The very same people that caused the last economic crisis have created a 278 TRILLION dollar derivatives time bomb that could go off at any moment. When this absolutely colossal bubble does implode, we are going to be faced with the worst economic crash in the history of the United States. During the last financial crisis, our politicians promised us that they would make sure that “too big to fail” would never be a problem again. Instead, as you will see below, those banks have actually gotten far larger since then. So now we really can’t afford for them to fail. The six banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo. When you add up all of their exposure to derivatives, it comes to a grand total of more than 278 trillion dollars. But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars. In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets. This is complete and utter insanity, and yet nobody seems too alarmed about it. For the moment, those banks are still making lots of money and funding the campaigns of our most prominent politicians. Right now there is no incentive for them to stop their incredibly reckless gambling so they are just going to keep on doing it.
So precisely what are “derivatives”? Well, they can be immensely complicated, but I like to simplify things. On a very basic level, a “derivative” is not an investment in anything. When you buy a stock, you are purchasing an ownership interest in a company. When you buy a bond, you are purchasing the debt of a company. But a derivative is quite different. In essence, most derivatives are simply bets about what will or will not happen in the future. The big banks have transformed Wall Street into the biggest casino in the history of the planet, and when things are running smoothly they usually make a whole lot of money.
But there is a fundamental flaw in the system, and I described this in a previous article…
The big banks use very sophisticated algorithms that are supposed to help them be on the winning side of these bets the vast majority of the time, but these algorithms are not perfect. The reason these algorithms are not perfect is because they are based on assumptions, and those assumptions come from people. They might be really smart people, but they are still just people.
Today, the “too big to fail” banks are being even more reckless than they were just prior to the financial crash of 2008.
As long as they keep winning, everyone is going to be okay. But when the time comes that their bets start going against them, it is going to be a nightmare for all of us. Our entire economic system is based on the flow of credit, and those banks are at the very heart of that system.
In fact, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system.
So that is why they are called “too big to fail”. We simply cannot afford for them to go out of business.
As I mentioned above, our politicians promised that something would be done about this. But instead, the four largest banks in the country have gotten nearly 40 percent larger since the last time around. The following numbers come from an article in the Los Angeles Times…
Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.
And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.
During this same time period, 1,400 smaller banks have completely disappeared from the banking industry.
So our economic system is now more dependent on the “too big to fail” banks than ever.
To illustrate how reckless the “too big to fail” banks have become, I want to share with you some brand new numbers which come directly from the OCC’s most recent quarterly report (see Table 2)…
Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)
Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)
Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)
Total Assets: $856,301,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)
Bank Of America
Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)
Total Assets: $801,382,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)
Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)
Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)
Compared to the rest of them, Wells Fargo looks extremely prudent and rational.
But of course that is not true at all. Wells Fargo is being very reckless, but the others are being so reckless that it makes everyone else pale in comparison.
And these banks are not exactly in good shape for the next financial crisis that is rapidly approaching. The following is an excerpt from a recent Business Insider article…
The New York Times isn’t so sure about the results from the Federal Reserve’s latest round of stress tests.
In an editorial published over the weekend, The Times cites data from Thomas Hoenig, vice chairman of the FDIC, who, in contrast to the Federal Reserve, found that capital ratios at the eight largest banks in the US averaged 4.97% at the end of 2014, far lower than the 12.9% found by the Fed’s stress test.
That doesn’t sound good.
So what is up with the discrepancy in the numbers? The New York Times explains…
The discrepancy is due mainly to differing views of the risk posed by the banks’ vast holdings of derivative contracts used for hedging and speculation. The Fed, in keeping with American accounting rules and central bank accords, assumes that gains and losses on derivatives generally net out. As a result, most derivatives do not show up as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets.
Mr. Hoenig uses stricter international accounting rules to value the derivatives. Those rules do not assume that gains and losses reliably net out. As a result, large derivative holdings are shown as assets on the balance sheet, an addition that reduces the ratio of capital to assets to the low levels reported in Mr. Hoenig’s analysis.
And you know what?
The guys running these big banks can see what is coming.
Just consider the words that JPMorgan Chase chairman and CEO Jamie Dimon wrote to his shareholders not too long ago…
Some things never change — there will be another crisis, and its impact will be felt by the financial market.
The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets
In the same letter, Dimon mentioned “derivatives moved by enormous players and rapid computerized trades” as part of the reason why our system is so vulnerable to another crisis.
If this is what he truly believes, why is his firm being so incredibly reckless?
Perhaps someone should ask him that.
Interestingly, Dimon also discussed the possibility of a Greek exit from the eurozone…
“We must be prepared for a potential exit,” J. P. Morgan Chief Executive Officer Jamie Dimon said. in his annual letter to shareholders. “We continually stress test our company for possible repercussions resulting from such an event.”
This is something that I have been warning about for a long time.
And of course Dimon is not the only prominent banker warning of big problems ahead. German banking giant Deutsche Bank is also sounding the alarm…
With a U.S. profit recession expected in the first half of 2015 and investors unlikely to pay up for stocks, the risk of a stock market drop of 5% to 10% is rising, Deutsche Bank says.
That’s the warning Deutsche Bank market strategist David Bianco zapped out to clients today before the opening bell on Wall Street.
Bianco expects earnings for the broad Standard & Poor’s 500-stock index to contract in the first half of 2015 — the first time that’s happened since 2009 during the financial crisis. And the combination of soft earnings and his belief that investors won’t pay top dollar for stocks in a market that is already trading at above-average valuations is a recipe for a short-term pullback on Wall Street.
The truth is that we are in the midst of a historic stock market bubble, and we are witnessing all sorts of patterns in the financial markets which also emerged back in 2008 right before the financial crash in the fall of that year.
When some of the most prominent bankers at some of the biggest banks on the entire planet start issuing ominous warnings, that is a clear sign that time is running out. The period of relative stability that we have been enjoying has been fun, and hopefully it will last just a little while longer. But at some point it will end, and then the pain will begin.
When an economic crisis is coming, there are usually certain indicators that appear in advance. For example, commodity prices usually start to plunge before a recession begins. And as you can see from the Bloomberg Commodity Index which you can find right here, this has already been happening. In addition, I have previously written about how the U.S. dollar went on a great run just before the financial collapse of 2008. This is something that has also been happening over the past few months. Some people would have you believe that nobody can anticipate the next great economic downturn and that to try to do so is just an exercise in “guesswork”. But that is not the case at all. We can look back over history and see patterns that keep repeating. And a lot of the exact same patterns that happened just before previous stock market crashes are happening again right now.
For example, let’s talk about the price of oil. There are only two times in history when the price of oil has fallen by more than 50 dollars in a six month time period. One was just before the financial crisis in 2008, and the other has just happened…
As a result of crashing oil prices, we are witnessing oil rigs shut down in the United States at a blistering pace. In fact, almost half of all oil rigs in the U.S. have already shut down. The following commentary and chart come from Wolf Richter…
In the latest week, drillers idled another 41 oil rigs, according to Baker Hughes. Only 825 rigs were still active, down 48.7% from October. In the 23 weeks since, drillers have idled 784 oil rigs, the steepest, deepest cliff-dive in the history of the data:
We are looking at a full-blown fracking bust, and this bust is already having a dramatic impact on the economies of states that are heavily dependent on the energy industry.
For example, just check out the disturbing number that just came out of Texas…
The crash in oil prices is hammering the Texas economy.
The latest manufacturing outlook index from the Dallas Fed plunged again in March, to -17.4 from -11.2 in February, indicating deteriorating business conditions in the state.
But this pain is going to be felt far beyond Texas. In recent years, Wall Street banks have made a massive amount of money packaging up energy industry loans, bonds, etc. and selling them off to investors.
If that sounds similar to the kind of behavior that preceded the subprime mortgage meltdown, that is because it is.
Now those loans, bonds, etc. are going bad as the fracking bust intensifies, and whoever is left holding all of this worthless paper at the end of the day is going to lose an extraordinary amount of money. Here is more from Wolf Richter…
It suited Wall Street just fine: according to Dealogic, banks extracted $31 billion in fees from the US oil and gas industry and its investors over the past five years by handling IPOs, spin-offs, “leveraged-loan” transactions, the sale of bonds and junk bonds, and M&A.
That’s $6 billion in fees per year! Over the last four years, these banks made over $4 billion in fees on just “leveraged loans.” These loans to over-indebted, junk-rated companies soared from about $40 billion in 2009 to $210 billion in 2014 before it came to a screeching halt.
For Wall Street it doesn’t matter what happens to these junk bonds and leveraged loans after they’ve been moved on to mutual funds where they can decompose sight-unseen. And it doesn’t matter to Wall Street what happens to leverage loans after they’ve been repackaged into highly rated Collateralized Loan Obligations that are then sold to others.
At the same time, we are also witnessing a slowdown in global trade. This usually happens when economic conditions are about to turn sour, and that is why it is so alarming that the total volume of global trade in January was down 1.4 percent from December. According to Tyler Durden of Zero Hedge, that was the largest drop since 2011…
Presenting the latest data from the CPB Netherlands Bureau for Economic Policy Analysis, according to which in January world trade by volume dropped by a whopping 1.4% from December: the biggest drop since 2011!
We are seeing some troubling signs in the U.S. as well.
I shared the following chart in a previous article, but it bears repeating. It comes from Charles Hugh Smith, and it shows that new orders for consumer goods are falling at a rate not seen since the last recession…
Well, what about the stock market? It was up more than 200 points on Monday. Isn’t that good news?
Yes, but the euphoria on Wall Street will not last for long.
When corporate earnings per share either start flattening out or start to decline, that is a huge red flag. We saw this just prior to the stock market crash of 2008, and it is happening again right now. The following commentary and chart come from Phoenix Capital Research…
Take a look at the below chart showing current stock levels and changes in forward Earnings Per Share (EPS). Note, in particular how divergences between EPS and stocks tend to play out (hint look at 2007-2008).
We all know what came next.
And guess what?
According to CNBC, a lot of the “smart money” is pulling their money out of the stock market right now while the getting is good…
Recent market volatility has sent stock market investors rushing for the exits and into cash.
Outflows from equity-based funds in 2015 have reached their highest level since 2009, thanks to a seesaw market that has come under pressure from weak economic data, a stronger dollar and the the prospect of monetary tightening.
Funds that invest in stocks have seen $44 billion in outflows, or redemptions, year to date, according to Bank of America Merrill Lynch. Equity funds have seen outflows in five of the last six weeks, including $6.1 billion in just the last week.
It doesn’t matter if you are a millionaire “on paper” today.
What matters is if the money is going to be there when you really need it.
At the moment, a whole lot of people have been lulled into a false sense of complacency by the soaring stock market and by the bubble of false economic stability that we have been enjoying.
But under the surface, there is a whole lot of turmoil going on.
Those that are looking for the signs are going to see the next crisis approaching well in advance.
Those that are not are going to get absolutely blindsided by what is coming.
Don’t let that happen to you.
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…
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.
Nearly two-thirds of all Americans are completely and totally unprepared for the next economic crisis. As you will read about below, a new survey has found that only 38 percent of Americans have enough money on hand to cover “a $500 repair bill or a $1,000 emergency room visit”. That essentially means that 62 percent of the people in this country do not have an emergency fund. Even after the extremely bitter financial lessons that millions of Americans learned during the last recession, most of us are still choosing to live on the edge. That is utter insanity, and when the next major economic downturn strikes most people are going to find themselves totally unprepared.
The number one thing that you need to do to get ready for the coming economic collapse is to build up an emergency fund.
I know that is not the most “sexy” piece of advice in the world, but it is the truth. Just think about it. During the last recession, millions of Americans suddenly lost their jobs. Because they did not have any cushion to fall back on, millions of them also suddenly could not pay their bills and their mortgages. Foreclosures skyrocketed and countless families went from living a very comfortable middle class lifestyle to being out on the street in very short order.
And now because the people of this country have been so foolish it is going to happen again.
Because of my website, people are constantly asking me what they should do to prepare for the coming economic collapse.
I think that they expect me to say something like this…
“Sell everything that you possibly can and buy gold and silver, go purchase a llama farm, and dig a bunker where you can bury 10,000 cases of MREs.”
Not that there is anything wrong with those kinds of preparations.
But before you do anything else, you have got to have an emergency fund. My recommendation is to have an emergency fund that can cover at least six months of expenses in case something happens.
Sadly, a solid majority of Americans do not have any emergency cash at all. The following comes from the Wall Street Journal…
Only 38% of those polled said they could cover a $500 repair bill or a $1,000 emergency room visit with funds from their bank accounts, a new Bankrate report said. Most others would need to take on debt or cut back elsewhere.
“A solid majority of Americans say they have a household budget,” said Bankrate banking analyst Claes Bell. “But too few have the ability to cover expenses outside their budget without going into debt or turning to family and friends for help.”
The survey found that an unexpected bill would cause 26% to reduce spending elsewhere, while 16% would borrow from family or friends and 12% would put the expense on a credit card. The remainder didn’t know what they would do or would make other arrangements.
And of course this is not the only poll that has come up with these kinds of results. In fact, a Federal Reserve survey from last year produced similar numbers…
The findings are strikingly similar to a U.S. Federal Reserve survey of more than 4,000 adults released last year. “Savings are depleted for many households after the recession,” it found. Among those who had savings prior to 2008, 57% said they’d used up some or all of their savings in the Great Recession and its aftermath. What’s more, only 39% of respondents reported having a “rainy day” fund adequate to cover three months of expenses and only 48% of respondents said that they would completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money.
Meanwhile, the financial condition of most American families is far worse than it was just prior to the last major economic crisis. As a recent MarketWatch article detailed, the average family currently has far less wealth than it did back then…
But while the jobs market is improving and the Affordable Care Act has given an estimated 15 million people access to medical care, the Great Recession does appear to have taken its toll on Americans’ finances; in fact, they’re 40% poorer today than they were in 2007. The net worth of American families — that is, the difference between the values of their assets, including homes and investments, and liabilities — fell to $81,400 in 2013, down slightly from $82,300 in 2010, but a long way off the $135,700 in 2007, according to a report released last month by the nonprofit think tank Pew Research Center in Washington, D.C.
So we have a lot less wealth, and almost two-thirds of us have no emergency cushion to fall back on whatsoever.
What could go wrong?
In addition, there is lots of evidence that much of the country has not bothered to make any preparations at all for even a basic emergency that would last for just a few days. For example, the following are results from a survey conducted by the Adelphi Center for Health Innovation that I featured in a previous article…
- 44 percent don’t have first-aid kits
- 48 percent lack emergency supplies
- 53 percent do not have a minimum three-day supply of nonperishable food and water at home
- 55 percent believe local authorities will come to their rescue if disaster strikes
- 52 percent have not designated a family meeting place if they are separated during an emergency
- 42 percent do not know the phone numbers of all of their immediate family members
- 21 percent don’t know if their workplace has an emergency preparedness plan
- 37 percent do not have a list of the drugs they are taking
- 52 percent do not have copies of health insurance documents
What are all of those people going to do if there is an extended crisis or disaster in this nation?
That is a very good question.
Meanwhile, the signs that we are on the verge of the next major economic crisis just continue to grow. Yesterday, I shared 10 things that happened just prior to the financial crisis of 2008 that are happening again right now.
Today, we learned that a major oil driller down in Texas has just declared bankruptcy, and many more energy companies are expected to follow suit in the coming months. The following is from the Wall Street Journal…
[S]igns of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.
Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”
And we also learned today that teen retailer Wet Seal is going to be closing two-thirds of its stores.
Dozens more retailers are expected to make similar announcements over the coming months.
We are moving into the most chaotic time for the U.S. economy that any of us have ever seen, and most Americans are totally oblivious to what is happening and are totally unprepared.
So what is our country going to look like when tens of millions of unprepared people are blindsided by a crisis that they never saw coming?
If you do not believe that we are heading directly toward another major financial crisis, you need to read this article. So many of the exact same patterns that preceded the great financial collapse of 2008 are happening again right before our very eyes. History literally appears to be repeating, but most Americans seem absolutely oblivious to what is going on. The mainstream media and our politicians are promising them that everything is going to be okay somehow, and that seems to be good enough for most people. But the signs that another massive financial crisis is on the horizon are everywhere. All you have to do is open up your eyes and look at them.
Bill Gross, considered by many to be the number one authority on government bonds on the entire planet, made headlines all over the world on Tuesday when he released his January Investment Outlook. I don’t know if we have ever seen Gross be more negative about a new year than he is about 2015. For example, just consider this statement…
“When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.”
And this is how he ended the letter…
And so that is why – at some future date – at some future Ides of March or May or November 2015, asset returns in many categories may turn negative. What to consider in such a strange new world? High-quality assets with stable cash flows. Those would include Treasury and high-quality corporate bonds, as well as equities of lightly levered corporations with attractive dividends and diversified revenues both operationally and geographically. With moments of liquidity having already been experienced in recent months, 2015 may see a continuing round of musical chairs as riskier asset categories become less and less desirable.
Debt supercycles in the process of reversal are not favorable events for future investment returns. Father Time in 2015 is not the babe with a top hat in our opening cartoon. He is the grumpy old codger looking forward to his almost inevitable “Ides” sometime during the next 12 months. Be cautious and content with low positive returns in 2015. The time for risk taking has passed.
So why are Gross and so many other financial experts being so “negative” right now?
It is because they can see what is happening.
They can see the same patterns that we saw in early 2008 unfolding again right in front of us. I wanted to put these patterns in a single article so that they will be easy to share with people. The following are 10 key events that preceded the last financial crisis that are happening again right now…
#1 A really bad start to the year for the stock market. During the first three trading days of 2015, the S&P 500 was down a total of 2.73 percent. There are only two times in history when it has declined by more than three percent during the first three trading days of a year. Those years were 2000 and 2008, and in both years we witnessed enormous stock market declines.
#2 Very choppy financial market behavior. This is something that I discussed yesterday. In general, calm markets tend to go up. When markets get choppy, they tend to go down. For example, the chart that I have posted below shows how the Dow Jones Industrial Average behaved from the beginning of 2006 to the end of 2008. As you can see, the Dow was very calm as it rose throughout 2006 and most of 2007, but it got very choppy as 2008 played out…
As I also mentioned yesterday, it is important not to get fooled if stocks soar on a particular day. The three largest single day stock market gains in history were right in the middle of the financial crisis of 2008. When you start to see big ups and big downs in the market, that is a sign of big trouble ahead. That is why it is so alarming that global financial markets have begun to become quite choppy in recent weeks.
#3 A substantial decline for 10 year bond yields. When investors get scared, there tends to be a “flight to safety” as investors move their money to safer investments. We saw this happen in 2008, and that is happening again right now.
In fact, according to Bloomberg, global 10 year bond yields have already dropped to low levels that are absolutely unprecedented…
Taken together, the average 10-year bond yield of the U.S., Japan and Germany has dropped below 1 percent for the first time ever, according to Steven Englander, global head of G-10 foreign-exchange strategy at Citigroup Inc.
That’s not good news. The rock-bottom rates, which fall below zero when inflation is taken into account, show “that investors think we are going nowhere for a long time,” Englander wrote in a report yesterday.
#4 The price of oil crashes. As I write this, the price of U.S. oil has dipped below $48 a barrel. But back in June, it was sitting at $106 at one point. As the chart below demonstrates, there is only one other time in history when the price of oil has declined by more than $50 in less than a year…
The only other time there has been an oil price collapse of this magnitude we experienced the greatest financial crisis since the Great Depression shortly thereafter. Are we about to see history repeat? For much more on this, please see my previous article entitled “Guess What Happened The Last Time The Price Of Oil Crashed Like This?”
#5 A dramatic drop in the number of oil and gas rigs in operation. Right now, oil and gas rigs are going out of operation at a frightening pace. During the fourth quarter of 2014, 93 oil and gas rigs were idled, and it is being projected that another 200 will shut down this quarter. As this Business Insider article demonstrates, this is also something that happened during the financial crisis of 2008 and it continued well into 2009.
#6 The price of gasoline takes a huge tumble. Millions of Americans are celebrating that the price of gasoline has plummeted in recent weeks. But they were also celebrating when it happened back in 2008 as well. But of course it turned out that there was really nothing to celebrate in 2008. In short order, millions of Americans lost their jobs and their homes. So the chart that I have posted below is definitely not “good news”…
#7 A broad range of industrial commodities begin to decline in price. When industrial commodities go down in price, that is a sign that economic activity is slowing down. And just like in 2008, that is what we are watching unfold on the global stage right now. The following is an excerpt from a recent CNBC article…
From nickel to soybean oil, plywood to sugar, global commodity prices have been on a steady decline as the world’s economy has lost momentum.
For an extended discussion on this, please see my recent article entitled “Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?”
#8 A junk bond crash. Just like in 2008, we are witnessing the beginnings of a junk bond collapse. High yield debt related to the energy industry is on the bleeding edge of this crash, but in recent weeks we have seen investors start to bail out of a broad range of junk bonds. Check out this chart and this chart in addition to the chart that I have posted below…
#9 Global inflation slows down significantly. When economic activity slows down, so does inflation. This is something that we witnessed in 2008, this is also something that is happening once again. In fact, it is being projected that global inflation is about to fall to the lowest level that we have seen since World War II…
Increases in the prices of goods and services in the world’s largest economies are slowing dramatically. Analysts are predicting that inflation will fall below 2pc in all of the countries that make up the G7 group of advanced nations this year – the first time that has happened since before the Second World War.
Indeed, Japan was the only G7 country whose inflation rate was above 2pc last year. And economists believe that was because its government increased sales tax which had the effect of artificially boosting prices.
#10 A crisis in investor confidence. Just prior to the last financial crisis, the confidence that investors had that we would be able to avoid a stock market collapse in the next six months began to decline significantly. And guess what? That is something else that is happening once again…
Investor confidence that the US will avoid a stock-market crash in the next six months has dropped dramatically since last spring.
The Yale School of Management publishes a monthly Crash Confidence Index. The index shows the proportion of investors who believe we will avoid a stock-market crash in the next six months.
Yale points out that “crash confidence reached its all-time low, both for individual and institutional investors, in early 2009, just months after the Lehman crisis, reflecting the turmoil in the credit markets and the strong depression fears generated by that event, and is plausibly related to the very low stock market valuations then.”
Are you starting to get the picture?
And of course I am not the only one warning about these things. As I wrote about earlier in the week, there are a whole host of prominent voices that are now warning of imminent financial danger.
Today, I would like to add one more name to the list. He is respected author James Howard Kunstler, and what he predicts is coming in 2015 is absolutely chilling…
Here are my financial forecast particulars for 2015:
- Early in 2015 the ECB proposes a lame QE program and is laughed out of the room. European markets tank.
- Greek elections in January produce a government that stands up to the EU and ECB and causes a fatal slippage of faith in the ability of that project to continue.
- Second half of 2015, the rest of the world gangs up and counter-attacks the US dollar.
- Bond markets in Europe implode in first half and the contagion spreads to the US as fear and distrust rises about viability of US safe haven status.
- Derivatives associated with currencies, interest rates, and junk bonds trigger a bloodbath in credit default swaps (CDS) and the appearance of countless black holes through which debt and “wealth” disappear forever.
- US stock markets continue to bid upward in the first half of 2015, crater in Q3 as faith in paper and pixels erodes. DJA and S & P fall 30 to 40 percent in the initial crash, then further into 2016.
- Gold and silver slide in the first half, then take off as debt and equity markets craters, faith in abstract instruments evaporates, faith in central bank omnipotence dissolves, and citizens all over the world desperately seek safety from currency war.
- Goldman Sachs, Citicorp, Morgan Stanley, Bank of America, DeutscheBank, SocGen, all succumb to insolvency. American government and Federal Reserve officials don’t dare attempt to rescue them again.
- By the end of 2015, central banks everywhere stand in general discredit. In the US, the Federal Reserve’s mandate is publically debated and revised back to its original mission as lender of last resort. It is forbidden to engage in further interventions and a new less-secretive mechanism is drawn up for regulating basic interest rates.
- Oil prices creep back into the $65 – $70 range by May 2015. It is not enough to halt the destruction in the shale, tar sand, and deepwater sectors. As contraction in the failing global economy accelerates, oil sinks back to the $40 range in October…
- …unless mischief in the Middle East (in particular, the Islamic State messing with Saudi Arabia) leads to gross and perhaps fatally permanent disruption in world oil markets — and then all bets are off for both the continuity of advanced economies and for peace between nations.
Personally, I don’t agree with Kunstler on all of the particulars and the timing of certain events, but overall I think that we are going to look back when the year is done and say that he was a lot more right than he was wrong.
We are moving into a time of extreme danger for the global economy. There has never been a time when I have been more concerned about a new year since I began The Economic Collapse Blog back in 2009.
Over the past couple of years, we have been very blessed to be able to enjoy a bubble of relative stability. But this period of stability also fooled many people into thinking that our economic problems had been fixed, when in reality they have only gotten worse.
We consume far more wealth than we produce, our debt levels are at record highs and we are at the tail end of the largest Wall Street financial bubble in all of history.
It is inevitable that we are heading for a tragic conclusion to all of this. It is just a matter of time.
On Monday, the price of oil fell below $50 for the first time since April 2009, and the Dow dropped 331 points. Meanwhile, the stock market declines over in Europe were even larger on a percentage basis, and the euro sank to a fresh nine year low on concerns that the anti-austerity Syriza party will be victorious in the upcoming election in Greece. These are precisely the kinds of things that we would expect to see happen if a global financial crash was coming in 2015. Just prior to the financial crisis of 2008, the price of oil collapsed, prices for industrial commodities got crushed and the U.S. dollar soared relative to other currencies. All of those things are happening again. And yet somehow many analysts are still convinced that things will be different this time. And I agree that things will indeed be “different” this time. When this crisis fully erupts, it will make 2008 look like a Sunday picnic.
Another thing that usually happens when financial markets begin to unravel is that they get really choppy. There are big ups and big downs, and that is exactly what we have witnessed since October.
So don’t expect the markets just to go in one direction. In fact, it would not be a surprise if the Dow went up by 300 or 400 points tomorrow. During the initial stages of a financial crash, there are always certain days when the markets absolutely soar.
For example, did you know that the three largest single day stock market advances in history were right in the middle of the financial crash of 2008? Here are the dates and the amount the Dow rose each of those days…
October 13th, 2008: +936 points
October 28th, 2008: +889 points
November 13th, 2008: +552 points
Just looking at those three days, you would assume that the fall of 2008 was the greatest time ever for stocks. But instead, it was the worst financial crash that we have seen since the days of the Great Depression.
So don’t get fooled by the volatility. Choppy markets are almost always a sign of big trouble ahead. Calm waters usually mean that the markets are going up.
In order to avoid a major financial crisis in the near future, we desperately need the price of oil to rebound in a substantial way.
Unfortunately, it does not look like that is going to happen any time soon. There is just way too much oil being produced right now. The following is an excerpt from a recent CNBC article…
The Morgan Stanley strategists say there are new reports of unsold West and North African cargoes, with much of the oil moving into storage. They also note that new supply has entered the global market with additional exports coming from Russia and Iraq, which is reportedly seeing production rising to new highs.
Since June, the price of oil has plummeted close to 55 percent. If the price of oil stays where it is right now, we are going to see large numbers of small producers go out of business, the U.S. economy will lose millions of jobs, billions of dollars of junk bonds will go bad and trillions of dollars of derivatives will be in jeopardy.
And the lower the price of oil goes, the worse our problems are going to get. That is why it is so alarming that some analysts are now predicting that the price of oil could hit $40 later this month…
Some traders appeared certain that U.S. crude will hit the $40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build.
‘We’re headed for a four-handle,’ said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York. ‘Maybe not today, but I’m sure when you get the inventory numbers that come out this week, we definitely will.’
Open interest for $40-$50 strike puts in U.S. crude have risen several fold since the start of December, while $20-$30 puts for June 2015 have traded, said Stephen Schork, editor of Pennsylvania-based The Schork Report.
The only way that the price of oil has a chance to move back up significantly is if global production slows down. But instead, production just continues to increase in the short-term thanks to projects that were already in the works. As a result, analysts from Morgan Stanley say that the oil glut is only going to intensify…
Morgan Stanley analysts said new production will continue to ramp up at a number of fields in Brazil, West Africa, Canada and in the U.S. Gulf of Mexico as well as U.S. shale production. Also, the potential framework agreement with Iran could mean more Iranian oil on the market.
Yes, lower oil prices mean that we get to pay less for gasoline when we fill up our vehicles.
But as I have written about previously, anyone that believes that lower oil prices are good for the U.S. economy or for the global economy as a whole is crazy. And these sentiments were echoed recently by Jeff Gundlach…
“Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.“
If the price of oil does not recover, we are going to see massive financial problems all over the planet and the geopolitical stress that this will create will be unbelievable.
To expand on this point, I want to share an excerpt from a recent Zero Hedge article. As you can see, a rapid rise or fall in the price of oil almost always correlates with a major global crisis of some sort…
Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the ‘difference this time’ is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.
So is the 45% YoY drop in oil prices about to ’cause’ contagion risk concerns for the world?
And without a doubt, we are overdue for another stock market crisis.
Between December 31st, 1996 and March 24th, 2000 the S&P 500 rose 106 percent.
Then the dotcom bubble burst and it fell by 49 percent.
Between October 9th, 2002 and October 9th, 2007 the S&P 500 rose 101 percent.
But then that bubble burst and it fell by 57 percent.
Between March 9th, 2009 and December 31st, 2014 the S&P 500 rose an astounding 204 percent.
When this bubble bursts, how far will it fall this time?
The 8th largest economy on the entire planet is in a state of turmoil right now. The shocking collapse of the price of oil has hit a lot of countries really hard, but very few nations are as dependent on energy production as Russia is. Sales of oil and natural gas account for approximately two-thirds of all Russian exports and approximately 50 percent of all government revenue. So it should be no surprise that the fact that the price of oil has declined by almost 50 percent since June is absolutely catastrophic for the Russian economy. And when you throw in international sanctions, wild money printing by the Central Bank of Russia and unprecedented capital flight, you get the ingredients for an almost perfect storm. But those of us living in the western world should not be too smug about what is happening in Russia, because the nightmare that is unfolding over there is just a preview of the economic chaos that will soon envelop the whole world.
So far this year, the Russian ruble has fallen nearly 50 percent against the U.S. dollar. That is a monumental shift. And as the collapse of the ruble has accelerated in recent days, we are seeing scenes in Russia that are reminiscent of the Weimar Republic. For example, just consider the following excerpt from an article that just appeared in the New York Times…
Scenes that Russians hoped had receded into the past reappeared on the streets: Currency exchange signs blinked ever-changing digits, and Russians rushed to appliance stores to buy washing machines or televisions to unload rubles.
“We are seeing an economic crisis,” Natalia V. Akindinova, a professor at the Higher School of Economics, said in a telephone interview. “We are seeing a sharp devaluation of the ruble at a time when the central bank doesn’t have the reserves to influence the market, as it did in the past crises.”
In a desperate attempt to stop the bleeding, the Central Bank of Russia made an astounding move. Last night it raised its key interest rate from 10.5 percent all the way up to 17 percent.
It was hoped that this desperate move would keep the ruble from plummeting any further.
And it did work for a few minutes, but then the collapse of the ruble resumed. This is how Zero Hedge described the carnage…
For those wondering if the CBR’s intervention in the Russian FX market with its shocking emergency rate hike to 17% overnight calmed things, the answer is yes… for about two minutes. The USDRUB indeed tumbled nearly 10% to 59 and then promptly blew right back out, the Ruble crashing in panic selling and seemingly without any CBR market interventions, and at last check was freefalling through 72 74, and sending the Russian stock market plummeting by over 15%.
So why is this happening now?
Well, the biggest reason for the freefall of the ruble is the fact that the Central Bank of Russia just printed up about 625 billion rubles and gave it to their friends at Rosneft.
Rosneft is an absolutely massive oil company that is controlled by the Russian government. For months, Rosneft has been asking for a bailout (sound familiar?) to refinance loans that can no longer be rolled over with western banks because of economic sanctions.
And on Friday they got one.
In an attempt to quietly slip this massive injection of new money past everyone, Rosneft issued 625 billion rubles worth of new bonds just before the weekend and the Central Bank of Russia gobbled most of those new bonds up with freshly created money. Unfortunately for Rosneft and the Central Bank of Russia, the rest of the world took notice…
With the oil giant in a bind, the central bank ruled that it would accept Rosneft bonds held by commercial banks as collateral for loans.
Rosneft issued 625 billion rubles, about $10.9 billion at the exchange rate at the time, in new bonds on Friday. The identities of the buyers were not publicly disclosed, but analysts say that large state banks bought the issue.
When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank.
So that is what led to the panic selling that we witnessed on Monday.
Meanwhile, money is being pulled out of Russia at an absolutely staggering pace. As confidence in the ruble and in the Russian financial system disappears, wealthy people are feverishly trying to protect their wealth by moving it somewhere else. The following is an excerpt from an editorial that Mohamed A. El-Erian recently penned for Business Insider…
Rather than bring in buyers at these substantially cheaper levels, Russian currency weakness is inducing more selling, including by a growing number of worried bank depositors who, instead of holding their savings in ruble, are opting for safer dollars. The larger the extent of this “currency substitution,” the bigger the scope for capital flight out of Russia. This puts even greater pressure on the currency, aggravating the output contraction, imported inflation, and the general sense economic and financial instability.
It has been estimated that total capital outflows for 2015 will reach an astounding $128 billion.
And this could just be the beginning of the economic troubles for Russia.
If the price of oil stays this low or goes even lower, the Russian economy will shrink. The only question is how much it will contract…
The Bank of Russia said Monday that the country could sink into a deep recession next year if oil prices remain at $60 a barrel. GDP could contract by as much as 4.7% in 2015, and then by a further 1.1% in 2016 unless oil prices pick up.
Sadly, it isn’t just oil producing nations such as Russia that are going to be devastated by the coming crisis.
Eventually, the entire globe is going to feel the pain.
Last week was the worst week for global financial markets in three years, and so many of the exact same patterns that we witnessed just prior to the great financial crisis of 2008 are happening once again. We have been living in a false bubble of relative stability for the past couple of years, but now time is running out. The next great financial crisis is rapidly approaching, and 2015 promises to be the most “interesting” year that we have seen in ages.