(2025-05-05) Hunt Our True Enemy Has Yet To Reveal Himself

Ben Hunt: Our True Enemy Has Yet to Reveal Himself. I don’t quote from The Godfather, Part 3 very much because it’s not a great movie and isn’t even in the same solar system as Part 1 and Part 2, but Al Pacino has two all-time great scenes here:

Michael Corleone’s realization of a deeper problem (and yes, it’s copied wonderfully by Silvio in The Sopranos) is summed up in this line — Our true enemy has yet to reveal himself — and it’s a line I couldn’t get out of my head in 2008 and it’s a line I can’t get out of my head today.

No one remembers this anymore, but in the second half of 2007 auto prices and auto sales rolled over in the United States, as did home prices and home sales — two classic indicators of an economic slowdown and a recession. The Big Question was whether we were going into a recession or whether this was just a ‘mid-cycle slowdown

Q4 2007, you’ll see tons of stuff about that and surprisingly little about the mortgage-backed securities that would actually blow up the world in 2008. (Credit Crisis 2008)

It’s not that the true enemy — an insanely over-financialized US residential mortgage market — didn’t show itself in 2007. Two Bear Stearns credit funds blew up that summer

But the STORY was that this wasn’t a problem for the entire mortgage market and the entire financial system, that it was only a problem for mortgage lending to the poors subprime (low credit score) market.

It was all a lie, of course, that whole ‘well contained’ bit about subprime loans, and it wasn’t even a particularly well-crafted lie. I remember like yesterday the Countrywide earnings call of August 2007, where the original Orange Man — tanning bed aficionado and CEO Angelo Mozilo — told the world that ALL of their mortgages, from subprime through alt-A through prime, were deteriorating at a crazy clip. I mean, it’s not like the data was hidden … every month you could look at the delinquency and default rates for the mortgage securitizations

The first six months of 2008 were such a psychic struggle for me as an investor. We had gone slightly net short in the hedge fund portfolio in Q4 2007, but the truth is that we went net short more because of a recession view

We got paid for that net short positioning in both Q4 2007 and Q1 2008, but it was REALLY tough to stay the course in April and May if you weren’t prepared to adopt the systemic risk view.

We did, in fact, shift from the recession view to the systemic risk view (that’s as much a credit to the larger firm and my partner than to me), and in retrospect that was obviously the right call, but man, those months were not easy!

I feel as strongly today as I did in 2008 that the ‘normal’ market discourse around recession and jobs and inventories acts as a distraction from the systemic risk that is manifesting itself.

if you’re in the belly of the beast it’s probably impossible — and almost certainly it’s irrational — to act proactively on what I’m writing about. Which is maybe the biggest problem that the world has right now, that the people who are most aware of the true enemy to the global economic system find themselves in a position where it is career suicide to do anything about it.

In 2008 the true enemy was the over-financialization of the US residential mortgage market, and the catalyst for the true enemy to wreak havoc in the global financial system was a sharp, universal decline in US home prices.

In 2025 the true enemy is the over-financialization of the US Treasury market, and the catalyst for the true enemy to wreak havoc in the global financial system is a sharp, universal decline in the full faith and credit of the United States.

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