The recently released movie “The Big Short” came highly recommended from several sources, so I was keen to view it – and it did not disappoint. It tells the story of a few people who recognised that the 2007 housing bubble in the US had been massively exacerbated by packaging housing mortgages together as a tradeable instrument (Mortgage Backed Securities or Mortgage Bonds) and on sold. And as the game accelerated, the worst of the mortgages, including many that didn’t actually exist, were packaged up as Collateralised Debt Obligation (CDO). Rated as AAA by the credit agencies, they were very often not, and when interest rate clauses on the loans kicked in in 2007, it was only a matter of time. But this then got amplified through the creation of Synthetic CDOs, effectively a bet on a bet, or a derivative instrument. The film claims the Synthetic CDO market was 40 times the underlying CDO market. The 2008 global GFC owes its genesis to this scam. If this subject interests you, I highly recommend the movie for its insights. Jon Schwarz says:
What sets The Big Short apart and makes it truly great is that it portrays this worldwide, straight-faced fraud accurately; that is, as not just dangerous and enraging, but also extremely funny. It calls to mind Monty Python’s famous dead parrot sketch about a pet store salesman who defrauds his customer and then offers an endless stream of preposterous, contradictory obfuscations to conceal the obvious reality. The Big Short demonstrates that we’re now all living in that pet store.
End of quote.
It’s also interesting for what it doesn’t say, which is the abundant evidence that this bubble was orchestrated, generating yet another harvesting of assets from the public into the hands of the banks and their owners. It also does not discuss how the GFC was used to sweep all remaining government level reserves into the hands of the banksters via “too big to fail” bailouts.
The movie does mention that no banks or major bank principals were prosecuted, that one of those who shorted this market (Michael Burry) who tried to tell the US government about how he knew there was an issue was treated with FBI and IRS attention (the usual treatment of whistleblowers) and that similar instruments began to be sold in 2015 called a “bespoke tranche opportunity” – a CDO by any other name.
For me, the real value is in alerting us to what we are about to witness, in my opinion. The derivatives market in general is absolutely huge and the underlying market is falling apart. I have shared many underlying indicators with you of the state of the global economy. In many ways, it’s worse than 2008 and there are no governmental reserves left to steal. Many countries now have “bail in” legislation in place, which means the banks’ depositors become a low ranked, unprotected creditor, meaning they’ll be taking your savings this time.
It seems that falls in the Chinese stockmarket are driving falls elsewhere. However, the following chart shows you this is a loaded gun.
This tells us that the Chinese market would have to fall by about 70% to approach the valuations of the major global markets, which are themselves falsely elevated. If you are looking for a loaded gun, this is it.
It’s as if the global economy has been hollowed out underneath the stockmarket, leaving it as the only indicator that things are OK…
I have said before that I consider that when this comes apart, it will make 2008 look like a Sunday school picnic. I have seen nothing to change my view.
The Big Short tells its story well, and it shares some insights we can all learn from; and you may like to read the rest of Jon Schwarz’s article.