Just a few days ago, the bull market for the S&P 500 turned six years old. This six year period of time has been great for investors, but what comes next? On March 9th, 2009 the S&P 500 hit a low of 676.53. Since that day, it has risen more than 200 percent. As you will see below, there are only two other times within the last 100 years when the S&P 500 performed this well over a six year time frame. In both instances, the end result was utter disaster. And as you take in this information, I want you to keep in mind what I said in my previous article entitled “7 Signs That A Stock Market Peak Is Happening Right Now“. What we are witnessing at this moment is classic “peaking behavior”, and there is a long way to go down from here. So if historical patterns hold up, those with lots of money in the stock market could soon be in for a whole lot of trouble.
According to Societe Generale analyst Andrew Lapthorne, there was an S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1929.
We all know what happened that year.
And there was another S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1999. In the end, all of those gains were wiped out when the dotcom bubble burst.
And now we are near the end of another great bull market for the S&P 500. The following is an excerpt from a recent Business Insider article…
“Such a strong six year run up in US equities has only been seen twice since 1900, i.e., back in 1929 and 1999, neither of which ended well,” Lapthorne wrote.
It’s anyone’s guess what happens next. But Lapthorne and his colleagues have slanted bearish.
So how will this current bull market end?
Needless to say, a lot of people are not very optimistic about that right now.
And there was another very interesting bull market that ended in 1987…
On Aug. 12, the S&P 500 dipped to 102.42, setting the stage for the third-biggest bull market in stocks since 1929. Inflation and unemployment fell. In 1984, President Reagan would cruise to reelection with an ad telling voters “It’s morning again in America.” By 1987, the stock market had tripled. Shareholders who were able to see beyond the gloom of the early 1980s reaped a huge return.
Of course a lot of those huge stock market returns were eliminated in a single day. On October 19th, 1987 the Dow declined by more than 22 percent during a single trading session. That day is still known as “Black Monday” up to this present time.
Markets tend to go down a lot faster than they go up. So if your stock portfolio has gone up substantially over the past few years, good for you. But keep in mind that all of your gains can be wiped out very rapidly. Millions of people experienced this during the last financial crisis, and millions more will experience this during the next one.
And as I keep reminding people, so many of the exact same patterns that we witnessed just prior to the last great stock market collapse are happening once again.
For example, just yesterday I explained that there has been only one other time over the past decade when we have seen the U.S. dollar surge in value in such a short period of time.
That was in 2008, just prior to the last financial crisis.
Another example is what has happened to the price of oil. Since the middle of last year, the price of oil has fallen by more than 50 dollars a barrel.
In all of history, that has happened only one other time.
That was in 2008, just prior to the last financial crisis.
I could go on and on. I could talk about margin debt, price/earnings ratios, industrial commodities, etc.
But you know what? Despite all of the warning signs there are still people out there that are eagerly pouring money into the stock market.
Back in 2005 and 2006, I knew people that were hurrying to buy homes before they got “priced out of the market”. So they did everything that they could to scrape together down payments and they took on mortgages that were larger than they could really afford.
And in the end they got burned.
Today, people are doing similar things. For instance, my friend Bob recently sent me an article that I could hardly believe. It turns out that an “expert” on CNBC is encouraging people “to take out a 7 year loan with a rapidly amortizing asset as collateral in order to buy stocks.”
Let me be clear. The really, really, really dumb money is jumping into the stock market right now. Those that are pouring money into stocks today are really going to get hit hard when the crash comes.
And it isn’t just me saying this.
Just consider the words of billionaire hedge fund manager Crispin Odey…
Mr Odey is best known for his big macroeconomic calls, including foreseeing the 2008 global credit crisis; piling into insurers in the wake of September 2001 attacks; and picking the recent oil price rout. He famously paid himself £28 million in 2008 after shorting credit crisis casualties, including British lender Bradford & Bingley. Mr Odey’s fund returned 54.8 per cent that year.
“The market’s reaction to all of this is leave it to the professionals, leave it to those great guys, the central bankers, because they saved the day in 2009,” he said. “These guys are kind of relying on central banks pulling a rabbit out of a hat.”
The risk is that this time, monetary policy may be ineffective: “We need the crisis to reformulate policy. Central banks are not all singing and all dancing, they cannot basically avoid the natural consequences of what we are doing.”
An inadequate supply-side response to the plunge in commodity prices as the resources industry declines to reduce production was in effect stimulating supply into falling demand.
“The trouble is today the players, whether they are the miners or the oil companies or the Saudis or anybody else, they are not doing the right things. This is the first time in my career where economics 101 doesn’t work at all.”
But it was also true that the world has not had a major recession for 25 years and thanks to frequent interventions, “there is a sensation we don’t have a business cycle”. Stocks are enjoying a six-year bull market but he also hinted at liquidity issues bubbling under the surface.
“I just think that you and I have got grandstand seats here [to an imminent market shock] and my point is having found myself in the second quarter of last year selling a lot of equities and starting to go short, I found out just how illiquid it all was. You never actually see it until people try and get out of these things.”
It was unclear to Mr Odey what central banks could do to prevent a crash.
The warning signs are clear.
Soon the time for warning will be over and the crisis will be here.
I hope that you are getting ready.
Are we on the verge of an unprecedented global currency crisis? On Tuesday, the euro briefly fell below $1.07 for the first time in almost a dozen years. And the U.S. dollar continues to surge against almost every other major global currency. The U.S. dollar index has now risen an astounding 23 percent in just the last eight months. That is the fastest pace that the U.S. dollar has risen since 1981. You might be tempted to think that a stronger U.S. dollar is good news, but it isn’t. A strong U.S. dollar hurts U.S. exports, thus harming our economy. In addition, a weak U.S. dollar has fueled tremendous expansion in emerging markets around the planet over the past decade or so. When the dollar becomes a lot stronger, it becomes much more difficult for those countries to borrow more money and repay old debts. In other words, the emerging market “boom” is about to become a bust. Not only that, it is important to keep in mind that global financial institutions bet a tremendous amount of money on currency movements. According to the Bank for International Settlements, 74 trillion dollars in derivatives are tied to the value of the U.S. dollar, the value of the euro and the value of other global currencies. When currency rates start flying around all over the place, you can rest assured that someone out there is losing an enormous amount of money. If this derivatives bubble ends up imploding, there won’t be enough money in the entire world to bail everyone out.
Do you remember what happened the last time the U.S. dollar went on a great run like this?
As you can see from the chart below, it was in mid-2008, and what followed was the worst financial crisis since the Great Depression…
A rapidly rising U.S. dollar is extremely deflationary for the overall global economy.
This is a huge red flag, and yet hardly anyone is talking about it.
Meanwhile, the euro continues to spiral into oblivion…
How many times have I said it? The euro is heading to all-time lows. It is going to go to parity with the U.S. dollar, and then it is eventually going to go below parity.
This is going to cause massive headaches in the financial world.
The Europeans are attempting to cure their economic problems by creating tremendous amounts of new money. It is the European version of quantitative easing, but it is having some very nasty side effects.
The markets are starting to realize that if the value of the U.S. dollar continues to surge, it is ultimately going to be very bad for stocks. In fact, the strength of the U.S. dollar is being cited as the primary reason for the Dow’s 332 point decline on Tuesday…
The Dow Jones industrial average fell more than 300 points to below the index’s 50-day moving average, wiping out gains for the year. The S&P 500 also closed in the red for the year and breached its 50-day moving average, which is an indicator of the market trend. Only the Nasdaq held onto gains of 2.61 percent for the year.
There’s “concern that energy and the strength in the dollar will somehow be negative for the equities,” said Art Hogan, chief market strategist at Wunderlich Securities. He noted that the speed of the dollar’s surge was the greatest market driver, amid mixed economic data and concerns about the Federal Reserve raising interest rates.
And as I noted above, when the U.S. dollar rises the things that we export to other nations become more expensive and that hurts our businesses.
This is so basic that even the White House understands it…
Despite reassurance from The Fed that a strengthening dollar is positive for US jobs, The White House has now issued a statement that a “strengthening USD is a headwind for US growth.”
But even more important, a surging U.S. dollar makes it more difficult for emerging markets all over the world to borrow new money and to repay old debts. This is especially true for nations that heavily rely on exporting commodities…
It becomes especially ugly for emerging market economies that produce commodities. Many emerging market countries rely on their natural resources for growth and haven’t yet developed more advanced industries. As the products of their principal industries decline in value, foreign investors remove available credit while their currency is declining against the U.S. dollar. They don’t just find it difficult to pay their debt – it is impossible.
It has been estimated that emerging markets have borrowed more than 3 trillion dollars since the last financial crisis.
But now the process that created the emerging markets “boom” is starting to go into reverse.
The global economy is fueled by cheap dollars. So if the U.S. dollar continues to rise, that is not going to be good news for anyone.
And of course the biggest potential threat of all is the 74 trillion dollar currency derivatives bubble which could end up bursting at any time.
The sophisticated computer algorithms that financial institutions use to trade currency derivatives are ultimately based on human assumptions. When currencies move very little and the waters are calm in global financial markets, those algorithms tend to work really, really well.
But when the unexpected happens, some of the largest financial firms in the world can implode seemingly overnight.
Just remember what happened to Lehman Brothers back in 2008. Unexpected events can cripple financial giants in just a matter of hours.
Today, there are five U.S. banks that each have more than 40 trillion dollars of total exposure to derivatives of all types. Those five banks are JPMorgan Chase, Bank of America, Goldman Sachs, Citibank and Morgan Stanley.
By transforming Wall Street into a gigantic casino, those banks have been able to make enormous amounts of money.
But they are constantly performing a high wire act. One of these days, their reckless gambling is going to come back to haunt them, and the entire global financial system is going to be severely harmed as a result.
As I have said so many times before, derivatives are going to be at the heart of the next great global financial crisis.
And thanks to the wild movement of global currencies in recent months, there are now more than 74 trillion dollars in currency derivatives at risk.
Anyone that cannot see trouble on the horizon at this point is being willingly blind.
Is this the end of the last great run for the U.S. stock market? Are we witnessing classic “peaking behavior” that is similar to what occurred just before other major stock market crashes? Throughout 2014 and for the early stages of 2015, stocks have been on quite a tear. Even though the overall U.S. economy continues to be deeply troubled, we have seen the Dow, the S&P 500 and the Nasdaq set record after record. But no bull market lasts forever – particularly one that has no relation to economic reality whatsoever. This false bubble of financial prosperity has been enjoyable, and even I wish that it could last much longer. But there comes a time when we all must face reality, and the cold, hard facts are telling us that this party is about to end. The following are 7 signs that a stock market peak is happening right now…
#1 Just before a stock market crash, price/earnings ratios tend to spike, and that is precisely what we are witnessing. The following commentary and chart come from Lance Roberts…
The chart below shows Dr. Robert Shiller’s cyclically adjusted P/E ratio. The problem is that current valuations only appear cheap when compared to the peak in 2000. In order to put valuations into perspective, I have capped P/E’s at 30x trailing earnings. The dashed orange line measures 23x earnings which has been the level where secular bull markets have previously ended. I have noted the peak valuations in periods that have exceeded that 30x earnings.
At 27.85x current earning the markets are currently at valuation levels where previous bull markets have ended rather than continued. Furthermore, the markets have exceeded the pre-financial crisis peak of 27.65x earnings. If earnings continue to deteriorate, market valuations could rise rapidly even if prices remain stagnant.
#2 The average bull market lasts for approximately 3.8 years. The current bull market has already lasted for six years.
#3 The median total gain during a bull market is 101.5 percent. For this bull market, it has been 213 percent.
#4 Usually before a stock market crash we see a divergence between the relative strength index and the stock market itself. This happened prior to the bursting of the dotcom bubble, it happened prior to the crash of 2008, and it is happening again right now…
The first technical warning sign that we should heed is marked by a significant divergence between the relative strength index (RSI) and the market itself. This is noted by a declining pattern of lower highs in the RSI as stocks continue to make higher highs, a sign that the market is “topping out”. In the late ‘90s this divergence persisted for many years as the tech bubble reached epic valuation levels. In 2007 this divergence lasted over a much shorter period (6 months) before the market finally peaked and succumbed to massive selling. With last month’s strong rally to new records, we now have a confirmed divergence between the long-term relative strength index and the market’s price action.
#5 In the past, peaks in margin debt have been very closely associated with stock market peaks. The following chart comes from Doug Short, and I included it in a previous article…
#6 As I have discussed previously, we usually witness a spike in 10 year Treasury yields just about the time that the stock market is peaking right before a crash.
Well, according to Business Insider, we just saw the largest 5 week rate rally in two decades…
Lots of guys and gals went home this past weekend thinking about the implications of the recent rise in the 10-year Treasury bond’s yield.
Chris Kimble notes it was the biggest 5-week rate rally in twenty years!
#7 A lot of momentum indicators seem to be telling us that we are rapidly approaching a turning point for stocks. For example, James Stack, the editor of InvesTech Research, says that the Coppock Guide is warning us of “an impending bear market on the not-too-distant horizon”…
A momentum indicator dubbed the Coppock Guide, which serves as “a barometer of the market’s emotional state,” has also peaked, Stack says. The indicator, which, “tracks the ebb and flow of equity markets from one psychological extreme to another,” is also flashing a warning flag.
The Coppock Guide’s chart pattern is flashing a “double top,” which suggests that “psychological excesses are present” and that “secondary momentum has peaked” in this bull market, according to Stack.
“All of this is just another reason for concern about an impending bear market on the not-too-distant horizon,” Stack writes.
So if we are to see a stock market crash soon, when will it happen?
Well, the truth is that nobody knows for certain.
It could happen this week, or it could be six months from now.
In fact, a whole lot of people are starting to point to the second half of 2015 as a danger zone. For example, just consider the words of David Morgan…
“Momentum is one indicator and the money supply. Also, when I made my forecast, there is a big seasonality, and part of it is strict analytical detail and part of it is being in this market for 40 years. I got a pretty good idea of what is going on out there and the feedback I get. . . . I’m in Europe, I’m in Asia, I’m in South America, I’m in Mexico, I’m in Canada; and so, I get a global feel, if you will, for what people are really thinking and really dealing with. It’s like a barometer reading, and I feel there are more and more tensions all the time and less and less solutions. It’s a fundamental take on how fed up people are on a global basis. Based on that, it seems to me as I said in the January issue of the Morgan Report, September is going to be the point where people have had it.”
Time will tell if Morgan was right.
But without a doubt, lots of economic warning signs are starting to pop up.
One that is particularly troubling is the decline in new orders for consumer goods. This is something that Charles Hugh-Smith pointed out in one of his recent articles…
The financial news is astonishingly rosy: record trade surpluses in China, positive surprises in Europe, the best run of new jobs added to the U.S. economy since the go-go 1990s, and the gift that keeps on giving to consumers everywhere, low oil prices.
So if everything is so fantastic, why are new orders cratering? New orders are a snapshot of future demand, as opposed to current retail sales or orders that have been delivered.
Posted below is a chart that he included with his recent article. As you can see, the only time things have been worse in recent decades was during the depths of the last financial crisis…
To me, it very much appears that time is running out for this bubble of false prosperity that we have been living in.
But what do you think? Please feel free to contribute to the discussion by posting a comment below…
Are we at the tail end of the stock market bubble to end all stock market bubbles? Wall Street was full of glee Monday when the Nasdaq closed above 5000 for the first time since the peak of the dotcom bubble in March 2000. And almost everyone in the financial world seems convinced that things are somehow “different” this time around. Even though by almost every objective measure stocks are wildly overpriced right now, and even though there are a whole host of signs that economic trouble is on the horizon, the overwhelming consensus is that this bull market is just going to keep charging ahead. But of course that is what they thought just before the last two stock market crashes in 2001 and 2008 as well. No matter how many times history repeats, we never seem to learn from it.
Back in October 2002, the Nasdaq hit a post-dotcom bubble low of 1108. From there, it went on an impressive run. In late 2007, it briefly moved above 2800 before losing more than half of its value during the stock market crash of 2008.
So the fact that the Nasdaq has now closed above 5000 is a really big deal. The following is how USA Today described what happened on Monday…
The Nasdaq Composite capped its long march back to 5000 Monday, eclipsing, then closing above the long-hallowed mark for the first time since March 2000.
The arduous climb came on the heels of a 10-day winning streak that ended last week, Nasdaq’s longest since July 2009. That helped fuel the technology-heavy market index to a 7% gain in February, the sixth-largest monthly climb since its 1971 launch.
The chart below shows how the Nasdaq has performed over the past decade. As you can see, we are coming dangerously close to doubling the peak that was hit just before the last stock market collapse…
By looking at that chart, you would be tempted to think that the overall U.S. economy must be doing great.
But of course that is not the case at all.
For example, just take a look at what has happened to the employment-population ratio over the past decade. The percentage of the working age U.S. population that is currently employed is actually far lower than it used to be…
So why is the stock market doing so well if the overall economy is not?
Well, the truth is that stocks have become completely divorced from economic reality at this point. Wall Street has been transformed into a giant casino, and trading stocks has been transformed into a high stakes poker game.
And one of the ways that we can tell that a stock market bubble has formed is when people start borrowing massive amounts of money to invest in stocks. As you can see from the commentary and chart from Doug Short below, margin debt is peaking again just like it did just prior to the last two stock market crashes…
Unfortunately, the NYSE margin debt data is a month old when it is published. Real (inflation-adjusted) debt hit its all-time high in February 2014, after which it margin declined sharply for two months, but by June it had risen to a level about two percent below its high and then oscillated in a relatively narrow range. The latest data point for January is four percent off its real high eleven month ago.
So why can’t more people see this?
We are in the midst of a monumental stock market bubble and most on Wall Street seem willingly blind to it.
Fortunately, there are a few sober voices in the crowd. One of them is John Hussman. He is warning that now is the time to get out of stocks…
Unless we observe a rather swift improvement in market internals and a further, material easing in credit spreads – neither which would relieve the present overvaluation of the market, but both which would defer our immediate concerns about downside risk – the present moment likely represents the best opportunity to reduce exposure to stock market risk that investors are likely to encounter in the coming 8 years.
Last week, the cyclically-adjusted P/E of the S&P 500 Index surpassed 27, versus a historical norm of just 15 prior to the late-1990’s market bubble. The S&P 500 price/revenue ratio surpassed 1.8, versus a pre-bubble norm of just 0.8. On a wide range of historically reliable measures (having a nearly 90% correlation with actual subsequent S&P 500 total returns), we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks. Advisory bullishness (Investors Intelligence) shot to 59.5%, compared with only 14.1% bears – one of the most lopsided sentiment extremes on record. The S&P 500 registered a record high after an advancing half-cycle since 2009 that is historically long-in-the-tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000 on the S&P 500 (across all stocks, current median price/earnings, price/revenue and enterprise value/EBITDA multiples already exceed the 2000 extreme). Equally important, our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors. An environment of compressed risk premiums coupled with increasing risk-aversion is without question the most hostile set of features one can identify in the historical record.
Everyone knows that the stock market cannot stay detached from economic reality forever.
At some point the bubble is going to burst.
If you want to know what the real economy is like, just ask Alison Norris of Detroit, Michigan…
When Alison Norris couldn’t find work in Detroit, she searched past city limits, ending up with a part-time restaurant job 20 miles away, which takes at least two hours to get to using public transportation.
Norris has to take two buses to her job at a suburban mall in Troy, Michigan, using separate city and suburban bus systems.
For many city residents with limited skills and education, Detroit is an employment desert, having lost tens of thousands of blue-collar jobs in manufacturing cutbacks and service jobs as the population dwindled.
Sadly, her story is not an anomaly. I get emails from readers all the time that are out of work and just can’t seem to find a decent job no matter how hard they try.
It would be one thing if the stock market was soaring because the U.S. economy was thriving.
But we all know that is not true.
So that means the current stock market mania that we are witnessing is artificial.
How long will it last?
Give us your opinion by posting a comment below…
The stock market continues to flirt with new record highs, but the signs that we could be on the precipice of the next major financial crisis continue to mount. A couple of days ago, I discussed the fact that the U.S. dollar is experiencing a tremendous surge in value just like it did in the months prior to the financial crisis of 2008. And previously, I have detailed how the price of oil has collapsed, prices for industrial commodities are tanking and market behavior is becoming extremely choppy. All of these are things that we witnessed just before the last market crash as well. It is also important to note that orders for durable goods are declining and the Baltic Dry Index has dropped to the lowest level on record. So does all of this mean that the stock market is guaranteed to crash in 2015? No, of course not. But what we are looking for are probabilities. We are looking for patterns. There are multiple warning signs that have popped up repeatedly just prior to previous financial crashes, and many of those same warning signs are now appearing once again.
One of these warning signs that I have not discussed previously is the wholesale inventories to sales ratio. When economic activity starts to slow down, inventory tends to get backed up. And that is precisely what is happening right now. In fact, as Wolf Richter recently wrote about, the wholesale inventories to sales ratio has now hit a level that we have not seen since the last recession…
In December, the wholesale inventory/sales ratio reached 1.22, after rising consistently since July last year, when it was 1.17. It is now at the highest – and worst – level since September 2009, as the financial crisis was winding down:
Rising sales gives merchants the optimism to stock more. But because sales are rising in that rosy scenario, the inventory/sales ratio, depicting rising inventories and rising sales, would not suddenly jump. But in the current scenario, sales are not keeping up with inventory growth.
Another sign that I find extremely interesting is the behavior of the yield on 10 year U.S. Treasury notes. As Jeff Clark recently explained, we usually see a spike in the 10 year Treasury yield about the time the market is peaking before a crash…
The 10-year Treasury note yield bottomed on January 30 at 1.65%. Today, it’s at 2%. That’s a 35-basis-point spike – a jump of 21% – in less than two weeks.
And it’s the first sign of an impending stock market crash.
As I explained last September, the 10-year Treasury note yield has ALWAYS spiked higher prior to an important top in the stock market.
For example, the 10-year yield was just 4.5% in January 1999. One year later, it was 6.75% – a spike of 50%. The dot-com bubble popped two months later.
In 2007, rates bottomed in March at 4.5%. By July, they had risen to 5.5% – a 22% increase. The stock market peaked in September.
Let’s be clear… not every spike in Treasury rates leads to an important top in the stock market. But there has always been a sharp spike in rates a few months before the top.
Once again, just because something has happened in the past does not mean that it will happen in the future.
But the fact that so many red flags are appearing all at once has got to give any rational person reason for concern.
Yes, the Dow gained more than 100 points on Thursday. But on Thursday we also learned that retail sales dropped again in January. Overall, this has been the worst two month drop in retail sales since 2009…
Following last month’s narrative-crushing drop in retail sales, despite all that low interest rate low gas price stimulus, January was more of the same as hopeful expectations for a modest rebound were denied. Falling 0.8% (against a 0.9% drop in Dec), missing expectations of -0.4%, this is the worst back-to-back drop in retail sales since Oct 2009. Retail sales declined in 6 of the 13 categories.
And economic activity is rapidly slowing down on the other side of the planet as well.
For example, Chinese imports and exports both fell dramatically in January…
Chinese imports collapsed 19.9% YoY in January, missing expectations of a modest 3.2% drop by the most since Lehman. This is the biggest YoY drop since May 2009 and worst January since the peak of the financial crisis. Exports tumbled 3.3% YoY (missing expectations of 5.9% surge) for the worst January since 2009. Combined this led to a $60.03 billion trade surplus in January – the largest ever. But apart from these massive imbalances, everything is awesome in the global economy (oh apart from The Baltic Dry at record lows, Iron Ore near record lows, oil prices crashed, and the other engine of the world economy – USA USA USA – imploding).
In light of so much bad economic data, it boggles my mind that stocks have been doing so well.
But this is typical bubble behavior. Financial bubbles tend to be very irrational and they tend to go on a lot longer than most people think they will. When they do finally burst, the consequences are often quite horrifying.
It may not seem like it to most people, but we are right on track for a major financial catastrophe. It is playing out right in front of our eyes in textbook fashion. But it is going to take a little while to unfold.
Unfortunately, most people these days do not have the patience to watch long-term trends develop. Instead, we have been trained by the mainstream media to have the attention spans of toddlers. We bounce from one 48-hour news cycle to the next, eagerly looking forward to the next “scandal” that is going to break.
And when the next financial crash does strike, the mainstream media is going to talk about what a “surprise” it is. But for those that are watching the long-term trends, it is not going to be a surprise at all. We will have seen it coming a mile away.
Over the past decade, there has been only one other time when the value of the U.S. dollar has increased by so much in such a short period of time. That was in mid-2008 – just before the greatest financial crash since the Great Depression. A surging U.S. dollar also greatly contributed to the Latin American debt crisis of the early 1980s and the Asian financial crisis of 1997. Today, the globe is more interconnected than ever. Most global trade is conducted in U.S. dollars, and much of the borrowing done by emerging markets all over the planet is denominated in U.S. dollars. When the U.S. dollar goes up dramatically, this can put a tremendous amount of financial stress on economies all around the world. It also has the potential to greatly threaten the stability of the 65 trillion dollars in derivatives that are directly tied to the value of the U.S. dollar. The global financial system is more vulnerable to currency movements than ever before, and history tells us that when the U.S. dollar soars the global economy tends to experience a contraction. So the fact that the U.S. dollar has been skyrocketing lately is a very, very bad sign.
Most of the people that write about the coming economic collapse love to talk about the coming collapse of the U.S. dollar as well.
But in the initial deflationary stage of the coming financial crisis, we are likely to see the U.S. dollar actually strengthen considerably.
As I have discussed so many times before, we are going to experience deflation first, and after that deflationary phase the desperate responses by the Federal Reserve and the U.S. government to that deflation will cause the inflationary panic that so many have written about.
Yes, someday the U.S. dollar will essentially be toilet paper. But that is not in our immediate future. What is in our immediate future is a “flight to safety” that will push the surging U.S. dollar even higher.
This is what we witnessed in 2008, and this is happening once again right now.
Just look at the chart that I have posted below. You can see the the U.S. dollar moved upward dramatically relative to other currencies starting in mid-2008. And toward the end of the chart you can see that the U.S. dollar is now experiencing a similar spike…
At the moment, almost every major currency in the world is falling relative to the U.S. dollar.
For example, this next chart shows what the euro is doing relative to the dollar. As you can see, the euro is in the midst of a stunning decline…
Instead of focusing on the U.S. dollar, those that are looking for a harbinger of the coming financial crisis should be watching the euro. As I discussed yesterday, analysts are telling us that if Greece leaves the eurozone the EUR/USD could fall all the way down to 0.90. If that happens, the chart above will soon resemble a waterfall.
And of course it isn’t just the euro that is plummeting. The yen has been crashing as well. The following chart was recently posted on the Crux…
Unfortunately, most Americans have absolutely no idea how important all of this is. In recent years, growing economies all over the world have borrowed gigantic piles of very cheap U.S. dollars. But now they are faced with the prospect of repaying those debts and making interest payments using much more expensive U.S. dollars.
Investors are starting to get nervous. At one time, investors couldn’t wait to pour money into emerging markets, but now this process is beginning to reverse. If this turns into a panic, we are going to have one giant financial mess on our hands.
The truth is that the value of the U.S. dollar is of great importance to every nation on the face of the Earth. The following comes from U.S. News & World Report…
In the early ’80s, a bullish U.S. dollar contributed to the Latin American debt crisis, and also impacted the Asian Tiger crisis in the late ’90s. Emerging markets typically have higher growth, but carry much higher risk to investors. When the economies are doing well, foreign investors will lend money to emerging market countries by purchasing their bonds.
They also deposit money in foreign banks, which facilitates higher lending. The reason for this is simple: Bond payments and interest rates in emerging markets are much higher than in the U.S. Why deposit cash in the U.S. and earn 0.25 percent, when you could earn 6 percent in Indonesia? With the dollar strengthening, the interest payments on any bond denominated in U.S. dollars becomes more expensive.
Additionally, the deposit in the Indonesian bank may still be earning 6 percent, but that is on Indonesian rupiahs. After converting the rupiahs to U.S. dollars, the extra interest doesn’t offset the loss from the exchange. As investors get nervous, the higher interest on emerging market debt and deposits becomes less alluring, and they flee to safety. It may start slowly, but history tells us it can quickly spiral out of control.
Over the past few months, I have been repeatedly stressing that so many of the signs that we witnessed just prior to previous financial crashes are happening again.
Now you can add the skyrocketing U.S. dollar to that list.
If you have not seen my previous articles where I have discussed these things, here are some places to get started…
“Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”
“Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?…”
“10 Key Events That Preceded The Last Financial Crisis That Are Happening Again RIGHT NOW”
The warnings signs are really starting to pile up.
When we look back at past financial crashes, there are recognizable patterns that can be identified.
Anyone with half a brain should be able to see that a large number of those patterns are unfolding once again right before our eyes.
Unfortunately, most people in this world end up believing exactly what they want to believe.
No matter how much evidence you show them, they will not accept the truth until it is too late.
This is the month when the future of the eurozone will be decided. This week, Greek leaders will meet with European officials to discuss what comes next for Greece. The new prime minister of Greece, Alexis Tsipras, has already stated that he will not accept an extension of the current bailout. Officials from other eurozone countries have already said that they expect Greece to fully honor the terms of the current agreement. So basically we are watching a giant game of financial “chicken” play out over in Europe, and a showdown is looming. Adding to the drama is the fact that the Greek government is rapidly running out of money. According to the Wall Street Journal, Greece is “on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro.” We have witnessed other moments of crisis for Greece before, but things are very different this time because the new Greek government is being run by radical leftists that based their entire campaign on ending the austerity that has been imposed on Greece by the rest of Europe. If they buckle under the demands of the European financial lords, their credibility will be gone and Syriza will essentially be finished in Greek politics. But if they don’t compromise, Greece could be forced to leave the eurozone and we could potentially be facing the equivalent of “financial armageddon” in Europe. If nobody flinches, the eurozone will fall to pieces, the euro will collapse and trillions upon trillions of dollars in derivatives will be in jeopardy.
According to the Bank for International Settlements, 26.45 trillion dollars in currency derivatives are directly tied to the value of the euro.
Let that number sink in for a moment.
To give you some perspective, keep in mind that the U.S. government spends a total of less than 4 trillion dollars a year.
The entire U.S. national debt is just a bit above 18 trillion dollars.
So 26 trillion dollars is an amount of money that is almost unimaginable. And of course those are just the derivatives that are directly tied to the euro. Overall, the total global derivatives bubble is more than 700 trillion dollars in size.
Over the past couple of decades, the global financial system has been transformed into the biggest casino in the history of the planet. And when things are stable, the computer algorithms used by the big banks work quite well and they make enormous amounts of money. But when unexpected things happen and markets go haywire, the financial institutions that gamble on derivatives can lose massive quantities of money very rapidly. We saw this in 2008, and we could be on the verge of seeing this happen again.
If no agreement can be reached and Greece does leave the eurozone, the euro is going to fall off a cliff.
When that happens, someone out there is going to lose an extraordinary amount of money.
And just like in 2008, when the big financial institutions start to fail that will plunge the entire planet into another major financial crisis.
So at the moment, it is absolutely imperative that Greece and the rest of the eurozone find some common ground.
Unfortunately, that may not happen. The new prime minister of Greece certainly does not sound like he is in a compromising mood…
Greece’s new leftist prime minister, Alexis Tsipras, said on Sunday he would not accept an extension to Greece’s current bailout, setting up a clash with EU leaders – who want him to do just that – at a summit on Thursday.
Tsipras also pledged his government would heal the “wounds” of austerity, sticking to campaign pledges of giving free food and electricity to those who had suffered, and reinstating civil servants who had been fired as part of bailout austerity conditions.
Prior to the summit on Thursday, eurozone finance ministers are going to get together on Wednesday to discuss what they should do. If these two meetings don’t go well this week, we could be looking at big trouble right around the corner. In fact, Greece is being warned that they only have until February 16th to apply for an extension of the current bailout…
Euro zone finance ministers will discuss how to proceed with financial support for Athens at a special session next Wednesday ahead of the first summit of EU leaders with the new Greek prime minister, Alexis Tsipras, the following day.
However, the chairman of the finance ministers said the following meeting of the Eurogroup on Feb. 16 would be Greece’s last chance to apply for a bailout extension because some euro zone countries would need to consult their parliaments.
“Time will become very short if they (Greece) don’t ask for an extension (by then),” said Jeroen Dijsselbloem.
The current bailout for Greece expires on Feb 28. Without it the country will not get financing or debt relief from its lenders and has little hope of financing itself in the markets.
And as I mentioned above, the Greek government is quickly running out of money.
Most analysts believe that because of the enormous stakes that one side or the other will give in at some point.
But what if that does not happen?
Personally, I believe that the eurozone is doomed in the configuration that we see it today, and that it is just a matter of time before it breaks up.
And I am far from alone. For example, just check out what former Fed chairman Alan Greenspan is saying…
Mr Greenspan, chairman of the Federal Reserve from 1987 to 2006, said: “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognizes that parting is the best strategy.
“The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”
The Greeks are using all of this to their advantage. They know that if they leave it could break apart the entire monetary union. So this gives them a tremendous amount of leverage. Greek Finance Minister Yanis Varoufakis has even gone so far as to compare the eurozone to a house of cards…
“The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.” Varoufakis said according to an Italian transcript of the interview released by RAI ahead of broadcast.
The euro zone faces a risk of fragmentation and “de-construction” unless it faces up to the fact that Greece, and not only Greece, is unable to pay back its debt under the current terms, Varoufakis said.
“I would warn anyone who is considering strategically amputating Greece from Europe because this is very dangerous,” he said. “Who will be next after us? Portugal? What will happen when Italy discovers it is impossible to remain inside the straitjacket of austerity?”
After all this time and after so many bailouts, we have finally reached a day of reckoning.
There is a very real possibility that Greece could leave the eurozone in just a matter of months, and the elite know this.
That is why they are getting prepared for that eventuality. The following is from a recent Wall Street Journal report…
The U.K. government is stepping up contingency planning to prepare for a possible Greek exit from the eurozone and the market instability such a move would create, U.K. Treasury chief George Osborne said on Sunday.
A spokeswoman for the Treasury declined comment on the details of the contingency planning.
The U.K. government has said the standoff between Greece’s new anti-austerity government and the eurozone is increasing the risks to the global and U.K. economy.
“That’s why I’m going tomorrow to the G-20 [Group of 20] to encourage our partners to resolve this crisis. It’s why we’re stepping up the contingency planning here at home,” Mr. Osborne told the BBC in an interview. “We have got to make sure we don’t, at this critical time when Britain is also facing a critical choice, add to the instability abroad with instability at home.”
And if Greece does leave, it will cause panic throughout global financial markets as everyone wonders who is next.
Italy, Spain and Portugal are all in a similar position. Every one of them could rapidly become “the next Greece”.
But of even greater concern is what a “Grexit” would do to the euro. If the euro falls below parity with the U.S. dollar, the derivatives losses are going to be absolutely mind blowing. And coupled with the collapse of the price of oil, we could be looking at some extreme financial instability in the not too distant future.
When big banks collapse, they don’t do it overnight. But we often learn about it in a single moment.
Just remember Lehman Brothers. Their problems developed over an extended period of time, but we only learned the full extent of their difficulties on one very disturbing day in 2008, and that day changed the world.
As you read this, big financial troubles are brewing in the background. At some point, they are going to come to the surface. When they do, the entire planet is going to be shocked.
The price of oil collapsed by more than 8 percent on Wednesday, and a decision by the European Central Bank has Greece at the precipice of a complete and total financial meltdown. What a difference 24 hours can make. On Tuesday, things really seemed like they were actually starting to get better. The price of oil had rallied by more than 20 percent since last Thursday, things in Europe seemed like they were settling down, and there appeared to be a good deal of optimism about how global financial markets would perform this month. But now fear is back in a big way. Of course nobody should get too caught up in how the markets behave on any single day. The key is to take a longer term point of view. And the fact that the markets have been on such a roller coaster ride over the past few months is a really, really bad sign. When things are calm, markets tend to steadily go up. But when the waters start really getting choppy, that is usually a sign that a big move down in on the horizon. So the huge ups and the huge downs that we have witnessed in recent days are likely an indicator that rough seas are ahead.
A stunning decision that the European Central Bank has just made has set the stage for a major showdown in Europe. The ECB has decided that it will no longer accept Greek government bonds as collateral from Greek banks. This gives the European Union a tremendous amount of leverage in negotiations with the new Greek government. But in the short-term, this could mean some significant pain for the Greek financial system. The following is how a CNBC article described what just happened…
“The European Central Bank is telling the Greek banking system that it will no longer accept Greek bonds as collateral for any repurchase agreement the Greek banks want to conduct,” said Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.
“This is because the ECB only accepts investment grade paper and up until today gave Greece a waiver to this clause. That waiver has now been taken away and Greek banks now have to go to the Greek Central Bank and tap their Emergency Liquidity Assistance facility for funding,” he said.
And it certainly didn’t take long for global financial markets to respond to this news…
The Greek stock market closed hours ago, but the exchange-traded fund that tracks Greek stocks, GREK, crashed during the final minutes of trading in the US markets.
The euro is also getting walloped, falling 1.3% against the US dollar.
The EUR/USD, which had recovered to almost 1.15, fell to nearly 1.13 on news of the action taken by the ECB.
But this is just the beginning.
In coming months, I fully expect the euro to head toward parity with the U.S. dollar.
And if the new Greek government will not submit to the demands of the EU, and Greece ultimately ends up leaving the common currency, it could potentially mean the end of the eurozone in the configuration that we see it today.
Meanwhile, the oil crash has taken a dangerous new turn.
Over the past week, we have seen the price of oil go from $43.58 to $54.24 to less than 48 dollars before rebounding just a bit at the end of the day on Wednesday.
This kind of erratic behavior is the exact opposite of what a healthy market would look like.
What we really need is a slow, steady climb which would take the price of oil back to at least the $80 level. In the current range in which it has been fluctuating, the price of oil is going to be absolutely catastrophic for the global economy, and the longer it stays in this current range the more damage that it is going to do.
But of course the problems that we are facing are not just limited to the oil price crash and the crisis in Greece. The truth is that there are birth pangs of the next great financial collapse all over the place. We just have to be honest with ourselves and realize what all of these signs are telling us.
And it isn’t just in the western world where people are sounding the alarm. All over the world, highly educated professionals are warning that a great storm is on the horizon. The other day, I had an economist in Germany write to me with his concerns. And in China, the head of the Dagong Rating Agency is declaring that we are going to have to face “a new world financial crisis in the next few years”…
The world economy may slip into a new global financial crisis in the next few years, China’s Dagong Rating Agency Head Guan Jianzhong said in an interview with TASS news agency on Wednesday.
“I believe we’ll have to face a new world financial crisis in the next few years. It is difficult to give the exact time but all the signs are present, such as the growing volume of debts and the unsteady development of the economies of the US, the EU, China and some other developing countries,” he said, adding the situation is even worse than ahead of 2008.
For a long time, I have been pointing at the year 2015. But this year is not going to be the end of anything. Rather, it is just going to be the beginning of the end.
During the past few years, we have experienced a temporary bubble of false stability fueled by reckless money printing and an unprecedented accumulation of debt. But instead of fixing anything, those measures have just made the eventual crash even worse.
Now a day of reckoning is fast approaching.
Life as we know it is about to change dramatically, and most people are completely and totally unprepared for it.