Another Earthshaking Financial Collapse Like 2000 and 2008 is Underway
It took 14 years for stocks to get back to where they were after the 2000 crash, and that doesn't adjust for inflation over that time or interest you could've made if you took the safe-and-easy path.
Iran says today that it will never again negotiate with Donald Trump, and reiterates that the Strait of Hormuz will stay closed until Trump meets every single one of its non-negotiable demands, including allowing the stranding of US and Israeli ships inside the gulf. They’re squeezing him hard, not making it easy to get out unburned.
In response to that, West Texas Intermediate crude (WTI) rose to touch $84/bb intraday and Brent settled just a shade below $90. Ukraine also successfully struck another Russian refinery deep in the heart of Russia.
All of that trembling was mere backdrop for some earthshaking news on the financial front. We have now learned that July managed to become the “worst month for hedge funds” since the financial crisis of 2008 due to AI stock wipeouts, taking us back almost two decades, even blitzing right past the big Covidcrash of 2020. It was a time where event after event relentlessly shook markets for a couple of years just like the big earthquake that shook down major buildings in Colombia today after a double earthquake took out major buildings in neighboring Venezuela less than a month ago.
The financial alarm became heightened today …
after an AI-focused hedge fund, Situational Awareness, founded by Leopold Aschenbrenner, came close to collapse amid a 67pc fall in value.
Hedge funds are supposed to built to help you weather bad times (but never are and are typically first to fall), and AI was supposed to never fall, remember? Of course, it’s fall was foretold here. The wisdom of the world, oh how wretched and distressed.
Let us segue to ponder the situation via some almost ancient words, seemingly addressed to our times:
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
—William Butler Yeats, The Second Coming
Poetic moment of reflection now past, moving right along in the prosaic present:
It forced the 24-year-old investor, once hailed as the “Nostradamus of AI”, to sell the bulk of his fund’s portfolio to Ken Griffin’s Citadel, under pressure from Wall Street lenders whose money he was using to make big bets on AI stocks.
These kinds of events arrive suddenly as black swans when the market leaders are nosediving. Suddenly one falls out of the sky to its death and lands at our feet. We find out, as Warren buffet famously said, when the blood-dimmed tide suddenly runs out this far, who was swimming without swimming trunks. (Or what Icarus of finance was flying with burning wings to land smoldering in our midst.)
Bruno Schneller, the managing partner of Erlen Capital Management, said the problems at Situational Awareness were a “near-perfect microcosm” of July’s hedge fund decline.
In other words, there is a lot more that look just like it. The black swans are lining up to put in their swan dives and sing their swan songs right now:
The already shredded stock of UWM Holdings, the parent company of United Wholesale Mortgage, the largest home-mortgage lender in the US with $40 billion in mortgage originations in Q2, plunged another 35% [on August 6th], into penny-stock territory of $1.20 a share.
That’s what happens when market leaders in other markets start to go down at the same time—in this case, in the housing market. (Eventually all of that starts to put stress on major banks and then they start going down.)
The company, which exclusively originates home loans through mortgage brokers, had gone public in January 2021 via merger with a SPAC that gave it a $16 billion valuation. It was the largest SPAC deal at the time and made CEO and founder Mat Ishbia a multi-billionaire. True to SPAC form, it has been a bloodbath for public investors ever since.
Again, we see strong comparisons to the GFC of 2008 because this one was a mortgage-backed derivatives bloodbath.
Here is the woeful path out of the sky today’s one-time leader in the mortgage world has beaten with its blackened wings on the way down into its smoking hell hole:
Now, as Wolf Richter said, it lies buried as virtually a penny stock, shredded to a meaningless demise. Well, not “meaningless;” it actually means a lot as a representative of things to come. You know like Bear Stearns, Lehman Bros., Washington Mutual—that kind of swan stream.
The causes this time were a huge loss after an interest-rate hedge blew up, the suspension of its dividend, and a $2 billion equity infusion from Oak Tree Capital Management, the largest distressed-debt investor in the world, and from the Ishbia family, at a price that’s going to dilute the bejesus out of the public shareholders.
Ah, hedge funds again, just like in 2008. And that’s likely how you spell “contagion.” Back in the ‘08 crisis we watched as the entities that ate the carcinogenic, rotting meat of fallen monsters, eventually got bad belly aches and went belly-up themselves or got big, fat government bankster bailouts. We’re almost back to those. What sounds lip-smacking good to some mega buyers at fire-sale prices sometimes turn out to have gone bad, so it its problems become your indigestion, and it eventually takes you down with it. But we never learn. Rinse and repeat as I wrote in my little book.
Rinse and repeat. Hedge funds. Derivatives. Catching falling knives in a falling highly overpriced housing market. Same old stuff, always with a little different flavor added. This time the insane buildup developed out of the Covidcrisis:
UWM is in the middle of the housing market that has been in a massive slump for the past few years: Sales of existing homes have plunged, originations of purchase mortgages have plunged even more, and originations of refinance mortgages have collapsed from the heady days during the free-money pandemic.
Of course, with that comes employment cuts … just like back in ‘08:
Nonbank mortgage lenders, such as UWM and Rocket Companies, have responded by reducing their headcount, either through attrition or through layoffs or both since the employment peak in 2021. At the nonbank mortgage lenders overall, employment has plunged by 39% since 2021.
It ain’t ’08 yet; but then it wasn’t ’08 in ’07 either … but it didn’t take long to get there:
As Ambrose Evans-Pritchard wrote today, “The ingredients are coming together for a US financial crisis.”
Indeed they are … just as forecast here where you get “the news before it happens,” especially if you are a paying subscriber.
