The fallout from the Brexit vote continues to rock the European financial system. On Wednesday, the British pound dropped to a fresh 31 year low as confidence in the currency continues to plummet. At one point it had fallen as low as $1.2796 before rebounding a bit. As I write this, it is still sitting at just $1.293. Meanwhile, the problems for the biggest banks in Europe just continue to mount. At one point on Wednesday Credit Suisse hit an all-time record low, and German banking giant Deutsche Bank closed the day at an all-time record closing low of 12.93. Overall, Europe’s Stoxx 600 Bank Index closed at the lowest level in almost five years. What we are watching is a full-blown financial meltdown in Europe, but because it is not personally affecting them yet, most Americans are not paying any attention to it.
The collapse of the British pound that we have seen since the Brexit vote has been nothing short of breathtaking. In fact, CNN says that this “is what a currency crash looks like”…
This is what a currency crash looks like. The pound has slumped to $1.28, its lowest level in more than three decades.
Investors are dumping the pound following Britain’s vote to leave the European Union on June 23. The pound has dropped roughly 15% since the referendum day, when it reached $1.50.
After appearing to stabilize, the pound resumed its decline this week after three big asset management firms halted withdrawals from real estate investment funds.
Of course this is likely only just the beginning. There are some analysts that are suggesting that the British pound could eventually hit parity with the U.S. dollar at some point. We are seeing seismic shifts on the foreign exchange market right now, and this is going to affect trillions of dollars worth of currency-related derivatives. It will be exceedingly interesting to see how all of this plays out.
Meanwhile, Deutsche Bank continues to get absolutely hammered.
If the biggest and most important bank in Germany is not completely imploding, then why does the stock price continue to crash time after time?
Since the start of 2016, the value of Deutsche Bank has fallen by half, and many have pointed out that the trajectory that it is on is very, very similar to Lehman Brothers in 2008.
My regular readers are probably sick and tired of hearing me warn about Deutsche Bank, so today I will let someone else do it. According to an article that was just published by the BBC, Deutsche Bank is now “the most dangerous bank in the world”…
Deutsche Bank shares hit a new record low today. It’s value has halved since the beginning of the year.
So is it now the most dangerous bank in the world?
According to the International Monetary Fund – yes.
Last week, the IMF said that, of the banks big enough to bring the financial system crashing down, Deutsche Bank was the riskiest. Not only that, Deutsche Bank’s US unit was one of only two of 33 big banks to fail tests of financial strength set by the US central bank earlier this year.
At this point Deutsche Bank is scrambling to raise cash to stave off an imminent implosion. Just today, I came across a report about how they plan to sell at least a billion dollars worth of shipping loans in order to bring in some much needed funds. Many of the steps that they are taking are reminiscent of what Lehman Brothers tried to do just prior to their collapse, and that alone should tell you something.
At the same time all of this is going on, things in Italy just continue to get even worse. As of this moment, approximately 17 percent of all bank loans held by Italian banks are considered to be “non-performing”. In other words, they are absolutely swamped by bad debts. At the height of the 2008 crisis, only about 5 percent of the loans held by U.S. banks were bad. So what we are watching unfold in Italy right now could definitely be described as “cataclysmic”.
Since the Brexit vote, Italian banks have been hit harder than anyone else. The following comes from CNN…
Shares in Italy’s Banca Monte Dei Paschi Di Siena have crashed 45% in 10 days, forcing regulators to temporarily ban short-selling in the stock. The bank has been given until Friday to come up with a plan to reduce its bad loans by 40% by 2018.
It’s not alone. Other Italian bank stocks have fallen by about 30% since June 23, when the U.K. voted to leave the European Union. Italian officials are trying to find ways to shore up the country’s financial system.
Italian banks have been choking on bad debt for years, but the U.K. vote has thrown their problems into sharp relief.
Personally, I have been amazed that the European financial system has been able to hold it together for this long. A total collapse was inevitable, but I really thought that it would have started before now. Up until this time we have seen small crisis after small crisis, but in 2016 the full-blown meltdown has finally arrived.
And this growing crisis in Europe is going to have a dramatic impact on the entire planet. Everywhere you look the economic fundamentals are getting worse, and if you won’t believe me, perhaps you will believe this editorial by Tim Quast on CNBC…
The bottom line is that the fundamentals of the economy and market don’t look good: Whoever you’re listening to — the Federal Reserve, to the Organization for Economic Cooperation and Development, to the International Monetary Fund — hoary heads of the dismal science see deepening malaise worsened by the Brexit, creaky European banks, possible copycat flight from the euro zone — even a slowdown for the U.S.
Can a market characterized by declining money flows, weakening fundamentals and arbitrage that has posted no material gain in over 18 months gather steam? Anything is possible. But it’s not a sound conclusion.
Whenever I post an article about Europe, it tends to get significantly less response than many of my other articles do.
But I hope that my fellow Americans will start paying attention to this growing crisis, because it is going to deeply affect all of us.
What is happening to the European financial system right now is truly history in the making, and I believe that it is going to be one of the biggest news stories of the second half of 2016.
Over the last two trading days, European banks have lost 23 percent of their value. Let that number sink it for a bit. In just a two day stretch, nearly a quarter of the value of all European banks has been wiped out. I warned you that the Brexit vote “could change everything“, and that is precisely what has happened. Meanwhile, the Dow was down another 260 points on Monday as U.S. markets continue to be shaken as well. Overall, approximately three trillion dollars of global stock market wealth has been lost over the last two trading days. That is an all-time record, and any doubt that we have entered a new global financial crisis has now been completely eliminated.
But of course the biggest news on Monday was what happened to European banks. The Brexit vote has caused financial carnage for those institutions unlike anything that we have ever seen before. Just check out this chart from Zero Hedge…
I knew that things would be bad if the UK voted to leave the European Union, but I didn’t know that they would be this bad.
Prior to all of this, a whole bunch of “too big to fail” banks all over Europe were already in the process of imploding, and now this chaotic financial environment may push several of them into full-blown collapse mode simultaneously. Just consider the following commentary from Wolf Richter…
Healthy big banks would get over Brexit and the political turmoil it is spawning, particularly non-UK banks. But there are no healthy big banks in Europe. And non-UK banks are crashing just as hard, and some harder. This is about a banking crisis morphing into a financial crisis.
These bank stocks got crushed on Friday. And they got crushed again today. Italian banks have been reduced to penny stocks. Spanish banks are getting closer. Commerzbank, Germany’s second largest bank, and still partially owned by the German government as a consequence of the last bailout, is well on the way.
One institution that I have been warning about for months is German banking giant Deutsche Bank. On Monday, their stock fell another 5.77 percent to a fresh all-time closing low of 13.87. I have been convinced that Deutsche Bank is going to zero for a long time, but these days it seems in quite a hurry to get there.
Of course Deutsche Bank is far from alone. The following are other “too big to fail” European banks that have lost at least one-fifth of their value over the past two trading days…
-Royal Bank of Scotland
-Lloyds Banking Group
-Banca Monte dei Paschi di Siena
This is what a full-blown financial crisis looks like, and U.S. banks have been getting hit very hard too…
The Brexit contagion is spreading as USD liquidity and counterparty risk in the interconnected global financial system has reached US banks with Goldman at 3 year lows and BofA and Citi plunging over 12%. This happens just two days after the Fed released its latest stress test results finding that none of the 33 banks tested would need additional capital in case of a “severe” financial crisis. That conclusion may be tested soon.
Meanwhile, the British pound continues to get absolutely pummeled. As I write this, the GBP/USD is down to 1.32, and some are now warning that the British pound may hit parity with the U.S. dollar by the end of the year.
One of the reasons why I expect the British pound to continue to tumble is because the global elite have to show the British people that they made the wrong decision, and they need to scare off any other countries that would consider holding similar votes.
So it was no surprise that the elite had two of their major credit rating agencies downgrade the UK on Monday…
Two major rating agencies downgraded the United Kingdom’s credit rating on Monday.
S&P Global Ratings lowered the UK to AA from AAA, with a “negative” outlook. And, Fitch cut its rating to AA from AA+, with a negative outlook as well.
And as I mentioned yesterday, Bank of America and Goldman Sachs have already projected that the UK economy is heading into recession.
As much economic and financial pain as possible will be inflicted upon the British people, and meanwhile they will be bombarded by mainstream news stories telling them that they made a stupid decision.
Hopefully the British people will stand strong and will not give in to the pressure.
But of course it isn’t just the British people that will be feeling the pain. The Brexit vote has sent shockwaves all over the planet, and global investors are losing tremendous amounts of money. For instance, here in the United States approximately 1.3 trillion dollars of stock market wealth has been wiped out so far…
Brexit isn’t just a European problem after all. The United Kingdom’s decision to quit the European Union is costing U.S. investors a pretty penny.
U.S.-based companies in the broad Russell 3000, including online advertising company Alphabet (GOOGL), software maker Microsoft (MSFT) and global bank JPMorgan Chase (JPM), have suffered a collective loss of $1.3 trillion since Friday’s shocker from the United Kingdom, according to a USA TODAY analysis of data from S&P Global Market Intelligence.
Hopefully tomorrow will be better. It is very rare for global financial markets to crash for three days in a row, but it could happen. More likely, however, is that we will see some kind of temporary bounce as long as some really negative event doesn’t hit the news.
But let there be no doubt about what has just happened. The collapse of Lehman Brothers was the “trigger event” that really accelerated the crisis of 2008, and now it appears as though the Brexit vote will be the “trigger event” that greatly accelerates the crisis of 2016.
Global investors had already lost trillions over the past 12 months, and a full-blown financial implosion was going to happen no matter how the vote turned out, but thanks to British voters the fun and games have arrived early.
Unfortunately, only a very small fraction of the population understands just how bad things are going to get in the months ahead…
The recent attacks in Paris and in Brussels were just the tip of the iceberg of a massive wave of Islamic terror that is soon coming to Europe. As you will see below, the Associated Press is reporting that ISIS has specially trained “at least 400 attackers” and has already sent them into Europe with specific instructions to conduct terror operations. So Barack Obama may not think that we have anything to be concerned about, but the facts on the ground tell us a completely different story. Thanks to Europe’s openness to “war refugees” from Syria, it is very easy for radical jihadists to get into countries such as France, Belgium and Germany. And once they are on European soil, there are plenty of other disgruntled Islamic refugees that they can recruit to their cause. Europe stands on the precipice of the greatest terror crisis that it has ever known, and the attacks that are coming next are likely to be far more deadly than anything we have seen so far.
As I mentioned above, the Associated Press is reporting that ISIS has already sent “at least 400″ trained fighters into Europe for the purpose of conducting terror attacks…
Security officials have told The Associated Press that the Islamic State group has trained at least 400 attackers and sent them into Europe for terror attacks.
The network of interlocking, agile and semiautonomous cells shows the reach of the extremist group in Europe even as it loses ground in Syria. The officials, including European and Iraqi intelligence officials and a French lawmaker who follows the jihadi networks, describe camps designed specifically to train for attacks against the West.
And just in case you were tempted to think that this threat was not real, you may want to consider what happened in France on Thursday.
According to NBC News, police in Paris were able to foil a terror attack that was in “the advanced stages” of planning…
Raids in northwest Paris have foiled a terrorist attack, French officials said late Thursday.
French Interior Minister Bernard Cazeneuve gave a press conference in Paris announcing there was an operation underway in Argenteuil, a commune in the northwest suburbs of Paris.
One man was arrested Thursday morning Cazeneuve said, adding that the operation thwarted a potential attack. Police were raiding his home again later Thursday evening.
The suspect was a French national who was in “the advanced stages” of a terror plot, the minister said, calling it a “major arrest.”
Of course much of the rest of the world is already solidly in the grip of Islamic terror. The number of people killed by Islamic terror attacks has been increasing year after year, but the western media only seems to get excited when an attack happens in North America or Europe.
I came across the following tweet earlier today, and it makes this point perfectly…
For instance, did you even hear about the horrific Islamic terror attack that happened in the Ivory Coast earlier this month? Gunmen opened fire on a very crowded beach in a key resort area on a beautiful Sunday afternoon, and Al-Qaeda in the Islamic Maghreb claimed responsibility for the bloodshed. The following comes from the New York Times…
Gunmen opened fire on picnickers and swimmers enjoying a perfect day at three beach resort hotels near the Ivory Coast’s capital on Sunday, killing 16 people and leaving bodies strewn across the bloodstained sand. It was the third major attack in West Africa since November, and verified fears that the spread of terrorism across the region was far from over.
The attack, on the first sunny Sunday in weeks, took place in Grand-Bassam, a popular palm tree-lined getaway for Ivorians and foreigners. Fourteen civilians and two members of the country’s special forces were killed, as well as six gunmen, according to a spokeswoman for the president.
So why do we get so bent out of shape when there is an attack in France or Belgium, but not when there is an attack in the Ivory Coast?
And what does that say about us?
As ISIS and other Islamic terror groups conduct more attacks in North America and Europe, the pressure to conduct military action in the Middle East is going to become very intense. For a long time I have been warning about the potential for World War III to erupt in Syria, and U.S. troops are already taking on a more prominent role in Iraq.
In fact, the International Business Times is reporting that U.S. marines are now “on the front line” in the fight against the Islamic State…
The Islamic State group is trying to retake control of the oil fields it lost two years ago in the semi-autonomous region of Iraqi Kurdistan by launching rockets at Kurdish and Iraqi soldiers. In an attempt to earn back the massive amount of cash it used to fund its international terrorism in 2014, the group has focused its resources on attacking Makhmur, a city just 75 miles miles from the oil-rich city of Kirkuk. So far, the group, also known as ISIS, has succeeded in outgunning the Iraqi forces in the city, but a new contingent of American Marines might change the outcome on the ground.
“Several weeks ago, thousands of Iraqi troops began occupying a tactical assembly area in Makhmur. This is part of the force generation associated with the liberation of Mosul,” Col. Steve Warren, spokesman for the fight against ISIS in Iraq and Syria, said in a press briefing this week. Mosul is the de facto ISIS headquarters in Iraq. “These Iraqi forces, along with their coalition advisers, require force protection,” Warren said. “So we constructed a small fire base to do just that.”
The U.S. Marines in Iraq are on the front line and have been tasked with protecting Iraqi units in Makhmur — a scenario President Barack Obama wanted to avoid as long as possible during his time in office.
And what happens when ISIS or another terror group is able to set off a chemical, biological or nuclear weapon in a major western city?
That would change the world literally overnight.
As I have been warning, most people have no idea how incredibly fragile our society truly is. Humanity has created weapons that are frighteningly powerful, and it is only a matter of time before terrorists acquire these weapons and begin using them.
The free and open society that we are all enjoying today is on borrowed time.
All it is going to take is the detonation of a single weapon of mass destruction in a major western city and everything will change.
The Italian banking system is a “leaning tower” that truly could completely collapse at literally any moment. And as Italy’s banks begin to go down like dominoes, it is going to set off financial panic all over Europe unlike anything we have ever seen before. I wrote about the troubles in Italy back in January, but since that time the crisis has escalated. At this point, Italian banking stocks have declined a whopping 28 percent since the beginning of 2016, and when you look at some of the biggest Italian banks the numbers become even more frightening. On Monday, shares of Monte dei Paschi were down 4.7 percent, and they have now plummeted 56 percent since the start of the year. Shares of Carige were down 8 percent, and they have now plunged a total of 58 percent since the start of the year. This is what a financial crisis looks like, and just like we are seeing in South America, the problems in Italy appear to be significantly accelerating.
So what makes Italy so important?
Well, we all saw how difficult it was for the rest of Europe to come up with a plan to rescue Greece. But Greece is relatively small – they only have the 44th largest economy in the world.
The Italian economy is far larger. Italy has the 8th largest economy in the world, and their government debt to GDP ratio is currently sitting at about 132 percent.
There is no way that Europe has the resources or the ability to handle a full meltdown of the Italian financial system. Unfortunately, that is precisely what is happening. Italian banks are absolutely drowning in non-performing loans, and as Jeffrey Moore has noted, this potentially represents “the greatest threat to the world’s already burdened financial system”…
Shares of Italy’s largest financial institutions have plummeted in the opening months of 2016 as piles of bad debt on their balance sheets become too high to ignore. Amid all of the risks facing EU members in 2016, the risk of contagion from Italy’s troubled banks poses the greatest threat to the world’s already burdened financial system.
At the core of the issue is the concerning level of Non-Performing Loans (NPL’s) on banks’ books, with estimates ranging from 17% to 21% of total lending. This amounts to approximately €200 billion of NPL’s, or 12% of Italy’s GDP. Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.
Things have already gotten so bad that the European Central Bank is now monitoring liquidity levels at Monte dei Paschi and Carige on a daily basis. The following comes from Reuters…
The European Central Bank is checking liquidity levels at a number of Italian banks, including Banca Carige and Monte dei Paschi di Siena , on a daily basis, two sources close to the matter said on Monday.
Italian banking shares have fallen sharply since the start of the year amid market concerns about some 360 billion euros of bad loans on their books and weak capital levels.
The ECB has been putting pressure on several Italian banks to improve their capital position. The regulator can decide to monitor liquidity levels at any bank it supervises on a weekly or daily basis if it has any concern about deposits or funding.
A run on the big Italian banks has already begun. Italians have already been quietly pulling billions of euros out of the banking system, and if these banks continue to crumble this “stealth run” could quickly become a stampede.
And of course panic in Italy would quickly spread to other financially troubled members of the eurozone such as Spain, Portugal, Greece and France. Here is some additional analysis from Jeffrey Moore…
A deteriorating financial crisis in Italy could risk repercussions across the EU exponentially greater than those spurred by Greece. The ripple effects of market turmoil and the potential for dangerous precedents being set by EU authorities in panicked response to that turmoil, could ignite yet more latent financial vulnerabilities in fragile EU members such as Spain and Portugal.
Unfortunately, most Americans are completely blinded to what is going on in the rest of the world because stocks in the U.S. have had a really good run for the past couple of weeks. Headlines are declaring that the risk of a new recession “has passed” and that the crisis “is over”. Meanwhile, South America is plunging into a full-blown depression, the Italian banking system is melting down, global manufacturing numbers are the worst that we have seen since the last recession, and global trade is absolutely imploding.
Other than that, things are pretty good.
Seriously, it is absolutely critical that we don’t allow ourselves to be fooled by every little wave of momentum in the stock market.
It is a fact that sales and profits for U.S. corporations are declining. This is a trend that began all the way back in mid-2014 and that has accelerated during the early stages of 2016. The following comes from Wolf Richter…
Total US business sales – not just sales by S&P 500 companies but also sales by small caps and all other businesses, even those that are not publicly traded – peaked in July 2014 at $1.365 trillion, according to the Census Bureau. By December 2015, total business sales were down 4.6% from that peak. A bad 18 months for sales! They’re back where they’d first been in January 2013!
Sales by S&P 500 companies dropped 3.8% in 2015, according to FactSet, the worst year since the Financial Crisis.
I know that a lot of people have been eagerly anticipating a complete and total global economic collapse for a long time, and many of them just want to “get it over with”.
Well, the truth is that nobody should want to see what is coming. Personally, I rejoice for every extra day, week or month we are given. Every extra day is another day to prepare, and every extra day is another day to enjoy the extremely comfortable standard of living that our debt-fueled prosperity has produced for us.
Most Americans have absolutely no idea how spoiled we really are. Even just fifty years ago, life was so much harder in this country. If we had to go back and live the way that Americans did 100 or 150 years ago, there are very few of us that would be able to successfully do that.
So enjoy the remaining days of debt-fueled prosperity while you still can, because great change is coming, and it is going to be extremely bitter for most of the population.
Stock markets around the world continue to collapse as this new global financial crisis picks up more steam. In the U.S., the Dow lost 254 more points on Thursday, and it has now fallen for five days in a row. European stocks continued to get obliterated, and financial institutions are leading the way. But this week what is happening in Japan has been the most sobering. After falling 918 points the other day, the Nikkei plunged another 760 points early on Friday. The Nikkei has now fallen for seven of the past eight days, and investors in Japan are in full panic mode. Overall, global stocks are well into bear market territory, and nearly 17 trillion dollars of global stock market wealth has already been wiped out.
As panic rises, investors are seeking alternative investments. On Thursday, the price of gold hit $1,260 an ounce at one point before settling back a bit. But even with the fade at the end of the day, it was still the biggest daily gain in more than two years. Overall, gold is having its best quarterly performance in 30 years.
Whenever a financial crisis happens, investors seek out safe havens such as gold that can help them weather the storm. In particular, demand for physical gold is going through the roof all over the planet. Just check out the following excerpt from a Telegraph article entitled “Investors ‘go bananas’ for gold bars as global stock markets tumble“…
BullionByPost, Britain’s biggest online gold dealer, said it has already taken record-day sales of £5.6m as traders pile into gold following fears the world is on the brink of another financial crisis.
Rob Halliday-Stein, founder and managing director of the Birmingham-based company, said takings today had already surpassed the firm’s previous one-day record of £4.4m in October 2014.
BullionByPost, which takes orders of up to £25,000 on the website but takes higher amounts over the phone, explained it had received a few hundred orders overnight and frantic numbers of phone calls this morning.
Meanwhile, the price of oil continues to drop to stunning new depths. On Thursday U.S. oil dropped as low as $26.21, which was the lowest price in 13 years. Not even during the worst parts of the last financial crisis did oil ever go this low.
And remember, the price of oil was sitting at about $108 a barrel back in June 2014. Since that time it has fallen about 75 percent.
Needless to say, this crash is having some very serious consequences for the energy industry. Previously, I have reported that 42 North American energy companies have gone into bankruptcy since the beginning of last year.
But I just found out that the true number is much worse than that.
According to CNN, “67 U.S. oil and natural gas companies filed for bankruptcy in 2015″…
Bankruptcy filings are flying in the American oil patch.
At least 67 U.S. oil and natural gas companies filed for bankruptcy in 2015, according to consulting firm Gavin/Solmonese.
That represents a 379% spike from the previous year when oil prices were substantially higher.
With oil prices crashing further in recent weeks, five more energy gas producers succumbed to bankruptcy in the first five weeks of this year, according to Houston law firm Haynes and Boone.
A lot of people tend to think that my writing is full of “doom and gloom”, but the truth is that I often understate how bad things really are. I’ll often report one number and find out later that an updated number is even worse than the one that I originally reported.
What we desperately need is for the price of oil to go back up.
Unfortunately, the International Energy Agency says that isn’t likely to happen any time soon…
The International Energy Agency said earlier this week that it expects the global oil glut to grow throughout the year.
“With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term,” the IEA said in its monthly report.
And of course all of this is incredibly bad news for financial institutions all over the world.
During the boom times, the big banks showered energy companies with loans. Now those loans are going bad, and the big banks are feeling the pain. The following comes from CNN…
It’s never a good sign when the country’s financial lifelines are under stress. Large U.S. banks JPMorgan Chase (JPM) and Wells Fargo (WFC) that helped bankroll the energy boom are already setting aside billions to cover potential loan losses in the oil industry. Investors are worried about imploding energy loans for European banks like Deutsche Bank (DB). High yield bonds in your investing portfolio wont be looking good either — Standard & Poor’s warned that half of all energy junk bonds are at risk of defaulting.
Speaking of Deutsche Bank, their stock price continued to plummet on Thursday, as did the stock prices of most other European banks.
Things were particularly bad for France’s Societe Generale. Their stock price plunged 12 percent on Thursday alone.
This is what a global financial crisis looks like. It began during the second half of last year, and now it is making major headlines all over the planet.
At this point, things are already so bad that the elite are starting to freak out about what this could potentially mean for them. I want you to carefully consider the following two paragraphs from an editorial that I came across in the Telegraph earlier today…
We are too fragile, fiscally as well as psychologically. Our economies, cultures and polities are still paying a heavy price for the Great Recession; another collapse, especially were it to be accompanied by a fresh banking bailout by the taxpayer, would trigger a cataclysmic, uncontrollable backlash.
The public, whose faith in elites and the private sector was rattled after 2007-09, would simply not wear it. Its anger would be so explosive, so-all encompassing that it would threaten the very survival of free trade, of globalisation and of the market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes, a war on the City and arbitrary jail sentences.
I think that the author of this editorial is correct.
I do believe that another financial crisis on the scale of 2008 would trigger “a cataclysmic, uncontrollable backlash”.
In fact, I believe that is what we are steamrolling toward right now.
We can already see the anger of the American people toward the establishment being expressed in their support of Bernie Sanders and Donald Trump.
But if the financial system completely collapses and it becomes exceedingly apparent that none of our problems from the last time around were ever fixed, the frustration is going to be off the charts.
Many people believed that this day of reckoning would never come, but now it is here.
The “coming nightmare” is now upon us, and this is just the start.
The rest of 2016 promises to be even more chaotic, and ultimately this new crisis is going to turn out to be far worse than what we experienced back in 2008.
The first trading day of 2016 was full of chaos and panic. It started in Asia where the Nikkei was down 582 points, Hong Kong was down 587 points, and Chinese markets experienced an emergency shutdown after the CSI 300 tumbled 7 percent. When European markets opened, the nightmare continued. The DAX was down 459 points, and European stocks overall had their worst start to a year ever. In the U.S., it looked like we were on course for a truly historic day as well. The Dow Jones Industrial Average was down 467 points at one stage, but some very mysterious late day buying activity helped trim the loss to just 276 points at the close of the market. The sudden market turmoil caught many by surprise, but it shouldn’t have. The truth is that a whole host of leading indicators have been telling us that this is exactly what should be happening. The global financial crisis that began in 2015 is now accelerating, and my regular readers already know precisely what is coming next.
The financial turmoil of the last 24 hours is making headlines all over the globe. It began last night in China. Very bad manufacturing data and another troubling devaluation of the yuan sent Chinese stocks tumbling to a degree that we have not seen since last August. In fact, the carnage would have probably been far, far worse if not for a new “circuit breaker” that China recently implemented. Once the CSI 300 was down 7 percent, trading was completely shut down for the rest of the day. The following comes from USA Today…
Under a new market “circuit breaker” rule in China established last year, which is designed to slow down markets and halt panic in the event of moves of 5% or more, the CSI 300, a large-company stock index in mainland China was halted for 15 minutes in mid-afternoon trading after diving more than 5%. But when shares headed lower once again just minutes after the initial trading halt, and losses for the day swelled to more than 7%, the new circuit breaker rules kicked in, prompting a shutdown of mainland China’s stock market for the day, according to Bloomberg.
After the first 15 minute halt, panic set in as Chinese traders rushed to get out of their trades before the 7 percent circuit breaker kicked in. This resulted in an absolutely chaotic seven minutes as investors made a mad dash for the exits…
The sell orders piled up fast on Monday at Shenwan Hongyuan Group, China’s fifth-biggest brokerage by market value.
China’s CSI 300 Index had just tumbled 5 percent, triggering a 15-minute trading halt, and stock investors were scrambling to exit before getting locked in by a full-day suspension set to take effect at 7 percent. When the first halt was lifted, the market reaction was swift: it took just seven minutes for losses to reach the limit as volumes surged to their highs of the day.
“Investors rushed to the door during the level-one stage of the circuit breaker as they fretted the market would go down further,” said William Wong, the head of sales trading at Shenwan Hongyuan in Hong Kong.
The financial carnage continued once the European markets opened. Markets were red all across the continent, and things were particularly bad in Germany. The DAX was down 459 points, and it is rapidly approaching the psychologically-important 10,000 barrier. Overall, it was the worst start to a year that the European markets have ever experienced.
When U.S. markets opened, unexpectedly bad U.S. manufacturing data seemed to add fuel to the fire. Monday morning we learned that our manufacturing sector is contracting at a pace that we haven’t seen since the last recession…
America’s manufacturing sector shrank for the second straight month in December. The industry’s key index — ISM — hit 48.2% in December, the lowest mark since June 2009. Anything below 50% is a contraction and a month ago it hit 48.6%.
The index has fallen for six straight months.
“The trend is certainly heading in a direction that would ring alarm bells,” says Sam Bullard, senior economist at Wells Fargo.
This is yet another sign that tells us that the U.S. economy has already entered the next recession.
And what happens to the markets during a recession?
They go down.
In addition to the bad data that we got from the U.S. and China, there was another number that was also extremely troubling.
South Korean exports have traditionally been considered a key leading indicator for the entire global economy, and on Monday we learned that they were down a whopping 13.8 percent in December from a year earlier…
One of the more reliable indicators of the global economy continues to confirm fears of a worldwide slowdown.
South Korean exports — also referred to as the world’s economic canary in the coal mine — fell 13.8% in December from a year earlier.
This was a deterioration from the 4.8% decline in November, and it was much worse than the 11.7% decline expected by economists.
The “nothing is happening” crowd may not be willing to admit it yet, but the truth is that a major global economic slowdown is already happening.
And what happened to global markets today is perfectly consistent with the longer term patterns that have been emerging over the past six months or so.
In the weeks and months to come, things are going to get even worse. There will always be days when the markets are up, but don’t let those days fool you into thinking that the crisis is over. In the western world we are so accustomed to 48 hour news cycles, and many of us seem to be incapable of focusing on trends that develop over longer periods of time.
If I was going to put together a scenario for a global financial crisis for a textbook, what we have seen over the past six months or so would be perfect. Things are playing out exactly how they should be, and that means big trouble for the rest of 2016.
But that doesn’t mean that we have to live in fear. In fact, I just wrote an entire article entitled “2016: A Year For Living With No Fear“. It is when times are at their worst that our character is put to the test. Some will respond to what happens in 2016 with courage and strength, and others will respond with fear and panic.
As things start falling apart all around us this year, how will you respond?
If you have a bank account anywhere in Europe, you need to read this article. On January 1st, 2016, a new bail-in system will go into effect for all European banks. This new system is based on the Cyprus bank bail-ins that we witnessed a few years ago. If you will remember, money was grabbed from anyone that had more than 100,000 euros in their bank accounts in order to bail out the banks. Now the exact same principles that were used in Cyprus are going to apply to all of Europe. And with the entire global financial system teetering on the brink of chaos, that is not good news for those that have large amounts of money stashed in shaky European banks.
Below, I have shared part of an announcement about this new bail-in system that comes directly from the official website of the European Parliament. I want you to notice that they explicitly say that “unsecured depositors would be affected last”. What they really mean is that any time a bank in Europe fails, they are going to come after private bank accounts once the shareholders and bond holders have been wiped out. So if you have more than 100,000 euros in a European bank right now, you are potentially on the hook when that bank goes under…
The directive establishes a bail-in system which will ensure that taxpayers will be last in the line to the pay the bills of a struggling bank. In a bail-in, creditors, according to a pre-defined hierarchy, forfeit some or all of their holdings to keep the bank alive. The bail-in system will apply from 1 January 2016.
The bail-in tool set out in the directive would require shareholders and bond holders to take the first big hits. Unsecured depositors (over €100,000) would be affected last, in many cases even after the bank-financed resolution fund and the national deposit guarantee fund in the country where it is located have stepped in to help stabilise the bank. Smaller depositors would in any case be explicitly excluded from any bail-in.
And as we have seen in the past, these rules can change overnight in the midst of a major crisis.
So they may be promising that those with under 100,000 euros will be safe right now, but that doesn’t necessarily mean that it will be true.
It is also important to note that there has been a really big hurry to get all of this in place by January 1. In fact, at the end of October the European Commission actually sued six nations that had not yet passed legislation adopting the new bail-in rules…
The European Commission is taking legal action against member states including the Netherlands and Luxembourg, after they failed to implement rules protecting European taxpayers from funding billions in bank rescues.
Six countries will be referred to the European Court of Justice (ECJ) for their continued failure to transpose the EU’s “bail-in” laws into national legislation, the European Commission said on Thursday.
So why was the European Commission in such a rush?
Is there some particular reason why January 1 is so important?
This is something that I will be watching.
Meanwhile, there have been major changes in the U.S. as well. The Federal Reserve recently adopted a new rule that limits what it can do to bail out the “too big to fail” banks. The following comes from CNN…
The Federal Reserve is cutting its lifeline to big banks in financial trouble.
The Fed officially adopted a new rule Monday that limits its ability to lend emergency money to banks.
In theory, the new rule should quash the notion that Wall Street banks are “too big to fail.”
If this new rule had been in effect during the last financial crisis, the Federal Reserve would not have been able to bail out AIG or Bear Stearns. As a result, the final outcome of the last crisis may have been far different. Here is more from CNN…
Under the new rule, banks that are going bankrupt — or appear to be going bankrupt — can no longer receive emergency funds from the Fed under any circumstances.
If the rule had been in place during the financial crisis, it would have prevented the Fed from lending to insurance giant AIG (AIG) and Bear Stearns, Fed chair Janet Yellen points out.
So if the Federal Reserve does not bail out these big financial institutions during the next crisis, what is going to happen?
Will we see European-style “bail-ins” when large banks start failing?
And exactly what would such a “bail-in” look like?
Earlier this year, I discussed the concept of a “bail-in”…
Essentially, what happens is that wealth is transferred from the “stakeholders” in the bank to the bank itself in order to keep it solvent. That means that creditors and shareholders could potentially lose everything if a major bank in Europe fails. And if their “contributions” are not enough to save the bank, those holding private bank accounts will have to take “haircuts” just like we saw in Cyprus. In fact, the travesty that we witnessed in Cyprus is being used as a “template” for much of the new legislation that is being enacted all over Europe.
Many Americans assume that when they put money in the bank that they have a right to go back and get “their money” whenever they want. But if we all went to the bank at the same time, there wouldn’t be nearly enough money for all of us. The reason for this is that the banks only keep a small fraction of our money on hand to satisfy the demands of those that conduct withdrawals on a day to day basis. The banks take the rest of the money that we have deposited and use it however they think is best.
If you have money at a bank that goes under, that bank will still be obligated to pay you back, but it may not be able to do so. This is where the FDIC comes in. The FDIC supposedly guarantees the safety of deposits in member banks, but at any given time it only has a very, very small amount of money on hand.
If some major crisis comes along that causes banks all over the United States to start falling like dominoes, the FDIC will be in panic mode. During such a scenario, the FDIC would be forced to ask Congress for a massive amount of money, and since we already run a giant deficit every year the government would have to borrow whatever funds would be required.
Personally, I find it very interesting that we have seen major rule changes in Europe and at the Federal Reserve just as we are entering a new global financial crisis.
Do they know something that the rest of us do not?
Be very careful with your money, because I am convinced that “bank bail-ins” will soon be making front page headlines all over the world.