As we enter the second half of 2015, financial panic has gripped most of the globe. Stock prices are crashing in China, in Europe and in the United States. Greece is on the verge of a historic default, and now Puerto Rico and Ukraine are both threatening to default on their debts if they do not receive concessions from their creditors. Not since the financial crisis of 2008 has so much financial chaos been unleashed all at once. Could it be possible that the great financial crisis of 2015 has begun? The following are 16 facts about the tremendous financial devastation that is happening all over the world right now…
1. On Monday, the Dow fell by 350 points. That was the biggest one day decline that we have seen in two years.
2. In Europe, stocks got absolutely smashed. Germany’s DAX index dropped 3.6 percent, and France’s CAC 40 was down 3.7 percent.
3. After Greece, Italy is considered to be the most financially troubled nation in the eurozone, and on Monday Italian stocks were down more than 5 percent.
4. Greek stocks were down an astounding 18 percent on Monday.
5. As the week began, we witnessed the largest one day increase in European bond spreads that we have seen in seven years.
6. Chinese stocks have already met the official definition of being in a “bear market” – the Shanghai Composite is already down more than 20 percent from the high earlier this year.
7. Overall, this Chinese stock market crash is the worst that we have witnessed in 19 years.
8. On Monday, Standard & Poor’s slashed Greece’s credit rating once again and publicly stated that it believes that Greece now has a 50 percent chance of leaving the euro.
11. Yields on 10 year Greek government bonds have shot past 15 percent.
12. U.S. investors are far more exposed to Greece than most people realize. The New York Times explains…
But the question of what happens when the markets do open is particularly acute for the hedge fund investors — including luminaries like David Einhorn and John Paulson — who have collectively poured more than 10 billion euros, or $11 billion, into Greek government bonds, bank stocks and a slew of other investments.
Through the weekend, Nicholas L. Papapolitis, a corporate lawyer here, was working round the clock comforting and cajoling his frantic hedge fund clients.
“People are freaking out,” said Mr. Papapolitis, 32, his eyes red and his voice hoarse. “They have made some really big bets on Greece.”
13. The Governor of Puerto Rico has announced that the debts that the small island has accumulated are “not payable“.
14. Overall, the government of Puerto Rico owes approximately 72 billion dollars to the rest of the world. Without debt restructuring, it is inevitable that Puerto Rico will default. In fact, CNN says that it could happen by the end of this summer.
15. Ukraine has just announced that it may “suspend debt payments” if their creditors do not agree to take a 40 percent “haircut”.
16. This week the Bank for International Settlements has just come out with a new report that says that central banks around the world are “defenseless” to stop the next major global financial crisis.
Without a doubt, we are overdue for another major financial crisis. All over the planet, stocks are massively overvalued, and financial markets have become completely disconnected from economic reality. And when the next crash happens, many believe that it will be even worse than what we experienced back in 2008. For example, just consider the words of Jim Rogers…
“In the United States, we have had economic slowdowns every four to seven years since the beginning of the Republic. It’s now been six or seven years since our last stock market problem. We’re overdue for another problem.”
In Rogers’ view, low interest rates caused stock prices to increase significantly. He believes many assets are priced beyond their fundamentals thanks to the ultra-easy monetary policies by the Federal Reserve. Fed supporters argue such measures are good for investors, but Rogers takes a different view.
“The Fed might tell us we don’t have to worry and that a correction or crash will never happen again. That’s balderdash! When this artificial sea of liquidity ends, we’re going to pay a terrible price. When the next economic problem occurs, it will be much worse because the debt is so much higher.”
Of course Rogers is far from alone. A recent article by Paul B. Farrell expressed similar sentiments…
America’s 95 million investors are at huge risk. Remember the $10 trillion losses in the crash and recession of 2007-2009? The $8 trillion lost after the dot-com technology crash and recession of 2000-2003? This is the third big recession of the century. Yes, America will lose trillions again.
Especially with dead-ahead predictions like Mark Cook’s 4,000-point Dow correction. And Jeremy Grantham’s warning of a 50% crash around election time, with negative stock returns through the first term of the next president, beyond 2020. Starting soon.
Why is America so vulnerable when the next recession hits? Simple: The Fed’s cheap-money giveaway is killing America. When the downturn, correction, crash hits, it will compare to the 2008 crash. The Economist warns: “the world will be in a rotten position to do much about it. Rarely have so many large economies been so ill-equipped to manage a recession,” whatever the trigger.
Things have been relatively quiet in the financial world for so long that many have been sucked into a false sense of security.
But the underlying imbalances were always there, and they have been getting worse over time.
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.
When it comes to geopolitics, there are often wheels working within wheels that are working within wheels. Once in a while we get a peek behind the scenes, but for the most part the machinations of the global elite remain shrouded in mystery most of the time. And sometimes the global elite appear to be doing things that, on the surface, do not seem to make much sense at all. What is going on in Europe is a perfect example of this. If everyone was negotiating honestly, I believe that a Greek debt deal would have been reached by now. As this endless crisis has stretched on month after month, it has become increasingly apparent that more is going on here than meets the eye. In particular, the IMF has been standing in the way of a deal time after time. So what do IMF officials want? Are they looking for the “unconditional surrender” of this new Greek government in order to send a message to other governments that would potentially defy them? Or could it be possible that the IMF actually wants a Greek debt default for some other insidious reason?
When the latest Greek proposal was embraced with enthusiasm by EU officials, many hoped that this meant that the crisis would soon be resolved. But it turns out that there is still one very important player that is not happy, and that is the IMF. The following comes from the Wall Street Journal…
But the IMF is still unhappy with key aspects of Greece’s new economic proposals and German officials were irritated by the speed with which the commission welcomed them, warning that much work needs to be done.
Greece’s plan calls for reducing the deficits in its pension system and government budget by relying heavily on raising taxes and social-security contributions, whereas the IMF wanted bigger spending cuts.
The Washington-based IMF has said Greece’s economy is already too heavily taxed and that too many additional tax increases would hurt economic growth, making it harder to pay down Greece’s debt.
“It is still short of everything that should be expected,” IMF Managing Director Christine Lagarde said Monday, suggesting Greece will have to modify its proposals significantly to win the IMF’s backing.
So what would make the IMF “happy”?
Would anything short of total capitulation by the Greek government suffice?
Meanwhile, members of Syriza are expressing a high level of frustration with the compromises that Greek Prime Minister Alexis Tsipras has already agreed to. At this point, there is even doubt whether the current Greek proposal could get through the Greek parliament. The following comes from Bloomberg…
Greek Prime Minister Alexis Tsipras is facing the first signs of dissent within his own party over his latest plan to end a five-month standoff with creditors.
Some of Syriza’s more radical and populist lawmakers expressed opposition Tuesday to the proposal as the deal’s backers called on members to see the bigger picture.
“Personally, I cannot support such an agreement that is contrary to our election promises,” Dimitris Kodelas, a Syriza lawmaker associated with former Maoists, said in an interview. “I do not care about the consequences of my decision.”
Despite all of the optimism that we have seen this week, the odds of a Greek debt deal getting pushed through are looking slimmer by the day.
And even if a deal somehow miraculously happens, all it would really mean is that the can has been kicked down the road for a few more months…
Assuming Tsipras can force the deal through the Greek parliament, and that key creditors such as the IMF and Germany accept it too, it will do little more than buy time for negotiations on yet another rescue.
The final tranche of cash from the existing bailout should be enough to meet repayments due to the IMF and European Central Bank through the end of August. But the Greek government will then have to find more than two billion euros for both institutions in September and October.
“If this week concludes with agreement between Greece and its creditors, it won’t be long before the next chapter in this drama,” said Angus Campbell, senior analyst at FxPro.
And no matter what happens by the end of this month, it is a virtual certainty that the economic depression in Greece will just continue to deepen.
“Business-to-business payments have almost been paused,” one Athens businessman says. “They are just rolling over postdated cheques.”
For Greek banks, mortgage loans left unserviced by strategic defaulters have become a particular headache, especially since the Syriza-led government says it is committed to protecting low-income homeowners from foreclosures on their properties
“There’s a real issue of moral hazard . . . Around 70 percent of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.
For a long time, I have been warning that the next major economic crisis would begin in Europe before spreading across the entire globe.
Greece has a relatively small economy, but Italy, Spain and France are going down the exact same road that Greece has gone.
And what IMF officials are doing right now is that they are setting a precedent for future debt negotiations that they know are almost certainly coming with other countries in the future.
Sadly, most of my readers (being Americans) don’t really grasp the importance of what is going on over in Europe. We are watching a horrific train wreck unfold in slow-motion, and what is going to happen over the next few weeks is going to have massive implications for the entire planet.
The Greek financial system is in the process of totally imploding, and the rest of Europe will soon follow. Neither the Greeks nor the Germans are willing to give in, and that means that there is very little chance that a debt deal is going to happen by the end of June. So that means that we will likely see a major Greek debt default and potentially even a Greek exit from the eurozone. At this point, credit default swaps on Greek debt have risen 456 percent in price since the beginning of this year, and the market has priced in a 75 percent chance that a Greek debt default will happen. Over the past month, the yield on two year Greek bonds has skyrocketed from 20 percent to more than 30 percent, and the Greek stock market has fallen by a total of 13 percent during the last three trading days alone. This is what a financial collapse looks like, and if Greece does leave the euro, we are going to see this kind of carnage happen all over Europe.
Greece is heading for a state of emergency and an exit from the euro following the collapse of talks to agree a bailout deal, senior EU officials warned last night.
Europe must be prepared to step in otherwise Greek society would face an unprecedented crisis with power blackouts, medicine shortages and no money to pay for police, they said.
In the past, the Greeks have always buckled under pressure. But this new Greek government was elected with a mandate to end austerity, and so far they have shown a remarkable amount of resolve. In order for a debt deal to happen, one side is going to have to blink, and at this point it does not look like it will be the Greeks…
The world’s financial markets are facing up to the possibility that Greece could soon become the first country to crash out of Europe’s single currency. Talks between Athens and its eurozone creditors have collapsed in acrimony just days before a final deadline for Greece to unlock the €7.2bn (£5.2bn) in bailout funds it needs to avoid a catastrophic debt default.
The Greek Prime Minister, Alexis Tsipras, accused the creditor powers of hidden “political motives” in their demands that Greece make further cuts to public pension payments in return for the financial aid. “We are shouldering the dignity of our people, as well as the hopes of the people of Europe,” Mr Tsipras said in a defiant statement. “We cannot ignore this responsibility. This is not a matter of ideological stubbornness. This is about democracy.”
As we approach the point of no return, both sides are preparing for the endgame.
In Greece, members of parliament have been studying what happened in Iceland a few years ago. Many of them believe that a Greek debt default combined with a nationalization of Greek banks and a Greek exit from the euro could set the nation back on the path to prosperity fairly rapidly. The following comes from the Telegraph…
The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers.
Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.
The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.
Meanwhile, in a desperate attempt to get the Greeks to give in at the last moment, Greek’s creditors are preparing to pull out all the stops in order to put as much financial pressure on Greece as possible…
Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.
For a long time, most in the financial world assumed that a debt deal would eventually happen. But now reality is setting in. As I mentioned at the top of this article, the cost to insure Greek debt has risen by an astounding 456 percent since the beginning of this year…
Given these dramatic stakes, the risk of a Greek default has gone way up. One way to measure that risk is by looking at the skyrocketing price of insurance policies that would pay out if Greek bonds go bust. The cost to insure Greek debt for one year against the risk of default has skyrocketed 456% since the start of the 2015, according to FactSet data.
These insurance-like contracts, known as credit default swaps, imply there is a 75% to 80% probability of Greece defaulting on its debt, according to Jigar Patel, a credit strategist at Barclays.
The probability of a Greek default soars to a whopping 95% for five-year CDS, Patel said.
“Default is looking more and more likely,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a note to clients on Tuesday.
And in recent days, we have also seen Greek stocks and Greek bonds totally crash. The following comes from CNN…
The Greek stock market has plummeted 13% over the past three trading days, including a 3% drop on Tuesday alone.
In the bond market, the yield on Greek two-year debt has skyrocketed to 30.2%. A month ago, the yield was only 20%. Yields rise as bond prices fall.
Of course if there is a Greek debt default and Greece does leave the euro, it won’t just be Greece that pays the price.
As I have written about previously, there are tens of trillions of dollars in derivatives that are directly tied to currency exchange rates and 505 trillion dollars in derivatives that are directly tied to interest rates. A “Grexit” would cause the euro to drop like a rock and interest rates all over the continent would start to go crazy. The financial chaos that a “Grexit” would cause should not be underestimated.
And there are signs that some of Europe’s biggest banks are already on the verge of collapse. For example, just consider what has been going on at the biggest bank in Germany. Both of the co-CEOs at Deutsche Bank recently resigned, and it is increasingly looking as if it could soon become Europe’s version of Lehman Brothers. The following summary of the recent troubles at Deutsche Bank comes from an article that was posted on NotQuant…
Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:
In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock – at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)
And that’s where we are now. How bad is it? We don’t know because we won’t be permitted to know. But these are not the moves of a healthy company.
For a very long time, I have been warning that a major financial crisis was coming to Europe, and for a very long time the authorities in Europe have been able to successfully kick the can down the road.
But now it looks like we have reached the end of the road, and a day of reckoning is finally here.
Nobody is quite sure what is going to happen next, but almost everyone agrees that it isn’t going to be pretty.
So you better buckle up, because it looks like we are all in for a wild ride as we enter the second half of this year.
Are stocks overvalued? By just about any measure that you could possibly name, stocks are at historically high prices right now. From a technical standpoint, the stock market is more overvalued today than it was just prior to the last financial crisis. The only two moments in U.S. history that even compare to our current state of affairs are the run up to the stock market crash of 1929 and the peak of the hysteria just before the dotcom bubble burst. It is so obvious that stocks are in a bubble that even Janet Yellen has talked about it, but of course she will never admit that the Federal Reserve has played a key role in creating this bubble. They say that hindsight is 20/20, but what is happening right in front of our eyes in 2015 is so obvious that everyone should be able to see it. Just like with all other financial bubbles throughout our history, someday people will look back and talk about how stupid we all were.
Why can’t we ever learn from history? We just keep on making the same mistakes over and over again. And without a doubt, some of the smartest members of our society are trying to warn us about what is coming. For example, Yale economics professor Robert Shiller has repeatedly tried to warn us that stocks are overvalued…
I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.
But the CAPE ratio is not the only metric I watch. In my book Irrational Exuberance (3rd Ed., Princeton 2015) I discuss several metrics that help judge what’s going on in the market. These include my stock market confidence indices. One of the indicators in that series is based on a single question that I have asked individual and institutional investors over the years along the lines of, “Do you think the stock market is overvalued, undervalued, or about right?” Lately, what I call “valuation confidence” captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000.
Other analysts prefer to use different valuation indicators than Shiller does. But no matter which indicators you use, they all show that stocks are tremendously overvalued in mid-2015. For instance, just consider the following chart. It comes from Doug Short, and it shows the average of four of his favorite valuation indicators. As you can see, there is only one other time in all of our history when stocks have been more overvalued than they are today according to the average of these four indicators…
Another danger sign that many analysts are pointing to is the dramatic rise in margin debt that we have seen in recent years. Investors are borrowing tremendous amounts of money to fund purchases of stock. This is something that we witnessed during the dotcom bubble, it was something that we witnessed just prior to the financial collapse of 2008, and now it is happening again. In fact, margin debt just surged to a brand new all-time record high. Once again, the following chart comes from Doug Short…
All of this margin debt has helped drive stocks to ridiculous highs, but it can also serve to drive stock prices down very rapidly when the market turns. This was noted by Henry Blodget of Business Insider in a recent editorial…
What is “margin debt”?
It’s the amount of money stock investors have collectively borrowed via traditional margin accounts to fund stock purchases.
In a bull market, the growth of margin debt serves as a turbocharger that helps drive stock prices higher.
As with a home mortgage, the more investors borrow, the more house or stock they can buy. So as margin debt grows, collective buying power grows. The borrowed money gets used to fund new stock purchases, which helps drives the prices of those stocks higher. The higher prices, in turn, allow traders to borrow more money to fund additional purchases. And so on.
It’s a self-reinforcing cycle.
The trouble is that it’s a self-reinforcing cycle on the way down, too.
If the overall U.S. economy was absolutely booming, these ultra-high stock prices would not be as much of a concern. But the truth is that the financial markets have become completely divorced from economic reality. Right now, corporate profits are actually falling and our exports are way down. U.S. GDP shrunk during the first quarter, and there are a whole host of economic trouble signs on the horizon. I am calling this a “recession within a recession“, and I believe that we are heading into another major economic downturn.
Unfortunately, our “leaders” are absolutely clueless about what is coming. They assure us that everything is going to be just fine – just like they did back in 2008 before everything fell apart. But the truth is that things are already so bad that even the big banks are sounding the alarm. For instance, just consider the following words from Deutsche Bank…
At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood.
Ultimately, most people believe what they want to believe.
Our politicians want to believe that the economy is going to get better, and so do the bureaucrats over at the Federal Reserve. The mainstream media wants to put a happy face on things, and they want all of us to continue to have faith in the system.
Unfortunately for them, the system is failing. I truly do hope that this bubble can last for a few more months, but I don’t see it going on for much longer than that.
The greatest financial crisis in U.S. history is fast approaching, and it is going to be extraordinarily painful.
When it arrives, it is not just going to destroy faith in the system. In the end, it is going to destroy the system altogether.
Presidents have always exercised emergency powers, but now thanks to dozens of new laws, regulations, court decisions and executive orders, Barack Obama is the most powerful president in all of U.S. history. Of course the U.S. Constitution does not actually give the president any special powers during a time of national emergency, but over time presidents have decided that they should be able to exercise such powers and the courts have generally agreed with them. During World War II and prior to that, these emergency powers were largely uncodified and were primarily used during times of war. But since World War II things have completely changed, and this has particularly been true since 9/11. Over the past decade or so, a whole host of extraordinary powers have specifically been given to the office of the president, and all that it takes to exercise them is a major “national emergency”. So if we do have a full-blown economic collapse, a historic natural disaster, a significant war or a massive pandemic, Barack Obama could use the emergency powers that he has been given to essentially take authority over everything.
There is not a single document or series of documents that contain all of the emergency powers that Barack Obama could potentially wield during a major national emergency. As I mentioned above, these powers come from literally dozens of laws, regulations, court decisions and executive orders. But in this article I will discuss a few important documents. One of these is a presidential directive that was issued during the second term of George W. Bush. It is entitled NATIONAL SECURITY PRESIDENTIAL DIRECTIVE/NSPD – 51/HOMELAND SECURITY PRESIDENTIAL DIRECTIVE/HSPD – 20, and you can take a look at it on the FEMA website right here. This document is primarily concerned with the continuity of our federal government in the event of a catastrophic emergency. So precisely what would constitute a “catastrophic emergency”? The following is how the document defines that term…
“Catastrophic Emergency” means any incident, regardless of location, that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the U.S. population, infrastructure, environment, economy, or government functions;
That sounds quite broad to me. It could apply to all sorts of scenarios.
If we do have such a “catastrophic emergency”, the president essentially becomes a dictator at that point. The document certainly talks about the need to ensure that “constitutional government” continues, but during the course of the emergency there really is not much of a role for the other two branches of government to play. Instead, the “shadow government” takes over under the overall command of the president. The following is a short excerpt from the document…
The President shall lead the activities of the Federal Government for ensuring constitutional government. In order to advise and assist the President in that function, the Assistant to the President for Homeland Security and Counterterrorism (APHS/CT) is hereby designated as the National Continuity Coordinator. The National Continuity Coordinator, in coordination with the Assistant to the President for National Security Affairs (APNSA), without exercising directive authority, shall coordinate the development and implementation of continuity policy for executive departments and agencies. The Continuity Policy Coordination Committee (CPCC), chaired by a Senior Director from the Homeland Security Council staff, designated by the National Continuity Coordinator, shall be the main day-to-day forum for such policy coordination.
Of course the 11 page document that we have on the FEMA website is just the tip of the iceberg when it comes to continuity of government planning. Unfortunately, most of the plans are top secret and are not allowed to be seen by the public. Astonishingly, this even applies to members of Congress. The following comes from Wikipedia…
On July 18, 2007, Rep. Peter DeFazio (D-OR), a member of the U.S. House Committee on Homeland Security, requested the classified and more detailed version of the government’s continuity of government plan in a letter signed by him and the chairperson of the House Homeland Committee, which is supposed to have access to confidential government information. The president refused to provide the information, to the surprise of the congressional committee.
Another document that raises a lot of red flags is an executive order entitled “National Defense Resources Preparedness” that was issued by Barack Obama on March 16th, 2012. This particular executive order updates previous executive orders, and it gives the president extraordinary authority during a time of national emergency. Below, I have posted most of section 201 of that executive order. As you can see, it potentially gives Barack Obama authority over just about everything during a time of national emergency if he feels it is needed for “national defense”…
Sec. 201. Priorities and Allocations Authorities. (a) The authority of the President conferred by section 101 of the Act, 50 U.S.C. App. 2071, to require acceptance and priority performance of contracts or orders (other than contracts of employment) to promote the national defense over performance of any other contracts or orders, and to allocate materials, services, and facilities as deemed necessary or appropriate to promote the national defense, is delegated to the following agency heads:
(1) the Secretary of Agriculture with respect to food resources, food resource facilities, livestock resources, veterinary resources, plant health resources, and the domestic distribution of farm equipment and commercial fertilizer;
(2) the Secretary of Energy with respect to all forms of energy;
(3) the Secretary of Health and Human Services with respect to health resources;
(4) the Secretary of Transportation with respect to all forms of civil transportation;
(5) the Secretary of Defense with respect to water resources; and
(6) the Secretary of Commerce with respect to all other materials, services, and facilities, including construction materials.
(b) The Secretary of each agency delegated authority under subsection (a) of this section (resource departments) shall plan for and issue regulations to prioritize and allocate resources and establish standards and procedures by which the authority shall be used to promote the national defense, under both emergency and non-emergency conditions. Each Secretary shall authorize the heads of other agencies, as appropriate, to place priority ratings on contracts and orders for materials, services, and facilities needed in support of programs approved under section 202 of this order.
A similar executive order regarding national communications was issued on July 6th, 2012.
But the powers that Barack Obama could potentially wield during a time of national emergency are not just limited to what is written down. This may shock many Americans, but it is true. In the past, presidents have used their “emergency powers” to suspend habeas corpus, to place American citizens in internment camps and to seize private property. The following comes from Wikipedia…
A claim of emergency powers was at the center of President Abraham Lincoln’s suspension of habeas corpus without Congressional approval in 1861. Lincoln claimed that the rebellion created an emergency that permitted him the extraordinary power of unilaterally suspending the writ. With Chief Justice Roger Taney sitting as judge, the Federal District Court of Maryland struck down the suspension in Ex Parte Merryman, although Lincoln ignored the order. 17 F. Cas. 144 (1861).
President Franklin Delano Roosevelt similarly invoked emergency powers when he issued an order directing that all Japanese Americans residing on the West Coast be placed into internment camps during World War II. The U.S. Supreme Court upheld this order in Korematsu v. United States. 323 U.S. 214 (1944).
Harry Truman declared the use of emergency powers when he seized private steel mills that failed to produce steel because of a labor strike in 1952. With the Korean War ongoing, Truman asserted that he could not wage war successfully if the economy failed to provide him with the material resources necessary to keep the troops well-equipped. The U.S. Supreme Court, however, refused to accept that argument in Youngstown Sheet & Tube Co. v. Sawyer, voting 6-3 that neither Commander in Chief powers nor any claimed emergency powers gave the President the authority to unilaterally seize private property without Congressional legislation. 343 U.S. 579.
And it is important to keep in mind that Barack Obama now possesses far more power than any of those presidents ever did. All it is going to take for him to exercise those powers is a major national emergency. This is something that Jim Powell discussed in an article for Forbes…
Not long after that, we found ourselves in an open-ended national emergency declared on September 14, 2001 and extended since by both George W. Bush and Barack Obama. This means the president has standby powers from hundreds of statutes that would enable him to re-introduce military conscription, seize private property and in myriad ways establish a government-run economy.
Thankfully, things are still somewhat stable for the moment so Obama does not have a reasonable excuse to use all of the powers that he has been given. But that could change at any time. If we do see a “catastrophic emergency” in the next year or so, there are very few limits on what Barack Obama would be able to do. That includes potentially postponing or suspending the 2016 election so that he can remain in office throughout the course of the national emergency.
We have never seen such a thing happen before, and hopefully we never will. And of course it isn’t just Barack Obama that we need to be concerned about. A future leader of this nation could potentially be even worse than him. It has been exceedingly foolish for us to give a single person so much power in the event of a “catastrophic emergency”, and in the end we may regret this bitterly.
Have you heard of the saying “sell in May and go away”? Traditionally, the period from May through October has been a time of weakness for stocks. In fact, on average stocks hit their lowest point of the year on October 27th. And most people don’t remember this, but the Dow Jones Industrial Average actually began plunging right at this time of the year just prior to the financial crisis of 2008. Most people do remember the huge stock crash that happened in the fall of that year, but the market actually started to slide in May. Throughout the first four and a half months of 2008, stocks moved up and down in a fairly narrow range, and the Dow closed at a short-term peak of 13,028.16 on May 19th. From there it was all downhill for the rest of the year. So will a similar thing happen in 2015 as we approach the next great financial crisis? Since March 20th, the Dow Jones Transportation Average has already fallen by almost 800 points. So will the Dow Jones Industrial Average soon follow? Well, only time will tell, but the Dow was down 190 points on Tuesday. Signs of trouble are popping up all over the place, and the “smart money” is getting out while the getting is good.
The chart that I have posted below shows how the Dow Jones Industrial Average performed during 2008. As you can see, stocks began plummeting long before the financial crisis in the fall. From May 19th through early July, the Dow fell by about 2,000 points. Should we expect to see a similar pattern this summer?…
Like I stated earlier in this article, red flags and warning signs are starting to pop up all over the place. The following are just a few of the trouble signs that we have seen this week…
-On Tuesday, the VIX (a closely watched measure of market volatility) jumped by the highest percentage that we have seen so far in 2015. As I have explained so often before, markets tend to go up in calm markets and they tend to go down in volatile markets. So the fact that volatility is on the rise is not a good sign.
-Thanks to the ongoing Greek crisis, the euro is falling again. It just hit a fresh one-month low, and if I am right it is going to go quite a bit lower as the European financial crisis intensifies.
-In the U.S., orders for durable goods have fallen year over year for four months in a row. When orders for durable goods start going negative for a few months, it is usually a signal that we are entering a recession.
-After rebounding a little bit, the price of crude oil is falling again. It just hit a new one-month low, and the number of oil rigs in operation has declined for 24 weeks in a row. Once again, this is highly reminiscent of what happened back in 2008.
-Unfortunately, it isn’t just oil that is declining. A whole host of other commodity prices are going down right now as well. This happened just prior to the financial crisis of 2008, and it is a sign that we are heading into a deflationary economic slowdown.
The reason why I talk so much about what happened the last time around is that we should be able to learn from it.
Looking back, there were so many warning signs leading up to the financial crisis of 2008 but most people totally missed them. Now, so many of those exact same signs are appearing once again, but they are being ignored.
Only this time the global financial system is in far worse shape than it was back in 2008. Debt levels all over the planet have absolutely exploded over the past seven years, and the debt to GDP ratio for the entire world is now up to a mind blowing 286 percent. In the United States, our national debt has approximately doubled since just prior to the last recession, and at this point it is mathematically impossible to pay it off. We are in the midst of the greatest stock market bubble of all time, the greatest bond bubble of all time (76 trillion dollars) and the greatest derivatives bubble of all time. Anyone that cannot see the trouble that is approaching is willingly blind.
In the western world, we have extremely short attention spans and we suffer deeply from something called “normalcy bias”. The following is how “normalcy bias” is defined by Wikipedia…
The normalcy bias, or normality bias, is a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster and its possible effects. This may result in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to include the populace in its disaster preparations.
The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred then it never will occur. It can result in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.
That is such a perfect description of what is happening in the western world today. But just because things have always been a certain way in our past does not mean that they will continue to be that way in the future. A great economic storm is rapidly approaching, and the signs of the times are all around us.
Hopefully more people will start listening to the warnings, because we have almost run out of time to prepare.
The Greek government says that a “moment of truth” is coming on June 5th. Either their lenders agree to give them more money by that date, or Greece will default on a 300 million euro loan payment to the IMF. Of course it won’t technically be a “default” according to IMF rules for another 30 days after that, but without a doubt news that Greece cannot pay will send shockwaves throughout the financial world. At that point, those holding Greek bonds will start to panic as they realize that they might not get paid as well. All over Europe, there are major banks that are holding large amounts of Greek debt and derivatives that are related to the performance of Greek debt. If something is not done to avert disaster at the last moment, a default by Greece could be the spark that sets off a major European financial crisis this summer.
As I discussed the other day, neither the EU nor the IMF have given any money to Greece since August 2014. So now the Greek government is just about out of money, and without any new loans they will not be able to pay back the old loans that are coming due. In fact, things are so bad at this point that the Greek government is openly warning that it will default on June 5th…
Greece cannot make an upcoming payment to the International Monetary Fund on June 5 unless foreign lenders disburse more aid, a senior ruling party lawmaker said on Wednesday, the latest warning from Athens it is on the verge of default.
Prime Minister Alexis Tsipras’s leftist government says it hopes to reach a cash-for-reforms deal in days, although European Union and IMF lenders are more pessimistic and say talks are moving too slowly for that.
Of course this is all part of a very high stakes chess game. The Greeks believe that the Germans will back down when faced with the prospect of a full blown European financial crisis, and the Germans believe that the Greeks will eventually be feeling so much pain that they will be forced to give in to their demands.
So with each day we get closer and closer to the edge, and the Greeks are trying to do their best to let everyone know that they are not bluffing. Just today, a spokesperson for the Greek government came out and declared that unless there is a deal by June 5th, the IMF “won’t get any money”…
Greek officials now point to a race against the clock to clinch a deal before payments totaling about 1.5 billion euros ($1.7 billion) to the IMF come due next month, starting with a 300 million euro payment on June 5.
“Now is the moment that negotiations are coming to a head. Now is the moment of truth, on June 5,” Nikos Filis, spokesman for the ruling Syriza party’s lawmakers, told ANT1 television.
“If there is no deal by then that will address the current funding problem, they won’t get any money,” he said.
The outlook for the Greek banking system is negative, primarily reflecting the acute deterioration in Greek banks’ funding and liquidity, says Moody’s Investors Service in a new report published recently. These pressures are unlikely to ease over the next 12-18 months and there is a high likelihood of an imposition of capital controls and a deposit freeze.
The new report: “Banking System Outlook: Greece”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
Moody’s notes that significant deposit outflows of more than €30 billion since December 2014 have increased banks’ dependence on central bank funding. In our view, the banks are likely to remain highly dependent on central bank funding, as ongoing uncertainty regarding Greece’s support programme continues to compromise depositors’ confidence.
Unfortunately, when things really start going crazy in Greece people might be faced with much more than just frozen bank accounts. As I wrote about just a few days ago, there is a very strong possibility that we could actually see Cyprus-style wealth confiscation implemented in Greece when the banks collapse.
Athens is promoting the idea of a special levy on banking transactions at a rate of 0.1-0.2 percent, while the government’s proposal for a two-tier value-added tax – depending on whether the payment is in cash or by card – has met with strong opposition from the country’s creditors.
A senior government official told Kathimerini that among the proposals discussed with the eurozone and the International Monetary Fund is the imposition of a levy on bank transactions, whose exact rate will depend on the exemptions that would apply. The aim is to collect 300-600 million euros on a yearly basis.
Fee won’t include ATM withdrawals, transactions up to EU500; in this case Greek govt projects EU300m-EU600m annual revenue from measure.
Sadly, most people living in North America (which is most of my audience) does not really care much about what happens on the other side of the world.
But they should care.
If Greece defaults and the Greek banking system collapses, stocks and bonds will crash all over Europe. Many believe that such a crash can be “contained” to just Europe, but that is really just wishful thinking.
In addition, the euro would plummet dramatically, which would cause substantial financial problems all over the planet. As I recently explained, the euro is headed to parity with the U.S. dollar and then it is going to go below parity. Before it is all said and done, the euro is going to all-time lows.
Of course the U.S. dollar is eventually going to totally collapse as well, but that comes later and that is a story for another day.
According to the Bank for International Settlements, 74 trillion dollars in derivatives are directly tied to the value of the euro, the value of the U.S. dollar and the value of other global currencies.
So if you believe that what is happening in Greece cannot have massive ramifications for the entire global financial system, you are dead wrong.
What is happening in Greece is exceedingly important, and it is time for all of us to start paying attention.
Did you know that there is more than $28,000 of debt for every man, woman and child on the entire planet? And since close to 3 billion of those people survive on less than 2 dollars a day, your share of that debt is going to be much larger than that. If we took everything that the global economy produced this year and everything that the global economy produced next year and used it to pay all of this debt, it still would not be enough. According to a recent report put out by the McKinsey Global Institute entitled “Debt and (not much) deleveraging“, the total amount of debt on our planet has grown from 142 trillion dollars at the end of 2007 to 199 trillion dollars today. This is the largest mountain of debt in the history of the world, and those numbers mean that we are in substantially worse condition than we were just prior to the last financial crisis.
When it comes to debt, a lot of fingers get pointed at the United States, and rightly so. Just prior to the last recession, the U.S. national debt was sitting at about 9 trillion dollars. Today, it has crossed the 18 trillion dollar mark. But of course the U.S. is not the only one that is guilty. In fact, the McKinsey Global Institute says that debt levels have grown in all major economies since 2007. The following is an excerpt from the report…
Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (Exhibit 1). That poses new risks to financial stability and may undermine global economic growth.
What is surprising is that debt has actually grown the most in China. If you can believe it, total Chinese debt has grown from 7 trillion dollars in 2007 to 28 trillion dollars today. Needless to say, that is absolutely insane…
China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007. At 282 percent of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable. However, MGI calculates that China’s government has the capacity to bail out the financial sector should a property-related debt crisis develop. The challenge will be to contain future debt increases and reduce the risks of such a crisis, without putting the brakes on economic growth.
What all of this means is that our long-term global economic problems have gotten much, much worse. This short-lived period of relative stability that we have been enjoying has been fueled by unprecedented amounts of debt and voracious money printing. Anyone with half a brain should be able to see that this is a giant financial bubble, and in the end it is going to unwind very, very painfully. The following comes from a Canadian news source…
At the beginning of 2008, government accounted for a smaller portion of the debt pie than corporate, household or financial debt. It now exceeds each of those other categories.
“The current situation is much worse than in 2000 or 2007, and with interest rates near or at zero, the central banks have already used up their ammunition. Plus, the total indebtedness, especially the indebtedness of governments, is much higher than ever before,” said Claus Vogt, a Berlin-based analyst and co-author of a 2011 book titled The Global Debt Trap.
“Every speculative bubble rests on some kind of a fairy tale, a story the bubble participants believe in and use as rationalization to buy extremely overvalued stocks or bonds or real estate,” Mr. Vogt argued. “And now it is the faith in the central-planning capabilities of global central bankers. When the loss of confidence in the Fed, the ECB etc. begins, the stampede out of stocks and bonds will start. I think we are very close to this pivotal moment in financial history.”
But for the moment, the ridiculous stock market bubble continues.
Internet companies that didn’t even exist a decade ago are now supposedly worth billions upon billions of dollars even though some of them don’t make any money at all. There is even a name for this phenomenon. Internet companies that have gigantic valuations without gigantic revenue streams are being called “unicorns”…
A dizzying mix of bold ideas and lavish investments has catapulted dozens of privately held start-ups to unicorn status, defined as having market valuations of at least $1 billion often without soaring revenues to match. Social-sharing site Pinterest has soared to $11 billion. Ride-hailing company Uber is now worth a staggering $50 billion.
How long can the party last?
And these days, Wall Street even rewards companies that lose huge amounts of money quarter after quarter. For example, just check out what happened when JC Penney announced that it only lost 167 million dollars during the first quarter of 2015…
Yippee!!! JC Penney ONLY lost $167 million in the first quarter. The Wall Street shysters are ecstatic because they BEAT expectations. Buy Buy Buy.
This loss now brings JC Penney’s cumulative loss since 2011 to, drum roll please, $3.5 BILLION. They haven’t had a profitable quarter in over four years. But, they are always on the verge of that turnaround just over the horizon.
Wall Street has told you to buy this stock from $42 in 2012 to it’s current pitiful level of $9. They tout the wonderful 3.4% increase in comparable sales. They fail to mention that first quarter 2016 sales are only 30% below first quarter sales in 2011.
They fail to mention that JC Penney burned through another $274 million of cash in the first quarter. Their equity has dropped by $1 billion in the last year, while their long term debt has gone up by $500 million.
This is how irrational Wall Street has become. JC Penney is ultimately going to zero, and yet there are still people out there that are pouring huge amounts of money into that financial black hole.
Sadly, the truth is that Wall Street is headed for a very painful awakening.
What we are experiencing right now is the greatest financial bubble of all time.
What comes after that is going to be the greatest financial crash of all time.
199,000,000,000,000 dollars of debt is about to come crashing down, and the pain of this disaster will be felt by every man, woman and child on the entire planet.