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Another 2009?


Another 2009? It’s a question I get a lot. Obviously, the worry embedded in this question is: “Is the market going to pull back as much as it did during this period?” I’ll first offer the usual disclaimer of ‘blah, blah, blah, nobody knows for sure’, but in my opinion I don’t think it will. Why? Ultimately the 2008-2009 crash was due to the breakdown of the housing market given subprime mortgages and the connected leverage in the system. This was the bubble. The key was this bubble took place as supposed “safe” investments infected the larger investment infrastructure. For example, subprime mortgages were basically sold as high-grade paper and bought by pensions and other major institutions that felt they had won the lottery by getting higher yields while maintaining their low-risk investment profile. Because these were seen as “safe”, higher amounts of leverage ensued as people borrowed money to get these bigger yields/returns. When this bubble popped it was a complete surprise to most people that the system had – from Wall Street to the government –pressed into these bonds with little or no risk management considerations. And between 2007-2009, as this realization spread, the stock market got worse. What about now? Absolutely there are bubbles out there now. As is always the case, the rise in M2 money supply to manage the pandemic has given rise to misallocation of capital. I have seen this with SPACs, NFTs, some Crypto, and even ESG investments. But, unlike during the 2008-2009 period, these investments were NEVER really seen as low risk. For that reason, they have not garnered the amount of leverage in the system seen by the subprime mortgages in 2008-2009. Crypto lending and margin have largely been backed by crypto itself. There will certainly be fallout as some crypto hedge funds fail, but I believe the infection of the financial system has been limited. Now, of course, there are other issues happening from energy disfunction in Europe, war in Ukraine, and supply chain issues. But in my view, these are “known” quantities to an extent. What maximized the damage during the Financial Crisis was the absolute shock as subprime mortgage defaulted and the domino effect that came as a result. If our thinking holds true, then we likely won’t approach the negative 50% seen in the 07-09 period. With the Nasdaq QQQ ETF down 30% plus now, we are closer to the bottom than the top. The major uncertainty right now is how hard the Fed will press down on the markets. As that becomes clarified, the markets should get more comfortable with moving back to an uptrend.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held Twin Gryphon Advisors, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results. Investment advisory services offered through Twin Gryphon Advisors, LLC, a registered investment advisor. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. Past performance does not guarantee future results.

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