To repeat once again my monotonous point: financial crises generally need some form of credit event to make them interesting. Risk assets losing value will cause some leveraged players to blow up. (Pretty much any exciting market movement can ultimately be traced to one or more hedge funds shifting off this mortal coil.) Although a hedge fund blowing up will cause some credit concerns with its counterparties, in most cases there will be enough unscathed market participants to step into liquidations, and once the dust settles, people go back to whatever they were doing.
(The apparent exception was the LTCM fiasco. Counterparties stupidly let LTCM get too big. However, the “LTCM Crisis” was not just them — pretty much everybody was doing the exact same trades as them, and so a lot of players were caught up in the liquidation. I had just started in finance a few months ahead of the crisis, so I do not have a real time assessment of the situation. Instead, my comments are based on conversations with market participants long after the dust settled.)
This is why the only recent crisis that had any legs was around the Silicon Valley Bank blow up. There was a plausible fear that other banks had excessive losses on their bond portfolios courtesy of the bond bear market. However, that fizzled out on the basis that most large banks have sensible duration risk management.
Although it is hard to argue with the market pricing of the next Fed move being a cut, the question remains whether the Fed can be more leisurely that what is priced into forwards. I leave finding the answer to that question as an exercise to my readers.
There is also the question of whether the U.S. could have a mild recession. This is related to the recent chatter about the Sahm rule, which links recessions to a rise in the unemployment rate. The issue at present is whether there are other factors in play.
As Claudia Sahm notes (link above), “The Sahm rule is likely overstating the labor market's weakening due to unusual shifts in labor supply caused by the pandemic and immigration.”
I am always somewhat unhappy with indicators/models that rely heavily on a single time series, as there are always measurement issues with any series. Although the unemployment rate looks simple, it has an embedded relation with the ratio of the workforce to total population — non-working people dropping in/out of the in-the-workforce state will change the unemployment rate without any actual changes to cash flows in the economy. The NBER uses a wide range of indicators to assess recession timing for good reason.
In any event, it is unclear how much a recession call matters. Theoretically, we could have a mild recession and there not being too large an effect. Jobs are created and destroyed all the time, a mild contraction could revert to expansion without most people noticing. However, this is not how many people approach the topic. People in finance love using recessions as a binary indicator and then look at things like equity market performance during recessions. They will use as much mathematics and statistics as possible to make their analysis look rigorous so as to avoid asking ugly qualitative questions like “what happens if we have a recession without a financial crisis occurring at the same time?” If we look at American history, it is very hard to find truly mild recessions where there was not a major credit contraction or inventory liquidation. That said, there could always be a first time, and in such an event, would the financial market response be the same?
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