Since the depths of the last recession, the price of ground beef in the United States has doubled. Has your paycheck doubled since then? Even though the Federal Reserve insists that we are in a “low inflation” environment, the government’s own numbers show that the price of ground beef has been on an unprecedented run over the past six years. In early 2009, the average price of a pound of ground beef was hovering near 2 dollars. In February, it hit a brand new all-time record high of $4.238 per pound. Even just 12 months ago, the price of ground beef was sitting at $3.555 per pound. So we are talking about a huge increase. And this hits American families where they really live. Each year, the average American consumes approximately 270 pounds of meat. The only nation in the world that eats more meat than we do is Luxembourg. If the paychecks of American workers were going up fast enough to deal with this increase, it wouldn’t be that big of a deal. But of course that is not happening. In an article just last week, I showed that real median household income is a couple thousand dollars lower now than it was during the depths of the last recession. The middle class is being squeezed, and we are rapidly getting to the point where burgers are going to be considered a “luxury” item.
The following chart was posted by the Economic Policy Journal on Wednesday, and it incorporates the latest data from the Bureau of Labor Statistics. When I first saw it, I was rather stunned. I knew that the price of ground beef had become rather outrageous in my local grocery stores, but I had no idea just how much damage had been done over the past six years…
The biggest reason why the price of ground beef has been going up is the fact that the U.S. cattle herd has been shrinking. It shrunk seven years in a row, and on January 1st, 2014 it was the smallest that it had been since 1951.
The good news is that the decline appears to have stopped, at least for the moment. According to the Wall Street Journal, the size of the U.S. cattle herd actually increased by 1 percent last year…
The U.S. cattle herd expanded in 2014 for the first time in eight years, offering hope to consumers that beef prices could start to subside after soaring to a series of records.
The nation’s cattle supply increased 1% in the year through Jan. 1 to 89.8 million head, according to data released Friday by the U.S. Agriculture Department, reversing a steady decline fueled by prolonged drought in the southern U.S. Great Plains and industry consolidation that encouraged many ranchers to thin herds.
But an increase of 1 percent is just barely going to keep up with the official population growth rate. If you factor in illegal immigration, we are still losing ground.
And if we have another major drought in cattle country this summer, the cattle herd is going to start shrinking again.
In addition, the price of food overall has been steadily rising for years. Here is a chart that I shared the other day…
It boggles the mind that the Federal Reserve can claim that we are in a “low inflation” environment. Anyone that goes grocery shopping feels the pain of these rising prices every time that they go to the store.
In the list that I put together yesterday, I included the following statistic…
Almost half of all Americans (47 percent) do not put a single penny out of their paychecks into savings.
One of the primary reasons why so many Americans are not saving any money is because many families simply cannot save any money. Their paychecks are stagnant while the cost of living just keeps going up and up.
There simply are not enough “good jobs” out there anymore. Our economy continues to bleed middle class jobs and the competition for the jobs that remain is quite intense.
Do you know what the two most common occupations in America today are?
According to the Bureau of Labor Statistics, they are “retail sales clerk” and “cashier”.
And of course neither of those “occupations” pays even close to what is required to support a middle class family.
On average, a retail sales clerk makes $24,020 a year, and a cashier makes $20,670 a year.
Because the quality of our jobs has declined so much, there are millions of American families today in which both the mother and the father are working multiple jobs in a desperate attempt to make ends meet each month.
But don’t worry, the Federal Reserve says that we are nearly at “full employment“, and Barack Obama says that everything is going to be just fine.
Actually, the truth is that things are about to get a lot worse. At this point, we are even getting pessimistic numbers out of the Federal Reserve. Just this week we learned that the Fed is now projecting that economic growth for the first quarter of 2015 will be barely above zero…
From almost 2.5% GDP growth expectations in February, The Atlanta Fed’s GDPNow model has now collapsed its estimates of Q1 GDP growth to just 0.2% – plunging from +1.4% just 2 weeks ago. The reality of plunging capex and no decoupling is starting to rear its ugly head in the hard data and as the sun warms things up, weather will start to lose its ability to sway sentiment.
We are at a turning point. The bubble of false stability that we have been living in is rapidly coming to an end, and when people start to realize that another great economic crisis is coming there is going to be a lot of panic.
And as far as food prices go, they are just going to keep taking a bigger chunk out of all of our wallets.
As high as prices are already, the truth is that your food dollars are never going to go farther than they do right now.
So let us hope for the best, but let us also get prepared for the worst.
If you believe that ignorance is bliss, you might not want to read this article. I am going to dispel the notion that there has been any sort of “economic recovery”, and I am going to show that we are much worse off than we were just prior to the last economic crisis. If you go back to 2007, people were feeling really good about things. Houses were being flipped like crazy, the stock market was booming and unemployment was relatively low. But then the financial crisis of 2008 struck, and for a while it felt like the world was coming to an end. Of course it didn’t come to an end – it was just the first wave of our problems. The waves that come next are going to be the ones that really wipe us out. Unfortunately, because we have experienced a few years of relative stability, many Americans have become convinced that Barack Obama, Janet Yellen and the rest of the folks in Washington D.C. have fixed whatever problems caused the last crisis. Even though all of the numbers are screaming otherwise, there are millions upon millions of people out there that truly believe that everything is going to be okay somehow. We never seem to learn from the past, and when this next economic downturn strikes it is going to do an astonishing amount of damage because we are already in a significantly weakened state from the last one.
For each of the charts that I am about to share with you, I want you to focus on the last shaded gray bar on each chart which represents the last recession. As you will see, our economic problems are significantly worse than they were just before the financial crisis of 2008. That means that we are far less equipped to handle a major economic crisis than we were the last time.
#1 The National Debt
Just prior to the last recession, the U.S. national debt was a bit above 9 trillion dollars. Since that time, it has nearly doubled. So does that make us better off or worse off? The answer, of course, is obvious. And even though Barack Obama promises that “deficits are under control”, more than a trillion dollars was added to the national debt in fiscal year 2014. What we are doing to future generations by burdening them with so much debt is beyond criminal. And so what does Barack Obama want to do now? He wants to ramp up government spending and increase the debt even faster. This is something that I covered in my previous article entitled “Barack Obama Says That What America Really Needs Is Lots More Debt“.
#2 Total Debt
Over the past 40 years, the total amount of debt in the United States has skyrocketed to astronomical heights. We have become a “buy now, pay later” society with devastating consequences. Back in 1975, our total debt level was sitting at about 2.5 trillion dollars. Just prior to the last recession, it was sitting at about 50 trillion dollars, and today we are rapidly closing in on 60 trillion dollars.
#3 The Velocity Of Money
When an economy is healthy, money tends to change hands and circulate through the system quite rapidly. So it makes sense that the velocity of money fell dramatically during the last recession. But why has it kept going down since then?
#4 The Homeownership Rate
Were you aware that the rate of homeownership in the United States has fallen to a 20 year low? Traditionally, owning a home has been a sign that you belong to the middle class. And the last recession was really rough on the middle class, so it makes sense that the rate of homeownership declined during that time frame. But why has it continued to steadily decline ever since?
#5 The Employment Rate
Barack Obama loves to tell us how the unemployment rate is “going down”. But as I will explain later in this article, this decline is primarily based on accounting tricks. Posted below is a chart of the civilian employment-population ratio. Just prior to the last recession, approximately 63 percent of the working age population of the United States was employed. During the recession, this ratio fell to below 59 percent and it stayed there for several years. Just recently it has peeked back above 59 percent, but we are still very, very far from where we used to be, and now the next economic downturn is rapidly approaching.
#6 The Labor Force Participation Rate
So how can Obama get away with saying that the unemployment rate has gone down dramatically? Well, each month the government takes thousands upon thousands of long-term unemployed workers and decides that they have been unemployed for so long that they no longer qualify as “part of the labor force”. As a result, the “labor force participation rate” has fallen substantially since the end of the last recession…
#7 The Inactivity Rate For Men In Their Prime Working Years
If things are “getting better”, then why are so many men in their prime working years doing nothing at all? Just prior to the last recession, the inactivity rate for men in their prime working years was about 9 percent. Today it is just about 12 percent.
#8 Real Median Household Income
Not only is a smaller percentage of Americans employed today than compared to just prior to the last recession, the quality of our jobs has gone down as well. This is one of the factors which has resulted in a stunning decline of real median household income.
I have shared these next numbers before, but they bear repeating. In America today, most Americans do not make enough to support a middle class lifestyle on a single salary. The following figures come directly from the Social Security Administration…
-39 percent of American workers make less than $20,000 a year.
-52 percent of American workers make less than $30,000 a year.
-63 percent of American workers make less than $40,000 a year.
-72 percent of American workers make less than $50,000 a year.
We all know people that are working part-time jobs because that is all that they can find in this economy. As the quality of our jobs continues to deteriorate, the numbers above are going to become even more dismal.
Even as our incomes have stagnated, the cost of living just continues to rise steadily. For example, the cost of food and beverages has gone up nearly 50 percent just since the year 2000.
#10 Government Dependence
As the middle class shrinks and the number of Americans that cannot independently take care of themselves soars, dependence on the government is reaching unprecedented heights. For instance, the federal government is now spending about twice as much on food stamps as it was just prior to the last recession. How in the world can anyone dare to call this an “economic recovery”?
So you tell me – are things “getting better” or are they getting worse?
To me, it is crystal clear that we are in much worse condition than we were just prior to the last economic crisis.
And now things are setting up in textbook fashion for the next great economic crisis. Unfortunately, most Americans are totally clueless about what is going on and the vast majority are completely and totally unprepared for what is coming.
Or could it be possible that I am wrong? Whether you agree or disagree with me, please feel free to add to the discussion by posting a comment below…
Are we on the verge of an unprecedented global currency crisis? On Tuesday, the euro briefly fell below $1.07 for the first time in almost a dozen years. And the U.S. dollar continues to surge against almost every other major global currency. The U.S. dollar index has now risen an astounding 23 percent in just the last eight months. That is the fastest pace that the U.S. dollar has risen since 1981. You might be tempted to think that a stronger U.S. dollar is good news, but it isn’t. A strong U.S. dollar hurts U.S. exports, thus harming our economy. In addition, a weak U.S. dollar has fueled tremendous expansion in emerging markets around the planet over the past decade or so. When the dollar becomes a lot stronger, it becomes much more difficult for those countries to borrow more money and repay old debts. In other words, the emerging market “boom” is about to become a bust. Not only that, it is important to keep in mind that global financial institutions bet a tremendous amount of money on currency movements. According to the Bank for International Settlements, 74 trillion dollars in derivatives are tied to the value of the U.S. dollar, the value of the euro and the value of other global currencies. When currency rates start flying around all over the place, you can rest assured that someone out there is losing an enormous amount of money. If this derivatives bubble ends up imploding, there won’t be enough money in the entire world to bail everyone out.
Do you remember what happened the last time the U.S. dollar went on a great run like this?
As you can see from the chart below, it was in mid-2008, and what followed was the worst financial crisis since the Great Depression…
A rapidly rising U.S. dollar is extremely deflationary for the overall global economy.
This is a huge red flag, and yet hardly anyone is talking about it.
Meanwhile, the euro continues to spiral into oblivion…
How many times have I said it? The euro is heading to all-time lows. It is going to go to parity with the U.S. dollar, and then it is eventually going to go below parity.
This is going to cause massive headaches in the financial world.
The Europeans are attempting to cure their economic problems by creating tremendous amounts of new money. It is the European version of quantitative easing, but it is having some very nasty side effects.
The markets are starting to realize that if the value of the U.S. dollar continues to surge, it is ultimately going to be very bad for stocks. In fact, the strength of the U.S. dollar is being cited as the primary reason for the Dow’s 332 point decline on Tuesday…
The Dow Jones industrial average fell more than 300 points to below the index’s 50-day moving average, wiping out gains for the year. The S&P 500 also closed in the red for the year and breached its 50-day moving average, which is an indicator of the market trend. Only the Nasdaq held onto gains of 2.61 percent for the year.
There’s “concern that energy and the strength in the dollar will somehow be negative for the equities,” said Art Hogan, chief market strategist at Wunderlich Securities. He noted that the speed of the dollar’s surge was the greatest market driver, amid mixed economic data and concerns about the Federal Reserve raising interest rates.
And as I noted above, when the U.S. dollar rises the things that we export to other nations become more expensive and that hurts our businesses.
This is so basic that even the White House understands it…
Despite reassurance from The Fed that a strengthening dollar is positive for US jobs, The White House has now issued a statement that a “strengthening USD is a headwind for US growth.”
But even more important, a surging U.S. dollar makes it more difficult for emerging markets all over the world to borrow new money and to repay old debts. This is especially true for nations that heavily rely on exporting commodities…
It becomes especially ugly for emerging market economies that produce commodities. Many emerging market countries rely on their natural resources for growth and haven’t yet developed more advanced industries. As the products of their principal industries decline in value, foreign investors remove available credit while their currency is declining against the U.S. dollar. They don’t just find it difficult to pay their debt – it is impossible.
It has been estimated that emerging markets have borrowed more than 3 trillion dollars since the last financial crisis.
But now the process that created the emerging markets “boom” is starting to go into reverse.
The global economy is fueled by cheap dollars. So if the U.S. dollar continues to rise, that is not going to be good news for anyone.
And of course the biggest potential threat of all is the 74 trillion dollar currency derivatives bubble which could end up bursting at any time.
The sophisticated computer algorithms that financial institutions use to trade currency derivatives are ultimately based on human assumptions. When currencies move very little and the waters are calm in global financial markets, those algorithms tend to work really, really well.
But when the unexpected happens, some of the largest financial firms in the world can implode seemingly overnight.
Just remember what happened to Lehman Brothers back in 2008. Unexpected events can cripple financial giants in just a matter of hours.
Today, there are five U.S. banks that each have more than 40 trillion dollars of total exposure to derivatives of all types. Those five banks are JPMorgan Chase, Bank of America, Goldman Sachs, Citibank and Morgan Stanley.
By transforming Wall Street into a gigantic casino, those banks have been able to make enormous amounts of money.
But they are constantly performing a high wire act. One of these days, their reckless gambling is going to come back to haunt them, and the entire global financial system is going to be severely harmed as a result.
As I have said so many times before, derivatives are going to be at the heart of the next great global financial crisis.
And thanks to the wild movement of global currencies in recent months, there are now more than 74 trillion dollars in currency derivatives at risk.
Anyone that cannot see trouble on the horizon at this point is being willingly blind.
When the coming economic crisis strikes, more than half the country is going to be financially wiped out within weeks. At this point, more than 60 percent of all Americans are living paycheck to paycheck, and a whopping 24 percent of the country has more credit card debt than emergency savings. One of the primary principles that any of these “financial experts” that you see on television will teach you is to have a cushion to fall back on. At the very least, you never know when unexpected expenses like major car repairs or medical bills will come along. And in the event of a major economic collapse, if you do not have any financial cushion at all you will be a sitting duck. Yes, I know that there are millions upon millions of families out there that are just trying to scrape by from month to month at this point. I hear from people that are deeply struggling in this economy all the time. So I don’t blame them for not being able to save lots of money. But if you are in a position to build up an emergency fund, you need to do so. We have been experiencing an extended period of relative economic stability, but it will not last. In fact, the time for getting prepared for the next great economic downturn is rapidly running out, and most Americans are not ready for it at all. The following are 14 signs that most Americans are flat broke and totally unprepared for the coming economic crisis…
#1 According to a survey that was just released, 24 percent of all Americans have more credit card debt than emergency savings.
#2 That same survey discovered that an additional 13 percent of all Americans do not have any credit card debt, but they do not have a single penny of emergency savings either.
#3 At this point, approximately 62 percent of all Americans are living paycheck to paycheck.
#4 Adults under the age of 35 in the United States currently have a savings rate of negative 2 percent.
#5 More than half of all students in U.S. public schools come from families that are poor enough to qualify for school lunch subsidies.
#6 A study that was conducted last year found that more than one out of every three adults in the United States has an unpaid debt that is “in collections“.
#7 One survey discovered that 52 percent of all Americans really cannot even financially afford the homes that they are living in right now.
#8 According to research conducted by Atif Mian of Princeton University and Amir Sufi of the University of Chicago Booth School of Business, 40 percent of Americans could not come up with $2000 right now without borrowing it.
#9 That same study found that 60 percent of Americans could not say yes to the following question…
“Do you have 3 months emergency funds to cover expenses in case of sickness, job loss, economic downturn?”
#10 A different study discovered that less than one out of every four Americans has enough money stored away to cover six months of expenses.
#11 Today, the average American household is carrying a grand total of 203,163 dollars of debt.
#12 It is estimated that less than 10 percent of the entire U.S. population owns any gold or silver for investment purposes.
#13 48 percent of all Americans do not have any emergency supplies in their homes whatsoever.
#14 53 percent of all Americans do not even have a minimum three day supply of nonperishable food and water in their homes.
Perhaps none of this concerns you.
Perhaps you think that this bubble economy can persist indefinitely.
Well, if you won’t listen to the more than 1200 articles that set out the case for the coming economic collapse on my website, perhaps you will listen to former Federal Reserve Chairman Alan Greenspan. The following is what he recently told one interviewer…
We asked him where he thought the gold price will be in five years and he said “measurably higher.”
In private conversation I asked him about the outstanding debts… and that the debt load in the U.S. had gotten so great that there has to be some monetary depreciation. Specially he said that the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event… By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.
He thinks something big is going to happen that we can’t get out of this era of money printing without some repercussions – and pretty severe ones – that gold will benefit from.
And as I have stressed so frequently, the signs that the next crisis is almost here are all around us.
For example, the Baltic Dry Index has just plunged to a fresh record low, and things have already gotten so bad that some global shippers are now filing for bankruptcy…
The unintended consequences of a money-printed, credit-fueled, mal-investment-boom in commodities (prices – as opposed to physical demand per se) and the downstream signals that sent to any and all industries are starting to bite. The Baltic Dry Index has plunged once again to new record lows and the collapse of the non-financialized ‘clean’ indicator of the imbalances between global trade demand and freight transport supply has the real-world effects are starting to be felt, as Reuters reports the third dry-bulk shipper this month has filed for bankruptcy… in what shippers call “the worst market conditions since the ’80s.”
Perhaps you do see things coming.
Perhaps you do want to get prepared.
If you are new to all of this, and you don’t quite know how to get started preparing, please see my previous article entitled “89 Tips That Will Help You Prepare For The Coming Economic Depression“. It will give you some basic tips that you can start implementing right away.
And of course one of the most important things is something that I talked about at the top of this article.
If at all possible, you have got to have an emergency fund. When the coming economic storm strikes, your family is going to need something to fall back on.
If you are trusting in the government to save you when things fall apart, you will be severely disappointed.
This is just the beginning of the oil crisis. Over the past couple of weeks, the price of U.S. oil has rallied back above 50 dollars a barrel. In fact, as I write this, it is sitting at $52.93. But this rally will not last. In fact, analysts at the big banks are warning that we could soon see U.S. oil hit the $20 mark. The reason for this is that the production of oil globally is still way above the current level of demand. Things have gotten so bad that millions of barrels of oil are being stored at sea as companies wait for the price of oil to go back up. But the price is not going to go back up any time soon. Even though rigs are being shut down in the United States at the fastest pace since the last financial crisis, oil production continues to go up. In fact, last week more oil was produced in the U.S. than at any time since the 1970s. This is really bad news for the economy, because the price of oil is already at a catastrophically low level for the global financial system. If the price of oil stays at this level for the rest of the year, we are going to see a whole bunch of energy companies fail, billions of dollars of debt issued by energy companies could go bad, and trillions of dollars of derivatives related to the energy industry could implode. In other words, this is a recipe for a financial meltdown, and the longer the price of oil stays at this level (or lower), the more damage it is going to do.
The way things stand, there is simply just way too much oil sitting out there. And anyone that has taken Economics 101 knows that when supply far exceeds demand, prices go down…
Oil prices have gotten crushed for the last six months. The extent to which that was caused by an excess of supply or by a slowdown in demand has big implications for where prices will head next. People wishing for a big rebound may not want to read farther.
Goldman Sachs released an intriguing analysis on Wednesday that shows what many already suspected: The big culprit in the oil crash has been an abundance of oil flooding the market. A massive supply shock in the second half of last year accounted for most of the decline. In December and January, slowing demand contributed to the continued sell-off.
At this point so much oil has already been stored up that companies are running out of places to put in all. Just consider the words of Goldman Sachs executive Gary Cohn…
“I think the oil market is trying to figure out an equilibrium price. The danger here, as we try and find an equilibrium price, at some point we may end up in a situation where storage capacity gets very, very limited. We may have too much physical oil for the available storage in certain locations. And it may be a locational issue.”
“And you may just see lots of oil in certain locations around the world where oil will have to price to such a cheap discount vis-a-vis the forward price that you make second tier, and third tier and fourth tier storage available.”
[…] “You could see the price fall relatively quickly to make that storage work in the market.”
The market for oil has fundamentally changed, and that means that the price of oil is not going to go back to where it used to be. In fact, Goldman Sachs economist Sven Jari Stehn says that we are probably heading for permanently lower prices…
The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”
So how low could prices ultimately go?
As I mentioned above, some analysts are throwing around $20 as a target number…
The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude.
Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out.
A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report.
Keep in mind that the price of oil is already low enough to be a total nightmare for the global financial system if it stays here for the rest of 2015.
If we go down to $20 and stay there, a global financial meltdown is virtually guaranteed.
Meanwhile, the “fracking boom” in the United States that generated so many jobs, so much investment and so much economic activity is now turning into a “fracking bust”…
The fracking-for-oil boom started in 2005, collapsed by 60% during the Financial Crisis when money ran out, but got going in earnest after the Fed had begun spreading its newly created money around the land. From the trough in May 2009 to its peak in October 2014, rigs drilling for oil soared from 180 to 1,609: multiplied by a factor of 9 in five years! And oil production soared, to reach 9.2 million barrels a day in January.
It was a great run, but now it is over.
In the months ahead, the trickle of good paying oil industry jobs that are being lost right now is going to turn into a flood.
And this boom was funded with lots and lots of really cheap money from Wall Street. I like how Wolf Richter described this in a recent article…
That’s what real booms look like. They’re fed by limitless low-cost money – exuberant investors that buy the riskiest IPOs, junk bonds, leveraged loans, and CLOs usually indirectly without knowing it via their bond funds, stock funds, leveraged-loan funds, by being part of a public pension system that invests in private equity firms that invest in the boom…. You get the idea.
As all of this bad paper unwinds, a lot of people are going to lose an extraordinary amount of money.
Don’t get caught with your pants down. You will want your money to be well away from the energy industry long before this thing collapses.
And of course in so many ways what we are facing right now if very reminiscent of 2008. So many of the same patterns that have played out just prior to previous financial crashes are happening once again. Right now, oil rigs are shutting down at a pace that is almost unprecedented. The only time in recent memory that we have seen anything like this was just before the financial crisis in the fall of 2008. Here is more from Wolf Richter…
In the latest reporting week, drillers idled another 84 rigs, the second biggest weekly cut ever, after idling 83 and 94 rigs in the two prior weeks. Only 1056 rigs are still drilling for oil, down 443 for the seven reporting weeks so far this year and down 553 – or 34%! – from the peak in October.
Never before has the rig count plunged this fast this far:
What if the fracking bust, on a percentage basis, does what it did during the Financial Crisis when the oil rig count collapsed by 60% from peak to trough? It would take the rig count down to 642!
But even though rigs are shutting down like crazy, U.S. production of oil has continued to rise…
Rig counts have long been used to help predict future oil and gas production. In the past week drillers idled 98 rigs, marking the 10th consecutive decline. The total U.S. rig count is down 30 percent since October, an unprecedented retreat. The theory goes that when oil rigs decline, fewer wells are drilled, less new oil is discovered, and oil production slows.
But production isn’t slowing yet. In fact, last week the U.S. pumped more crude than at any time since the 1970s. “The headline U.S. oil rig count offers little insight into the outlook for U.S. oil production growth,” Goldman Sachs analyst Damien Courvalin wrote in a Feb. 10 report.
Look, it should be obvious to anyone with even a basic knowledge of economics that the stage is being set for a massive financial meltdown.
This is just the kind of thing that can plunge us into a deflationary depression. And when you combine this with the ongoing problems in Europe and in Asia, it is easy to see that a “perfect storm” is brewing on the horizon.
Sadly, a lot of people out there will choose not to believe until the day the crisis arrives.
By then, it will be too late to do anything about it.
The stock market continues to flirt with new record highs, but the signs that we could be on the precipice of the next major financial crisis continue to mount. A couple of days ago, I discussed the fact that the U.S. dollar is experiencing a tremendous surge in value just like it did in the months prior to the financial crisis of 2008. And previously, I have detailed how the price of oil has collapsed, prices for industrial commodities are tanking and market behavior is becoming extremely choppy. All of these are things that we witnessed just before the last market crash as well. It is also important to note that orders for durable goods are declining and the Baltic Dry Index has dropped to the lowest level on record. So does all of this mean that the stock market is guaranteed to crash in 2015? No, of course not. But what we are looking for are probabilities. We are looking for patterns. There are multiple warning signs that have popped up repeatedly just prior to previous financial crashes, and many of those same warning signs are now appearing once again.
One of these warning signs that I have not discussed previously is the wholesale inventories to sales ratio. When economic activity starts to slow down, inventory tends to get backed up. And that is precisely what is happening right now. In fact, as Wolf Richter recently wrote about, the wholesale inventories to sales ratio has now hit a level that we have not seen since the last recession…
In December, the wholesale inventory/sales ratio reached 1.22, after rising consistently since July last year, when it was 1.17. It is now at the highest – and worst – level since September 2009, as the financial crisis was winding down:
Rising sales gives merchants the optimism to stock more. But because sales are rising in that rosy scenario, the inventory/sales ratio, depicting rising inventories and rising sales, would not suddenly jump. But in the current scenario, sales are not keeping up with inventory growth.
Another sign that I find extremely interesting is the behavior of the yield on 10 year U.S. Treasury notes. As Jeff Clark recently explained, we usually see a spike in the 10 year Treasury yield about the time the market is peaking before a crash…
The 10-year Treasury note yield bottomed on January 30 at 1.65%. Today, it’s at 2%. That’s a 35-basis-point spike – a jump of 21% – in less than two weeks.
And it’s the first sign of an impending stock market crash.
As I explained last September, the 10-year Treasury note yield has ALWAYS spiked higher prior to an important top in the stock market.
For example, the 10-year yield was just 4.5% in January 1999. One year later, it was 6.75% – a spike of 50%. The dot-com bubble popped two months later.
In 2007, rates bottomed in March at 4.5%. By July, they had risen to 5.5% – a 22% increase. The stock market peaked in September.
Let’s be clear… not every spike in Treasury rates leads to an important top in the stock market. But there has always been a sharp spike in rates a few months before the top.
Once again, just because something has happened in the past does not mean that it will happen in the future.
But the fact that so many red flags are appearing all at once has got to give any rational person reason for concern.
Yes, the Dow gained more than 100 points on Thursday. But on Thursday we also learned that retail sales dropped again in January. Overall, this has been the worst two month drop in retail sales since 2009…
Following last month’s narrative-crushing drop in retail sales, despite all that low interest rate low gas price stimulus, January was more of the same as hopeful expectations for a modest rebound were denied. Falling 0.8% (against a 0.9% drop in Dec), missing expectations of -0.4%, this is the worst back-to-back drop in retail sales since Oct 2009. Retail sales declined in 6 of the 13 categories.
And economic activity is rapidly slowing down on the other side of the planet as well.
For example, Chinese imports and exports both fell dramatically in January…
Chinese imports collapsed 19.9% YoY in January, missing expectations of a modest 3.2% drop by the most since Lehman. This is the biggest YoY drop since May 2009 and worst January since the peak of the financial crisis. Exports tumbled 3.3% YoY (missing expectations of 5.9% surge) for the worst January since 2009. Combined this led to a $60.03 billion trade surplus in January – the largest ever. But apart from these massive imbalances, everything is awesome in the global economy (oh apart from The Baltic Dry at record lows, Iron Ore near record lows, oil prices crashed, and the other engine of the world economy – USA USA USA – imploding).
In light of so much bad economic data, it boggles my mind that stocks have been doing so well.
But this is typical bubble behavior. Financial bubbles tend to be very irrational and they tend to go on a lot longer than most people think they will. When they do finally burst, the consequences are often quite horrifying.
It may not seem like it to most people, but we are right on track for a major financial catastrophe. It is playing out right in front of our eyes in textbook fashion. But it is going to take a little while to unfold.
Unfortunately, most people these days do not have the patience to watch long-term trends develop. Instead, we have been trained by the mainstream media to have the attention spans of toddlers. We bounce from one 48-hour news cycle to the next, eagerly looking forward to the next “scandal” that is going to break.
And when the next financial crash does strike, the mainstream media is going to talk about what a “surprise” it is. But for those that are watching the long-term trends, it is not going to be a surprise at all. We will have seen it coming a mile away.
The signs of the times are everywhere – all you have to do is open up your eyes and look at them. When a pregnant woman first goes into labor, the birth pangs are usually fairly moderate and are not that close together. But as the time for delivery approaches, they become much more frequent and much more intense. Economically, what we are experiencing right now are birth pangs of the coming Great Depression. As we get closer to the crisis that is looming on the horizon, they will become even more powerful. This week, we learned that the Baltic Dry Index has fallen to the lowest level that we have seen in 29 years. The Baltic Dry Index also crashed during the financial collapse of 2008, but right now it is already lower than it was at any point during the last financial crisis. In addition, “Dr. Copper” and other industrial commodities continue to plunge. This almost always happens before we enter an economic downturn. Meanwhile, as I mentioned the other day, orders for durable goods are declining. This is also a traditional indicator that a recession is approaching. The warning signs are there – we just have to be open to what they are telling us.
And of course there are so many more parallels between past economic downturns and what is happening right now.
For example, volatility has returned to the markets in a big way. On Tuesday the Dow was down about 300 points, on Wednesday it was down another couple hundred points, and then on Thursday it was up a couple hundred points.
This is precisely how markets behave just before they crash. When markets are calm, they tend to go up. When markets get really choppy and start behaving erratically, that tells us that a big move down is usually coming.
At the same time, almost every major global currency is imploding. For much more on this, see the amazing charts in this article.
In particular, I am greatly concerned about the collapse of the euro. The Swiss would not have decoupled their currency from the euro if it was healthy. And political events in Greece are certainly not going to help things either. Economic conditions across Europe just continue to get worse, and the future of the eurozone itself is very much in doubt at this point. And if the eurozone does break up, a European economic depression is almost virtually assured – at least in the short term.
And I haven’t even mentioned the oil crash yet.
There is only one other time in all of history when the price of oil collapsed by more than 60 dollars, and that was just prior to the horrific financial crisis of 2008.
Since the last financial crisis, the oil industry has been a huge source for job growth in this country. The following is an excerpt from a recent CNN article…
The oil sector has added over a half million jobs — many of them high paying — since the recession ended in June 2009. That’s 13% of all US job growth over that period.
Now energy companies and related sectors are laying off thousands. Expect that trend to continue, bears say.
But losing good jobs is just the tip of the iceberg of this oil crisis.
At this point, the price of oil has already dropped to a catastrophically low level. The longer it stays at this level, the more damage that it is going to do. If the price of oil stays at this level for all of 2015, we are going to have a complete and total financial nightmare on our hands…
For the first time in 18 years, oil exporters are pulling liquidity out of world markets rather than putting money in. The world is now fast approaching a world reserve currency shift. If we see 8 to 12 months at these oil prices; U.S. shale industry will be wiped out. The effect on junk bonds will cascade to the rest of the stock market and U.S. economy.
…and this time there will be nothing left to catch the falling knife before it hits the American economy right in the heart. Not the FED nor the U.S. government can stop what’s coming. Liquidity will freeze up, our credit will be downgraded, the stock market will start to collapse, and then we can expect the FED to come in and hyper-inflate the dollar. This will cause the world to finish abandoning the world reserve currency in the last rungs of trade. This will be the end of the petrodollar.
Something that I have not discussed so far this year is the looming crisis in emerging market debt.
As economic problems spread around the world, a number of “emerging markets” are in danger of having their debt downgraded. And many investment funds have rules that prohibit them from holding any debt that is not “investment grade”. Therefore, we could potentially see some of these giant funds dumping massive amounts of emerging market debt if downgrades happen.
This is a really big deal. As a Business Insider article recently detailed, we could be talking about hundreds of billions of dollars…
Russia this week became the first of the major economies to lose its investment grade status from Standard & Poor’s, falling out off the top ratings category for credits deemed to have a low risk of default for the first time in a decade.
If Moody’s and Fitch follow, conservative investors barred from owning junk securities must sell their holdings. JPMorgan estimates this means they may ditch $6 billion in Russian government rouble and dollar debt.
Russia may have company. Almost $260 billion worth of sovereign and corporate bonds – nearly a tenth of outstanding emerging market (EM) debt – is in danger of being relegated to junk, according to David Spegel, head of emerging debt at BNP Paribas, who calls such credits “falling angels”.
And no article of this nature would be complete without mentioning derivatives.
I could not possibly overemphasize the danger that the 700 trillion dollar derivatives bubble poses to the global financial system.
As we enter the coming Great Depression, derivatives are going to play a starring role. Wall Street has been pumped full of funny money by global central banks, and our financial markets have been transformed into the greatest casino in the history of the world. When this house of cards comes crashing down, and it will, it is going to be a financial disaster unlike anything that the planet has ever seen.
And yes, global central banks are very much responsible for setting the stage for what we are about to experience.
I really like the way that David Stockman put it the other day…
The global financial system is literally booby-trapped with accidents waiting to happen owing to six consecutive years of massive money printing by nearly every central bank in the world.
Over that span, the collective balance sheet of the major central banks has soared by nearly $11 trillion, meaning that honest price discovery has been virtually destroyed. This massive “bid” for existing financial assets based on credit confected from thin air drove long-term bond yields to rock bottom levels not seen in 600 years since the Black Plague; and pinned money market costs at zero—-for 73 months running.
What is the consequence of this drastic financial repression along the entire yield curve? The answer is bond prices which keep rising regardless of credit risk, inflation or taxes; and rampant carry trade speculation that can’t get out of its own way because central banks have made the financial gamblers’ cost of goods—the “funding” cost of their trades—-essentially zero.
Of course I am not the only one warning that a new Great Depression is coming. For instance, just consider what British hedge fund manager Crispin Odey is saying…
British hedge fund manager Crispin Odey thinks we’ve entered an economic downturn that is “likely to be remembered in a hundred years,” and central banks won’t be able to stop it.
In his Odey Asset Management investor letter dated Dec. 31, Odey writes that the shorting opportunity “looks as great as it was in 07/09.”
“My point is that we used all our monetary firepower to avoid the first downturn in 2007-09,” he writes, “so we are really at a dangerous point to try to counter the effects of a slowing China, falling commodities and EM incomes, and the ultimate First World Effects. This is the heart of the message. If economic activity far from picks up, but falters, then there will be a painful round of debt default.”
Even though most average citizens are completely oblivious to what is happening, many among the elite are heeding the warning signs and are feverishly getting prepared. As Robert Johnson told a stunned audience at the World Economic Forum the other day, they are “buying airstrips and farms in places like New Zealand“. They can see the horrifying storm forming on the horizon and they are preparing to get out while the getting is good.
It can be very frustrating to write about economics, because things in the financial world can take an extended period of time to play out. Sadly, most people these days have extremely short attention spans. We live in a world of iPhones, iPads, YouTube videos, Facebook updates and 48 hour news cycles. People no longer are accustomed to thinking in long-term time frames, and if something does not happen right away we tend to get bored with it.
But the economic world is not like a game of “Angry Birds”. Rather, it is very much like a game of chess.
And unfortunately for us, checkmate is right around the corner.
Radical leftists have been catapulted to power in Greece, and that means that the European financial crisis has just entered a dangerous new phase. Syriza, which is actually an acronym for “Coalition of the Radical Left” in Greek, has 36 percent of the total vote with approximately 80 percent of the polling stations reporting. The current governing party, New Democracy, only has 28 percent of the vote. Syriza leader Alexis Tsipras is promising to roll back a whole host of austerity measures that were imposed on Greece by the EU, and his primary campaign slogan was “hope is on the way”. Hmmm – that sounds a bit familiar. Clearly, the Greek population is fed up with the EU after years of austerity and depression-like conditions. At this point, the unemployment rate in Greece is sitting at 25.8 percent, and the Greek economy is approximately 25 percent smaller than it was just six years ago. The people of Greece are desperate for things to get better, and so they have turned to the radical leftists. Unfortunately, things may be about to get a whole lot worse.
Once they formally have control of the government, Syriza plans to call for a European debt conference during which they plan to demand that the repayment terms of their debts be renegotiated. But the rest of Europe appears to be highly resistant to any renegotiation – especially Germany.
Syriza says that it does not plan to unilaterally pull Greece out of the eurozone, and that it also intends for Greece to continue to use the euro.
But what happens if Germany will not budge?
Syriza’s entire campaign was based on promises to end austerity. If international creditors refuse to negotiate and continue to insist that Greece abide by the austerity measures that were previously put in place, what will Syriza do?
Will Syriza back down and lose all future credibility with Greek voters?
Since 2010, the Greek people have endured a seemingly endless parade of wage reductions, pension cuts, tax increases and government budget cutbacks.
The Greek people just want things to go back to the way that they used to be, and they are counting on Syriza to deliver.
Unfortunately for Syriza, delivering on those promises is not going to be easy. They may be faced with a choice of either submitting to the demands of their international creditors or choosing to leave the eurozone altogether.
And if Greece does leave the eurozone, the consequences for all of Europe could be catastrophic…
Syriza risks overplaying its hand, said International Capital Strategies’ Rediker. “Given that the ECB controls the liquidity of the Greek banking system, and also serves as its regulator through the SSM (Single Supervisory Mechanism), going toe-to-toe with the ECB is one battle that could end very badly for the Greek government.”
If the ECB were to stop funding the liquidity of the Greek banks, the banks could collapse—an event that could lead to Greece abandoning the euro and printing its own money once more.
Milios didn’t believe it would come to that, saying, “No one wants a collapse of banks in the euro zone. This is going to be Lehman squared or to the tenth. No one wants to jeopardize the future of the euro zone.”
Hopefully cooler heads will prevail, because one bad move could set off a meltdown of the entire European financial system.
Even before the Greek election, the euro was already falling like a rock and economic conditions all over Europe were already getting worse.
So why would the Greeks risk pushing Europe to the brink of utter disaster?
Well, it is because economic conditions in Greece have been absolutely hellish for years and they are sick and tired of it.
For example, the BBC is reporting that many married women have become so desperate to find work in Greece that they are literally begging to work in brothels…
Some who have children and are struggling to support them have turned to sex work, to put food on the table.
Further north, in Larissa, Soula Alevridou, who owns a legal brothel, says the number of married women coming to her looking for work has doubled in the last five years.
“They plead and plead but as a legal brothel we cannot employ married women,” she says. “It’s illegal. So eventually they end up as prostitutes on the streets.”
When people get this desperate, they do desperate things – like voting radical leftists into power.
But Greece might just be the beginning. Surveys show that the popularity of the EU is plummeting all over Europe. Just check out the following excerpt from a recent Telegraph article…
Europe is being swept by a wave of popular disenchantment and revolt against mainstream political parties and the European Union.
In 2007, a majority of Europeans – 52 per cent – trusted the EU. That level of trust has now fallen to a third.
Once, Britain’s Euroscepticism was the exception, and was seen as the biggest threat to the future of the EU.
Now, other countries pose a far bigger danger thanks to the political discontents unleashed by the euro.
At this point, the future of the eurozone is in serious jeopardy.
I have a feeling that major changes in Europe are on the way which are going to shock the planet.
Meanwhile, the rest of the globe continues to slide toward another major financial crisis as well.
So many of the things that preceded the last financial crisis are happening once again. This includes a massive crash in the price of oil. Most people have absolutely no idea how critical the price of oil is to global financial markets. I like how Gerald Celente put it during an interview the other day…
I began getting recognition as a trend forecaster in 1987. The Wall Street Journal covered my forecast. I said, ‘1987 would be the year it all collapses.’ I said, ‘There will be a stock market crash.’ One of the fundamentals I was looking at were the crashing oil prices in 1986.
Well, we see crashing oil prices today and the banks are much more concentrated and levered up in the oil patch than they were in 1987. From Goldman Sachs to Morgan Stanley banks have been involved in major debt financing, derivatives and energy transactions. But much of this debt has not been sold to investors and now we are going to start seeing some big defaults.
By itself, the Greek election would be a significant crisis.
But combined with all of the other economic and geopolitical problems that are erupting all over the planet, it looks like the conditions for a “perfect storm” are rapidly coming together.
Unfortunately, the overall global economy is in far worse shape today than it was just prior to the last major financial crisis.
This time around, the consequences might just be far more dramatic than most people would ever dare to imagine.