By the time this article by John Mauldin titled “Fingers of Instability” came out in August of 2006 it was well beyond clear that the eventual implosion of housing and credit had reached a point of no return, and it was only a question of when it would happen. Anyone even tangentially involved with the financial markets knew that Fannie Mae and Freddie Mac had been cooking the books for years and were already insolvent, but Congress (thank you Barney Frank) had no desire to reign them in. The political benefits of throwing money at everyone who wanted to buy a house (or 2,…or 5) were just to good to pass up. This snippet from a good post-mortem of the Fannie/Freddie debacles sums it up, but for those interested in a trip down memory lane, the whole article gives it lots more color:
Right now the corporate credit markets could not be in better shape, and there are no systemic dangers lurking like the insolvencies of Fannie and Freddie. But below theQQQ 0.00%↑ and SPY 0.00%↑ surface stocks do feel unstable. To the extent that “volatility is the inverse of liquidity”, daily mid-single digit percentage moves in multi-trillion dollars megacaps, short squeezes of shitcos, the well documented internal divergences, not to mention geopolitics and our own electoral circus, do not exactly inspire confidence. Permabears continue to fantasize current conditions as the precursor to the inevitable unwind of financial civilization; that’s been the case for the last 25 years and will likely be the same for the next 25 years, and the 25 years after that; so heed their screeching at your own peril.
But violent air pockets can and do happen especially in the midst of secular bull markets, when few people expect them. All the “innocent looking” red arrows in the chart below show intra-quarterly drawdowns of 15-35%.
And the chart does not include the drops that took place during the ‘00-’02 and ‘07-’09 credit crises, or around the Covid breakout.
A couple of weeks ago I made fun of myself for buying a slug of long-dated lotto puts. But the way the markets feel, maybe - just maybe - I might end up with a cat-like grin on my face.
Good luck!