Why The Friday Selloff?
“So, a Bear Stearns hedge fund went belly up, who cares? I don’t really care for the Bear guys anyhow.”
That was a typical comment I heard from my Wall Street buddies in June 2007. The market was humming along, and nobody really cared that some boneheads at Bear had put too much risk on.
The past 4 years, from 2003 to 2007, saw the market double in a straight line. Nothing could be better. The buy and holders were back baby.
It took several months from the time the Bear hedge fund imploded until the market realized what was actually happening. It wasn’t until November of 2007 that the real fall began.
And, from there is was a full year of investor crushing losses, until the market finally bottomed in February and March of 2009.
This bear market has been MUCH swifter than the financial crisis bear of 2007-8. But, on Friday, an old familiar feeling crept into traders minds as they decided what to do with positions headed into the weekend.
See, around midday Friday it was announced that Ronin Capital, a clearing firm on the Chicago Mercantile Exchange, or CME, could not meet a margin call and had to be liquidated.
“So, a CME clearing firm went belly up, who cares…” Yeah, that’s about as far into that thought as the pros who were around in 2007 got. The next thought was, oh boy, here we go again.
Now, this time it’s different. Well, yes…and no.
This time around financial institutions are in MUCH better shape to face the current crisis than they were in 2007. That is 100% true.
One of my clients in 2007-8 happened to be the FDIC. So I had the pleasure, or horror, of a front row seat to the obliteration of our financial institutions.
My team was working on a system to help FDIC shutdown large institutions. We often came in at the end of briefings on those institutions, to present where we were in the software buildout.
It was, in a word, scary.
Remember, TARP, and every other Federal Reserve tool, that today are being brought out in a week, were still just twinkles in the eyes of Ben Bernanke at that time. No one knew if, or how, the government would step in to help.
That is one way the current financial crisis is very different. There is already a playbook to start from, and it has been implemented with lightning speed.
But, despite Dodd-Frank, and the draconian rules it put in place, there will still be a few financial firms that get overextended in this market. We are definitely at the “when the tide goes out, you’ll see who isn’t wearing any swim trunks” moment.
Yesterday, after the CME announcement about Ronin, prudent traders made the decision to not be standing anywhere near anyone without trunks on. Even if your shop is in order, counterparty risk, as we found out in 2007-8 is very, very real.
When we go to the grocery store now, we eye every other shoppers for any semblance of a stuffy nose or cough. Well, yesterday, the pros decided to simply leave the store for the weekend. And, the market reflected that exodus.
Friday’s meltdown wasn’t a statement on what Trump said, or whether or not Microsoft is a buy at these prices. It was fear, what I would call prudent fear, of a history repeating itself moment.
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