The recklessness of the “too big to fail” banks almost doomed them the last time around, but apparently they still haven’t learned from their past mistakes. Today, the top 25 U.S. banks have 222 trillion dollars of exposure to derivatives. In other words, the exposure that these banks have to derivatives contracts is approximately equivalent to the gross domestic product of the United States times twelve. As long as stock prices continue to rise and the U.S. economy stays fairly stable, these extremely risky financial weapons of mass destruction will probably not take down our entire financial system. But someday another major crisis will inevitably happen, and when that day arrives the devastation that these financial instruments will cause will be absolutely unprecedented.
During the great financial crisis of 2008, derivatives played a starring role, and U.S. taxpayers were forced to step in and bail out companies such as AIG that were on the verge of collapse because the risks that they took were just too great.
But now it is happening again, and nobody is really talking very much about it. In a desperate search for higher profits, all of the “too big to fail” banks are gambling like crazy, and at some point a lot of these bets are going to go really bad. The following numbers regarding exposure to derivatives contracts come directly from the OCC’s most recent quarterly report (see Table 2), and as you can see the level of recklessness that we are currently witnessing is more than just a little bit alarming…
Total Assets: $1,792,077,000,000 (slightly less than 1.8 trillion dollars)
Total Exposure To Derivatives: $47,092,584,000,000 (more than 47 trillion dollars)
Total Assets: $2,490,972,000,000 (just under 2.5 trillion dollars)
Total Exposure To Derivatives: $46,992,293,000,000 (nearly 47 trillion dollars)
Total Assets: $860,185,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $41,227,878,000,000 (more than 41 trillion dollars)
Bank Of America
Total Assets: $2,189,266,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $33,132,582,000,000 (more than 33 trillion dollars)
Total Assets: $814,949,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $28,569,553,000,000 (more than 28 trillion dollars)
Total Assets: $1,930,115,000,000 (more than 1.9 trillion dollars)
Total Exposure To Derivatives: $7,098,952,000,000 (more than 7 trillion dollars)
Collectively, the top 25 banks have a total of 222 trillion dollars of exposure to derivatives.
If you are new to all of this, you might be wondering what a “derivative” actually is.
When you buy a stock you are purchasing an ownership interest in a company, and when you buy a bond you are purchasing the debt of a company. But when you buy a derivative, you are not actually getting anything tangible. Instead, you are simply making a side bet about whether something will or will not happen in the future. These side bets can be extraordinarily complex, but at their core they are basically just wagers. The following is a pretty good definition of derivatives that comes from Investopedia…
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Those that trade derivatives are essentially engaged in a form of legalized gambling, and some of the brightest names in the financial world have been warning about the potentially destructive nature of these financial instruments for a very long time.
In a letter that he wrote to shareholders of Berkshire Hathaway in 2003, Warren Buffett actually referred to derivatives as “financial weapons of mass destruction”…
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Warren Buffett was right on the money when he made that statement, and of course the derivatives bubble is far larger today than it was back then.
In fact, the total notional value of derivatives contracts globally is in excess of 500 trillion dollars.
This is a disaster that is just waiting to happen, and investors such as Buffett are quietly positioning themselves to take advantage of the giant crash that is inevitably coming.
According to financial expert Jim Rickards, Buffett’s Berkshire Hathaway Inc. is hoarding 86 billion dollars in cash because he is likely anticipating a major stock market downturn…
Far from a bullish sign, Buffett’s cash hoard could mean he’s preparing for a market crash. When the crash comes, Buffett can walk through the wreckage with his checkbook open and buy great companies for a fraction of their current value.
That’s the real Buffett style, but you won’t hear that from your broker or wealth manager. If Buffett has a huge cash allocation, shouldn’t you?
He knows what’s coming. Now you do too.
Warren Buffett didn’t become one of the wealthiest men in the entire world by being stupid. He knows that stocks are ridiculously overvalued at this point, and he is poised to make his move after the pendulum swings in the other direction.
And he might not have too long to wait. In recent weeks I have been writing about many of the signs that the U.S. economy is slowing down substantially, and today we received even more bad news…
Despite high levels of economic confidence expressed by business owners and consumers, one key indicator shows that it has not translated into much action yet.
Loan issuance declined in the first quarter from the previous three-month period, the first time that has happened in four years, according to an SNL Financial analysis of bank earnings reports filed for the period. The total of recorded loans and leases fell to $9.297 trillion from $9.305 trillion in the fourth quarter of 2016.
This is precisely what we would expect to see if a new economic downturn was beginning. Our economy is very highly dependent on the flow of credit, and when that flow begins to diminish that is a very bad sign.
For the moment, financial markets continue to remain completely disconnected from the hard economic data, but as we saw in 2008 the markets can plunge very rapidly once they start catching up with the real economy.
Warren Buffett is clearly getting prepared for the crisis that is ahead.
Italian voters have embraced the global trend of rejecting the established world order, but the “no” vote on Sunday has plunged global financial markets into a state of utter chaos. The euro has already fallen to a 20 month low, Italian government bonds are poised for a tremendous crash, and futures markets are indicating that both U.S. and European stock markets will be way down when they open on Monday. It is being projected that Italian Prime Minister Matteo Renzi’s referendum on constitutional reforms will be defeated by about 20 percentage points when all the votes have been counted, and Renzi has already announced that he plans to resign as a result. When new elections are held it looks like comedian Beppe Grillo’s Five-Star movement will come to power, and the European establishment is extremely alarmed at that prospect because Grillo wants to take Italy out of the eurozone. In the long run Italy would be much better off without the euro, but in the short-term the only thing propping up Italy’s failing banking system is support from Europe. Without that support, the 8th largest economy on the entire planet would already be in the midst of an unprecedented financial crisis.
I know that I said a lot in that first paragraph, but it is imperative that people understand how serious this crisis could quickly become.
This “no” vote virtually guarantees a major banking crisis for Italy, and many analysts fear that it could trigger a broader financial crisis all across the rest of the continent as well.
Just look at what has already happened. All of the votes haven’t even been counted yet, and the euro is absolutely plummeting…
The euro dropped 1.3 percent to $1.0505, falling below its 1 1/2-year low of $1.0518 touched late last month, and testing its key support levels where the currency has managed to rebound in the past couple of years.
A break below its 2015 March low of $1.0457 would send the currency to its lowest level since early 2003, opening a way for a test of $1, or parity against the dollar, a scenario which many market players now see as a real possibility.
In early 2014, there were times when one euro was trading for almost $1.40. For a very long time I have been warning that the euro was eventually heading for parity with the U.S. dollar, and now we are almost there.
Meanwhile, Italian government bonds are going to continue to crash following this election result. This is going to make it even more difficult for the Italian government to borrow money, and that will only aggravate their ongoing financial troubles.
But the big problem in Italy is the banks. At this moment there are eight banks in imminent danger of collapsing, and virtually all of the rest of them are in some stage of trouble. The following comes from a Bloomberg article about the crisis that Italian banks are facing right at this moment…
They’re burdened with a mountain of bad loans. Their stocks have cratered. And they have to operate in an economy prone to recession and political upheaval.
Signs have been mounting for months that Italy’s weakest lenders, and in particular Banca Monte dei Paschi di Siena SpA, were sliding toward the precipice, threatening to reignite a broader crisis.
And we may get some news regarding the fate of Banca Monte dei Paschi di Siena as early as Monday morning if what the Sydney Morning Herald is reporting is correct…
A last-gasp rescue for Monte dei Paschi di Siena, the world’s oldest surviving bank, has been thrown into doubt after reformist prime minister Matteo Renzi decisively lost a referendum on constitutional reform on Sunday.
MPS and advisers JPMorgan and Mediobanca will meet as early as Monday morning to decide whether to pull a plan to go ahead with a €5bn recapitalisation, the FT reports, citing people informed of the plan.
Senior bankers will decide whether to pursue their underwriting commitments or exercise their right to drop the transaction due to adverse market conditions, these people said. In the event the banks drop the capital plan, the Italian state is expected to nationalise the bank, say senior bankers.
If Banca Monte dei Paschi di Siena fails, major banks all over Italy (and all over the rest of Europe) could start going down like dominoes.
So what were Italians voting on anyway?
Well, the truth is that the constitutional reforms that were proposed actually sound quite boring…
“The changes involve sharply reducing the size of one of the chambers of Parliament — the Senate — shifting its powers to the executive, and eliminating the Senate’s power to bring down government coalitions.
“The amendments also shift some powers now held by the regions to the central government, thereby reducing frequent and lengthy court battles between Rome and the regional governments.”
The reason why this vote was ultimately so important is because it became a referendum on Renzi’s administration. The fact that he announced in advance that he would resign if it did not get approved gave a tremendous amount of fuel to the opposition.
So now Beppe Grillo’s Five-Star Movement stands poised to come to power, and that could be very bad news for those that are hoping to hold the common currency together.
The following is how NPR recently summarized the main goals of the Five-Star Movement…
“It calls for a government-guaranteed, universal income, abolishing Italy’s fiscal commitments to the European Union and a referendum on Italy’s membership in the Euro — a prospect that could unravel the entire single currency Eurozone.”
If Italy chooses to leave the euro, it will probably mean the end of the common currency, and the continued existence of the entire European Union would be called into question.
So this vote on Sunday was huge. The Brexit had already done a tremendous amount of damage to the long-term prospects for the European Union, and now the crisis in Italy is sending political and financial shockwaves throughout the entire continent.
Over the next few weeks, keep a close eye on the euro and on Italian government bonds.
If they both continue to crash, that will be a sign that a major European financial crisis is now upon us.
And what happens in Europe definitely does not stay in Europe.
If Europe goes down, we are going to go down too.
At this point we still have almost a month left in 2016, but 2017 is already shaping up to be a very troubling year. As always, let us hope for the best, but let us also keep preparing for the worst.
Do you remember when our politicians promised to do something about the “too big to fail” banks? Well, they didn’t, and now the chickens are coming home to roost. On Thursday, it was announced that one of those “too big to fail” banks, Wells Fargo, has been slapped with 185 million dollars in penalties. It turns out that for years their employees had been opening millions of bank and credit card accounts for customers without even telling them. The goal was to meet sales goals, and customers were hit by surprise fees that they never intended to pay. Some employees actually created false email addresses and false PIN numbers to sign customers up for accounts. It was fraud on a scale that is hard to imagine, and now Wells Fargo finds itself embroiled in a major crisis.
There are six banks in America that basically dwarf all of the other banks – JPMorgan Chase, Citibank, Bank of America, Wells Fargo, Morgan Stanley and Goldman Sachs. If a single one of those banks were to fail, it would be a catastrophe of unprecedented proportions for our financial system. So we need these banks to be healthy and running well. That is why what we just learned about Wells Fargo is so concerning…
Employees of Wells Fargo (WFC) boosted sales figures by covertly opening the accounts and funding them by transferring money from customers’ authorized accounts without permission, the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency and Los Angeles city officials said.
An analysis by the San Francisco-headquartered bank found that its employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers, the officials said. Many of the transfers ran up fees or other charges for the customers, even as they helped employees make incentive goals.
Wells Fargo says that 5,300 employees have been fired as a result of this conduct, and they are promising to clean things up.
Hopefully they will keep their word.
It is interesting to note that the largest shareholder in Wells Fargo is Berkshire Hathaway, and Berkshire Hathaway is run by Warren Buffett. There has been a lot of debate about whether or not this penalty on Wells Fargo was severe enough, and it will be very interesting to hear what he has to say about this in the coming days…
Wells Fargo is the most valuable bank in America, worth just north of $250 billion. Berkshire Hathaway (BRKA), the investment firm run legendary investor Warren Buffett, is the company’s biggest shareholder.
“One wonders whether a penalty of $100 million is enough,” said David Vladeck, a Georgetown University law professor and former director of the Federal Trade Commission’s Bureau of Consumer Protection. “It sounds like a big number, but for a bank the size of Wells Fargo, it isn’t really.”
After the last crisis, we were told that we would never be put in a position again where the health of a single “too big to fail” institution could threaten to bring down our entire financial system.
But our politicians didn’t fix the “too big to fail” problem.
Instead it has gotten much, much worse.
Back in 2007, the five largest banks held 35 percent of all bank assets. Today, that number is up to 44 percent…
Since 1992, the total assets held by the five largest U.S. banks has increased by nearly fifteen times! Back then, the five largest banks held just 10 percent of the banking industry total. Today, JP Morgan alone holds over 12 percent of the industry total, a greater share than the five biggest banks put together in 1992.
Even in the midst of the global financial crisis, the largest U.S. banks managed to increase their hold on total bank industry assets. The assets held by the five largest banks in 2007 – $4.6 trillion – increased by more than 150 percent over the past 8 years. These five banks went from holding 35 percent of industry assets in 2007 to 44 percent today.
Meanwhile, nearly 2,000 smaller institutions have disappeared from our financial system since the beginning of the last crisis.
So the problem of “too big to fail” is now larger than ever.
Considering how reckless these big banks have been, it is inevitable that one or more of them will fail at some point. When that takes place, it will make the collapse of Lehman Brothers look like a Sunday picnic.
And with each passing day, the rumblings of a new financial crisis grow louder. For example, this week we learned that commercial bankruptcy filings in the United States in August were up a whopping 29 percent compared to the same period a year ago…
In August, US commercial bankruptcy filings jumped 29% from a year ago to 3,199, the 10th month in a row of year-over-year increases, the American Bankruptcy Institute, in partnership with Epiq Systems, reported today.
There’s money to be made. While stockholders and some creditors get raked over the coals, lawyers make a killing on fees. And some folks on the inside track, hedge funds, and private equity firms can make a killing picking up assets for cents on the dollar.
Companies are going bankrupt at a rate that we haven’t seen since the last financial crisis, but nobody seems concerned.
Back in 2007 and early 2008, Federal Reserve Chair Ben Bernanke, President Bush and a whole host of “experts” assured us that everything was going to be just fine and that a recession was not coming.
Today, Federal Reserve Chair Janet Yellen, Barack Obama and a whole host of “experts” are assuring us that everything is going to be just fine and that a recession is not coming.
I hope that they are right.
I really do.
But there is a reason why so many firms are filing for bankruptcy, and there is a reason why so many Americans are getting behind on their auto loans.
Our giant debt bubble is beginning to burst, and this is going to cause a tremendous amount of financial chaos.
Let us just hope that the “too big to fail” banks can handle the stress this time around.
Over the last two trading days, European banks have lost 23 percent of their value. Let that number sink it for a bit. In just a two day stretch, nearly a quarter of the value of all European banks has been wiped out. I warned you that the Brexit vote “could change everything“, and that is precisely what has happened. Meanwhile, the Dow was down another 260 points on Monday as U.S. markets continue to be shaken as well. Overall, approximately three trillion dollars of global stock market wealth has been lost over the last two trading days. That is an all-time record, and any doubt that we have entered a new global financial crisis has now been completely eliminated.
But of course the biggest news on Monday was what happened to European banks. The Brexit vote has caused financial carnage for those institutions unlike anything that we have ever seen before. Just check out this chart from Zero Hedge…
I knew that things would be bad if the UK voted to leave the European Union, but I didn’t know that they would be this bad.
Prior to all of this, a whole bunch of “too big to fail” banks all over Europe were already in the process of imploding, and now this chaotic financial environment may push several of them into full-blown collapse mode simultaneously. Just consider the following commentary from Wolf Richter…
Healthy big banks would get over Brexit and the political turmoil it is spawning, particularly non-UK banks. But there are no healthy big banks in Europe. And non-UK banks are crashing just as hard, and some harder. This is about a banking crisis morphing into a financial crisis.
These bank stocks got crushed on Friday. And they got crushed again today. Italian banks have been reduced to penny stocks. Spanish banks are getting closer. Commerzbank, Germany’s second largest bank, and still partially owned by the German government as a consequence of the last bailout, is well on the way.
One institution that I have been warning about for months is German banking giant Deutsche Bank. On Monday, their stock fell another 5.77 percent to a fresh all-time closing low of 13.87. I have been convinced that Deutsche Bank is going to zero for a long time, but these days it seems in quite a hurry to get there.
Of course Deutsche Bank is far from alone. The following are other “too big to fail” European banks that have lost at least one-fifth of their value over the past two trading days…
-Royal Bank of Scotland
-Lloyds Banking Group
-Banca Monte dei Paschi di Siena
This is what a full-blown financial crisis looks like, and U.S. banks have been getting hit very hard too…
The Brexit contagion is spreading as USD liquidity and counterparty risk in the interconnected global financial system has reached US banks with Goldman at 3 year lows and BofA and Citi plunging over 12%. This happens just two days after the Fed released its latest stress test results finding that none of the 33 banks tested would need additional capital in case of a “severe” financial crisis. That conclusion may be tested soon.
Meanwhile, the British pound continues to get absolutely pummeled. As I write this, the GBP/USD is down to 1.32, and some are now warning that the British pound may hit parity with the U.S. dollar by the end of the year.
One of the reasons why I expect the British pound to continue to tumble is because the global elite have to show the British people that they made the wrong decision, and they need to scare off any other countries that would consider holding similar votes.
So it was no surprise that the elite had two of their major credit rating agencies downgrade the UK on Monday…
Two major rating agencies downgraded the United Kingdom’s credit rating on Monday.
S&P Global Ratings lowered the UK to AA from AAA, with a “negative” outlook. And, Fitch cut its rating to AA from AA+, with a negative outlook as well.
And as I mentioned yesterday, Bank of America and Goldman Sachs have already projected that the UK economy is heading into recession.
As much economic and financial pain as possible will be inflicted upon the British people, and meanwhile they will be bombarded by mainstream news stories telling them that they made a stupid decision.
Hopefully the British people will stand strong and will not give in to the pressure.
But of course it isn’t just the British people that will be feeling the pain. The Brexit vote has sent shockwaves all over the planet, and global investors are losing tremendous amounts of money. For instance, here in the United States approximately 1.3 trillion dollars of stock market wealth has been wiped out so far…
Brexit isn’t just a European problem after all. The United Kingdom’s decision to quit the European Union is costing U.S. investors a pretty penny.
U.S.-based companies in the broad Russell 3000, including online advertising company Alphabet (GOOGL), software maker Microsoft (MSFT) and global bank JPMorgan Chase (JPM), have suffered a collective loss of $1.3 trillion since Friday’s shocker from the United Kingdom, according to a USA TODAY analysis of data from S&P Global Market Intelligence.
Hopefully tomorrow will be better. It is very rare for global financial markets to crash for three days in a row, but it could happen. More likely, however, is that we will see some kind of temporary bounce as long as some really negative event doesn’t hit the news.
But let there be no doubt about what has just happened. The collapse of Lehman Brothers was the “trigger event” that really accelerated the crisis of 2008, and now it appears as though the Brexit vote will be the “trigger event” that greatly accelerates the crisis of 2016.
Global investors had already lost trillions over the past 12 months, and a full-blown financial implosion was going to happen no matter how the vote turned out, but thanks to British voters the fun and games have arrived early.
Unfortunately, only a very small fraction of the population understands just how bad things are going to get in the months ahead…
Should central banks create money out of thin air and give it directly to governments and average citizens? If you can believe it, this is now under serious consideration. Since 2008, global central banks have cut interest rates 637 times, they have injected 12.3 trillion dollars into the global financial system through various quantitative easing programs, and we have seen an explosion of government debt unlike anything we have ever witnessed before. But despite these unprecedented measures, the global economy is still deeply struggling. This is particularly true in Japan, in South America, and in Europe. In fact, there are 16 countries in Europe that are experiencing deflation right now. In a desperate attempt to spur economic activity, central banks in Europe and in Japan are playing around with negative interest rates, and so far they seem to only have had a limited effect.
So as they rapidly run out of ammunition, global central bankers are now openly discussing something that might sound kind of crazy. According to the Telegraph, central banks are becoming increasingly open to employing a tactic known as “helicopter money”…
Faced with political intransigence, central bankers are openly talking about the previously unthinkable: “helicopter money”.
A catch-all term, helicopter drops describe the process by which central banks can create money to transfer to the public or private sector to stimulate economic activity and spending.
Long considered one of the last policymaking taboos, debate around the merits of helicopter money has gained traction in recent weeks.
Do you understand what is being said there?
The idea is basically this – central banks would create money out of thin air and would just give it to national governments or ordinary citizens.
So who would decide who gets the money?
Well, they would.
If you are anything like me, this sounds very much like Pandora’s Box being opened.
But this just shows how much of a panic there is among central bankers right now. They know that we are plunging into a new global economic crisis, and they are desperate to find something that will stop it. And if that means printing giant gobs of money and dropping it from helicopters over the countryside, well then that is precisely what they are going to do.
In fact, the chief economist at the European Central Bank is quite adamant about the fact that the ECB can print money out of thin air and “distribute it to people” when the situation calls for it…
ECB chief Mario Draghi has refused to rule out the prospect, saying only that the bank had not yet “discussed” such matters due to their legal and accounting complexity. This week, his chief economist Peter Praet went further in hinting that helicopter drops were part of the ECB’s toolbox.
“All central banks can do it“, said Praet. “You can issue currency and you distribute it to people. The question is, if and when is it opportune to make recourse to that sort of instrument“.
Apparently memories of the Weimar Republic must have faded over in Europe, because this sounds very much like what they tried to do. I don’t know why anyone would ever want to risk going down that road again.
Here in the United States, the Federal Reserve is not openly talking about “helicopter money” just yet, but that is only because the stock market is doing okay for the moment.
Most Americans don’t realize this, but the primary reason why stocks are doing better in the U.S. than in the rest of the world is because of stock buybacks. According to Wolf Richter, corporations spent more than half a trillion dollars buying back their own stocks over the past 12 months…
During the November-January period, 378 of the S&P 500 companies bought back their own shares, according to FactSet. Total buybacks in the quarter rose 5.2% from a year ago, to $136.6 billion. Over the trailing 12 months (TTM), buybacks totaled $568.9 billion.
When corporations buy back their own stocks, that means that they are slowly liquidating themselves. Instead of pouring money into new good ideas, they are just returning money to investors. This is not how a healthy economy should work.
But corporate executives love stock buybacks, because it increases the value of their stock options. And big investors love them too, because they love to see the value of their stock holdings rise.
So we will continue to see big corporations cannibalize themselves, but there are a couple of reasons why this is starting to slow down.
Number one, corporate profits are starting to fall steadily as the economy slows down, so there will be less income to plow into these stock buybacks.
Number two, many corporations have used debt to fund buybacks, but now it is getting tougher for corporations to get new funding as corporate defaults rise.
As stock buybacks slow, this is going to put downward pressure on the market, and we will eventually catch up with the rest of the planet. At this point, many experts are still calling for stocks to fall by another 40, 50 or 60 percent from current levels. For example, the following comes from John Hussman…
From a long-term investment standpoint, the stock market remains obscenely overvalued, with the most historically-reliable measures we identify presently consistent with zero 10-12 year S&P 500 nominal total returns, and negative expected real returns on both horizons.
From a cyclical standpoint, I continue to expect that the completion of the current market cycle will likely take the S&P 500 down by about 40-55% from present levels; an outcome that would not be an outlier or worst-case scenario, but instead a rather run-of-the-mill cycle completion from present valuations. If you are a historically-informed investor who is optimistic enough to reject the idea that the financial markets are forever doomed to extreme valuations and dismal long-term returns, you should be rooting for this cycle to be completed. If you are a passive investor, you should at least align your current exposure with your investment horizon and your tolerance for cyclical risk, which we expect to be similar to what we anticipated in 2000-2002 and 2007-2009.
When the S&P 500 does fall that much eventually, the Federal Reserve will respond with emergency measures.
So yes, we may see “helicopter money” employed in Japan and in Europe first, but we will see it here someday too.
I know that a lot of people out there are feeling pretty good about things for the moment because U.S. stocks have rebounded quite a bit lately. But remember, the fundamental economic numbers just continue to get even worse. Just today we learned that existing home sales in the United States had fallen by the most in six years. That is definitely not a sign that things are “getting better”, and I keep trying to warn people that tumultuous times are dead ahead.
And if global central bankers did not agree with me, they would not be talking about the need for “helicopter money” and other emergency measures.
The Italian banking system is a “leaning tower” that truly could completely collapse at literally any moment. And as Italy’s banks begin to go down like dominoes, it is going to set off financial panic all over Europe unlike anything we have ever seen before. I wrote about the troubles in Italy back in January, but since that time the crisis has escalated. At this point, Italian banking stocks have declined a whopping 28 percent since the beginning of 2016, and when you look at some of the biggest Italian banks the numbers become even more frightening. On Monday, shares of Monte dei Paschi were down 4.7 percent, and they have now plummeted 56 percent since the start of the year. Shares of Carige were down 8 percent, and they have now plunged a total of 58 percent since the start of the year. This is what a financial crisis looks like, and just like we are seeing in South America, the problems in Italy appear to be significantly accelerating.
So what makes Italy so important?
Well, we all saw how difficult it was for the rest of Europe to come up with a plan to rescue Greece. But Greece is relatively small – they only have the 44th largest economy in the world.
The Italian economy is far larger. Italy has the 8th largest economy in the world, and their government debt to GDP ratio is currently sitting at about 132 percent.
There is no way that Europe has the resources or the ability to handle a full meltdown of the Italian financial system. Unfortunately, that is precisely what is happening. Italian banks are absolutely drowning in non-performing loans, and as Jeffrey Moore has noted, this potentially represents “the greatest threat to the world’s already burdened financial system”…
Shares of Italy’s largest financial institutions have plummeted in the opening months of 2016 as piles of bad debt on their balance sheets become too high to ignore. Amid all of the risks facing EU members in 2016, the risk of contagion from Italy’s troubled banks poses the greatest threat to the world’s already burdened financial system.
At the core of the issue is the concerning level of Non-Performing Loans (NPL’s) on banks’ books, with estimates ranging from 17% to 21% of total lending. This amounts to approximately €200 billion of NPL’s, or 12% of Italy’s GDP. Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.
Things have already gotten so bad that the European Central Bank is now monitoring liquidity levels at Monte dei Paschi and Carige on a daily basis. The following comes from Reuters…
The European Central Bank is checking liquidity levels at a number of Italian banks, including Banca Carige and Monte dei Paschi di Siena , on a daily basis, two sources close to the matter said on Monday.
Italian banking shares have fallen sharply since the start of the year amid market concerns about some 360 billion euros of bad loans on their books and weak capital levels.
The ECB has been putting pressure on several Italian banks to improve their capital position. The regulator can decide to monitor liquidity levels at any bank it supervises on a weekly or daily basis if it has any concern about deposits or funding.
A run on the big Italian banks has already begun. Italians have already been quietly pulling billions of euros out of the banking system, and if these banks continue to crumble this “stealth run” could quickly become a stampede.
And of course panic in Italy would quickly spread to other financially troubled members of the eurozone such as Spain, Portugal, Greece and France. Here is some additional analysis from Jeffrey Moore…
A deteriorating financial crisis in Italy could risk repercussions across the EU exponentially greater than those spurred by Greece. The ripple effects of market turmoil and the potential for dangerous precedents being set by EU authorities in panicked response to that turmoil, could ignite yet more latent financial vulnerabilities in fragile EU members such as Spain and Portugal.
Unfortunately, most Americans are completely blinded to what is going on in the rest of the world because stocks in the U.S. have had a really good run for the past couple of weeks. Headlines are declaring that the risk of a new recession “has passed” and that the crisis “is over”. Meanwhile, South America is plunging into a full-blown depression, the Italian banking system is melting down, global manufacturing numbers are the worst that we have seen since the last recession, and global trade is absolutely imploding.
Other than that, things are pretty good.
Seriously, it is absolutely critical that we don’t allow ourselves to be fooled by every little wave of momentum in the stock market.
It is a fact that sales and profits for U.S. corporations are declining. This is a trend that began all the way back in mid-2014 and that has accelerated during the early stages of 2016. The following comes from Wolf Richter…
Total US business sales – not just sales by S&P 500 companies but also sales by small caps and all other businesses, even those that are not publicly traded – peaked in July 2014 at $1.365 trillion, according to the Census Bureau. By December 2015, total business sales were down 4.6% from that peak. A bad 18 months for sales! They’re back where they’d first been in January 2013!
Sales by S&P 500 companies dropped 3.8% in 2015, according to FactSet, the worst year since the Financial Crisis.
I know that a lot of people have been eagerly anticipating a complete and total global economic collapse for a long time, and many of them just want to “get it over with”.
Well, the truth is that nobody should want to see what is coming. Personally, I rejoice for every extra day, week or month we are given. Every extra day is another day to prepare, and every extra day is another day to enjoy the extremely comfortable standard of living that our debt-fueled prosperity has produced for us.
Most Americans have absolutely no idea how spoiled we really are. Even just fifty years ago, life was so much harder in this country. If we had to go back and live the way that Americans did 100 or 150 years ago, there are very few of us that would be able to successfully do that.
So enjoy the remaining days of debt-fueled prosperity while you still can, because great change is coming, and it is going to be extremely bitter for most of the population.
As bad as the month of January was for the global economy, the truth is that the rest of 2016 promises to be much worse. Layoffs are increasing at a pace that we haven’t seen since the last recession, major retailers are shutting down hundreds of locations, corporate profit margins are plunging, global trade is slowing down dramatically, and several major European banks are in the process of completely imploding. I am about to share some numbers with you that are truly eye-popping. Each one by itself would be reason for concern, but when you put all of the pieces together it creates a picture that is hard to deny. The global economy is in crisis, and this is going to have very serious implications for the financial markets moving forward. U.S. stocks just had their worst January in seven years, and if I am right much worse is still yet to come this year. The following are 22 signs that the global economic turmoil that we have seen so far in 2016 is just the beginning…
1. The number of job cuts in the United States skyrocketed 218 percent during the month of January according to Challenger, Gray & Christmas.
2. The Baltic Dry Index just hit yet another brand new all-time record low. As I write this article, it is sitting at 303.
3. U.S. factory orders have now dropped for 14 months in a row.
4. In the U.S., the Restaurant Performance Index just fell to the lowest level that we have seen since 2008.
5. In January, orders for class 8 trucks (the big trucks that you see shipping stuff around the country on our highways) declined a whopping 48 percent from a year ago.
6. Rail traffic is also slowing down substantially. In Colorado, there are hundreds of train engines that are just sitting on the tracks with nothing to do.
7. Corporate profit margins peaked during the third quarter of 2014 and have been declining steadily since then. This usually happens when we are heading into a recession.
8. A series of extremely disappointing corporate quarterly reports is sending stock after stock plummeting. Here is a summary from Zero Hedge of a few examples that we have just witnessed…
- SHARES OF LIONS GATE ENTERTAINMENT FALL 5 PCT IN EXTENDED TRADE AFTER QUARTERLY RESULTS – RTRS
- TABLEAU SOFTWARE SHARES TUMBLE 40 PCT IN AFTER HOURS TRADING – RTRS
- YRC WORLDWIDE SHARES DOWN 16.4 PCT AFTER THE BALL FOLLOWING RESULTS – RTRS
- SPLUNK INC SHARES DOWN 7.6 PCT IN AFTER HOURS TRADING – RTRS
- LINKEDIN SHARES EXTEND DECLINE, DOWN 24 PCT AFTER RESULTS, GUIDANCE – RTRS
- HANESBRANDS SHARES FURTHER ADD TO LOSSES IN EXTENDED TRADE, LAST DOWN 14.9 PCT – RTRS
- OUTERWALL SHARES FALL 11 PCT IN EXTENDED TRADING AFTER QUARTERLY RESULTS – RTRS
- GENWORTH SHARES DOWN 16.5 PCT AFTER THE BELL FOLLOWING RESULTS, RESTRUCTURING PLAN
9. Junk bonds continue to crash on Wall Street. On Monday, JNK was down to 32.60 and HYG was down to 77.99.
10. On Thursday, a major British news source publicly named five large European banks that are considered to be in very serious danger…
Deutsche Bank, Credit Suisse, Santander, Barclays and RBS are among the stocks that are falling sharply sending shockwaves through the financial world, according to former hedge fund manager and ex Goldman Sachs employee Raoul Pal.
11. Deutsche Bank is the biggest bank in Germany and it has more exposure to derivatives than any other bank in the world. Unfortunately, Deutsche Bank credit default swaps are now telling us that there is deep turmoil at the bank and that a complete implosion may be imminent.
12. Last week, we learned that Deutsche Bank had lost a staggering 6.8 billion euros in 2015. If you will recall, I warned about massive problems at Deutsche Bank all the way back in September. The most important bank in Germany is exceedingly troubled, and it could end up being for the EU what Lehman Brothers was for the United States.
13. Credit Suisse just announced that it will be eliminating 4,000 jobs.
14. Royal Dutch Shell has announced that it is going to be eliminating 10,000 jobs.
15. Caterpillar has announced that it will be closing 5 plants and getting rid of 670 workers.
16. Yahoo has announced that it is going to be getting rid of 15 percent of its total workforce.
17. Johnson & Johnson has announced that it is slashing its workforce by 3,000 jobs.
18. Sprint just laid off 8 percent of its workforce and GoPro is letting go 7 percent of its workers.
19. All over America, retail stores are shutting down at a staggering pace. The following list comes from one of my previous articles…
-Wal-Mart is closing 269 stores, including 154 inside the United States.
-K-Mart is closing down more than two dozen stores over the next several months.
-J.C. Penney will be permanently shutting down 47 more stores after closing a total of 40 stores in 2015.
-Macy’s has decided that it needs to shutter 36 stores and lay off approximately 2,500 employees.
-The Gap is in the process of closing 175 stores in North America.
-Aeropostale is in the process of closing 84 stores all across America.
-Finish Line has announced that 150 stores will be shutting down over the next few years.
-Sears has shut down about 600 stores over the past year or so, but sales at the stores that remain open continue to fall precipitously.
20. According to the New York Times, the Chinese economy is facing a mountain of bad loans that “could exceed $5 trillion“.
21. Japan has implemented a negative interest rate program in a desperate attempt to try to get banks to make more loans.
22. The global economy desperately needs the price of oil to go back up, but Morgan Stanley says that we will not see $80 oil again until 2018.
It is not difficult to see where the numbers are trending.
Last week, I told my wife that I thought that Marco Rubio was going to do better than expected in Iowa.
How did I come to that conclusion?
It was simply based on how his poll numbers were trending.
And when you look at where global economic numbers are trending, they tell us that 2016 is going to be a year that is going to get progressively worse as it goes along.
So many of the exact same things that we saw happen in 2008 are happening again right now, and you would have to be blind not to see it.
Hopefully I am wrong about what is coming in our immediate future, because millions upon millions of Americans are not prepared for what is ahead, and most of them are going to get absolutely blindsided by the coming crisis.
Last time around it was subprime mortgages, but this time it is oil that is playing a starring role in a global financial crisis. Since the start of 2015, 42 North American oil companies have filed for bankruptcy, 130,000 good paying energy jobs have been lost in the United States, and at this point 50 percent of all energy junk bonds are “distressed” according to Standard & Poor’s. As you will see below, some of the big banks have a tremendous amount of loan exposure to the energy industry, and now they are bracing for big losses. And the longer the price of oil stays this low, the worse the carnage is going to get.
Today, the price of oil has been hovering around 29 dollars a barrel, and over the past 18 months the price of oil has fallen by more than 70 percent. This is something that has many U.S. consumers very excited. The average price of a gallon of gasoline nationally is just $1.89 at the moment, and on Monday it was selling for as low as 46 cents a gallon at one station in Michigan.
But this oil crash is nothing to cheer about as far as the big banks are concerned. During the boom years, those banks gave out billions upon billions of dollars in loans to fund exceedingly expensive drilling projects all over the world.
Now those firms are dropping like flies, and the big banks could potentially be facing absolutely catastrophic losses. The following examples come from CNN…
For instance, Wells Fargo (WFC) is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”
JPMorgan Chase (JPM) is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months.
Citigroup is another bank that also has a tremendous amount of exposure…
Citigroup (C) built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.”
If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there.
For the moment, these big banks are telling the public that the damage can be contained.
But didn’t they tell us the same thing about subprime mortgages in 2008?
We are already seeing bank stocks start to slide precipitously. People are beginning to realize that these banks are dangerously exposed to a lot of really bad deals.
If the price of oil were to shoot back up above 50 dollars in very short order, the damage would probably be manageable. Unfortunately, that does not appear likely to happen. In fact, now that sanctions have been lifted on Iran, the Iranians are planning to flood the world with massive amounts of oil that they have been storing in tankers at sea…
Iran has been carefully planning for its return from the economic penalty box by hoarding tons of oil in tankers at sea.
Now that the U.S. and European Union have lifted some sanctions on Iran, the OPEC country can begin selling its massive stockpile of oil.
The sale of this seaborne oil will allow Iran to get an immediate financial boost before it ramps up production. The onslaught of Iranian oil is coming at a terrible time for the global oil markets, which are already drowning in an epic supply glut.
Just the other day, I explained that some of the biggest banks in the world are now projecting that the price of oil could soon fall much, much lower.
Morgan Stanley says that it could go as low as 20 dollars a barrel, the Royal Bank of Scotland says that it could go as low as 16 dollars a barrel, and Standard Chartered says that it could go as low as 10 dollars a barrel.
But the truth is that the price of oil does not need to go down one penny more to have a catastrophic impact on global financial markets. If it just stays right here, we will see an endless parade of layoffs, energy company bankruptcies and debt defaults. Without any change, junk bonds will continue to crash and financial institutions will continue to go down like dominoes.
We are already experiencing a major disaster. Things are already so bad that some forms of low quality crude oil are literally selling for next to nothing. The following comes from Bloomberg…
Oil is so plentiful and cheap in the U.S. that at least one buyer says it would pay almost nothing to take a certain type of low-quality crude.
Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a corrected list of prices posted on its website Monday. It had previously posted a price of -$0.50. The crude is down from $13.50 a barrel a year ago and $47.60 in January 2014.
While the near-zero price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch.
A chart that I saw posted on Zero Hedge earlier today can help put all of this into perspective. Whenever the price of oil falls really low relative to the price of gold, there is a major global crisis. Right now an ounce of gold will purchase more oil than ever before, and many believe that this indicates that a new great crisis is upon us…
The number of barrels of oil that a single ounce of gold can buy has never, ever been higher.
All over the planet, big banks are absolutely teeming with bad loans. And to be honest, the big banks in the U.S. are probably in better shape than some of the major banks in Europe and Asia. But once the dominoes start to fall, very few financial institutions are going to escape unscathed.
In the coming days I would expect to see more headlines like we just got out of Italy. Apparently, Italian banks are nearing full meltdown mode, and short selling has been temporarily banned. To me, it appears that we are just inches away from full-blown financial panic in Europe.
However, just like with the last financial crisis, you never quite know where the next “explosion” is going to happen next.
But one thing is for sure – the financial crisis that began during the second half of 2015 is raging out of control, and the pain that we have seen so far is just the beginning.
Did you know that 15 trillion dollars of global stock market wealth has been wiped out since last June? The worldwide financial crisis that began in the middle of last year is starting to spin wildly out of control. On Friday, the Dow plunged another 390 points, and it is now down a total of 1,437 points since the beginning of this calendar year. Never before in U.S. history have stocks ever started a year this badly. The same thing can be said in Europe, where stocks have now officially entered bear market territory. As I discussed yesterday, the economic slowdown and financial unraveling that we are witnessing are truly global in scope. Banks are failing all over the continent, and I expect major European banks to start making some huge headlines not too long from now. And of course let us not forget about China. On Friday the Shanghai Composite declined another 3.6 percent, and overall it is now down more than 20 percent from its December high. Much of this chaos has been driven by the continuing crash of the price of oil. As I write this article, it has dipped below 30 dollars a barrel, and many of the big banks are projecting that it still has much farther to fall.
The other night, Barack Obama got up in front of the American people and proclaimed that anyone that was saying that the economy was not recovering was peddling fiction. Well, if the U.S. economy is doing so great, then why in the world has Wal-Mart decided to shut down 269 stores?…
Walmart (WMT) will close 269 stores around the world in a strategic move to focus more on its supercenters and e-commerce business, the company said Friday.
The closures include 154 U.S. locations, encompassing Walmart’s entire fleet of 102 ‘Express’ format stores, its smallest stores that have been in pilot testing since 2011. Some supercenters, Sam’s Club locations and Neighborhood Markets will also close, plus 115 stores in Latin American markets. The closures were decided based on financial performance and how well the locations fit with Walmart’s broader strategy, says Greg Hitt, a company spokesman.
We have grown accustomed to other major retailers shutting down stores, but this is Wal-Mart.
Wal-Mart doesn’t retreat. For decades, Wal-Mart has been on a relentless march forward. They have been an unstoppable juggernaut that has expanded extremely aggressively and that has ruthlessly crushed the competition.
I was absolutely stunned when I saw that they were going to close down 269 stores. If you want to know if your local store is in danger, you can view the full list right here.
Overall, 10,000 Wal-Mart employees will be affected. I could understand closing down a few underperforming stores, but if the U.S. economy truly is in great shape then it wouldn’t make any sense at all to shut down hundreds of stores.
What in the name of Sam Walton is going on out there?
The truth, of course, is that the U.S. economy is in great danger. We have now entered the next great crisis, but most communities around the country never even recovered from the last one. In fact, the Wall Street Journal is reporting that a whopping 93 percent of all counties in the United States “have failed to fully recover” from the last recession…
More than six years after the economic expansion began, 93% of counties in the U.S. have failed to fully recover from the blow they suffered during the recession.
Nationwide, 214 counties, or 7% of 3,069, had recovered last year to prerecession levels on four indicators: total employment, the unemployment rate, size of the economy and home values, a study from the National Association of Counties released Tuesday found.
The next few weeks are going to be very interesting to watch. The economic fundamentals continue to deteriorate, and the financial markets are finally starting to catch up with economic reality.
As the collapse on Wall Street accelerates, we are going to increasingly see panic selling and forced liquidations. In the past, it was mostly humans that had their hands on the controls during market crashes, but today the machines are making more of the decisions than ever before. The following comes from CNBC…
The new market age is decidedly different: Rather than that seething cacophony, aggressive corrections like the current ones are directed by a faceless metronome of computer-generated orders, triggering irresistible momentum and trillions in losses.
Amid it all, market veterans are left to ponder when the script will flip and market direction will turn not by newfound optimism among traders in the pits, but rather by algorithms that generate “buy” rather than “sell” signals.
“It feels like sell program after sell program,” said Michael Cohn, chief market strategist at Atlantis Asset Management, a boutique firm in New York. “It seems to happen first thing in the morning, and then however the market transpires during the day is how they close it. If it looks like it’s coming back, they’ll take it at the end. If if looks like it’s heading lower, they’ll slam it at the end of the day.”
Earlier today, an article authored by Michael Pento entitled “A recession worse than 2008 is coming” was posted on CNBC. Here is a short excerpt…
But a recession has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one — we are overdue.
Most importantly, the average market drop during the peak to trough of the last 6 recessions has been 37 percent. That would take the S&P 500 down to 1,300; if this next recession were to be just of the average variety.
But this one will be worse.
If stocks do drop a total of 37 percent, that would just bring them back to levels that would be considered “normal” or “average” by historical standards. There is certainly the possibility that they could fall much farther than that.
And of course the markets are so incredibly fragile at this point that any sort of a “trigger event” could cause a collapse of epic proportions.
All it is going to take is a major disaster or emergency of some sort.
Do you have a feeling that something really bad is about to happen? This is something that I have been hearing from people that I respect, and I would like to know if it is a phenomenon that is more widespread. If you have been feeling something like this, please feel free to share it with us by posting a comment below…