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…
The Royal Bank of Scotland is telling clients that 2016 is going to be a “cataclysmic year” and that they should “sell everything”. This sounds like something that you might hear from The Economic Collapse Blog, but up until just recently you would have never expected to get this kind of message from one of the twenty largest banks on the entire planet. Unfortunately, this is just another indication that a major global financial crisis has begun and that we are now entering a bear market. The collective market value of companies listed on the S&P 500 has dropped by about a trillion dollars since the start of 2016, and panic is spreading like wildfire all over the globe. And of course when the Royal Bank of Scotland comes out and openly says that “investors should be afraid” that certainly is not going to help matters.
It amazes me that the Royal Bank of Scotland is essentially saying the exact same thing that I have been saying for months. Just like I have been telling my readers, RBS has observed that global markets “are flashing the same stress alerts as they did before the Lehman crisis in 2008″…
RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that the major stock markets could fall by a fifth and oil may reach US$16 a barrel.
The bank’s credit team said markets are flashing the same stress alerts as they did before the Lehman crisis in 2008.
So what should our response be to these warning signs?
According to RBS, the logical thing to do is to “sell everything” excerpt for high quality bonds…
“Sell everything except high quality bonds,” warned Andrew Roberts in a note this week.
He said the bank’s red flags for 2016 — falling oil, volatility in China, shrinking world trade, rising debt, weak corporate loans and deflation — had all been seen in just the first week of trading.
“We think investors should be afraid,” he said.
And of course RBS is not the only big bank issuing these kinds of ominous warnings.
The biggest bank in America, J.P. Morgan Chase, is “urging investors to sell stocks on any bounce”…
J.P. Morgan Chase has turned its back on the stock market: For the first time in seven years, the investment bank is urging investors to sell stocks on any bounce.
“Our view is that the risk-reward for equities has worsened materially. In contrast to the past seven years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally,” Mislav Matejka, an equity strategist at J.P. Morgan, said in a report.
Aside from technical indicators, expectations of anemic corporate earnings combined with the downward trajectory in U.S. manufacturing activity and a continued weakness in commodities are raising red flags.
Major banks have not talked like this since the great financial crisis of 2008/2009. Clearly something really big is going on. Trillions of dollars of financial wealth were wiped out around the world during the last six months of 2015, and trillions more dollars have been wiped out during the first 12 days of 2016. As I noted above, the collective market value of the S&P 500 is down by about a trillion dollars all by itself.
One of the big things driving all of this panic is the stunning collapse in the price of oil. U.S. oil was trading as low as $29.93 a barrel on Tuesday, and this was the first time that oil has traded under 30 dollars a barrel since December 2003.
Needless to say, this collapse is absolutely killing energy companies. The following comes from USA Today…
There aren’t many people who feel bad for oil companies. But the implosion in oil prices is causing a profit decline that almost invokes pity.
The companies in the Standard & Poor’s 500 energy sector are expected to lose a collective $28.8 billion this calendar year, down from $95.4 billion in net income earned during the industry’s bonanza year of 2008, according to a USA TODAY analysis of data from S&P Capital IQ. That’s a $124 billion swing against energy companies – and one you’re probably enjoying at the pump. The analysis includes only the 36 S&P 500 energy companies that reported net income in 2008.
If we are to avoid a major global deflationary crisis, we desperately need the price of oil to get back above 50 dollars a barrel. Unfortunately, that does not appear to be likely to happen any time soon. In fact, Dallas Fed President Robert Kaplan says that the price of oil is probably going to stay very low for years to come…
You’d expect at least some artificial optimism when the president of the Dallas Fed talks about oil. You’d expect some droplets of hope for that crucial industry in Texas. But when Dallas Fed President Robert Kaplan spoke on Monday, there was none, not for 2016, and most likely not for 2017 either, and maybe not even for 2018.
The wide-ranging speech included a blunt section on oil, the dismal future of the price of oil, the global and US causes for its continued collapse, and what it might mean for the Texas oil industry: “more bankruptcies, mergers and restructurings….”
The oil price plunge since mid-2014, with its vicious ups and downs, was bad enough. But since the OPEC meeting in December, he said, “the overall tone in the oil and gas sector has soured, as expectations have decidedly shifted to an ‘even lower for even longer’ price outlook.”
In recent articles I have discussed so many of the other signs that indicate that there is big trouble ahead, but today I just want to quickly mention another one that has just popped up in the news.
The amount of stuff being shipped across the U.S. by rail has been dropping dramatically. The only times when we have seen similar large drops has been during previous recessions. The following comes from Bloomberg…
Railroad cargo in the U.S. dropped the most in six years in 2015, and things aren’t looking good for the new year.
“We believe rail data may be signaling a warning for the broader economy,” the recent note from Bank of America says. “Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009.”
BofA analysts led by Ken Hoexter look at the past 30 years to see what this type of steep decline usually means for the U.S. economy. What they found wasn’t particularly encouraging: All such drops in rail carloads preceded, or were accompanied by, an economic slowdown (Note: They excluded 1996 due to an extremely harsh winter).
The “next economic downturn” is already here, and it is starting to accelerate.
Yes, the financial markets are starting to catch up with economic reality, but they still have a long, long way to go. It is going to take another 30 percent drop or so just for them to get to levels that are considered to be “normal” or “average” by historical standards.
And the markets are so fragile at this point that any sort of a major “trigger event” could cause a sudden market implosion unlike anything that we have ever seen before.
So let us hope for the best, but let us also heed the advice of RBS and get prepared for a “cataclysmic” year.
Did you know that there are 5 “too big to fail” banks in the United States that each have exposure to derivatives contracts that is in excess of 30 trillion dollars? Overall, the biggest U.S. banks collectively have more than 247 trillion dollars of exposure to derivatives contracts. That is an amount of money that is more than 13 times the size of the U.S. national debt, and it is a ticking time bomb that could set off financial Armageddon at any moment. Globally, the notional value of all outstanding derivatives contracts is a staggering 552.9 trillion dollars according to the Bank for International Settlements. The bankers assure us that these financial instruments are far less risky than they sound, and that they have spread the risk around enough so that there is no way they could bring the entire system down. But that is the thing about risk – you can try to spread it around as many ways as you can, but you can never eliminate it. And when this derivatives bubble finally implodes, there won’t be enough money on the entire planet to fix it.
A lot of readers may be tempted to quit reading right now, because “derivatives” is a term that sounds quite complicated. And yes, the details of these arrangements can be immensely complicated, but the concept is quite simple. Here is a 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.
I like to refer to the derivatives marketplace as a form of “legalized gambling”. Those that are engaged in derivatives trading are simply betting that something either will or will not happen in the future. Derivatives played a critical role in the financial crisis of 2008, and I am fully convinced that they will take on a starring role in this new financial crisis.
And I am certainly not the only one that is concerned about the potentially destructive nature of these financial instruments. In a letter that he once wrote to shareholders of Berkshire Hathaway, Warren Buffett 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.
Since the last financial crisis, the big banks in this country have become even more reckless. And that is a huge problem, because our economy is even more dependent on them than we were the last time around. At this point, the four largest banks in the U.S. are approximately 40 percent larger than they were back in 2008. The five largest banks account for approximately 42 percent of all loans in this country, and the six largest banks account for approximately 67 percent of all assets in our financial system.
So the problem of “too big to fail” is now bigger than ever.
If those banks go under, we are all in for a world of hurt.
Yesterday, I wrote about how the Federal Reserve has implemented new rules that would limit the ability of the Fed to loan money to these big banks during the next crisis. So if the survival of these big banks is threatened by a derivatives crisis, the money to bail them out would probably have to come from somewhere else.
In such a scenario, could we see European-style “bail-ins” in this country?
Ellen Brown, one of the most fierce critics of our current financial system and the author of Web of Debt, seems to think so…
Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank.
Title II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.
For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back.
As I mentioned yesterday, the FDIC guarantees the safety of deposits in member banks up to a certain amount. But as Brown has pointed out, the FDIC only has somewhere around 70 billion dollars sitting around to cover bank failures.
If hundreds of billions or even trillions of dollars are ultimately needed to bail out the banking system, where is that money going to come from?
It would be difficult to overstate the threat that derivatives pose to our “too big to fail” banks. The following numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is on a level that is difficult to put into words…
Total Assets: $1,808,356,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $53,042,993,000,000 (more than 53 trillion dollars)
Total Assets: $2,417,121,000,000 (about 2.4 trillion dollars)
Total Exposure To Derivatives: $51,352,846,000,000 (more than 51 trillion dollars)
Total Assets: $880,607,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $51,148,095,000,000 (more than 51 trillion dollars)
Bank Of America
Total Assets: $2,154,342,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $45,243,755,000,000 (more than 45 trillion dollars)
Total Assets: $834,113,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $31,054,323,000,000 (more than 31 trillion dollars)
Total Assets: $1,751,265,000,000 (more than 1.7 trillion dollars)
Total Exposure To Derivatives: $6,074,262,000,000 (more than 6 trillion dollars)
As the “real economy” crumbles, major hedge funds continue to drop like flies, and we head into a new recession, there seems to very little alarm among the general population about what is happening.
The mainstream media is assuring us that everything is under control, and they are running front page headlines such as this one during the holiday season: “Kylie Jenner shows off her red-hot, new tattoo“.
But underneath the surface, trouble is brewing.
A new financial crisis has already begun, and it is going to intensify as we head into 2016.
And as this new crisis unfolds, one word that you are going to want to listen for is “derivatives”, because they are going to play a major role in the “financial Armageddon” that is rapidly approaching.
If you have a bank account anywhere in Europe, you need to read this article. On January 1st, 2016, a new bail-in system will go into effect for all European banks. This new system is based on the Cyprus bank bail-ins that we witnessed a few years ago. If you will remember, money was grabbed from anyone that had more than 100,000 euros in their bank accounts in order to bail out the banks. Now the exact same principles that were used in Cyprus are going to apply to all of Europe. And with the entire global financial system teetering on the brink of chaos, that is not good news for those that have large amounts of money stashed in shaky European banks.
Below, I have shared part of an announcement about this new bail-in system that comes directly from the official website of the European Parliament. I want you to notice that they explicitly say that “unsecured depositors would be affected last”. What they really mean is that any time a bank in Europe fails, they are going to come after private bank accounts once the shareholders and bond holders have been wiped out. So if you have more than 100,000 euros in a European bank right now, you are potentially on the hook when that bank goes under…
The directive establishes a bail-in system which will ensure that taxpayers will be last in the line to the pay the bills of a struggling bank. In a bail-in, creditors, according to a pre-defined hierarchy, forfeit some or all of their holdings to keep the bank alive. The bail-in system will apply from 1 January 2016.
The bail-in tool set out in the directive would require shareholders and bond holders to take the first big hits. Unsecured depositors (over €100,000) would be affected last, in many cases even after the bank-financed resolution fund and the national deposit guarantee fund in the country where it is located have stepped in to help stabilise the bank. Smaller depositors would in any case be explicitly excluded from any bail-in.
And as we have seen in the past, these rules can change overnight in the midst of a major crisis.
So they may be promising that those with under 100,000 euros will be safe right now, but that doesn’t necessarily mean that it will be true.
It is also important to note that there has been a really big hurry to get all of this in place by January 1. In fact, at the end of October the European Commission actually sued six nations that had not yet passed legislation adopting the new bail-in rules…
The European Commission is taking legal action against member states including the Netherlands and Luxembourg, after they failed to implement rules protecting European taxpayers from funding billions in bank rescues.
Six countries will be referred to the European Court of Justice (ECJ) for their continued failure to transpose the EU’s “bail-in” laws into national legislation, the European Commission said on Thursday.
So why was the European Commission in such a rush?
Is there some particular reason why January 1 is so important?
This is something that I will be watching.
Meanwhile, there have been major changes in the U.S. as well. The Federal Reserve recently adopted a new rule that limits what it can do to bail out the “too big to fail” banks. The following comes from CNN…
The Federal Reserve is cutting its lifeline to big banks in financial trouble.
The Fed officially adopted a new rule Monday that limits its ability to lend emergency money to banks.
In theory, the new rule should quash the notion that Wall Street banks are “too big to fail.”
If this new rule had been in effect during the last financial crisis, the Federal Reserve would not have been able to bail out AIG or Bear Stearns. As a result, the final outcome of the last crisis may have been far different. Here is more from CNN…
Under the new rule, banks that are going bankrupt — or appear to be going bankrupt — can no longer receive emergency funds from the Fed under any circumstances.
If the rule had been in place during the financial crisis, it would have prevented the Fed from lending to insurance giant AIG (AIG) and Bear Stearns, Fed chair Janet Yellen points out.
So if the Federal Reserve does not bail out these big financial institutions during the next crisis, what is going to happen?
Will we see European-style “bail-ins” when large banks start failing?
And exactly what would such a “bail-in” look like?
Earlier this year, I discussed the concept of a “bail-in”…
Essentially, what happens is that wealth is transferred from the “stakeholders” in the bank to the bank itself in order to keep it solvent. That means that creditors and shareholders could potentially lose everything if a major bank in Europe fails. And if their “contributions” are not enough to save the bank, those holding private bank accounts will have to take “haircuts” just like we saw in Cyprus. In fact, the travesty that we witnessed in Cyprus is being used as a “template” for much of the new legislation that is being enacted all over Europe.
Many Americans assume that when they put money in the bank that they have a right to go back and get “their money” whenever they want. But if we all went to the bank at the same time, there wouldn’t be nearly enough money for all of us. The reason for this is that the banks only keep a small fraction of our money on hand to satisfy the demands of those that conduct withdrawals on a day to day basis. The banks take the rest of the money that we have deposited and use it however they think is best.
If you have money at a bank that goes under, that bank will still be obligated to pay you back, but it may not be able to do so. This is where the FDIC comes in. The FDIC supposedly guarantees the safety of deposits in member banks, but at any given time it only has a very, very small amount of money on hand.
If some major crisis comes along that causes banks all over the United States to start falling like dominoes, the FDIC will be in panic mode. During such a scenario, the FDIC would be forced to ask Congress for a massive amount of money, and since we already run a giant deficit every year the government would have to borrow whatever funds would be required.
Personally, I find it very interesting that we have seen major rule changes in Europe and at the Federal Reserve just as we are entering a new global financial crisis.
Do they know something that the rest of us do not?
Be very careful with your money, because I am convinced that “bank bail-ins” will soon be making front page headlines all over the world.
One of the most important banks in the western world says that the 7th largest economy on the entire planet has entered a full-blown economic depression. Brazil’s economy has now contracted for three quarters in a row, and many analysts believe that things are going to get far worse before they have a chance to get any better. Earlier this year, I warned about “the South American financial crisis of 2015“, and now it is in full swing. The surging U.S. dollar is absolutely crushing emerging markets such as Brazil, and if the Fed raises interest rates this month that is going to make the pain even worse. The global financial system is more interconnected than ever before, and the decisions made by the Federal Reserve truly do have global consequences. So much of the “hot money” that was created by the Fed poured into emerging markets such as Brazil during the good times, but now the process is starting to reverse itself. At this point, it is hard to see how much of South America is going to avoid a complete and total economic disaster.
It is one thing for Michael Snyder from the Economic Collapse Blog to say that the Brazilian economy has entered a “depression”, but it is another thing entirely when Goldman Sachs comes out and publicly says it. The following comes from a Bloomberg article that was just posted entitled “Goldman Warns of Brazil Depression After GDP Plunges Again“…
Latin America’s largest economy shrank more than analysts forecast, as rising unemployment and higher inflation sapped domestic demand, pulling the nation deeper into what Goldman Sachs now calls “an outright depression.”
Gross domestic product in Brazil contracted 1.7 percent in the three months ended in September, after a revised 2.1 percent drop the previous quarter, the national statistics institute said in Rio de Janeiro. That’s worse than all but three estimates from 44 economists surveyed by Bloomberg, whose median forecast was for a 1.2 percent decline. It also marks the first three-quarter contraction since the institute’s series began in 1996, and a seasonally adjusted annual drop of 6.7 percent.
And when you look deeper into the numbers they become even more disturbing.
Unemployment is rising, consumer spending is way down, and investment spending is absolutely collapsing. Here is some of the data that Goldman Sachs just released that comes via Zero Hedge…
Private consumption has now declined for three consecutive quarters (at an average quarterly rate of -8.5% qoq sa, annualized), and investment spending for nine consecutive quarters (at an average rate of -10.0% qoq sa, annualized). Overall, gross fixed investment declined by a cumulative 21% from 2Q2013. The declining capital stock of the economy (declining capital-labor ratio) hurts productivity growth and limits even further potential GDP. The sharp contraction of real activity during 3Q was broad-based: both on the supply and final demand side. Final domestic demand weakened sharply during 3Q2015 (-1.7% qoq sa and -6.0% yoy) with private consumption down 1.5% qoq sa (-4.5% yoy) and gross fixed investment down 4.0% qoq sa (-15.0% yoy). Finally, on the supply side, we highlight that the large labor intensive services sector retrenched again at the margin (-1.0% qoq sa; -2.9% yoy).
The term “economic depression” is not something that should be used lightly, because it conjures up images of the Great Depression of the 1930s. And the Brazilian economy is very important to the global economic system. As I mentioned above, there are only six countries in the entire world that have a larger economy, and Brazil accounts for more than 242 billion dollars worth of exports every year.
So if Brazil is feeling pain, it is going to affect all of us.
Up to this point, everyone had been calling what has been going on in Brazil a “recession”, but now Goldman Sachs is the first major bank to label it “an outright economic depression”…
“What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., wrote in a report Tuesday.
Of course Brazil is far from alone. The third largest economy on the globe, Japan, has also now slipped into recession territory. So has Russia. And just today we learned that Canadian GDP is plunging…
Who could have seen that coming? It appears, for America’s northern brethren, low oil prices are unequivocally terrible. Against expectations of a flat 0.0% unchanged September, Canadian GDP plunged 0.5% – its largest MoM drop since March 2009 and the biggest miss since Dec 2008.
It is just a matter of time before this global economic downturn catches up with us here in the U.S. too.
In fact, there is evidence that this is already happening.
According to brand new numbers that just came out, manufacturing activity in the U.S. is contracting at the fastest pace that we have seen since the last recession…
Manufacturing in the U.S. unexpectedly contracted in November at the fastest pace since the last recession as elevated inventories led to cutbacks in orders and production.
The Institute for Supply Management’s index dropped to 48.6, the lowest level since June 2009, from 50.1 in October, a report from the Tempe, Arizona-based group showed Tuesday. The November figure was weaker than the most pessimistic forecast in a Bloomberg survey. Readings less than 50 indicate contraction.
Another indicator that I am watching is the velocity of money.
When an economy is healthy, money tends to flow fairly freely. I buy something from you, and then you buy something from someone else, etc.
But when economic conditions start to get tough, people start to hold on to their money. That means that money doesn’t change hands as quickly and the velocity of money goes down. As you can see below, the velocity of money has declined during every single recession since 1960…
When a recession ends, the velocity of money normally starts going back up.
But a funny thing happened when the last recession ended. The velocity of money ticked up slightly, but then it started going down steadily. In fact, it has kept on declining ever since and it has now hit a brand new all-time record low.
This is not normal. Yes, Wall Street is temporarily flying high for the moment, but the underlying economic fundamentals are all screaming that something is horribly wrong.
A global crisis has begun, and the U.S. will not be immune from it. I truly believe that we are heading toward the worst economic downturn that any of us have ever experienced.
But there are many out there that insist that nothing is the matter and that happy times are ahead.
So who is right and who is wrong?
We will just have to wait and see…
Keep an eye on the shadow banking system – it is about to be shaken to the core. According to the Financial Stability Board, the size of the global shadow banking system has reached an astounding 75 trillion dollars. It has approximately tripled in size since 2002. In the U.S. alone, the size of the shadow banking system is approximately 24 trillion dollars. At this point, shadow banking assets in the United States are even greater than those of conventional banks. These shadow banks are largely unregulated, but governments around the world have been extremely hesitant to crack down on them because these nonbank lenders have helped fuel economic growth. But in the end, we will all likely pay a very great price for allowing these exceedingly reckless financial institutions to run wild.
If you are not familiar with the “shadow banking system”, the following is a pretty good definition from investing answers.com…
The shadow banking system (or shadow financial system) is a network of financial institutions comprised of non-depository banks — e.g., investment banks, structured investment vehicles (SIVs), conduits, hedge funds, non-bank financial institutions and money market funds.
How it works/Example:
Shadow banking institutions generally serve as intermediaries between investors and borrowers, providing credit and capital for investors, institutional investors, and corporations, and profiting from fees and/or from the arbitrage in interest rates.
Because shadow banking institutions don’t receive traditional deposits like a depository bank, they have escaped most regulatory limits and laws imposed on the traditional banking system. Members are able to operate without being subject to regulatory oversight for unregulated activities. An example of an unregulated activity is a credit default swap (CDS).
These institutions are extremely dangerous because they are highly leveraged and they are behaving very recklessly. They played a major role during the financial crisis of 2008, and even the New York Fed admits that shadow banking has “increased the fragility of the entire financial system”…
The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities.
Over the past decade, shadow banking has become a truly worldwide phenomenon, and thus it is a major threat to the entire global financial system. In China, shadow banking has been growing by leaps and bounds, but this has the authorities deeply concerned. In fact, according to Bloomberg one top Chinese regulator has referred to shadow banking as a “Ponzi scheme”…
Their growth had caused the man who is now China’s top securities regulator to label the off-balance-sheet products a “Ponzi scheme,” because banks have to sell more each month to pay off those that are maturing.
And what happens to all Ponzi schemes eventually?
In the end, they always collapse.
And when this 75 trillion dollar Ponzi scheme collapses, the global devastation that it will cause will be absolutely unprecedented.
Bond expert Bill Gross, who is intimately familiar with the shadow banking system, has just come out with a major warning about the lack of liquidity in the shadow banking system…
Mutual funds, hedge funds, and ETFs, are part of the “shadow banking system” where these modern “banks” are not required to maintain reserves or even emergency levels of cash. Since they in effect now are the market, a rush for liquidity on the part of the investing public, whether they be individuals in 401Ks or institutional pension funds and insurance companies, would find the “market” selling to itself with the Federal Reserve severely limited in its ability to provide assistance.
As far as shadow banking is concerned, everything is just fine as long as markets just keep going up and up and up.
But once they start falling, the whole system can start falling apart very rapidly. Here is more from Bill Gross on what might cause a “run on the shadow banks” in the near future…
Long used to the inevitability of capital gains, investors and markets have not been tested during a stretch of time when prices go down and policymakers’ hands are tied to perform their historical function of buyer of last resort. It’s then that liquidity will be tested.
And what might precipitate such a “run on the shadow banks”?
1) A central bank mistake leading to lower bond prices and a stronger dollar.
2) Greece, and if so, the inevitable aftermath of default/restructuring leading to additional concerns for Eurozone peripherals.
3) China – “a riddle wrapped in a mystery, inside an enigma”. It is the “mystery meat” of economic sandwiches – you never know what’s in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign.
4) Emerging market crisis – dollar denominated debt/overinvestment/commodity orientation – take your pick of potential culprits.
5) Geopolitical risks – too numerous to mention and too sensitive to print.
6) A butterfly’s wing – chaos theory suggests that a small change in “non-linear systems” could result in large changes elsewhere. Call this kooky, but in a levered financial system, small changes can upset the status quo. Keep that butterfly net handy.
Should that moment occur, a cold rather than a hot shower may be an investor’s reward and the view will be something less than “gorgeous”. So what to do? Hold an appropriate amount of cash so that panic selling for you is off the table.
In order to avoid a shadow banking crisis, what we need is for global financial markets to stabilize and to resume their upward trends.
If stocks and bonds start crashing, which is precisely what I have projected will happen during the last half of 2015, the shadow banking system is going to come under an extreme amount of stress. If the coming global financial crisis is even half as bad as I believe it is going to be, there is no way that the shadow banking system is going to hold up.
So let’s hope that the financial devastation that we have seen so far this week is not a preview of things to come. The global financial system has been transformed into a delicately balanced pyramid of glass that is not designed to handle turbulent times. We should have never allowed the shadow banks to run wild like this, but we did, and now in just a short while we are going to get to witness a financial implosion unlike anything the world has ever seen before.