Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?

Question Button - Public DomainThe second largest stock market in the entire world is collapsing right in front of our eyes.  Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out.  Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States.  From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value.  It was the greatest stock market surge in Chinese history.  But after hitting a peak, it began to fall dramatically.  From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed.  In the end, more than two-thirds of all wealth in the market was completely wiped out.  You can see all of this on a chart that you can find right here.  What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again.  Is this yet another sign that a U.S. stock market crash is imminent?

Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008.  Today, I want to share with you an excerpt from a New York Times article that was published in April 2008.  At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…

The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

This sounds almost exactly like what is happening in China right now.  First we witnessed a ridiculous Chinese stock market bubble form, and now we are watching a nightmarish sell off take place.  This next excerpt is from a Reuters article that was just published…

Shanghai’s benchmark share index crashed below 4,000 points for the first time since April – a key support level that analysts said had been seen as a line in the sand that Beijing had to defend, below which more conservative investors would start ejecting from their leveraged positions, widening the rout.

Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed at an incredibly rapid pace in since June 12, losing more than 20 percent in jaw-dropping volatility as money surges in and out of the market.

That drop has wiped out nearly $3 trillion in market capitalization, more than the GDP of Brazil.

Did you catch that last part?

The amount of wealth that has been wiped out during this Chinese stock market crash is already greater than the entire yearly GDP of Brazil.

To me, that is absolutely incredible.

And now that the global financial system is more interconnected than ever, what goes on over in China has a greater impact on the rest of the globe than ever before.  Today, China has the largest economy on the planet on a purchasing power basis, and the Chinese stock market “is the second largest in the world in terms of market capitalization”

Just as in 1929, flighty retail investors make up the bulk of China’s stock market and, just as in 1929 in the U.S., they have heavily margined their accounts. The Financial Times puts the number of retail investors in the Chinese stock market at 80 to 90 percent of the total market. Retail investors, unlike sophisticated institutional investors, are prone to panic selling, which explains the wild intraday swings in the Shanghai Composite over the past week.

Last night, the Shanghai Composite broke a key technical support level, closing below 4,000 at 3,912.77. The index is now down 24 percent since it peaked earlier this month and has wiped out more than $2.4 trillion in value. China’s stock market is the second largest in the world in terms of market capitalization, with the U.S. ranking number one.

Making world markets even more worried about the situation in China, its regulators are showing a similar brand of leadership as Mario Draghi. After previously pledging to trim back risky margin lending, they have now done a complete flip flop and are permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed.

I know that a lot of Americans don’t really care about what happens over in Asia, but when the second largest stock market in the entire world crashes, it is a very big deal.

The great financial crisis of 2015 has now begun, and it is just going to get much, much worse.  On Thursday, Ron Paul declared that “the day of reckoning is at hand“, and I agree with him.

So what comes next?

The following is what Phoenix Capital Research is anticipating…

By the time it’s all over, I expect:

1)   Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.

2)   The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).

3)   Japan to have defaulted and very likely enter hyperinflation.

4)   US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.

5)   Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.

I tend to agree with most of that. I don’t agree that the euro is going to go away, but I do agree that the eurozone is going to break up and be reconstituted in a new form eventually.  And yes, we are going to see tremendous inflation all over the world down the road, but I wouldn’t say that it is imminent in Japan or anywhere else.  But overall, I think that is a pretty good list.

So what do you think is coming?  Please feel free to join the discussion by posting a comment below…

16 Facts About The Tremendous Financial Devastation That We Are Seeing All Over The World

Fireball - Devastation - Public DomainAs we enter the second half of 2015, financial panic has gripped most of the globe.  Stock prices are crashing in China, in Europe and in the United States.  Greece is on the verge of a historic default, and now Puerto Rico and Ukraine are both threatening to default on their debts if they do not receive concessions from their creditors.  Not since the financial crisis of 2008 has so much financial chaos been unleashed all at once.  Could it be possible that the great financial crisis of 2015 has begun?  The following are 16 facts about the tremendous financial devastation that is happening all over the world right now…

1. On Monday, the Dow fell by 350 points.  That was the biggest one day decline that we have seen in two years.

2. In Europe, stocks got absolutely smashed.  Germany’s DAX index dropped 3.6 percent, and France’s CAC 40 was down 3.7 percent.

3. After Greece, Italy is considered to be the most financially troubled nation in the eurozone, and on Monday Italian stocks were down more than 5 percent.

4. Greek stocks were down an astounding 18 percent on Monday.

5. As the week began, we witnessed the largest one day increase in European bond spreads that we have seen in seven years.

6. Chinese stocks have already met the official definition of being in a “bear market” – the Shanghai Composite is already down more than 20 percent from the high earlier this year.

7. Overall, this Chinese stock market crash is the worst that we have witnessed in 19 years.

8. On Monday, Standard & Poor’s slashed Greece’s credit rating once again and publicly stated that it believes that Greece now has a 50 percent chance of leaving the euro.

9. On Tuesday, Greece is scheduled to make a 1.6 billion euro loan repayment.  One Greek official has already stated that this is not going to happen.

10. Greek banks have been totally shut down, and a daily cash withdrawal limit of 60 euros has been established.  Nobody knows when this limit will be lifted.

11. Yields on 10 year Greek government bonds have shot past 15 percent.

12. U.S. investors are far more exposed to Greece than most people realize.  The New York Times explains…

But the question of what happens when the markets do open is particularly acute for the hedge fund investors — including luminaries like David Einhorn and John Paulson — who have collectively poured more than 10 billion euros, or $11 billion, into Greek government bonds, bank stocks and a slew of other investments.

Through the weekend, Nicholas L. Papapolitis, a corporate lawyer here, was working round the clock comforting and cajoling his frantic hedge fund clients.

“People are freaking out,” said Mr. Papapolitis, 32, his eyes red and his voice hoarse. “They have made some really big bets on Greece.”

13. The Governor of Puerto Rico has announced that the debts that the small island has accumulated are “not payable“.

14. Overall, the government of Puerto Rico owes approximately 72 billion dollars to the rest of the world.  Without debt restructuring, it is inevitable that Puerto Rico will default.  In fact, CNN says that it could happen by the end of this summer.

15. Ukraine has just announced that it may “suspend debt payments” if their creditors do not agree to take a 40 percent “haircut”.

16. This week the Bank for International Settlements has just come out with a new report that says that central banks around the world are “defenseless” to stop the next major global financial crisis.

Without a doubt, we are overdue for another major financial crisis.  All over the planet, stocks are massively overvalued, and financial markets have become completely disconnected from economic reality.  And when the next crash happens, many believe that it will be even worse than what we experienced back in 2008.  For example, just consider the words of Jim Rogers

“In the United States, we have had economic slowdowns every four to seven years since the beginning of the Republic. It’s now been six or seven years since our last stock market problem. We’re overdue for another problem.”

In Rogers’ view, low interest rates caused stock prices to increase significantly. He believes many assets are priced beyond their fundamentals thanks to the ultra-easy monetary policies by the Federal Reserve. Fed supporters argue such measures are good for investors, but Rogers takes a different view.

The Fed might tell us we don’t have to worry and that a correction or crash will never happen again. That’s balderdash! When this artificial sea of liquidity ends, we’re going to pay a terrible price. When the next economic problem occurs, it will be much worse because the debt is so much higher.”

Of course Rogers is far from alone.  A recent article by Paul B. Farrell expressed similar sentiments…

America’s 95 million investors are at huge risk. Remember the $10 trillion losses in the crash and recession of 2007-2009? The $8 trillion lost after the dot-com technology crash and recession of 2000-2003? This is the third big recession of the century. Yes, America will lose trillions again.

Especially with dead-ahead predictions like Mark Cook’s 4,000-point Dow correction. And Jeremy Grantham’s warning of a 50% crash around election time, with negative stock returns through the first term of the next president, beyond 2020. Starting soon.

Why is America so vulnerable when the next recession hits? Simple: The Fed’s cheap-money giveaway is killing America. When the downturn, correction, crash hits, it will compare to the 2008 crash. The Economist warns: “the world will be in a rotten position to do much about it. Rarely have so many large economies been so ill-equipped to manage a recession,” whatever the trigger.

Things have been relatively quiet in the financial world for so long that many have been sucked into a false sense of security.

But the underlying imbalances were always there, and they have been getting worse over time.

I believe that we are heading into a global financial collapse that will make what happened in 2008 look like a Sunday picnic by the time it is all said and done.

Global debt levels are at all-time highs, big banks all over the planet have been behaving more recklessly than ever, and financial markets are absolutely primed for a huge crash.

Hopefully things will calm down a bit as the rest of this week unfolds, but I wouldn’t count on it.

We have entered uncharted territory, and what comes next is going to shock the world.

Signs Of Financial Turmoil In Europe, China And The United States

Earth In Peril - Public DomainAs we move toward the second half of 2015, signs of financial turmoil are appearing all over the globe.  In Greece, a full blown bank run is happening right now.  Approximately 2 billion euros were pulled out of Greek banks in just the past three days, Barclays says that capital controls are “imminent” unless a debt deal is struck, and there are reports that preparations are being made for a “bank holiday” in Greece.  Meanwhile, Chinese stocks are absolutely crashing.  The Shanghai Composite Index was down more than 13 percent this week alone.  That was the largest one week decline since the collapse of Lehman Brothers.  In the U.S., stocks aren’t crashing yet, but we just witnessed one of the largest one week outflows of capital from the bond markets that we have ever witnessed.  Slowly but surely, we are starting to see the smart money head for the exits.  As one Swedish fund manager put it recently, everyone wants “to avoid being caught on the wrong side of markets once the herd realizes stocks are over-valued“.

I don’t think that most people understand how serious things have gotten already.  In Greece, so much money has been pulled out of the banks that the European Central Bank admits that Greek banks may not be able to open on Monday

The European Central Bank told a meeting of euro zone finance ministers on Thursday that it was not sure if Greek banks, which have been suffering large daily deposit outflows, would be able to open on Monday, officials with knowledge of the talks said.

Greek savers have withdrawn about 2 billion euros from banks over the past three days, with outflows accelerating rapidly since talks between the government and its creditors collapsed at the weekend, banking sources told Reuters.

All over social media, people are sharing photos of long lines at Greek ATMs as ordinary citizens rush to get their cash out of the troubled banks.  Here is one example

And if there is no debt deal by the end of this month, the Greek debt crisis is going to totally spin out of control and financial chaos will begin to erupt all over Europe.  But instead of trying to be reasonable, EU president Donald Tusk “has delivered an ultimatum to Greece”, and it almost appears as if EU officials are more concerned about winning a power struggle than they are about averting financial catastrophe…

EU president Donald Tusk has delivered an ultimatum to Greece, claiming the country must ‘accept an offer or default’ at an emergency summit set for Monday – in a last-ditch effort to stop the debt-stricken nation crashing out of the euro.

‘We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default,’ Mr Tusk said today.

His comments come as Greek Prime Minister Alexis Tsipras warned that his country’s exit from the eurozone would trigger the collapse of the single currency.

‘The famous Grexit cannot be an option either for the Greeks or the European Union,’ he said in an Austrian newspaper interview.

‘This would be an irreversible step, it would be the beginning of the end of the eurozone.’

While all of this has been going on, the obscene stock market bubble in China has started to implode.  Just check out the following numbers from Zero Hedge

As the carnage began last night in China we noted the extreme levels of volatility the major indices had experienced in recent weeks. By the close, things were ugly with the broad Shanghai Composite down a stunning 13.3% on the week – the most since Lehman in 2008 (with Shenzhen slightly better at down 12.8% and CHINEXT down a record-breaking 14.99%).

Under normal circumstances, numbers like these would be reason for a full-blown financial panic over in Asia.  But these are not normal times.  Even with these losses, stock prices in China are still massively overinflated.  For example, USA Today is reporting that the median stock over in China is “trading at 95 times earnings”…

Margin debt in China has soared to a record $363 billion, according to Bloomberg, and the median stock in mainland China is now trading at 95 times earnings, which even tops the price-to-earnings multiple of 68 back at the 2007 peak.

That is absolutely ridiculous.  When a stock is trading at 25 or 30 times earnings it is overpriced.  So these numbers that are coming out of China are beyond crazy, and what this means is that Chinese stocks have much, much farther to fall before they get back to any semblance of reality.

Meanwhile, in the U.S. money is flowing out of bonds at a staggering pace.  The following quote originally comes from Bank of America

“High grade credit funds suffered their biggest outflow this year, and double the previous week (and also the biggest since June 2013). High yield outflows also jumped to $1.1bn, the biggest since the start of the year. However, government bond funds suffered the most amid the recent spike in volatility, with outflows surging to the highest weekly number on record ($2.7bn). This brings the total outflow from fixed income funds to almost $6bn over the last week, the highest since the Taper Tantrum and the third highest outflow ever.”

What this means is that big trouble is brewing in the bond markets.  This is something that I warned about in my previous article entitled “Experts Are Warning That The 76 Trillion Dollar Global Bond Bubble Is About To Explode“.

For the moment, U.S. stocks are doing fine.  But just about everyone can see that we in a massive financial bubble that could burst at any time.  Presidential candidate Donald Trump says that what we are witnessing is a “big fat economic and financial bubble like you’ve never seen before”

Yesterday during an interview on MSNBC, presidential candidate Donald Trump said he has some big names in mind for the Treasury secretary if he wins the White House. “I’d like guys like Jack Welch. I like guys like Henry Kravis. I’d love to bring my friend Carl Icahn.” He also opined on the economy and the stock market, admitting that the Fed has benefited people like him but that the economy and is in a “big fat economic and financial bubble like you’ve never seen before.

Ron Paul also believes that this financial bubble is going to end very badly.  Just check out what he told CNBC earlier this week

Despite record highs in the market, former Rep. Ron Paul says the Fed’s easy money policies have left stocks and bonds are on the verge of a massive collapse.

“I am utterly amazed at how the Federal Reserve can play havoc with the market,” Paul said on CNBC’s “Futures Now” referring to Thursday’s surge in stocks. The S&P 500 closed less than 1 percent off its all-time high. “I look at it as being very unstable.”

In Paul’s eyes, “the fallacy of economic planning” has created such a “horrendous bubble” in the bond market that it’s only a matter of time before the bottom falls out. And when it does, it will lead to “stock market chaos.”

Yes, this financial bubble has persisted far longer than many believed possible, but all irrational bubbles eventually burst.

And you know what they say – the bigger they come the harder they fall.

When this gigantic financial bubble finally implodes, it is going to be absolutely horrifying, and the entire planet is going to be shocked by the carnage.

China Has Announced Plans For A ‘World Currency’

Chinese World CurrencyThe Chinese do not plan to live in a world dominated by the U.S. dollar for much longer.  Chinese leaders have been calling for the U.S. dollar to be replaced as the primary global reserve currency for a long time, but up until now they have never been very specific about what they would put in place of it.  Many have assumed that the Chinese simply wanted some new international currency to be created.  But what if that is not what the Chinese had in mind?  What if they have always wanted their own currency to become the single most dominant currency on the entire planet?  What you are about to see is rather startling, but it shouldn’t be a surprise.  When it comes to economics and finance, the Chinese have always been playing chess while the western world has been playing checkers.  Sadly, we have gotten to the point where checkmate is on the horizon.

On Wednesday, I came across an excellent article by Simon Black.  What he had to say in that article just about floored me…

When I arrived to Bangkok the other day, coming down the motorway from the airport I saw a huge billboard—and it floored me.

The billboard was from the Bank of China. It said: “RMB: New Choice; The World Currency”

Given that the Bank of China is more than 70% owned by the government of the People’s Republic of China, I find this very significant.

It means that China is literally advertising its currency overseas, and it’s making sure that everyone landing at one of the world’s busiest airports sees it. They know that the future belongs to them and they’re flaunting it.

This is the photograph of that billboard that he posted with his article…

Chinese World Currency

Everyone knows that China is rising.

And most everyone has assumed that Chinese currency would soon play a larger role in international trade.

But things have moved so rapidly in recent years that now a very large chunk of the financial world actually expects the renminbi to replace the dollar as the primary reserve currency of the planet someday.  The following comes from CNBC

The tightly controlled Chinese yuan will eventually supersede the dollar as the top international reserve currency, according to a new poll of institutional investors.

The survey of 200 institutional investors – 100 headquartered in mainland China and 100 outside of it – published by State Street and the Economist Intelligence Unit on Thursday found 53 percent of investors think the renminbi will surpass the U.S. dollar as the world’s major reserve currency.

Optimism was higher within China, where 62 percent said they saw a redback world on the horizon, compared with 43 percent outside China.

And without a doubt we are starting to see the beginnings of a significant shift.

Just consider this excerpt from a recent Reuters report

China’s yuan broke into the top five as a world payment currency in November, overtaking the Canadian dollar and the Australian dollar, global transaction services organization SWIFT said on Wednesday.

The U.S. dollar won’t be replaced overnight, but things are changing.

Of course the truth is that the Chinese have been preparing for this for a very long time.  The Chinese refuse to tell the rest of the world exactly how much gold they have, but everyone knows that they have been accumulating enormous amounts of it.  And even if they don’t explicitly back the renminbi with gold, the massive gold reserves that China is accumulating will still give the rest of the planet a great deal of confidence in Chinese currency.

But don’t just take my word for it.  Consider what Alan Greenspan has had to say on the matter…

Alan Greenspan, who served at the helm of the Federal Reserve for nearly two decades, recently penned an op-ed for the Council on Foreign Relations discussing gold and its possible role in China, the world’s second-largest economy. He notes that if China converted only a “relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system.”

Meanwhile, the Chinese have also been accumulating a tremendous amount of U.S. debt.  At this point, the Chinese own approximately 1.3 trillion dollars worth of our debt, and that gives them a lot of power over our currency and over our financial system.

Someday if the Chinese wanted to undermine confidence in the U.S. dollar and in the U.S. financial system, they have a lot of ammunition at their disposal.

And it isn’t just all of that debt that gives China leverage.  In recent years, the Chinese have been buying up real estate, businesses and energy assets all over the United States at a staggering pace.  For a small taste of what has been taking place, check out the YouTube video posted below…

For much, much more on this trend, please see the following articles…

-“The Chinese Are Acquiring Large Chunks Of Land In Communities All Over America

-“Meet Your New Boss: Buying Large Employers Will Enable China To Dominate 1000s Of U.S. Communities

-“Not Just The Largest Economy – Here Are 26 Other Ways China Has Surpassed America

-“The Chinese Want To Spend Billions Constructing A 600 Acre ‘China City’ In New York State

-“45 Signs That China Is Colonizing America

-“Will Detroit Be The First Major Chinese City In The United States?

On a purchasing power basis, the size of the Chinese economy has already surpassed the size of the U.S. economy.

And there are lots of signs of trouble ahead for the U.S. economy at this point.  I like how Brandon Smith put it in one recent article…

We are only two months into 2015, and it has already proven to be the most volatile year for the economic environment since 2008-2009. We have seen oil markets collapsing by about 50 percent in the span of a few months (just as the Federal Reserve announced the end of QE3, indicating fiat money was used to hide falling demand), the Baltic Dry Index losing 30 percent since the beginning of the year, the Swiss currency surprise, the Greeks threatening EU exit (and now Greek citizens threatening violent protests with the new four-month can-kicking deal), and the effects of the nine-month-long West Coast port strike not yet quantified. This is not just a fleeting expression of a negative first quarter; it is a sign of things to come.

In addition, things continue to look quite bleak for Europe.  Once upon a time, many expected the euro to overtake the U.S. dollar as the primary global reserve currency, but that didn’t happen.  And in recent months the euro has been absolutely crashing.  On Wednesday, it hit the lowest point that we have seen against the dollar in more than a decade

The euro last stood at $1.1072, off 0.90 percent for the day and below a key support level, Sutton said. It fell to as little as $1.1066, which was the lowest level for the euro against the dollar since September 2003, according to Thomson Reuters data.

The euro also declined to one-month lows against the Japanese yen, which was flat against the dollar at 119.72 yen to the dollar.

As the U.S. and Europe continue to struggle, China is going to want a significantly larger role on the global stage.

And as the billboard in Thailand suggests, they are more than willing to step up to the plate.

So will the road to the future be paved with Chinese currency?  Please feel free to share what you think by posting a comment below…

3 Of The 10 Largest Economies In The World Have Already Fallen Into Recession – Is The U.S. Next?

Global RecessionAre you waiting for the next major wave of the global economic collapse to strike?  Well, you might want to start paying attention again.  Three of the ten largest economies on the planet have already fallen into recession, and there are very serious warning signs coming from several other global economic powerhouses.  Things are already so bad that British Prime Minister David Cameron is comparing the current state of affairs to the horrific financial crisis of 2008.  In an article for the Guardian that was published on Monday, he delivered the following sobering warning: “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.”  For the leader of the nation with the 6th largest economy in the world to make such a statement is more than a little bit concerning.

So why is Cameron freaking out?

Well, just consider what is going on in Japan.  The economy of Japan is the 3rd largest on the entire planet, and it is a total basket case at this point.  Many believe that the Japanese will be on the leading edge of the next great global economic crisis, and that is why it is so alarming that Japan has just dipped into recession again for the fourth time in six years

Japan’s economy unexpectedly fell into recession in the third quarter, a painful slump that called into question efforts by Prime Minister Shinzo Abe to pull the country out of nearly two decades of deflation.

The second consecutive quarterly decline in gross domestic product could upend Japan’s political landscape. Mr. Abe is considering dissolving Parliament and calling fresh elections, people close to him say, and Monday’s economic report is seen as critical to his decision, which is widely expected to come this week.

Of course Japan is far from alone.

Brazil has the 7th largest economy on the globe, and it has already been in recession for quite a few months.

And the problems that the national oil company is currently experiencing certainly are not helping matters

In the past five days, 23 powerful Brazilians have been arrested, with even more warrants still outstanding.

The country’s stock market has become a whipsaw, and its currency, the real, has hit a nine-year low.

All of this is due to a far-reaching corruption scandal at one massive company, Petrobras.

In the last month the company’s stock has fallen by 35%.

The 9th largest economy in the world, Italy, has also fallen into recession

Italian GDP dropped another 0.1% in the third quarter, as expected.

That’s following a 0.2% drop in Q2 and another 0.1% decline in Q1, capping nine months of recession for Europe’s third-largest economy.

Like Japan, there is no easy way out for Italy.  A rapidly aging population coupled with a debt to GDP ratio of more than 132 percent is a toxic combination.  Italy needs to find a way to be productive once again, and that does not happen overnight.

Meanwhile, much of the rest of Europe is currently mired in depression-like conditions.  The official unemployment numbers in some of the larger nations on the continent are absolutely eye-popping.  The following list of unemployment figures comes from one of my previous articles

France: 10.2%

Poland: 11.5%

Italy: 12.6%

Portugal: 13.1%

Spain: 23.6%

Greece: 26.4%

Are you starting to get the picture?

The world is facing some real economic problems.

Another traditionally strong economic power that is suddenly dealing with adversity is Israel.

In fact, the economy of Israel is shrinking for the first time since 2009

Israel’s economy contracted for the first time in more than five years in the third quarter, as growth was hit by the effects of a war with Islamist militants in Gaza.

Gross domestic product fell 0.4 percent in the July-September period, the Central Bureau of Statistics said on Sunday. It was the first quarterly decline since a 0.2 percent drop in the first three months of 2009, at the outset of the global financial crisis.

And needless to say, U.S. economic sanctions have hit Russia pretty hard.

The rouble has been plummeting like a rock, and the Russian government is preparing for a “catastrophic” decline in oil prices…

President Vladimir Putin said Russia’s economy, battered by sanctions and a collapsing currency, faces a potential “catastrophic” slump in oil prices.

Such a scenario is “entirely possible, and we admit it,” Putin told the state-run Tass news service before attending this weekend’s Group of 20 summit in Brisbane, Australia, according to a transcript e-mailed by the Kremlin today. Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events, he said.

Crude prices have fallen by almost a third this year, undercutting the economy in Russia, the world’s largest energy exporter.

It is being reported that Russian President Vladimir Putin has been hoarding gold in anticipation of a full-blown global economic war.

I think that will end up being a very wise decision on his part.

Despite all of this global chaos, things are still pretty stable in the United States for the moment.  The stock market keeps setting new all-time highs and much of the country is preparing for an orgy of Christmas shopping.

Unfortunately, the number of children that won’t even have a roof to sleep under this holiday season just continues to grow.

A stunning report that was just released by the National Center on Family Homelessness says that the number of homeless children in America has soared to an astounding 2.5 million.

That means that approximately one out of every 30 children in the United States is homeless.

Let that number sink in for a moment as you read more about this new report from the Washington Post

The number of homeless children in the United States has surged in recent years to an all-time high, amounting to one child in every 30, according to a comprehensive state-by-state report that blames the nation’s high poverty rate, the lack of affordable housing and the effects of pervasive domestic violence.

Titled “America’s Youngest Outcasts,” the report being issued Monday by the National Center on Family Homelessness calculates that nearly 2.5 million American children were homeless at some point in 2013. The number is based on the Education Department’s latest count of 1.3 million homeless children in public schools, supplemented by estimates of homeless preschool children not counted by the agency.

The problem is particularly severe in California, which has about one-eighth of the U.S. population but accounts for more than one-fifth of the homeless children, totaling nearly 527,000.

This is why I get so fired up about the destruction of the middle class.  A healthy economy would mean more wealth for most people.  But instead, most Americans just continue to see a decline in the standard of living.

And remember, the next major wave of the economic collapse has not even hit us yet.  When it does, the suffering of the poor and the middle class is going to get much worse.

Unfortunately, there are already signs that the U.S. economy is starting to slow down too.  In fact, the latest manufacturing numbers were not good at all

The Federal Reserve’s new industrial production data for October show that, on a monthly basis, real U.S. manufacturing output has fallen on net since July, marking its worst three-month production stretch since March-June, 2011. Largely responsible is the automotive sector’s sudden transformation from a manufacturing growth leader into a serious growth laggard, with combined real vehicles and parts production enduring its worst three-month stretch since late 2008 to early 2009.

A lot of very smart people are forecasting economic disaster for next year.

Hopefully they are all wrong, but I have a feeling that they are going to be right.

It’s Currency War! – And Japan Has Fired The First Shot

Currency War - Public DomainThis is the big problem with fiat currency – eventually the temptation to print more of it when you are in a jam becomes too powerful to resist.  In a surprise move on Friday, the Bank of Japan dramatically increased the size of the quantitative easing program that it has been conducting.  This sent Japanese stocks soaring and the Japanese yen plunging.  The yen had already fallen by about 11 percent against the dollar over the last year before this announcement, and news of the BOJ’s surprise move caused the yen to collapse to a seven year low.  Essentially what the Bank of Japan has done is declare a currency war.  And as you will see below, in every currency war there are winners and there are losers.  Let’s just hope that global financial markets do not get shredded in the crossfire.

Without a doubt, the Japanese are desperate.  Their economic decline has lasted for decades, and their debt levels are off the charts.  In such a situation, printing more money seems like such an easy solution.  But as history has shown us, wild money printing always ends badly.  Just remember what happened in the Weimar Republic and in Zimbabwe.

At this point, the Bank of Japan is already behaving so recklessly that it is making the Federal Reserve look somewhat responsible in comparison.  The following is how David Stockman summarized what just happened…

This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.

Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.

The Japanese are absolutely destroying the credibility of their currency in a last ditch effort to boost short-term economic growth.

So why would they want to devalue their currency?

Well, there are too main reasons why nations do this.

One reason is that it makes it easier to pay off debt.  The government debt to GDP ratio in Japan is approximately 250 percent at the moment, and the total debt to GDP ratio is approximately 600 percent.  When you have lots more money floating around, servicing crippling levels of debt becomes more feasible.

Secondly, nations like to devalue their currencies because it makes their products less expensive on the world stage.

In other words, it helps them sell more stuff to other people.

But in the process, this hurts other exporters.  For example, what the Bank of Japan just did is already having serious consequences for South Korean automakers

In Seoul, shares of auto makers Hyundai Motor and Kia Motors fell 5.9% and 5.6%, respectively, on Monday.

South Korean and Japanese companies often compete head-to-head in the same product groups in global markets, notably cars and electronics goods.

From the Bank of Japan’s standpoint, “you’re giving your industry a head start relative to someone else’s,” said Markus Rosgen, regional head of equity strategy at Citi in Hong Kong. “The perception in the equity market will be that they [South Korea] will have to take a hit from the lack of competitiveness versus the Japanese.”

This is why I said that there are winners and there are losers in every currency war.

If you boost your exports by devaluing your currency, you take away business from someone else.  And ultimately other nations start devaluing their currencies in an attempt to stay competitive.  That is why they call it a currency war.

For now, the Japanese are celebrating.  On Friday, Japanese stocks surged almost five percent for the day and reached a seven year high.  Investors tend to love quantitative easing, and they were very pleasantly surprised by what the Bank of Japan decided to do.

But of course rising stock prices are not always a good thing.  As Kyle Bass recently explained, wild money printing caused Zimbabwe’s stock market to skyrocket to unprecedented heights as well and that turned out very, very badly…

Amid the euphoria… Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC’s Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected).

However, he caveats that nominally bullish statement with a critical point, “Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs” as purchasing power is crushed. Investors, he says, are “too focused on nominal prices” as the rate of growth of the monetary base is destroying true wealth. Bass is convinced that cost-push inflation is coming (as the velocity of money will move once psychology shifts) and investors must not take their eye off the insidious nature of underlying inflation – no matter what we are told by the government (as they will always lie when its critical). Own ‘productive assets’, finance them at low fixed rates (thank you Ben)…

And just like we have experienced with quantitative easing in the United States, Japan’s money printing has done very little to help the real economy.  Here is more from David Stockman

Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south.

So up to this point Japan’s experiment in crazy money printing has been a dismal failure.

Will printing even more money turn things around?

We shall see, but I wouldn’t hold your breath.

Meanwhile, there are reports that the European Central Bank is getting ready for more quantitative easing.  Central banks all over the planet are becoming increasingly desperate for answers, and the temptation to print, print and print some more is extremely strong.

Nobody is quite sure how this currency war will play out, but I have a feeling that it isn’t going to be pretty.

Serious Financial Trouble Is Erupting In Germany And Japan

Stock Market Collapse - Public DomainThere are some who believe that the next great financial crash will not begin in the United States.  Instead, they are convinced that a financial crisis that begins in Europe or in Japan (or both) will end up spreading across the globe and take down the U.S. too.  Time will tell if they are ultimately correct, but even now there are signs that financial trouble is already starting to erupt in both Germany and Japan.  German stocks have declined 10 percent since July, and that puts them in “correction” territory.  In Japan, the economy is a total mess right now.  According to figures that were just released, Japanese GDP contracted at a 7.1 percent annualized rate during the second quarter and private consumption contracted at a 19 percent annualized rate.  Could a financial collapse in either of those nations be the catalyst that sets off financial dominoes all over the planet?

This week, the worst German industrial production figure since 2009 rattled global financial markets.  Germany is supposed to be the economic “rock” of Europe, but at this point that “rock” is starting to show cracks.

And certainly the civil war in Ukraine and the growing Ebola crisis are not helping things either.  German investors are becoming increasingly jittery, and as I mentioned above the German stock market has already declined 10 percent since July

German stocks, weighed down by the economic fallout spawned by the Ukraine-Russia crisis and the eurzone’s weak economy, are now down more than 10% from their July peak and officially in correction territory.

The DAX, Germany’s benchmark stock index, has succumbed to recent data points that show the German economy has ground to a halt, hurt in large part by the economic sanctions levied at its major trading partner, Russia, by the U.S. and European Union as a way to get Moscow to butt out of Ukraine’s affairs. The economic slowdown in the rest of the debt-hobbled eurozone has also hurt the German economy, considered the economic locomotive of Europe.

In trading today, the DAX fell as low as 8960.43, which put it down 10.7% from its July 3 closing high of 10,029.43 and off nearly 11% from its June 20 intraday peak of 10,050.98.

And when you look at some of the biggest corporate names in Germany, things look even more dramatic.

Just check out some of these numbers

The hardest hit sectors have been retailers, industrials and leisure stocks with sports clothing giant Adidas down 37.7pc for the year, airline Lufthansa down 27pc, car group Volkswagen sliding 23.6pc and Deutchse Bank falling 20.2pc so far this year.

Meanwhile, things in Japan appear to be going from bad to worse.

The government of Japan is more than a quadrillion yen in debt, and it has been furiously printing money and debasing the yen in a desperate attempt to get the Japanese economy going again.

Unfortunately for them, it is simply not working.  The revised economic numbers for the second quarter were absolutely disastrous.  The following comes from a Japanese news source

On an annualized basis, the GDP contraction was 7.1 percent, compared with 6.8 percent in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.

The blow from the first stage of the sales tax hike in April extended into this quarter, with retail sales and household spending falling in July. The administration signaled last week that it is prepared to boost stimulus to help weather a second stage of the levy scheduled for October 2015.

Corporate capital investment dropped 5.1 percent from the previous quarter, more than double the initial estimate of 2.5 percent.

Private consumption was meanwhile revised to a 5.1 percent drop from the initial reading of 5 percent, meaning it sank 19 percent on an annualized basis from the previous quarter, rather than the initial estimate of 18.7 percent, Monday’s report said.

For the moment, things are looking pretty good in the United States.

But as I have written about so many times, our financial markets are perfectly primed for a fall.

Other experts see things the same way.  Just consider what John Hussman wrote recently…

As I did in 2000 and 2007, I feel obligated to state an expectation that only seems like a bizarre assertion because the financial memory is just as short as the popular understanding of valuation is superficial: I view the stock market as likely to lose more than half of its value from its recent high to its ultimate low in this market cycle.

At present, however, market conditions couple valuations that are more than double pre-bubble norms (on historically reliable measures) with clear deterioration in market internals and our measures of trend uniformity. None of these factors provide support for the market here. In my view, speculators are dancing without a floor.

And it isn’t just stocks that could potentially be on the verge of a massive decline.  The bond market is also experiencing an unprecedented bubble right now.  And when that bubble bursts, the carnage will be unbelievable.  This has become so obvious that even CNBC is talking about it…

Picture this: The bond market gets spooked by a sudden interest rate scare, sending a throng of buyers streaming toward the exits, only to find a dearth of buyers on the other side.

As a result, liquidity evaporates, yields soar, and the U.S. finds itself smack in the middle of another debt crisis no one saw coming.

It’s a scenario that TABB Group fixed income head Anthony J. Perrotta believes is not all that far-fetched, considering the market had what could be considered a sneak preview in May 2013. That was the “taper tantrum,” which saw yields spike and stocks sell off after then-Federal Reserve Chairman Ben Bernanke made remarks that the market construed as indicating rates would rise sooner than expected.

If the strength of our financial markets reflected overall strength in the U.S. economy there would not be nearly as much cause for concern.

But at this point our financial markets have become completely and totally divorced from economic reality.

The truth is that our economic fundamentals continue to decay.  In fact, the IMF says that China now has the largest economy on the planet on a purchasing power basis.  The era of American economic dominance is ending.  It is just that the financial markets have not gotten the memo yet.

Hopefully we still have at least a few more months before stock markets all over the world start crashing.  But remember, we are entering the seventh year of the seven year cycle of economic crashes that so many people are talking about these days.  And we are definitely primed for a global financial collapse.

Sadly, most people did not see the crash of 2008 coming, and most people will not see the next one coming either.

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