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.
Since Donald Trump’s victory on election night we have seen the worst bond crash in 15 years. Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead. The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates. Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown. And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money. The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.
For those that are not familiar with the bond market, when yields go up bond prices go down. And when bond prices go down, that is bad news for economic growth.
The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!
The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.
As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes. Just look at what is happening to mortgages. As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…
The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”
If mortgage rates continue to shoot higher, there will be another housing crash.
Rates on auto loans, credit cards and student loans will also be affected. Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.
Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon…
In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one:
“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”
Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.
And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.
Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down. It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.
The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge. The following comes from Lance Roberts…
With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.
Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.
Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.
If you look at history, a stock market crash almost always follows a major bond crash. So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.
And history has also shown us that no bull market can survive a major recession. If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.
The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.
Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.
Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.
That is an enormous mistake.
A shaking has already begun in the financial world, and this shaking could easily become an avalanche.
Now is not a time to party. Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.
All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way.
So get prepared while you still can, because time is running out.
The election of Donald Trump has sent shockwaves through the U.S. economy and the U.S. financial system. Since November 8th, the Dow has hit a brand new all-time record high, the U.S. dollar has strengthened greatly, and bank stocks are way up. But not all of the economic news is good news. Unlike stocks, bonds have reacted very negatively to Trump’s election victory. The past week has been an absolute bloodbath for bond traders, and as you will see below this is going to have dramatic implications for all U.S. consumers moving forward.
Over just a two day period, more than a trillion dollars was wiped out as bond yields spiked all over the globe. As CNN has noted, this type of “violent reaction” in the bond market has only happened three other times within the past ten years…
The rate on 10-year Treasury notes has surged to 2.3%, from 1.77% before the election. Last week’s spike in Treasury rates was so big, that it had only happened three times before in the last decade.
BlackRock’s Russ Koesterich called it a “violent reaction.”
The move stands to have broad repercussions for all Americans. Not only will the U.S. government have to pay more to borrow money, but mortgage rates and car loan costs should also rise. That’s because Treasuries are used as the benchmark for many other forms of credit.
As interest rates rise, virtually everyone in our society is going to feel the pain.
Those that need an auto loan in order to purchase a vehicle are going to find that loan payments are significantly higher than they were before.
Credit card rates will also go up, and those just getting out of school will discover that their student loan payments are even more suffocating.
The average contract rate on the popular 30-year fixed mortgage hit 4 percent, according to Mortgage News Daily, a level most didn’t expect to see until the middle of next year. Rates have now moved nearly a half a percentage point higher since Donald Trump was elected president.
“The situation on the ground is panicked. Damage control,” said Matthew Graham, chief operating officer of Mortgage News Daily. “People were trying to lock loans quickly last week and are now facing a tough choice to lock today or hope for a bounce. Many hoped for a bounce last week heading into the long weekend and we obviously didn’t get it.”
Rising interest rates was one of the key factors that precipitated the financial crisis of 2008, and many fear that it could happen again.
“If you’re going to buy a house and your mortgage payment went up by $200 or $300, you may buy a smaller house. There’s impact on interest rate sensitive sectors, like autos and housing, and also corporate bonds themselves, where financial engineering has helped juice up the equity market,” said George Goncalves, head of rate strategy at Nomura.
In addition, rising rates will make it more difficult for those with adjustable rate mortgages to keep their homes. Foreclosure activity was already up 27 percent during the month of October, and many are projecting that we could see another giant spike in foreclosures during the months ahead that is similar to what we saw during the last financial crisis.
Many Trump supporters don’t really care what the rest of the world thinks of our new president, but this is an area where what the rest of the world thinks really, really matters.
The truth is that the rest of the planet is not all too fond of Trump, and if that makes them a lot less eager to lend us money that is a major problem.
The only way that we can maintain our massively inflated debt-fueled standard of living is to continue to borrow gigantic mountains of money from the rest of the world at ultra-low interest rates.
If the rest of the world starts demanding higher rates of return now that Trump is president, we are going to experience economic pain on a scale that most Americans don’t believe is possible.
One of our big lenders has been China, and right now they are deeply concerned about what a Trump presidency might mean. Trump has talked very tough about trade with China, and the Chinese are gearing up for a major trade war. The following comes from CNBC…
During his election campaign this year, Trump spoke of a 45 percent import tariff on all Chinese goods while failing to outline how it would work. Should any such policy come into effect, China will take a “tit-for-tat approach”, according to an opinion piece in the Global Times, a newspaper backed by the Communist party.
“A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.,” the Global Times article read.
Most Trump supporters assume that since Trump has been a very successful businessman that he will be able to strengthen the U.S. economy.
But it isn’t that simple.
The only reason we are able to live the way that we live today is because we have been able to borrow trillions upon trillions of dollars at irrationally low interest rates.
The moment the rest of the world decides that they are not going to loan us money at irrationally low interest rates any longer the game is over, and it won’t really matter who is in the White House at that point.
So watch interest rates very carefully. If they keep going up, it is inevitable that a major economic slowdown will follow no matter what economic policies the new Trump administration implements.
The extreme carnage that we are witnessing in the junk bond market right now is one of the clearest signals yet that a major U.S. stock market crash is imminent. For those that are not familiar with “junk bonds”, please don’t get put off by the name. They aren’t really “junk”. They simply have a higher risk and thus a higher return than other bonds of the same type. And yesterday, I explained why I watch them so closely. If stocks are going to crash, you would expect to see a junk bond crash first. This happened in 2008, and it is happening again right now. On Monday, a high yield bond ETF known as JNK crashed through the psychologically important 35.00 barrier for the very first time since the last financial crisis. On Tuesday, high yield bonds had their worst day in three months, and JNK plummeted all the way down to 34.44. When I saw this I was absolutely stunned. This is precisely the kind of junk bond crash that I have been anticipating that we would soon witness.
Normally, stocks and junk bonds track one another very closely, but just like before the 2008 crash, they have become decoupled in recent months. Anyone that even has an elementary understanding of the financial world knows that this cannot continue indefinitely. And when they start converging once again, the movement could be quite violent.
When I chose to use the word “carnage” to open this article, I was not exaggerating what is going on in the junk bond market one bit. On Tuesday evening, Jeffrey Gundlach used the exact same word to describe what is happening…
Jeffrey Gundlach, the widely followed investor who runs DoubleLine Capital, said on a webcast on Tuesday that the junk bond market has come under severe selling pressure ahead of the Federal Reserve’s policy meeting next week.
“We are looking at real carnage in the junk bond market,” Gundlach said. Gundlach also said it was too early to buy high-yield junk bonds and energy debt securities. “I don’t like things when they go down every single day.”
Sometimes a chart can be extremely helpful in understanding what is going on. The following chart was posted by Zero Hedge on Tuesday, and it shows that yields on the riskiest junk bonds are heading into the stratosphere…
And for those that are not familiar, it is important to note that when yields go up, bond prices go down. So the chart above is what a “crash” looks like.
Another “leading indicator” that I watch is the behavior of Dow Transports.
Dow Transports are in reverse. Down over 3% today, the biggest drop since the Black Monday collapse, Trannies are now below the lows of the Bullard bounce from October 2014 and down a shocking 16% in 2015. This would be the first four-quarters-in-a-row drop in Transports since 1994 and the worst year since 2008…
In addition, we are also seeing trouble signs erupt at major financial institutions just like we did during the run up to the 2008 crash. For example, I have been concerned about Morgan Stanley for quite a while, and on Tuesday we learned that they have just laid off more than a thousand workers…
Struggling Morgan Stanley slashed 1,200 jobs around the world in recent days, a person familiar with the matter told CNNMoney.
The cuts were broad-based and eliminated 25% of the positions within the fixed income and commodities businesses, the person said. Those divisions are grappling with tumbling trading revenue and shrinking fees.
Morgan Stanley also eliminated about 730 back-office jobs like human-resources and IT positions.
Virtually all of the things that we would expect to see just prior to a 2008-style stock market crash are happening right now.
If just two or three leading indicators were flashing red, we could have a really good debate about what they might mean.
But the fact that virtually all of the numbers are screaming a warning at us should mean that the debate is over. Anyone with an open mind should be able to very clearly see what is coming next.
Very quickly, let me give you just 10 signs that indicate that we are right on the precipice of a major recession and a very substantial financial downturn…
1. Global GDP growth has gone negative for the first time since 2009.
10. Of the 93 largest stock market indexes in the entire world, 47 of them (slightly more than half) have already plunged at least 10 percent year to date.
Just like in 2008, other global financial markets are imploding ahead of a U.S. collapse.
On Tuesday, the Dow Jones Industrial Average was down another 162 points, but we are still within 1000 points of the market peak that was set earlier this year. We are still in far better shape than most of the rest of the world, but that will soon change.
I can’t think of a single leading indicator that is telling us that everything is going to be okay. All of the numbers are pointing to major trouble ahead. So I hope that you are being smart and doing what you can to get prepared while there is still time.
A lot of people out there expected something to happen in September that did not ultimately happen. There were all kinds of wild theories floating around, and many of them had no basis in reality whatsoever. But without a doubt, some very important things did happen in September. As I warned about ahead of time, we are witnessing the most significant global financial meltdown since the end of 2008. All of the largest stock markets in the world are crashing simultaneously, and so far the amount of wealth that has been wiped out worldwide is in excess of 5 trillion dollars. In addition to stocks, junk bonds are also crashing, and Bank of America says that it is a “slow moving trainwreck that seems to be accelerating“. Thanks to the commodity price crash, many of the largest commodity traders on the planet are now imploding. I wrote about the death spiral that has gripped Glencore yesterday. On Tuesday, the stock price of the largest commodity trader in Asia, the Noble Group, plummeted like a rock and commodity trading giant Trafigura appears to be in worse shape than either Glencore or the Noble Group. The total collapse of any of them could easily be a bigger event than the implosion of Lehman Brothers in 2008. So I honestly do not understand the “nothing is happening” crowd. It takes ignorance on an almost unbelievable level to try to claim that “nothing is happening” in the financial world right now.
Within the last 60 days, we have seen some things happen that we have never seen before.
For example, did you know that we witnessed the greatest intraday stock market crash in U.S. history on August 24th?
During that day, the Dow Jones Industrial Average plunged from a high of 16,459.75 to a low of 15,370.33 before rebounding substantially. That intraday point swing of 1,089 points was the largest in all of U.S. history.
Overall, the Dow has down 588.40 points that day. When you combine that decline with the 530.94 point plunge from the previous Friday, you get a total drop of 1119.34 points over two consecutive trading days. Never before in history had the Dow fallen by more than 500 points on two trading days in a row. If that entire decline had fallen within one trading day, it would have been the largest stock market crash in U.S. history by a very wide margin, and everyone would be running around saying that author Jonathan Cahn was right again.
But because this massive decline fell over two consecutive trading days that somehow makes him wrong?
Are you kidding me?
Come on people – let’s use some common sense here. We are already witnessing the greatest global stock market decline in seven years, and after a brief lull things are starting to accelerate once again. Last night, stocks in Hong Kong were down 629 points and stocks in Japan were down 714 points. In the U.S., the Nasdaq has had a string of down days recently, and the “death cross” that has just formed has many investors extremely concerned…
The Nasdaq composite spooked investors on Monday after forming a death cross, a trading pattern that shows a decline in short-term momentum and is often a precursor to future losses.
A death cross occurs when the short-term moving average of a security or an index pierces below the long-term trend, in this case the 50-day moving average breaking through the 200-day moving average.
In the past month, similar chart patterns formed in the S&P 500, Dow and small-cap Russell 2000, but the Nasdaq avoided a death cross formation until Monday.
What we witnessed in September was not “the end” of anything.
Instead, it is just the beginning.
And if you listen carefully, some of the biggest names on Wall Street are issuing some very ominous warnings about what is coming. For instance, just consider what Carl Icahn is saying…
Danger ahead—that’s the warning from Carl Icahn in a video coming Tuesday.
The activist says low rates caused bubbles in art, real estate and high-yield bonds—with potentially dramatic consequences.
“It’s like giving somebody medicine and this medicine is being given and given and given and we don’t know what’s going to happen – you don’t know how bad it’s going to be. We do know when we did it a few years ago it caused a catastrophe, it caused ’08. Where do you draw the line?”
Jim Cramer, the ex-hedge fund manager and host of CNBC’s show “Mad Money,” has been vocal recently on air, saying repeatedly that he doesn’t like the market now, and last week said “we have a first-class bear market going.” Similarly, Gary Kaltbaum, president of Kaltbaum Capital Management, has been sending out notes to clients and this newspaper for weeks, saying the poor price action of the stock market and many hard-hit sectors, such as energy and the recently clobbered biotech sector, has all the earmarks of a bear market. Over the weekend, Kaltbaum said: “We remain in a worldwide bear market for stocks.”
As I have warned repeatedly, there will continue to be ups and downs. The stock market is not going to fall every day. In fact, on some days stocks will absolutely soar.
But without a doubt, we have entered the period of time that I have warned about for so long. The global financial system is now beginning to unravel, and any piece of major bad news will likely accelerate things.
For instance, the total collapse of Deutsche Bank, Petrobras, Glencore, the Noble Group, Trafigura or any of a number of other major financial institutions that I am currently watching could create mass panic on the global financial stage.
In addition, an unexpected natural disaster that hits a financially important major city or a massive terror attack in the western world are other examples of things that could accelerate this process.
Our world is becoming increasingly unstable, and we all need to learn to expect the unexpected.
The period of relative peace and security that we all have been enjoying for so long is ending, and now chaos is going to reign for a time.
So get prepared while you still can, because there is very little time remaining to do so…
Are we about to witness trillions of dollars of “paper wealth” vaporize into thin air? During the next financial crisis, a lot of “wealthy” investors are going to be in for a very rude awakening. The truth is that securities are only worth what someone else is willing to pay for them, and that is why liquidity is so important. Back on April 17th, I published an article entitled “The Global Liquidity Squeeze Has Begun“, but it didn’t get nearly as much attention as many of my other articles do. But now that the liquidity crisis is intensifying, hopefully people will start to grasp the implications of what is happening. The 76 trillion dollar global bond bubble is threatening to implode, and if it does, the amount of “paper wealth” that could potentially be lost during the months ahead is almost unimaginable.
For those that do not consider the emerging liquidity crisis to be important, I would suggest that they check out what the financial experts are saying. For instance, the following comes from a recent Bloomberg report…
There are three things that matter in the bond market these days: liquidity, liquidity and liquidity.
How — or whether — investors can trade without having prices move against them has become a major worry as bonds globally tanked in the past few months. As a result, liquidity, or the lack of it, is skewing markets in new and surprising ways.
Things have already gotten so bad that Zero Hedge says that some fund managers “are starting to panic” about the lack of liquidity in the marketplace…
Fund managers who together control trillions in assets are starting to panic in the face of an acute bond market liquidity shortage.
Dealer inventories have collapsed in the post-crisis regulatory regime, eliminating the traditional source of liquidity in secondary corporate credit markets, while HFTs and central banks have combined to create the conditions under which USTs and German Bunds can, at any given time, trade like penny stocks (October’s Treasury flash crash and May’s dramatic Bund rout are the quintessential examples).
For a moment, just imagine what would happen if someone yelled “fire” in a very crowded movie theater, and the only exit was a very small doggie door that only one person at a time could squeeze through. According to experts, that is what the bond market could soon look like…
“When the unwind comes, like we’ve seen in the past few months, it comes abruptly and sharply as the exit door is tiny,” said Ryan Myerberg, a London-based fund manager at Janus Capital Group Inc., which oversees about $190 billion.
Are you starting to get the picture?
In the end, I believe that those that “squeezed through the door” during this time period are going to be very glad that they got out while they still could.
Another very prominent voice that is deeply concerned about bonds is Carl Icahn. The following is what he told CNBC on Wednesday…
Carl Icahn warned investors on Wednesday that he believes the market is “extremely overheated—especially high-yield bonds.”
“I think the public is walking into a trap again as they did in 2007,” the activist investor told CNBC’s “Fast Money Halftime Report.” “I think it’s almost the duty of well-respected investors, like myself I hope, to warn people, to tell people, that really you are making errors.”
Icahn compared the current market situation to the prerecession days, when mortgage-backed securities were being widely sold. “It’s almost deja vu,” he said.
Let’s talk about high-yield bonds for a moment. Prior to the last financial crisis, they started crashing way before stocks did, and now we see the exact same pattern repeating once again.
Normally high yield credit tracks stocks very closely. When there is a disconnect, that can be a huge sign of trouble. The following chart comes from Zero Hedge, and it brilliantly demonstrates how similar things are today to the period just before the stock market crash of 2008…
It is glaringly apparent that we are due for a “correction”. And even though stocks have recently hit brand new record highs, there are rumblings under the surface that a big move down is right around the corner.
For example, USA Today is reporting that mutual fund investors have pulled more money out of stocks than they have put in for 16 weeks in a row….
In a sign of stock market nervousness on Main Street, mutual fund investors have yanked more money out of U.S. stock funds than they put in for 16 straight weeks.
The last time domestic stock funds had positive net cash inflows was in the week ending Feb. 25, according to data from the Investment Company Institute, a mutual fund trade group.
In the week ended June 17, the most recent data available, mutual funds that invest in U.S. stocks suffered net outflows of $3.45 billion, according to the ICI.
Since late February, U.S. stock funds have suffered estimated outflows of nearly $55 billion. Those net withdrawals come despite the fact the benchmark Standard & Poor’s 500 hit a fresh record high of 2130.82 on May 21 and the Dow Jones industrial average notched a fresh record on May 19.
Those that are smart are getting out while the getting is good.
In all the time that I have been publishing The Economic Collapse Blog, I have never seen stocks so primed for a crash. If you were writing up a scenario for a textbook that imagined what a lead up to a major stock market crash would look like, you could very easily use the last six months as a model.
For a long time, many people out there (including some of my readers) have been very impatiently waiting for the financial markets to crash. But this is not something that any of us should want to see. When this next great financial crisis comes, it is going to be absolutely horrible. Millions upon millions of workers will lose their jobs, and there will be tremendous economic suffering all over the planet.
Tomorrow I plan to share something that is going to shock a lot of people.
It is going to be something that I have never done before, but the time has come.
As Greece plunges even deeper into economic chaos, Greek Prime Minister Alexis Tsipras says that his government is prepared to respond to the demands of the EU and the IMF with “the great no” and that his party will accept responsibility for whatever consequences follow. Despite years of intervention from the rest of Europe, Greece is a bigger economic mess today than ever. Greek GDP has shrunk by 26 percent since 2008, the national debt to GDP ratio in Greece is up to a staggering 175 percent, and the unemployment rate is up above 25 percent. Greek stocks are crashing and Greek bond yields are shooting into the stratosphere. Meanwhile, the banking system is essentially on life support at this point. 400 million euros were pulled out of Greek banks on Monday alone. No matter what happens in the coming days, many believe that it is now only a matter of time before capital controls like we saw in Cyprus are imposed.
Over the past several months, there have been endless high level meetings over in Europe regarding this Greek crisis, but none of them have fixed anything. And even Jeroen Dijsselbloem admits that the odds of anything being accomplished during the meeting of eurozone finance ministers on Thursday is “very small”…
Some officials believe Thursday’s meeting of eurozone finance ministers will be perhaps the last chance to stop Greece sliding into default and towards leaving the euro.
However the president of the so-called Eurogroup, Jeroen Dijsselbloem, said the chance of an accord was “very small”.
And it is certainly not just Dijsselbloem that feels this way. At this point pretty much everyone is resigned to the fact that there is not going to be a deal any time soon. The following comes from Reuters…
“People are getting anxious on both sides. Athens expects Brussels to move. And Brussels expects Athens to move. And it’s stuck,” said a senior EU diplomat, who declined to be named.
“It’s very dangerous, and we may have an accident.”
EU officials insist that it is Greece that needs to back down, but the Greeks have no intention of backing down. Just consider the words of Greek Prime Minister Alexis Tsipras. He says that he is not afraid to deliver “the great no” to the rest of Europe…
Greek Prime Minister Alexis Tsipras said he’s ready to assume responsibility for the consequences of rejecting an unfair deal with creditors.
In a sign that he’s being taken at his word, officials from the Netherlands, Portugal and Germany said they were bracing for a breakdown in talks that could roil the currency bloc.
With a viable solution “the Greek government recently elected by the Greek people will bear the cost of carrying through,” Tsipras told reporters in Athens on Wednesday. Without one, “we will assume the responsibility to say ‘the great no’ to a continuation of the catastrophic policies.”
To me, that sounds like a man that is not going to back down. And to call it “the great no” is not an exaggeration at all. I think that he realizes that this “great no” will unleash financial chaos all over Europe.
Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.
All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.
And no matter how confident the Germans appear to be right now, the truth is that a Greek debt default would be a complete and total nightmare for the rest of Europe as well. The euro would drop like a rock, stocks would crash all over Europe and bond yields would go crazy. And that is just for starters.
So we desperately need to see a deal. But with each passing day that seems less and less likely.
In fact, a Greek parliament committee on public debt just released a new report containing their preliminary findings. This report is not legally binding, but it does show the mood of the Greek parliament, and what this report says is absolutely stunning. It concluded that the Greek government is under absolutely no obligation to repay its debts. Just check out the following excerpt from the report…
All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.
In other words, what this report is saying is that the Greek government should never pay back any of this debt. That certainly is not going to sit well with the officials from the EU and the IMF.
And what happens if other financially troubled nations in the eurozone decide that their debts are “illegal” and “odious” as well?
Globally, there are more than 76 trillion dollars worth of bonds floating around out there, and the yields on those bonds are based on the assumption that they will always be paid off. If nations such as Greece start defaulting, that will throw the entire global financial system into a state of tremendous chaos.
Of course the Greek financial system is already in a state of tremendous chaos. At this point, many believe that it is just a matter of time before capital controls are imposed. This is something that I have warned about in the past. The following description of what capital controls in Greece may look like comes from Bloomberg…
No one knows the specifics for Greece, but here’s what happened in Cyprus: ATM withdrawals were capped at 300 euros a person per day. Transfers of more than 5,000 euros abroad were subject to approval by a special committee. Companies needed documents for each payment order, with approvals for over 200,000 euros determined by available liquidity. Parents couldn’t send children that were studying abroad more than 5,000 euros a quarter. Cypriots traveling abroad could carry no more than 1,000 euros with them. Termination of fixed-term deposits was prohibited, while payments with credit and debit cards were capped at 5,000 euros. Checks couldn’t be cashed.
Since most Greeks do not want to have their money trapped in the banks, they have been pulling out cash and hiding it at home at a record breaking pace. This is precisely what we would expect to see when a nation is on the verge of total financial collapse…
“Everybody’s doing it,” said Joanna Christofosaki, in front of a Eurobank cash dispenser in the leafy Athens neighbourhood of Kolonaki. “Our friends have all done it. Nobody wants their money to be worthless tomorrow. Nobody wants to be unable to get at it.”
A researcher in the archaeology department at the Academy of Athens, Christofosaki said she knew plenty of people who had “€10,000 somewhere at home” and plenty of others who chose to keep their stash at the office. Was she among them? “If I was, I certainly wouldn’t tell you.”
As I wrote about yesterday, I believe that this is the beginning of the next great European financial crisis.
Eventually, it will spread all over the planet.
Unfortunately, even though global debt levels have never been higher and the signs of the coming financial implosion are all around us, most people have been lulled into a false sense of security.
Most people just assume that everything is going to turn out okay somehow.
The second half of this year is going to be much different from the first half, but most people will not be convinced until everything starts completely falling apart.
By then, it may be far too late to do anything about it.
Every great con game eventually comes to an end. For years, global central banks have been manipulating the financial marketplace with their monetary voodoo. Somehow, they have convinced investors around the world to invest tens of trillions of dollars into bonds that provide a return that is way under the real rate of inflation. For quite a long time I have been insisting that this is highly irrational. Why would any rational investor want to put money into investments that will make them poorer on a purchasing power basis in the long run? And when any central bank initiates a policy of “quantitative easing”, any rational investor should immediately start demanding a higher rate of return on the bonds of that nation. Creating money out of thin air and pumping into the financial system devalues all existing money and creates inflation. Therefore, rational investors should respond by driving interest rates up. Instead, central banks told everyone that interest rates would be forced down, and that is precisely what happened. But now things have shifted. Investors are starting to behave more rationally and the central banks are starting to lose control of the financial markets, and that is a very bad sign for the rest of 2015.
And of course it isn’t just bond yields that are out of control. No matter how hard they try, financial authorities in Europe can’t seem to fix the problems in Greece, and the problems in Italy, Spain, Portugal and France just continue to escalate as well. This week, Greece became the very first nation to miss a payment to the IMF since the 1980s. We’ll discuss that some more in a moment.
Over in Asia, stocks are fluctuating very wildly. The Shanghai Composite Index plunged by 5.4 percent on Thursday before regaining all of those losses and actually closing with a gain of 0.8 percent. When we see this kind of extreme volatility, it is a very bad sign. It is during times of extreme volatility that markets crash.
Remember, stocks generally tend to go up during calm markets, and they generally tend to go down during choppy markets. So most investors do not want to see lots of volatility. Unfortunately, that is precisely what we are witnessing all over the world right now. The following comes from the Wall Street Journal…
“Volatility over the last days has been breathtaking, especially in bond markets,” said Wouter Sturkenboom, senior investment strategist at Russell Investments. He said that it rippled through equity and currency markets, which overreacted.
The yield on the benchmark German 10-year bond touched 0.99%, its highest level since September, before erasing the day’s rise and falling back to 0.84%. The 10-year U.S. Treasury yield, which hit a fresh 2015 high of 2.42% earlier Thursday, recently fell back to 2.33%. Yields rise as prices fall.
Sometimes when bond yields go up, it is because investors are taking money out of bonds and putting it into stocks because they are feeling really good about where the stock market is heading. This is not one of those times. As Peter Tchir has noted, the huge moves in the bond market that we are now seeing are the result of “sheer panic in the market”…
In a morning note before the open, Brean Capital’s Peter Tchir wrote: “It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a ‘risk on’ trade it is a ‘risk off’ trade, where low yields are viewed as a risk asset and not a safe haven.” And Tom di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets, told Bloomberg, “This is sheer panic in the market from the standpoint of what’s been happening in Europe … Most of Wall Street is guarded here as far as taking on new positions.”
But this wasn’t supposed to happen.
After watching the Federal Reserve be able to successfully use quantitative easing to drive down interest rates, the European Central Bank decided to try the same thing. Unfortunately for them, investors are starting to behave more rationally. The central banks are starting to lose control of the financial markets, and bond yields are soaring. I think that Peter Boockvar summarized where we are currently at very well when he stated the following…
I’ve said this before but I’m sorry, I need to say it again. What we are witnessing in global markets is the inherent contradiction writ large that is modern day monetary policy where dangerously ZIRP, NIRP and QE are considered conventional policies. The contradiction is simply this: the desire for higher inflation if fulfilled will result in higher interest rates that central banks are trying so hard and desperately to suppress.
Outside of the short end of the curve, markets will always win for better or worse and that is clearly evident now. The ECB is getting their first taste of the market talking back and in quite the violent way. In the US, the bond market is watching the Fed drag its feet (its never-ending) with wanting to raise interest rates and finally said enough is enough. The US Treasury market is tightening for them. Since mid April, the 5 yr note yield is higher by 40 bps, the 10 yr is up by 55 bps and the 30 yr yield is up by 65 bps.
And if global investors continue to move in a rational direction, this is just the beginning. Bond yields all over the planet should be much, much higher than they are right now. What that means is that bond prices potentially have a tremendous amount of room to go down.
One thing that could accelerate the global bond crash is the crisis in Greece. Negotiations between the Greeks and their creditors have been dragging on for four months, and no agreement has been reached. Now, Greece has missed the loan payment that was due to the IMF on June 5th, and it is asking the IMF to bundle all of the payments that are due this month into one giant payment at the end of June…
Greece has asked to bundle its four debt payments to the International Monetary Fund that fall due in June so that it can pay them in one batch at the end of the month, Greek newspaper Kathimerini reported on Thursday.
The request is expected to be approved by the IMF, the newspaper said. That would mean Greece does not have to pay the first tranche of 300 million euros that falls due on Friday.
Greece faces a total bill of 1.5 billion euros owed to the IMF over four installments this month.
Of course that payment will not be made either if a deal does not happen by then. And with each passing day, a deal seems less and less likely. At this point, the package of “economic reforms” that the creditors are demanding from Greece is completely unacceptable to Syriza. The following comes from an article in the Guardian…
Fresh from talks in Brussels, Tsipras faced outrage on Thursday from highly skeptical members of his own Syriza party. A five-page ultimatum from creditors, presented by the European commission president, Jean-Claude Juncker, was variously described as shocking, provocative, disgraceful and dishonourable.
“It will never pass,” said Greece’s deputy social security minister, Dimitris Stratoulis. “If they don’t back down, the country won’t be lost … there are alternatives that would cost less than our signing a disgraceful and dishonourable agreement.”
Ultimately, I don’t believe that we are going to see an agreement.
The Eurozone does not want to make any compromise with the current Greek government because (a) they don’t believe they need to because Greek threats to leave the euro are empty both because internal polling suggests Greeks don’t want to leave and because if they did leave that doesn’t really constitute any threat to the euro; (b) because they (particularly perhaps Angela Merkel) believe that under enough pressure the Greek government might collapse and be replaced by a more cooperative government, as has happened repeatedly before in the Eurozone crisis including in Italy and Greece itself; and (c) because any deal with Greece that is seen to involve or be presentable as any victory for the Greek government would threaten the political positions of governments in several Eurozone states including Spain, Portugal, Italy, Finland and perhaps even the Netherlands and Germany.
Furthermore, it’s not clear to me that the Eurozone creditors at this stage would have much interest in any deal based upon promises, regardless of how much the Greek had verbally surrendered. Things have gone too far now for mere words to work. They would need to see the Greeks deliver actions — tangible economic reforms and tangible, credible primary surplus targets and a sustainable change in the long-term political mood within Greece that meant other Eurozone states might eventually get their money back. That is almost certainly not doable at all with the current Greek government. The only deal possible would be with some replacement Greek government that had come in precisely on the basis that it did want to do a deal and did want to pay the creditors back.
On the Syriza side, I see no more appetite for a deal. They believe that austerity has been ruinous for the lives of Greeks and that decades more austerity would mean decades more Greek economic misery. From their point of view, default or even exit from the euro, even if economically painful in the short term, would be better than continuing with austerity now.
You can read the rest of his excellent article right here.
Without a deal, the value of the euro is going to absolutely plummet and bond yields over in Europe will go through the roof. I am fully convinced that this is the beginning of the end for the eurozone as it is currently constituted, and that we stand on the verge of a great European financial crisis.
And of course the financial crisis that is coming won’t just be in Europe. The global financial system is more interconnected than ever, and there are tens of trillions of dollars in derivatives that are tied to foreign exchange rates and 505 trillion dollars in derivatives that are tied to interest rates. When this giant house of cards collapses, the central banks won’t be able to stop it.
In the end, could we eventually see the entire central banking system itself totally collapse?
Last year (2014) will likely go down in history as the “beginning of the end” for the current global Central Banking system.
What will follow will be a gradual unfolding of the next crisis and very likely the collapse of the Central Banking system as we know it.
However, this process will not be fast by any means.
Central Banks and the political elite will fight tooth and nail to maintain the status quo, even if this means breaking the law (freezing bank accounts or funds to stop withdrawals) or closing down the markets (the Dow was closed for four and a half months during World War 1).
There will be Crashes and sharp drops in asset prices (20%-30%) here and there. However, history has shown us that when a financial system goes down, the overall process takes take several years, if not longer.
We stand at the precipice of the greatest economic transition that any of us have ever seen.
Even though things may seem very “normal” to most people right now, the truth is that the global financial system is fundamentally flawed, and cracks in the system are starting to appear all over the place.
When this system does collapse, it will take most people entirely by surprise.
But it shouldn’t.
All con games eventually fall apart in the end, and we are about to learn that lesson the hard way.
Is the financial collapse that so many are expecting in the second half of 2015 already starting? Many have believed that we would see bonds crash before the stock market crashes, and that is precisely what is happening right now. Since mid-April, the yield on 10 year German bonds has shot up from 0.05 percent to 0.89 percent. But much of that jump has come this week. Just a couple of days ago, the yield on 10 year German bonds was sitting at just 0.54 percent. And it isn’t just Germany – bond yields are going crazy all over Europe. So far, it is being estimated that global investors have lost more than half a trillion dollars, and there is much more room for these bonds to fall. In the end, the overall losses could be well into the trillions even before the stock market collapses.
I know that for most average Americans, talk about “bond yields” is rather boring. But it is important to understand these things, because we could very well be looking at the beginning of the next great financial crisis. The following is an excerpt from an article by Wolf Richter in which he details the unprecedented carnage that we have witnessed over the past few days…
On Tuesday, ahead of the ECB’s policy announcement today, German Bunds sagged, and the 10-year yield soared from 0.54% to 0.72%, drawing a squiggly diagonal line across the chart. In just one day, yield increased by one-third!
Makes you wonder to which well-connected hedge funds the ECB had once again leaked its policy statement and the all-important speech by ECB President Mario Draghi that the rest of us got see today.
And today, the German 10-year yield jump to 0.89%, the highest since October last year. From the low in mid-April of 0.05% to today’s 0.89% in just seven weeks! Bond prices, in turn, have plunged! This is the definition of a “rout.”
Other euro sovereign bonds have gone through a similar rout, with the Spanish 10-year yield soaring from 1.05% in March to 2.07% today, and the Italian 10-year yields jumping from a low in March of 1.03% to 2.17% now.
What this means is that the central banks are losing control.
In particular, the European Central Bank has been trying very hard to force yields down, and now the exact opposite is happening.
This is very bad news for a global financial system that is absolutely teeming with red ink. Since the last financial crisis, our planet has been on the greatest debt binge of all time. If we are moving into a time of higher interest rates, that is going to cause enormous problems. Unfortunately, CNBC says that is precisely where things are headed…
The wild breakout in German yields is rocking global debt markets, and giving investors an early glimpse of the uneasy future for bonds in a world of higher interest rates.
The shakeout also carries a message for corporate bond investors, who have snapped up a record level of new issuance this year, and are now seeing negative total returns in the secondary market for the first time this year.
So why is this happening?
Why are bond yields going crazy?
According to the Wall Street Journal, financial regulators in Europe are blaming the ECB’s quantitative easing program…
A recent surge in government bond market volatility can be blamed on the quantitative easing program of the European Central Bank, according to one of Europe’s top financial regulators.
EIOPA, the body responsible for regulating insurers and pension funds in the European Union, has warned that the ECB’s decision to buy billions of euros’ worth of sovereign bonds, to kick-start the region’s economy, has caused markets to become choppier.
And actually this is what should be happening. When central banks start creating money out of thin air and pumping it into the markets, investors should rationally demand a higher return on their money. This didn’t really happen when the Federal Reserve tried quantitative easing, so the Europeans thought that they might as well try to get away with it too. Unfortunately for them, investors are starting to catch up with the scam.
So what happens next?
Well, European bond yields are probably going to keep heading higher over the coming weeks and months. This will especially be true if the Greek crisis continues to escalate. And unfortunately for Europe, that appears to be exactly what is happening…
Greece will not make a June 5 repayment to the International Monetary Fund if there is no prospect of an aid-for-reforms deal with its international creditors soon, the spokesman for the ruling Syriza party’s lawmakers said on Wednesday.
The payment of 300 million euros ($335 million) is the first of four this month totaling 1.6 billion euros from a country that depends on foreign aid to stay afloat.
Greece owes a total of about 320 billion euros, of which about 65 percent to euro zone governments and the IMF, and about 8.7 percent to the European Central Bank.
On Tuesday, Greece’s creditors drafted the broad outlines of an agreement to put to the leftist government in Athens in a bid to conclude four months of negotiations and release aid before the country runs out of money.
“If there is no prospect of a deal by Friday or Monday, I don’t know by when exactly, we will not pay,” Nikos Filis told Mega TV.
Biagio Bossone and Marco Cattaneo write that according to several recent media reports, both the Greek government and the ECB are taking into consideration the possibility (for Greece) to issue a parallel domestic currency to pay for government expenditures, including civil servant salaries, pensions, etc. This could happen in the coming weeks as Greece faces a severe shortage of euros. A new domestic currency would help make payments to public employees and pensioners while freeing up the euros needed to pay out creditors.
If Greece defaults and starts using another currency, the value of the euro is going to absolutely plummet and bond yields all over the continent are going to start heading into the stratosphere.
That is why it is so important to keep an eye on what is going on in Greece.
But no matter what happens in Greece, it appears that we are moving into a time when there will be higher interest rates around the world. And since 505 trillion dollars in derivatives are directly tied to interest rate levels, that could lead to a financial unraveling unlike anything that we have ever seen before in the history of our planet.
As I have warned about so many times before, 2008 was just the warm up act.
The main event is still coming, and it is going to be extraordinarily painful.