After enduring their worst August in 17 years, U.S. stocks are off to their worst start to a September in 13 years. Just yesterday, I declared that we would be entering the “danger zone” this month, and it didn’t take long for the action to begin. Historically, this month is the worst month of the year for stocks, and most of the biggest stock market crashes throughout our history have come in the fall. On Tuesday, the Dow plunged another 469 points, and it is now down more than 10 percent from the peak of the market back in May. That means that we have officially entered “correction” territory. Asian stocks also crashed hard on Tuesday, so did European stocks, and the price of oil plummeted about 8 percent. For a long time, there have been a lot of people out there that have been warning that a financial crisis would happen in the second half of 2015, and they are being proven right. It is actually happening.
Of course there will be plenty of ups and downs still to come. I cannot emphasize enough that we should fully expect waves of panic selling and waves of panic buying. This always happens during any market crash.
For instance, just consider what happened when the tech bubble crashed. The following analysis comes from Graham Summers…
In a six month period, investors moved stocks down 19%, up 8%, then down 27%, then up 21%, then down 22%, then up 34%, then down 17%, then up 16%, then down 28%, then up 16%, and finally down 17%. Only at that point did stocks break their trendline for the bubble (the blue line) and it became obvious that the bubble had burst.
My point with all of this is that even when the bubble was both very specific AND obvious, the collapse was neither quick nor clean. There were several large 20%+ crashes, but overall, it was a roller coaster with jarring rallies that gradually wore its way down.
It was a full-blown market collapse, and yet there were moments when the market absolutely skyrocketed.
The same thing happened in 2008. In fact, the best two days in stock market history were right in the middle of the last financial crisis.
So don’t be fooled by what happens on any one particular day. Huge up days and huge down days are both red flags.
If the market is going to recover any time soon, what we need are nice quiet days without much volatility. Unfortunately, that is not likely to happen any time soon because a tremendous amount of damage has already been done and some massive imbalances have already developed. I like how Richard Smith put it recently…
Serious damage has been done to the financial markets in the past two weeks – very serious. Don’t let anyone tell you otherwise.
No one should be kidding themselves that what’s happened in the past two weeks is just a little late summer blip – building up some energy to rally into the fall and winter. I’m not saying it couldn’t happen but it isn’t the odds play.
Everywhere I look, technical damage has been done – and it’s like nothing we’ve seen since 2008.
Yes, the mainstream media is telling everyone that they shouldn’t panic and that everything will be just fine, but those that study the charts for a living know what is really happening. For months, I have been telling you over and over that things were setting up in textbook fashion for another financial crisis, and other experts have been seeing the exact same things that I have been seeing. For example, just consider what Louise Yamada told CNBC…
Looking at a chart of the S&P 500, Louise Yamada noted that momentum has been declining for four months, which by her work, is a “classic” sell signal.
“This is suggesting to me that we are looking at a bear market,” said Yamada said Tuesday on CNBC’s “Futures Now.” Yamada noted that the last two times the market saw a similar shift in momentum were in January 2008 and June 2000.
Right now, a lot of people are very confused about what to do. Those that told them to buy stocks in the first place are telling them to buy even more stocks. And of course the mainstream media is telling them that everything is going to be just wonderful after this “correction” runs its course. But at the same time a lot of people have a gut feeling that things are about to get really bad.
Personally, I think that what John Hussman shared in his recent newsletter contains a lot of wisdom…
“If you’re taking more equity risk than you can actually tolerate if the market goes south, setting your portfolio right isn’t a market call – it’s just sound financial planning. It’s only fun to be reckless if you also turn out to be lucky. Market conditions are now more hostile than at any time since the 2007 peak. If you want to be speculating, and you can tolerate the outcome, then you’re not taking too much equity risk in the first place. But it’s one or the other. Can you tolerate a 40-55% market loss over the next 18 months or so? If not, take this opportunity to set things right. That’s not the worst-case scenario under present conditions; it’s actually the run-of-the-mill historical expectation.”
I also want to point out that we are now less than two weeks away from the end of the Shemitah year.
If you are still not familiar with the concept of the Shemitah year, please see my previous article entitled “The Shemitah: The Biblical Pattern Which Indicates That A Financial Collapse May Be Coming In 2015“.
Even though the stock market crashed in September 2001 at the end of a Shemitah year, and in September 2008 at the end of another Shemitah year, and it is crashing again in September 2015, somehow there are still people out there that do not think that this is real.
Well, I am here to tell you that this is very real. But if you won’t listen to me, perhaps you will consider the findings of Israeli mathematician Thomas Pound. The following comes from an outstanding piece that was just published by WND…
After a friend told him about the seven-year Sabbatical cycle to the stock market, Pound again set out to see if the theory held up under statistical scrutiny.
Applying the same ANOVA test to the Shemitah cycle, Pound’s research revealed that the sabbatical years were the only group of years in which the market cycle averages consistent significant losses since 1871.
He also found that, in Shemitah years, the difference in loss was greater than that noted in professor Shiller’s decennial cycle.
“Statistically, it appears that the calendar years in which the Sabbatical year ends are worse than the other six years, and that difference is significant based on the data I have,” Pound told Breaking Israel News.
Look, I know that this may not fit with how you currently view the world.
The truth is that a whole bunch of weird stuff is about to happen that may not fit with how you currently view the world.
But if you honestly want to discover the truth, then you have got to go wherever the evidence ultimately leads you.
So what do you think about all of this? Please feel free to join the discussion by posting a comment below…
On Monday, the Dow Jones Industrial Average plummeted 588 points. It was the 8th worst single day stock market crash in U.S. history, and it was the first time that the Dow has ever fallen by more than 500 points on two consecutive days. But the amazing thing is that the Dow actually performed better than almost every other major global stock market on Monday. In the U.S., the S&P 500 and the Nasdaq both did worse than the Dow. In Europe, almost every major index performed significantly worse than the Dow. Over in Asia, Japanese stocks were down 895 points, and Chinese stocks experienced the biggest decline of all (a whopping 8.46 percent). On June 25th, I was not kidding around when I issued a “red alert” for the last six months of 2015. I had never issued a formal alert for any other period of time, and I specifically stated that “a major financial collapse is imminent“. But you know what? As the weeks and months roll along, things will eventually be even worse than what any of the experts (including myself) have been projecting. The global financial system is now unraveling, and you better pack a lunch because this is going to be one very long horror show.
Our world has not seen a day quite like Monday in a very, very long time. Let’s start our discussion where the carnage began…
For weeks, the Chinese government has been taking unprecedented steps to try to stop Chinese stocks from crashing, but nothing has worked. As most Americans slept on Sunday night, the markets in China absolutely imploded…
As Europe and North America slept on Sunday night, Chinese markets went through the floor — the Shanghai Composite index of stocks fell by 8.49%, the biggest single-day collapse since 2007.
It wasn’t alone. Hong Kong’s Hang Seng fell 5.17%, and Japan’s Nikkei fell 4.61%. Stocks in Taiwan, the Philippines, Singapore, and Thailand also tumbled.
Things would have been even worse in China if trading had not been stopped in most stocks. Trading was suspended for an astounding 2,200 stocks once they hit their 10 percent decline limits.
Overall, the Shanghai Composite Index is now down close to 40 percent from the peak of the market, and the truth is that Chinese stocks are still massively overvalued when compared to the rest of the world.
That means that they could very easily fall a lot farther.
The selling momentum in Asia carried over into Europe once the European markets opened. On a percentage basis, all of the major indexes on the continent declined even more than the Dow did…
In Europe, the bloodbath from Friday continued unabated. The German Dax plunged 4.7%, the French CAC 40 5.4%, UK’s FTSE 100 dropped 4.7%. Euro Stoxx 600, which covers the largest European companies, was down 5.3%.
But wait… Europe is where the omnipotent ECB and other central banks have imposed negative deposit rates. The ECB is engaged in a massive ‘whatever it takes” QE program to inflate stock markets. But it’s not working. Omnipotence stops functioning once people stop believing in it.
Even before U.S. markets opened on Monday morning, the New York Stock Exchange was already warning that trading would be halted if things got too far out hand, and it almost happened…
The thousands of companies listed by the New York Stock Exchange and Nasdaq Stock Market will pause for 15 minutes if the Standard & Poor’s 500 Index plunges 7 percent before 3:25 p.m. New York time. The benchmark got close earlier, falling as much as 5.3 percent.
There were other circuit breakers in place for later in the day if too much panic selling ensued, but fortunately none of those were triggered either. Here is more from Bloomberg…
Another circuit breaker kicks in if the S&P 500 extends its losses to 13 percent before 3:25 p.m. If the plunge reaches 20 percent at any point during today’s session, the entire stock market will shut for the rest of the day.
When the U.S. markets did open, the Dow plunged 1,089 points during the opening minutes of trading. If the Dow would have stayed at that level, it would have been the worst single day stock market crash in U.S. history by a wide margin.
Instead, by the end of the day it only turned out to be the 8th worst day ever.
And in case you are wondering, yes, investors are losing a staggering amount of money. According to MarketWatch, the total amount of money lost is now starting to approach 2 trillion dollars…
As of March 31, households and nonprofits held $24.1 trillion in stocks. That’s both directly, and through mutual funds, pension funds and the like. That also includes the holdings of U.S.-based hedge funds, though you’d have to think that most hedge funds are held by households.
Using the Dow Jones Total Stock Market index DWCF, -4.21% through midmorning trade, that number had dropped to $22.32 trillion.
In other words, a cool $1.8 trillion has been lost between now and the first quarter — and overwhelmingly, those losses occurred in the last few days.
Unfortunately, U.S. stock prices are still nowhere near where they should be. If they were to actually reflect economic reality, they would have to fall a lot, lot lower.
For example, there is usually a very strong correlation between commodity prices and the S&P 500, but in recent times we have seen a very large divergence take place. Just check out the chart in this article. At this point the S&P 500 would have to fall another 30 to 40 percent or commodities would have to rise 30 or 40 percent in order to close the gap. I think that the following bit of commentary sums up where we are quite nicely…
“Markets are afraid of further economic weakness in China, further pain in global commodity markets and uncertain about Fed and PBoC policy — what they will do and what the impact will be,” Societe Generale’s Kit Juckes wrote on Monday. “The divergence between global commodity prices and equities is not a new theme but the danger now is that they begin to re-correlate – as they did when the dotcom bubble burst in 2000 and what had previously been an emerging market crisis became a US recession.”
And commodities were absolutely hammered once again on Monday.
For instance, the price of U.S. oil actually fell below 38 dollars a barrel at one point.
What we are watching unfold is incredible.
Of course the mainstream media is bringing on lots of clueless experts that are talking about what a wonderful “buying opportunity” this is. Even though those of us that saw this coming have been giving a detailed play by play account of the unfolding crisis for months, the talking heads on television still seem as oblivious as ever.
What is happening right now just doesn’t seem to make any sense to the “experts” that most people listen to. I love this headline from an article that Business Insider posted on Monday: “None of the theories for the Black Monday market crash add up“. Yes, if you are willingly blind to the long-term economic and financial trends which are destroying us, I guess these market crashes wouldn’t make sense.
And if stocks go up tomorrow (which they probably should), all of those same “experts” will be proclaiming that the “correction” is over and that everything is now fine.
But don’t be fooled by that. Just because stocks go up on any particular day does not mean that everything is fine. We are in the midst of a financial meltdown that is truly global in scope. This is going to take time to fully play out, and there will be good days and there will be bad days. The three largest single day increases for the Dow were right in the middle of the financial crisis of 2008. So one very good day for stocks is not going to change the long-term analysis one bit.
It isn’t complicated. Those that follow my writing regularly know that I have repeatedly explained how things were setting up in textbook fashion for another global financial crisis, and now one is unfolding right in front of our eyes.
At this point, everyone should be able to very clearly see what is happening, and yet most are still blind.
Why is that?
A global stock market crash has begun. European stocks are crashing, Chinese stocks are crashing, and commodities are crashing. And guess what? All of those things happened before U.S. stocks crashed in the fall of 2008 too. In so many ways, it seems like we are watching a replay of the financial crisis of 2008, but this time around the world is in far worse shape financially. Global debt levels are at an all-time high, the 75 trillion dollar global shadow banking system could implode at any time, and there are hundreds of trillions of dollars in derivatives that threaten to wipe out major banks all over the planet. The last major worldwide financial crash was almost seven years ago, and very little has been done since that time to prepare for the next one. If global markets do not calm down, we could see carnage in the months ahead that is absolutely unprecedented.
For months, European authorities have been promising us that a “Grexit” is already “priced in” to the markets and that any “contagion” from the Greek crisis will be “contained”. Of course everyone knew that was just a smokescreen. Just in the past couple of days since the Greek “no” vote, European stocks have already been crashing. The following comes from Zero Hedge…
Does this look contained to you?
Portugal, Spain, and Italy all collapsing…
As I mentioned at the top of this article, European stocks started crashing well before U.S. stocks started crashing during the last financial crisis. If you doubt this, just look at this chart, and this chart and this chart.
Will the same thing happen again this time?
And just like I have warned repeatedly, European bond yields have started to soar. When bond yields go up, bond prices go down, so many bond investors are losing a tremendous amount of money right now. Here is more from Zero Hedge…
European bond risk is anything but “contained” as GGB 10Y Yields top 18%…
If there is not a last minute deal between Greece and her creditors, what we have witnessed so far in the bond markets will just be the tip of the iceberg. In the months ahead, we could witness a bond crash unlike anything that we have ever seen in all of history. Just consider what Egon von Greyerz recently told Eric King…
There is no liquidity in this market and this is where we will soon see a problem. We will see the bond market totally seizing up in the next few months. Eric, people simply don’t understand that this is a much bigger problem than Greece.
So we are talking about a worldwide problem, not just a Greek problem. The majority of the $100 trillion bond market is worthless, and of course a ticking time-bomb of over $1 quadrillion worth of derivatives is linked to that. This means that, sadly, we are heading into a major contagion that will lead to financial catastrophe for the world. This will also lead to an implosion of all bubble assets across the globe.
Hmm – there is that word “derivatives” again.
It is funny how that keeps popping up.
As things unravel over in Europe, a lot of desperate Europeans are feverishly purchasing physical gold. The following comes from Bloomberg…
European investors are increasing purchases of gold as Greece’s turmoil boosts the appeal for an alternative to the euro.
Demand from Greek customers for Sovereign gold coins was double the five-month average in June, the U.K. Royal Mint said in an e-mailed statement. CoinInvest.com, an online retailer, said sales on Saturday and Sunday were the highest since Cyprus limited cash withdrawals in 2013, driven by a jump in German, French and Greek buyers.
Investors are searching for a safe haven after Greece imposed capital controls, closed banks and stopped selling gold coins to the public until at least July 6.
Meanwhile, Chinese stocks have continued to fall. Overall, Chinese stocks have fallen 27 percent since the peak, and a whopping 3.2 trillion dollars of “paper wealth” has been wiped out in China in just the last three weeks.
At this point things are so bad that about one-fourth of all stocks in China have already suspended trading according to CNN…
The turmoil in China’s stock market is so bad that some companies are calling it quits.
Over 700 Chinese companies have halted trading to “self preserve,” according to the state media. That means about a quarter of the companies listed on China’s two big exchanges — the Shanghai and Shenzhen — are no longer trading.
Desperate measures are being employed to try to stop the stock market crash in China. For example, over the weekend an alliance of securities brokerages pledged to invest “at least 120 billion yuan” in order to stabilize stock prices…
China’s top 21 securities brokerages said on Saturday they would collectively invest at least 120 billion yuan ($19.3 billion) to help stabilize the country’s stock markets after a slump of nearly 30 percent since mid-June. In addition, 57 Chinese mutual funds are reportedly investing 2.2 billion yuan in stock funds.
The Chinese central bank has gotten involved as well. In fact, the People’s Bank of China has taken the dramatic step of actually directly loaning money to brokerages…
In an extraordinary move, the People’s Bank of China has begun lending money to investors to buy shares in the flailing market. The Wall Street Journal reports this “liquidity assistance” will be provided to the regulator-owned China Securities Finance Corp, which will lend the money to brokerages, which will in turn lend to investors.
The dramatic intervention marks the first time funds from the central bank have been directed anywhere other than the banks, signalling serious concern from authorities about the crisis.
In addition, the Chinese government has taken the following steps to intervene…
-All short selling of stocks has been banned.
-China’s national social security fund has been banned from selling stocks, but they can continue to buy stocks.
-Local media has been banned from using the terms “equity disaster” and “rescue the market” in their news reports.
But despite everything that you just read, Chinese stocks have still been falling.
Meanwhile, global commodity prices are crashing. Just check out this chart. This is also something that happened before U.S. stocks crashed back in 2008.
Thankfully, U.S. stocks have not started crashing yet. But it should be noted that the “smart money” in the United States has been selling stocks like crazy since the “no” vote in the Greek referendum. And if the patterns that we witnessed seven years ago hold up, it is just a matter of time before we experience a stock market crash too.
Incredibly, there are a lot of people out there that very strongly believe that everything is going to be just fine. They have tremendous faith in the central bankers and in our political leaders, and they are assuring all the rest of us that there is no possible way that the global financial system could be brought down again.
I truly wish that they were right. If everything was going to be just fine, instead of writing about the coming economic collapse I could write about sports or do a blog dedicated to LOLcats. But of course the truth is that the “hopetimists” are dead wrong.
A great shaking is coming to our world, and life as we know it is about to change in a major way.
The result of the referendum in Greece is a great victory for freedom, but it is also threatens to unleash unprecedented economic chaos all across Europe. With almost all of the votes counted, it is being reported that approximately 61 percent of Greeks have voted “no” and only about 39 percent of Greeks have voted “yes”. This is a much larger margin of victory for the “no” side than almost everyone was anticipating, and it represents a stunning rejection of European austerity. Massive celebrations have erupted on the streets of Athens and other major Greek cities, but the euphoria may not last long. Greek Prime Minister Alexis Tsipras is promising that Greece will be able to stay in the euro, but that gives EU bureaucrats and the IMF a tremendous amount of power, because at this point the Greek government is flat broke. Without more money from the EU and the IMF, the Greek government will not be able to pay its bills and virtually all Greek banks will inevitably collapse. Meanwhile, the rest of Europe is about to experience a tremendous amount of pain as financial markets respond to the results of this referendum. The euro is already plummeting, and most analysts expect European bond yields to soar and European stocks to drop substantially when trading opens on Monday morning.
Personally, I love the fact that the Greek people decided not to buckle under the pressure being imposed on them by the EU and the IMF. But amidst all of the celebration, the cold, hard reality of the matter is that your options are extremely limited when you are out of money.
How is the Greek government going to pay its bills without any money?
How are the insolvent Greek banks going to operate without any money?
How is the Greek economy going to function without any money?
Now that the Greek people have overwhelmingly rejected the demands of the creditors, it will be very interesting to see what the EU and the IMF do. Prior to the referendum, European leaders were insisting that a “no” vote would put an end to negotiations and would force Greece to leave the euro.
Now that the results are in, are they going to change their tune? Because the ball is definitely in their court…
“This does two things: it legitimises the stance of the Greek government and it leaves the ball in Europe’s court,” ANZ Bank analysts said in a note.
“Europe either folds or Greece goes bankrupt; over to you Merkel.”
So would they actually let Greece go bankrupt?
It is going to be fascinating to watch what happens over the next few days. Right now, Greek banks are on life support. If the European Central Bank decides to pull the plug, they would essentially destroy the entire Greek banking system. The only thing that can keep Greek banks alive and kicking is more intervention from the ECB. The following comes from the New York Times…
Now that Greek voters have said no to the economic demands of its international creditors, the fate of the country’s struggling banks is in the hands of the European Central Bank.
Greece’s banks, closed since last Monday because they are perilously low on cash, have been kept alive in recent weeks by emergency loans from the European Central Bank. On Monday, the central bank’s policy makers plan to convene to determine how much longer they are willing to prop up the Greek banks, now that the country has essentially said no to the unpopular dictates of the other eurozone countries.
Of much greater concern to the rest of the world is how financial markets are going to respond to all of this. As I write this article, things already appear to be unraveling. The following comes from CNBC…
Germany’s Dax is indicated sharply lower from Friday’s close at around 4 percent, while the euro was down 2 percent against the yen as the news emerged. U.S. stocks are expected to open around 1 percent lower Monday, according to recent stock futures data.
What could be most important for those worried about contagion from the Greek crisis is how Portuguese, Spanish and Italian government bonds perform in Monday morning trade.
If these peripheral euro zone countries, often lumped in with Greece, suffer a sharp spike in yields, this could cause alarm about whether Greece leaving the currency might cause further contagion to other weaker euro zone economies.
This could potentially become a “trigger event” that unleashes a wave of financial panic all over Europe. And once financial panic begins, it is very difficult to end.
If the EU and the IMF want to avoid a crisis, they could just give in to the new Greek government. But that would be politically risky for certain high profile European leaders. For instance, Angela Merkel would face a huge backlash back home if she conceded to the new Greek government now. And other German leaders are already calling the referendum result a “disaster”…
German politicians branded the result a ‘disaster’, with the country’s economy minister Sigmar Gabriel Sigmar accusing Tsipras of ‘tearing down the last bridges on which Greece and Europe could have moved towards a compromise’.
He added: ‘Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness.’
And the president of the European Parliament, a German, told a German radio station over the weekend that a “no” vote would almost certainly mean that the Greeks will be forced out of the euro…
“If after the referendum, the majority is a ‘no,’ they will have to introduce another currency because the euro will no longer be available for a means of payment,” Martin Schulz, European Parliament president, said on German radio.
That is pretty strong language, eh?
Here is yet another quote from Schulz…
“Without new money, salaries won’t be paid, the health system will stop functioning, the power network and public transport will break down, and they won’t be able to import vital goods because nobody can pay,” he said.
So at this point it is all up to the EU and the IMF, and in particular the focus will be on the Germans.
What will they decide to do?
Will they give in, or will they force the Greeks to leave the euro?
If the Greeks do transition from the euro to a new currency, it will be a process that takes months (if not longer). You just can’t change ATMs, computer systems, cash registers, etc. overnight. So a move to the drachma would not be as simple as many are suggesting…
British firms like De La Rue, which prints 150 currencies worldwide, are believed to have been contacted with a view to providing such services.
It’s done in great secrecy to prevent currency speculation. The other big problem is the logistical challenges of switching a currency. All ATMs, computers and other machinery of commerce that bears the euro symbol will have to be adjusted. It could, and would, take months.
And if Greece does leave, it will be a massive shock for global financial markets. Faith in the European project will be shattered, the euro will drop like a rock, bond yields all over the continent will rise to unsustainable levels and major banks all over Europe will fail.
I think that the following quote from Romano Prodi sums things up quite well…
Romano Prodi, former chief of the European Commission and Italy’s ex-premier, said it is the EU’s own survival that is now at stake as the botched handling of the Greek crisis escalates into a catastrophe. “If the EU cannot resolve a small problem the size of Greece, what is the point of Europe?“
Meanwhile, we should all keep in mind that a financial crisis has already erupted over in Asia as well. Chinese stocks have lost 30 percent of their value in just the last three weeks. In fact, the amount of “paper wealth” wiped out in China over the past three weeks is approximately equivalent to “10 times Greece’s gross domestic product”…
A dizzying three-week plunge in Chinese equities has wiped out $2.36 trillion in market value — equivalent to about 10 times Greece’s gross domestic product last year.
The great financial collapse of 2015 is well underway, and it should be a very interesting week for global markets.
But no matter what happens this week, we all need to keep in mind that this is just the tip of the iceberg.
A “perfect storm” is on the way, and we all need to get prepared for it while we still can.
Can you smell that? It is the smell of panic in the air. As I have noted before, when financial markets catch up to economic reality they tend to do so very rapidly. Normally we don’t see virtually all asset classes get slammed at the same time, but the bucket of cold water that Federal Reserve Chairman Ben Bernanke threw on global financial markets on Wednesday has set off an epic temper tantrum. On Thursday, U.S. stocks, European stocks, Asian stocks, gold, silver and government bonds all over the planet all got absolutely shredded. This is not normal market activity. Unfortunately, there is nothing “normal” about our financial markets anymore. Over the past several years they have been grossly twisted and distorted by the Federal Reserve and by the other major central banks around the globe. Did the central bankers really believe that there wouldn’t be a great price to pay for messing with the markets? The behavior that we have been watching this week is the kind of behavior that one would expect at the beginning of a financial panic. Dick Bove, the vice president of equity research at Rafferty Capital Markets, told CNBC that what we are witnessing right now “is not normal. It is not normal for all markets to move in the same direction at the same point in time due to the same development.” The overriding emotion in the financial world right now is fear. And fear can cause investors to do some crazy things. So will global financial markets continue to drop, or will things stabilize for now? That is a very good question. But even if there is a respite for a while, it will only be temporary. More carnage is coming at some point.
What we have witnessed this week very much has the feeling of a turning point. The euphoria that drove the Dow well over the 15,000 mark is now gone, and investors all over the planet are going into crisis mode. The following is a summary of the damage that was done on Thursday…
-U.S. stocks had their worst day of the year by a good margin. The Dow fell 354 points, and that was the biggest one day drop that we have seen since November 2011. Overall, the Dow has lost more than 550 points over the past two days.
-Thursday was the eighth trading day in a row that we have seen a triple digit move in the Dow either up or down. That is the longest such streak since October 2011.
-The yield on 10 year U.S. Treasuries went as high as 2.47% before settling back to 2.42%. That was a level that we have not seen since August 2011, and the 10 year yield is now a full point above the all-time low of 1.4% that we saw back in July 2012.
– The yield on 30 year U.S. Treasuries hit 3.53 percent on Thursday. That was the first time it had been that high since September 2011.
-The CBOE Volatility Index jumped 28 percent on Thursday. It hit 20.49, and this was the first time in 2013 that it has risen above 20. When volatility rises, that means that the markets are getting stressed.
-European stocks got slammed too. The Bloomberg Europe 500 index fell more than 3 percent on Thursday. It was the worst day for European stocks in 20 months.
-In London, the FTSE fell about 3 percent. In Germany, the DAX fell 3.3 percent. In France, the CAC-40 fell 3.7 percent.
-Things continue to get even worse in Japan. The Nikkei has fallen close to 17 percent over the past month.
-Brazilian stocks have fallen by about 15 percent over the past month.
-On Thursday the price of gold got absolutely hammered. Gold was down nearly $100 an ounce. As I am writing this, it is trading at $1273.60.
-Silver got slammed even more than gold did. It fell more than 8 percent. At the moment it is trading at $19.57. That is ridiculously low. I have a feeling that anyone that gets into silver now is going to be extremely happy in the long-term if they are able to handle the wild fluctuations in the short-term.
-Manufacturing activity in China is contracting at a rate that we haven’t seen since the middle of the last recession.
-For the week ending June 15th, initial claims for unemployment benefits in the United States rose by about 18,000 from the previous week to 354,000. This is a number that investors are going to be watching closely in the months ahead.
Needless to say, Thursday was the type of day that investors don’t see too often. The following is what one stock trader told CNBC…
“It’s freaking, crazy now,” said one stock trader during the 3 p.m. ET hour as the Dow sunk more than 350 points. “Even defensive sectors are getting smoked. The super broad-based sell off between commodities, bonds, equities – I wouldn’t say it’s panic, but we’ve seen aggressive selling on the lows.”
Unfortunately, this may just be the beginning.
In fact, Mark J. Grant has suggested that we may see even more panic in the short-term…
Yesterday was the first day of the reversal. There will be more days to come.
What you are seeing, in the first instance, is leverage coming off the table. With short term interest rates right off of Kelvin’s absolute Zero there was been massive leverage utilized in both the bond and equity markets. While it cannot be quantified I can tell you, dealing with so many institutional investors, that the amount of leverage on the books is giant and is now going to get covered. It will not be pretty and it will be a rush through the exit doors as the fire alarm has been pulled by the Fed and the alarms are ringing. There is also an additional problem here.
The Street is not what it was. There is not enough liquidity in the major Wall Street banks, any longer, to deal with the amount of securities that will be thrown at them and I expect the down cycle to get exacerbated by this very real issue. Bernanke is no longer at the gate and the Barbarians are going to be out in force.
If we see global interest rates start to shift in a major way, that is going to be huge.
Well, it is because there are literally hundreds of trillions of dollars worth of interest rate derivatives contracts sitting out there…
The interest rate derivatives market is the largest derivatives market in the world. The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world’s top 500 companies as of April 2003 used interest rate derivatives to control their cashflows. This compares with 75% for foreign exchange options, 25% for commodity options and 10% for stock options.
If interest rates begin to swing wildly, that could burst the derivatives bubble that I keep talking about.
And when that house of cards starts falling, we are going to see panic that is going to absolutely dwarf anything that we have seen this week.
So keep watching interest rates, and keep listening for any mention of a problem with “derivatives” in the mainstream media.
When the next great financial crash comes, global credit markets are going to freeze up just like they did in 2008. That will cause economic activity to grind to a standstill and a period of deflation will be upon us. Yes, the way that the Federal Reserve and the federal government respond to such a crisis will ultimately cause tremendous inflation, but as I have written about before, deflation will come first.
It would be wise to build up your emergency fund while you still can. When the next great financial crisis fully erupts a lot of people are going to lose their jobs and for a while it will seem like hardly anyone has any extra money. If you have stashed some cash away, you will be in better shape than most people.
Is the financial system of Europe on the verge of a meltdown? I have always maintained that the next wave of the economic crisis would begin in Europe, and right now the situation in Europe is unraveling at a frightening pace. On Monday, European stocks had their worst day in over six months, and over the past four days we have seen the EUR/USD decline by the most that it has in nearly seven months. Meanwhile, scandals are erupting all over the continent. A political scandal in Spain, a derivatives scandal in Italy and banking scandals all over the eurozone are seriously shaking confidence in the system. If things move much farther in a negative direction, we could be facing a full-blown financial crisis in Europe very rapidly. So watch the financial markets in Europe very carefully. Yes, most Americans tend to ignore Europe because they are convinced that the U.S. is “the center of the universe”, but the truth is that Europe actually has a bigger population than we do, they have a bigger economy then we do, and they have a much larger banking system than we do. The global financial system is more integrated today than it ever has been before, and if there is a major stock market crash in Europe it is going to deeply affect the United States and the rest of the globe as well. So pay close attention to what is going on in Europe, because events over there could spark a chain reaction that would have very serious implications for every man, woman and child on the planet.
As I noted above, European markets started off the week very badly and things have certainly not improved since then. The following is how Zero Hedge summarized what happened on Thursday…
EuroStoxx (Europe’s Dow) closed today -1% for 2013. France, Germany, and Spain are all lower on the year now. Italy, following ENI’s CEO fraud, collapsed almost 3% from the US day-session open, leaving it up less than 1% for the year. Just as we argued, credit markets have been warning that all is not well and today’s afternoon free-fall begins the catch-down.
In addition, the euro has been dropping like a rock all of a sudden. Just check out this chart which shows what happened to the euro on Thursday. It is very rare to see the euro move that dramatically.
So what is causing all of this?
Well, we already know that the economic fundamentals in Europe are absolutely horrible. Unemployment in the eurozone is at a record high, and the unemployment rates in both Greece and Spain are over 26 percent. Those are depression-level numbers.
But up until now there had still been a tremendous amount of confidence in the European financial system. But now that confidence is being shaken by a whole host of scandals.
In recent days, a number of major banking scandals have begun to emerge all over Europe. Just check out this article which summarizes many of them.
One of the worst banking scandals is in Italy. A horrible derivatives scandal has pushed the third largest bank in Italy to the verge of collapse…
Monte dei Paschi di Siena (BMPS.MI), Italy’s third biggest lender, said on Wednesday losses linked to three problematic derivative trades totaled 730 million euros ($988.3 million) as it sought to draw a line under a scandal over risky financial transactions.
There is that word “derivative” that I keep telling people to watch for. Of course this is not the big “derivatives panic” that I have been talking about, but it is an example of how these toxic financial instruments can bring down even the biggest banks. Monte dei Paschi is the oldest bank in the world, and now the only way it is able to survive is with government bailouts.
Another big scandal that is shaking up Europe right now is happening over in Spain. It is being alleged that Spanish Prime Minister Mariano Rajoy and other members of his party have been receiving illegal cash payments. The following summary of the scandal comes from a recent Bloomberg article…
On Jan. 31, the Spanish newspaper El Pais published copies of what it said were ledgers from secret accounts held by Luis Barcenas, the former treasurer of the ruling People’s Party, which revealed the existence of a party slush fund. The newspaper said 7.5 million euros in corporate donations were channeled into the fund and allegedly doled out from 1997 to 2009 to senior party members, including Rajoy.
That doesn’t sound good at all.
So what is the truth?
Could Rajoy actually be innocent?
Well, at this point most of the population of Spain does not believe that is the case. Just check out the following poll numbers from the Bloomberg article quoted above…
According to the Metroscopia poll, 76 percent of Spaniards don’t believe the People’s Party’s denials of the slush-fund allegations. Even more damning, 58 percent of the party’s supporters think it’s lying. All of the Spanish businessmen with whom I discussed the latest scandal expect it to get worse before it gets better. Their assumption that there are more skeletons in the government’s closet indicates what little trust they have in their leaders.
Meanwhile, the underlying economic fundamentals in Europe just continue to get worse. One of the biggest concerns right now is France. Just check out this excerpt from a recent report by Phoenix Capital Research…
The house of cards that is Europe is close to collapsing as those widely held responsible for solving the Crisis (Prime Ministers, Treasurers and ECB head Mario Draghi) have all been recently implicated in corruption scandals.
Those EU leaders who have yet to be implicated in scandals are not faring much better than their more corrupt counterparts. In France, socialist Prime Minister Francois Hollande, has proven yet again that socialism doesn’t work by chasing after the wealthy and trying to grow France’s public sector… when the public sector already accounts for 56% of French employment.
France was already suffering from a lack of competitiveness. Now that wealthy businesspeople are fleeing the country (meaning investment will dry up), the economy has begun to positively implode.
As the report goes on to mention, over the past few months the economic numbers coming out of France have been absolutely frightful…
Auto sales for 2012 fell 13% from those of 2011. Sales of existing homes outside of Paris fell 20% year over year for the third quarter of 2012. New home sales fell 25%. Even the high-end real estate markets are collapsing with sales for apartments in Paris that cost over €2 million collapsing an incredible 42% in 2012.
Today, the jobless rate in France is at a 15-year high, and industrial production is headed into the toilet. The wealthy are fleeing France in droves because of the recent tax increases, and the nation is absolutely drowning in debt. Even the French jobs minister recently admitted that France is essentially “bankrupt” at this point…
France’s government was plunged into an embarrassing row yesterday after a minister said the country was ‘totally bankrupt’.
Employment secretary Michel Sapin said cuts were needed to put the damaged economy back on track.
‘There is a state but it is a totally bankrupt state,’ he said.
So what does all of this mean?
It means that the crisis in Europe is just beginning. Things are going to be getting a lot worse.
Perhaps that is one reason why corporate insiders are dumping so much stock right now as I noted in my article yesterday entitled “Do Wall Street Insiders Expect Something Really BIG To Happen Very Soon?” There are a whole host of signs that both the United States and Europe are heading for recession, and a lot of financial experts are warning that stocks are way overdue for a “correction”.
For example, Blackstone’s Byron Wien told CNBC the other day that he expects the S&P 500 to drop by 200 points during the first half of 2013.
Seabreeze Partners portfolio manager Doug Kass recently told CNBC that what is happening right now in the financial markets very much reminds him of the stock market crash of 1987…
“I’m getting the ‘summer of 1987 feeling’ in the U.S. equity market,” Kass told CNBC, “which means we’re headed for a sharp fall.”
Toward the end of 2012 and at the very beginning of 2013 we saw markets both in the U.S. and in Europe move up steadily even though the underlying economic fundamentals did not justify such a move.
In many ways, that move up reminded me of the “head fakes” that we have seen prior to many of the largest “market corrections” of the past. Often financial markets are at their most “euphoric” just before a crash hits.
So get ready.
Even if you don’t have a penny in the financial markets, now is the time to prepare for what is ahead.
We all need to learn from what Europe is going through right now. In Greece, formerly middle class citizens are now trampling one another for food. We all need to prepare financially, mentally, emotionally, spiritually and physically so that we can weather the economic storm that is coming.
Most Americans are accustomed to living paycheck to paycheck and being constantly up to their eyeballs in debt, but that is incredibly foolish. Even in the animal kingdom, animals work hard during the warm months to prepare for the winter months. Even so, we should all be working very hard to prepare during prosperous times so that we will have something stored up for the lean years that are coming.
Unfortunately, if events in Europe are any indication, we may be rapidly running out of time.