The Disasters The Financial Industry Refuses to Investigate

2008-09 Recession killed more Americans than 9/11 by a factor of seventy. There was no commission. There was no reform of the FED. And in 2022, the same profession did it again.

The Right Call in 2022 - which was called a “Contrarian Call”

2022 was a Cold place. I was almost alone in the Bulls Corner - dismissing the Calls for Recession and a massive Bear Market - and into the Summer of 2022 I became VERY Bullish - and forecasted a massive Blow-Off-Top to begin - which should take us to at least(!) 6300.

Here almost 4 years later, that situation has almost been forgotten.

But it was an extremely important event. Everybody - in particular the Financial Industry - got it wrong. Calling a Recession. Calling a massive Bear Market.

The same can be said about late 2007 and early 2008. Everybody got that wrong as well. But from the other side.

So what did they see? What did they miss? And what should they have been looking at instead?

On a cold Florida morning in January 1986, the space shuttle Challenger broke apart seventy-three seconds after launch. Seven astronauts died. What followed, in the months after, was one of the great public investigations of the 20th century. A presidential commission was formed. Engineers testified under oath. Richard Feynman, in a famous moment of theatre, dropped a rubber O-ring into a glass of ice water to show, live on television, why the shuttle had failed. NASA was rebuilt around what they found. Procedures changed. Tolerances changed. The culture changed.

Fifteen years later, on another bright September morning, four airliners were turned into weapons. Around three thousand innocent people died. And again, the American response was to investigate. The 9/11 Commission sat for almost two years. Intelligence agencies were restructured from the ground up. The Department of Homeland Security was created. Aviation security was rewritten in every airport on earth. An entire architecture of institutions was redesigned because the old architecture had failed and people had died.

This is what serious societies do when they are wrong. They investigate. They publish. They rewrite the procedures. Because when people die as a result of a mistake, the only morally defensible response is to make absolutely certain that the mistake cannot be made again.

Now consider the Financial Industry.

In the run-up to 2007, the Federal Reserve kept interest rates too low for too long, inflating the largest housing bubble in American history. Then, when the bubble began to crack, the Fed and nearly every major economist at every major bank failed to see what was coming. They missed it. Not by a little. By everything.

Bear Stearns was still rated investment grade weeks before it collapsed. Lehman was still hiring the week before it filed. Bernanke said, that “the Fed was ready to act, if a Recession would come, but it was not their Base Scenario.” At that point, the Recession was 3 months old.

The consensus heading into the worst financial crisis since 1929 was that the economy was fundamentally sound.

When the recession finally hit, the American unemployment rate rose from roughly 4.5 percent to 10 percent. An increase of about 5.5 percentage points. This is not an abstract number.

In the film The Big Short, Brad Pitt’s character Ben Rickert - based on the real trader Ben Hockett - turns to his younger colleagues as they celebrate their winning bet against the American housing market and says, almost in disgust, “Every one percent unemployment goes up, forty thousand (40,000) people die. Did you know that?” The line is not Hollywood embellishment. It is based on academic research by Bluestone, Harrison and Baker, published in 1981, which estimated roughly thirty-seven thousand excess deaths in the United States for every one percentage point rise in the unemployment rate. Heart attacks. Suicides. Overdoses. Strokes. The quiet diseases of despair that follow when a man loses his job, his home, his sense of standing in the world. The BBC fact-checked the figure in 2016 and found it broadly concurred with the academic literature.

Do the math. Five and a half percentage points, times roughly forty thousand, comes out to more than two hundred thousand excess American deaths attributable to the Great Recession.

Two hundred thousand.

Compare that to the numbers that produced the Rogers Commission and the 9/11 Commission. Challenger killed seven. September 11th killed around three thousand. And America, rightly, rebuilt entire institutional structures in response to both. The Federal Reserve’s two-fisted failure into 2007 — first inflating the bubble through too-easy policy for too long, then missing the resulting downturn entirely — contributed to a body count roughly seventy times the size of 9/11.

I’m not saying that the FED is responsible for 200,000 dead Americans. But I am saying that the Financial Disaster due to the Fed’s mistakes going into the 2007-09 Recession was as a minimum at the scale of 9/11 when counted in human lives. And likely much greater!

And the response? Nothing. No commission. No engineers on the stand. No Feynman. No published root-cause analysis. No structural reform of the Federal Reserve. No rewrite of macroeconomic forecasting. The same framework. The same people. The same profession, carrying on as though a catastrophic failure of this scale were merely an unusually difficult quarter.

How is this tolerated? How is it that an institution with a dual mandate over American prosperity can preside over the single most consequential macroeconomic disaster of the postwar era and face no inquiry, no reform, no serious professional reckoning? Every other domain in American life gets investigated when it fails at that scale. Aviation. Defence. Public health. Space exploration. But not economics. Economics just shrugs, publishes another forecast, and goes back on television.

And then, because nothing had been learned, the industry did it again in 2022. In the opposite direction.

This time the consensus called a recession and a massive bear market that never came. A phantom. Trillions in hedging costs, misallocated capital, foregone equity gains, retail investors frozen in cash, institutions under-positioned at the greatest blow-off-top in a generation. Two catastrophic consensus failures in fifteen years. One missed a recession that was already forming. The other predicted a recession that was structurally impossible. Same framework. Mirror-image error.

The charts below are the evidence. They are not exotic. They are not proprietary. They are not hidden. They are the cycle, rendered honestly, on instruments that sit on every Bloomberg terminal on every trading floor on earth. The industry had the data. It just refused to read it.

The yield curve - right chart, wrong reading

Start with the indicator everyone anchored to in 2022. The famous inversion of the yield curve - the 10-Year minus the 2-Year.

Every strategist on Wall Street knew this chart. Every macro note cited it. And every one of them read it the wrong way.

The inversion is not the event. The un-inversion is. Look across five decades - 1989, 2000, 2006, 2019 - and the pattern is the same every time. The curve inverts. The economy then spends months, sometimes years, sitting inside that inverted regime. The recession does not arrive until the curve un-inverts. The un-inversion is the trigger. The inversion is only the condition that makes the trigger possible.

In 2022, the industry treated the inversion itself as the signal. It was like watching someone install a smoke detector and then sprinting for the exits because the battery light blinked. A misread of the most basic mechanics of the indicator they were holding.

Leading indicators - at a 40-year peak

Then there is the indicator that actually precedes recessions. The one that has preceded every single recession in the postwar era. The Leading Indicator Index - here in my Zeberg Business Cycle Model, built from the components I have tracked for the better part of two decades.

The signature is mechanical. Before every recession on that chart - 1980, 1990, 2000, 2008, 2020 - the leading indicators roll over and break down through the zero line first. Always. That is the pre-recession fingerprint. The cycle leaves its calling card months before the event.

In 2022, the leading indicators were at a multi-decade peak. The highest reading on the chart going back to the late 1970s. Not rolling over. Not even flat. Vertical.

To call recession from that position was not a brave contrarian view. It was structurally incoherent. There is no historical precedent, in the entire dataset, for a recession beginning from that configuration. None.

And yet recession is exactly what the industry forecast. Loudly, and for more than a year.

Half a million jobs a month

The American economy in 2022 was creating more than four hundred thousand jobs a month on a twelve-month moving average. Four hundred thousand. In some months, five hundred thousand. Half a million.

Every recession on this chart - 2001, 2008, 2020 - was entered with the twelve-month moving average rolling down toward roughly one hundred thousand. The American labour market has never, not once in the modern era, slipped into recession while generating jobs at this pace. The mechanism does not exist. A growing labour market is a growing economy. A growing economy is not a contracting economy. These are tautologies, not forecasts.

But tautologies only matter if you are actually looking at the labour market. The Financial Industry in 2022 was looking at Jerome Powell’s eyebrows.

Record job openings, collapsing unemployment

And then, the most visually absurd chart in the entire case against the 2022 consensus. Job openings exploding to an all-time high above twelve million. Unemployed workers collapsing beneath them. The two lines crossing. More openings than people to fill them.