rose by 11%.
If the market is effective, why does it have no response to this event?
From a macro perspective, it is in a bull market at this time, the unemployment rate remains at a low level, the economy is growing strongly, and the performance of listed companies in Q1 generally exceeded expectations.
Although subprime bonds and their derivatives financial product were already a hot topic of investment before 2007, for most investors, this is still a non-mainstream product. They think that "it has something wrong with me, what does it have to do with me?" and do not think that it can have a big impact on the stock market.
Regarding the cause of the subprime mortgage crisis, I used to read "Can we avoid the next crisis?" 》 has a detailed explanation. The scale of subprime loan itself is not large, so it is a normal reaction for investors not to care. However, from subprime loans to subprime debts, to CDO, CDO CDO, and then to CDS, it is equivalent to a virus product, which has been packaged into normal financial products many times, thus making large-scale financial products "toxic". This feature was not taken seriously enough at the beginning.
htmlOn July 10, S&P lowered the rating of subprime mortgage loan bonds. The reduction of bond ratings usually leads to a plummeting price of related financial products, which finally attracted more investors' attention, causing the Nasdaq to fall by 1.16% that day and triggered a wave of decline in the global financial market. However, the above chart cannot be seen because it rose back the next day.
Until 10 days later, the net value of two hedge funds under Bear Stearns fell to zero. Their holders include major financial institutions such as Goldman Sachs , Merrill Lynch , JPMorgan Chase . Since then, many other products have exploded, and more financial institutions have discovered "toxic assets", even including Industrial and Commercial Bank of China far away from Pacific .
This is one of the paradigms for investors' reactions in a major financial crisis: goes from "What does this matter have to do with me" to finally discovering that "it seems to be quite troublesome."
summarizes experience and is an effective weapon for people to deal with the future, but Taleb believes that the characteristic of the black swan event is that "beyond the usual expectations, there is no evidence that can determine the possibility of it happening in the past", so the more serious the crisis is, the less it is impossible to predict it from historical experience.
Of course, a small number of investors do realize the danger of subprime bonds. In " Big Short ", hedge fund manager Michael Barry was the first to short the mortgage market and established a CDS based on subprime bonds. This type of product was later widely held by financial institutions.
CDS is equivalent to "buying insurance" for the subprime bonds held by financial institutions, which means that they feel bad, but they subjectively feel that the problem is controllable and they just need to reduce their risk exposure.
The reactions of these investors are still "past". This seemingly cautious and practical optimistic sentiment instead verifies the characteristics of the "past experience is unreliable" of the black swan event.
This reaction is also related to the bull market atmosphere at that time. In the bull market, most negative news often brings the opportunity to increase positions on dips - cruel joy will eventually end with cruelty.
The market finally attracted a wave of decent adjustments and entered the second phase of the crisis - the financial crisis stage.
3/5. Why use taxpayers’ money to save bankers?
As more and more financial institutions are involved in the "subprime mortgage crisis", the market's estimates of toxic products are getting closer and closer to the actual situation. The stock market has undergone a wave of adjustments of more than 10%, and has given up all the gains since the beginning of the year . Due to the return of funds, Asia and emerging markets fell even more, and even A shares fell for two consecutive days.
Investors' concerns about something will definitely be reflected in stocks. The decline in stock price is to resolve the negative impact, and investors' confidence is also reflected in stocks. The rise in stock prices is to fulfill this confidence. The next wide-range fluctuation trend of is the game between "worry about crisis" and "confidence in crisis response".
In crisis events, investors' greatest confidence often comes from the government's "market rescue action".
htmlOn August 17, Federal temporarily lowered the discount interest rate, which means that the government entered a "market rescue mode". By the end of the month, it had invested hundreds of billions of dollars in the financial system to prevent the subprime mortgage crisis from worsening. At the interest rate meeting in September, the 4-year interest rate hike cycle entered a new round of interest rate cuts .
Bush administration proposed to provide loan guarantees to borrowers hit by the subprime mortgage crisis to avoid losing property rights. The US Treasury Department helped major financial institutions establish a $100 billion fund to purchase mortgage securities that are in crisis.
A set of "combination punches" were hit. As a result, the stock market just came out of ICU and entered KTV, with a maximum increase of 20% in two months. Not only did it conquer the lost ground, it also hit a new high again.
However, the crisis has not been eliminated. The U.S. real estate market in the center of the storm has deteriorated across the board, existing home sales have declined sharply for several consecutive months, inventory has increased significantly, credit defaults have intensified, and overdue repayment rate has risen to the highest since 2001.
House mortgage loans are the underlying assets of these financial products. Every day of deterioration, it means that more financial products that were originally considered normal have "lesions", , and the market perception is still before. This is why everyone underestimates its danger when a crisis occurs.
Financial products are based on confidence. If everyone loses confidence, the decline in assets will prompt a further decline in housing prices. The decline in housing prices will lead to more people being unable to repay mortgage loans, which will further lead to the "explosion" of related financial products, forming a vicious cycle.
By 2008, the market finally lost its enthusiasm for a bull market, falling from November to March of the following year, with the fifth largest investment bank Bear Stearns on the verge of bankruptcy as the highest point of the crisis at this stage. While the crisis escalated, the government's rescue of the market began to escalate: the Federal Reserve lowered the interest rate almost once a month, and the pace also increased from 25 basis points to 75 basis points each time; the Bush administration finally took advantage of the crisis atmosphere and allowed Congress to pass a package of economic stimulus bills, which greatly refunded taxes to stimulate consumption and prevented the economy from falling into recession.
In the battle between the crisis and the response to the crisis, most people still believe in the Federal Reserve's monetary policy and the government's toolbox. The reversal of market sentiment in was the Federal Reserve that prompted Bear Stearns to be acquired by Modern Chase, avoiding the explosion of $30 billion in financial assets, and the market entered a B wave rebound.
Next, a larger " Two-room crisis " happened. Two houses refer to two major companies: Fanlimei and Freddie Mac . The main business is to purchase bank mortgage loans, and then package them into MBS, CDO and other derivative products to sell them to institutional investors, so sooner or later, the "two houses" will endanger.
But the market is not panicked, because the two houses themselves are "government-sponsored enterprises" that shoulder the mission of "everyone has a house". The government has almost no suspense from acquiring the financial products of the "two houses" to the full takeover of the "two houses" - This fully shows that the impact of the crisis does not depend on the crisis itself, but on the expectations of investors.
So far, the B wave rebounded for nearly half a year, but the number of waves is the standard "rearview mirror". There were countless numbers at the time. At that time, it was a standard double bottom in terms of shape. Judging from the decline, the maximum drop was 25%, which lasted for 9 months. What is the concept of
9 months falling by 25%? Taking this round of decline as an example, the largest decline in US stocks was 25%, which lasted 6 months, and the largest decline in A-shares was 26%, which lasted 5 months. Therefore, investors can fully understand it as a complete bear market, which has reflected all negative news.
From the perspective of event logic, the "two houses" are the source of subprime debt, the largest gunpowder bank, and the "two houses" have been taken over. Can it be considered that the climax of the crisis has ended?
From the macro fundamental , the subprime mortgage crisis is just a problem for financial institutions and has not been proven to affect the real economy. European Central Bank even raised interest rates once to deal with inflation.
It seems that the valuation is already very attractive, everything is like the bottom feature - However, the real danger is always lurking in human nature.
These "devil is one foot taller, and the road is one foot taller" rescue actions have given the market an illusion: the government's "financial toolbox" is now very large, and a major financial crisis will not happen.
At the same time, more and more reports have begun to reveal that the initiator of these crises are Wall StreetThe victims are poor people who have been looted by banks and lost their houses. Now the government is using taxpayers’ money to rescue these greedy bankers.
Can we only save the "problem product" and not the "bad guy bank"? This puts the Fed and the government's crisis response actions at moral risk.
In other words, if these companies are not saved, will naiveness collapse?
Take this year's Fed rate hike as an example. Everyone knows that raises interest rates when inflation just rose last year is the best way, but if one or two rate hikes really bring inflation down, most people start to question again, how can there be inflation? The Fed is scaring people again.
This "illusion" and "reflection" just verifies what Taleb said in his book, "What we don't know is more important than what we know."
The second paradigm of the financial black swan is: People praise the "heroes" who stand up in crisis, but always question in advance whether the means to deal with potential crises are necessary.
The result is that when facing the next object in need of help, "Lehman Brothers ", the Federal Reserve chose another path - let it go bankrupt.
This "black swan" finally found an opportunity to reveal its true face after lurking for nearly a year.
4/5. Only crisis can solve the crisis
If there is only one regret medicine, the Federal Reserve will definitely choose not to let Lehman Brothers go bankrupt.
Before the Lehman Brothers bankruptcy incident, the market fell 20% in one year, and plummeted by 40% in the next two months. The C wave did not end until March of the following year. Although the Federal Reserve frantically injected liquidity into the market, cut interest rates 10 times in a row, and continued to drop to 0%, and launched "quantitative easing". Although Congress also passed an unprecedented 700 billion market rescue plan, the market still entered the collapse mode of "all good news is a chance to escape".
More serious is that the subprime mortgage crisis immediately evolved into the financial crisis that swept the world. The credit of the whole society was frozen. In order to save itself, banks desperately regained liquidity, which eventually affected the real economy, enterprises went bankrupt on a large scale, and the unemployment rate hit the highest level since the end of World War II .
The existence of financial institutions depends entirely on confidence. Once the myth of "too big to fail" breaks, all banks will be "in danger". Of course, the Federal Reserve understands this simple truth, but the public does not understand, and Congress does not understand (or pretends to be confused if you understand).
Now everyone has experience. The best way to deal with this type of financial crisis is to inject liquidity far beyond the crisis level on a large scale in advance and stifle it in its bud. But if the stock market is not "dead to show you", how could Congress pass the 700 billion market rescue plan so quickly? How can major banks on Wall Street accept government funding?
The third paradigm of financial black swan is: only crisis can the crisis be completely resolved.
No one likes the stock market crash, but from another perspective, the stock market crash is when everyone can't solve the problem, trying to solve your own problems yourself.
As investors, we cannot imagine that the government can solve all problems, because the government must always prevent its behavior from falling into "public moral constraints".
If there is an obvious crisis, it has received attention from the government and a certain degree of assistance, but it cannot be completely solved for a long time due to some reasons, in the end, will gradually get used to it psychologically. Then, when everyone fantasizes about "using time to digest the problem", use an accidental event as an opportunity to completely solve the crisis in a violent way like the "black swan".
5/5. The real danger is confidence
World Bank Chief economist Shen Liantao wrote at the beginning of his book " Ten Years of Reincarnation " as follows:
A year ago, Royal Bank of Scotland spent US$100 billion to acquire the Bank of the Netherlands. Now, the same amount of money can be left with $8 billion after acquiring Citi (22.5 billion), Morgan Stanley (10.5 billion), Goldman Sachs (21 billion), Merrill Lynch (12.3 billion), Deutsche (13 billion) and Barclays (12.7 billion). … With this change, you can acquire the F1 teams of GM, Ford, Chrysler and Honda.
The value of the company will certainly not change so drastically in a year, and the stock price is just a bid of confidence.
Financial black swan event, in the early stage often uses investors' conventional reaction modes (such as government rescue) to consolidate a series of "beliefs". Finally, an unexpected and unsuccessful incident is used to break down a "long-term belief" similar to "big but not falling", which leads to the sudden collapse of the pricing system and triggers a negative cycle.
The financial crisis in 2008 allowed governments to establish a standard crisis response model. After several trials, investors have become more and more trusted in it, and this just laid the foreshadowing of the next "black swan crisis".
We don’t know when it will come, the only thing we know is that will definitely come in a way we didn’t expect.
So the real danger of is confidence-our confidence in something that "always work".
was first published on the WeChat official account of "Idea Stencil (ID: sxgy9999)", telling the concepts and methods of value investment.
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