The Greek government says that a “moment of truth” is coming on June 5th. Either their lenders agree to give them more money by that date, or Greece will default on a 300 million euro loan payment to the IMF. Of course it won’t technically be a “default” according to IMF rules for another 30 days after that, but without a doubt news that Greece cannot pay will send shockwaves throughout the financial world. At that point, those holding Greek bonds will start to panic as they realize that they might not get paid as well. All over Europe, there are major banks that are holding large amounts of Greek debt and derivatives that are related to the performance of Greek debt. If something is not done to avert disaster at the last moment, a default by Greece could be the spark that sets off a major European financial crisis this summer.
As I discussed the other day, neither the EU nor the IMF have given any money to Greece since August 2014. So now the Greek government is just about out of money, and without any new loans they will not be able to pay back the old loans that are coming due. In fact, things are so bad at this point that the Greek government is openly warning that it will default on June 5th…
Greece cannot make an upcoming payment to the International Monetary Fund on June 5 unless foreign lenders disburse more aid, a senior ruling party lawmaker said on Wednesday, the latest warning from Athens it is on the verge of default.
Prime Minister Alexis Tsipras’s leftist government says it hopes to reach a cash-for-reforms deal in days, although European Union and IMF lenders are more pessimistic and say talks are moving too slowly for that.
Of course this is all part of a very high stakes chess game. The Greeks believe that the Germans will back down when faced with the prospect of a full blown European financial crisis, and the Germans believe that the Greeks will eventually be feeling so much pain that they will be forced to give in to their demands.
So with each day we get closer and closer to the edge, and the Greeks are trying to do their best to let everyone know that they are not bluffing. Just today, a spokesperson for the Greek government came out and declared that unless there is a deal by June 5th, the IMF “won’t get any money”…
Greek officials now point to a race against the clock to clinch a deal before payments totaling about 1.5 billion euros ($1.7 billion) to the IMF come due next month, starting with a 300 million euro payment on June 5.
“Now is the moment that negotiations are coming to a head. Now is the moment of truth, on June 5,” Nikos Filis, spokesman for the ruling Syriza party’s lawmakers, told ANT1 television.
“If there is no deal by then that will address the current funding problem, they won’t get any money,” he said.
But the Germans know that the Greeks desperately need more money and can’t last much longer. The Greek banking system is so close to collapse that Moody’s just downgraded it again and warned that “there is a high likelihood of an imposition of capital controls and a deposit freeze” in the months ahead…
The outlook for the Greek banking system is negative, primarily reflecting the acute deterioration in Greek banks’ funding and liquidity, says Moody’s Investors Service in a new report published recently. These pressures are unlikely to ease over the next 12-18 months and there is a high likelihood of an imposition of capital controls and a deposit freeze.
The new report: “Banking System Outlook: Greece”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
Moody’s notes that significant deposit outflows of more than €30 billion since December 2014 have increased banks’ dependence on central bank funding. In our view, the banks are likely to remain highly dependent on central bank funding, as ongoing uncertainty regarding Greece’s support programme continues to compromise depositors’ confidence.
Unfortunately, when things really start going crazy in Greece people might be faced with much more than just frozen bank accounts. As I wrote about just a few days ago, there is a very strong possibility that we could actually see Cyprus-style wealth confiscation implemented in Greece when the banks collapse.
In fact, the Greek government is already talking about the possibility of a special tax on banking transactions…
Athens is promoting the idea of a special levy on banking transactions at a rate of 0.1-0.2 percent, while the government’s proposal for a two-tier value-added tax – depending on whether the payment is in cash or by card – has met with strong opposition from the country’s creditors.
A senior government official told Kathimerini that among the proposals discussed with the eurozone and the International Monetary Fund is the imposition of a levy on bank transactions, whose exact rate will depend on the exemptions that would apply. The aim is to collect 300-600 million euros on a yearly basis.
Fee won’t include ATM withdrawals, transactions up to EU500; in this case Greek govt projects EU300m-EU600m annual revenue from measure.
Sadly, most people living in North America (which is most of my audience) does not really care much about what happens on the other side of the world.
But they should care.
If Greece defaults and the Greek banking system collapses, stocks and bonds will crash all over Europe. Many believe that such a crash can be “contained” to just Europe, but that is really just wishful thinking.
In addition, the euro would plummet dramatically, which would cause substantial financial problems all over the planet. As I recently explained, the euro is headed to parity with the U.S. dollar and then it is going to go below parity. Before it is all said and done, the euro is going to all-time lows.
Of course the U.S. dollar is eventually going to totally collapse as well, but that comes later and that is a story for another day.
According to the Bank for International Settlements, 74 trillion dollars in derivatives are directly tied to the value of the euro, the value of the U.S. dollar and the value of other global currencies.
So if you believe that what is happening in Greece cannot have massive ramifications for the entire global financial system, you are dead wrong.
What is happening in Greece is exceedingly important, and it is time for all of us to start paying attention.
Some really weird things are happening in the financial world right now. If you go back to 2008, there was lots of turmoil bubbling just underneath the surface during the months leading up to the great stock market crash in the second half of that year. When Lehman Brothers finally did collapse, it was a total shock to most of the planet, but we later learned that their problems had been growing for a long time. I believe that we are in a similar period right now, and the second half of this year promises to be quite chaotic. Apparently, those that run some of the largest exchange-traded funds in the entire world agree with me, because as you will see below they are quietly preparing for a “liquidity crisis” and a “market meltdown”. About a month ago, I warned of an emerging “liquidity squeeze“, and now analysts all over the financial industry are talking about it. Could it be possible that the next great financial crisis is right around the corner?
According to Reuters, the companies that run some of the largest exchange-traded funds in existence are deeply concerned about what a lack of liquidity would mean for them during the next financial crash. So right now they are quietly “bolstering bank credit lines” so that they will be better positioned for “a market meltdown”…
The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown.
Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show.
The measures come as the Federal Reserve and other U.S. regulators express concern about the ability of fund managers to withstand a wave of investor redemptions in the event of another financial crisis. They have pointed particularly to fixed-income ETFs, which tend to track less liquid markets such as high yield corporate bonds or bank loans.
So why are Vanguard Group, Guggenheim Investments and First Trust all making these kinds of preparations right now?
Do they know something that the rest of us do not?
Over recent months, I have been writing about how so many of the exact same patterns that we witnessed just prior to previous financial crashes seem to be repeating once again in 2015.
One of the things that we would expect to see happen just before a major event would be for the “smart money” to rush out of long-term bonds and into short-term bonds and other more liquid assets. This is something that had not been happening, but during the past couple of weeks there has been a major change. All of a sudden, long-term yields have been spiking dramatically. The following comes from Martin Armstrong…
The amount of cash rushing around on the short-end is stunning. Yields are collapsing into negative territory and this is the same flight to quality we began to see at the peak in the crisis back in 2009. The big money is selling the 10 year or greater paper and everyone is rushing into the short-term. There is not enough paper around to satisfy the demands. Capital is unwilling to hold long-term even the 10 year maturities of governments including Germany. This is illustrating the crisis that is unfolding and there is a collapse in liquidity.
There is that word “liquidity” once again. It is funny how that keeps popping up.
Here is a chart that shows what has been happening to the yield on 30 year U.S. Treasuries in 2015. As you can see, there has been a big move recently…
And what this chart doesn’t show is that the yield on 30 year Treasuries shot up to about 3.08% on Wednesday.
Of course it isn’t just yields in the U.S. that are skyrocketing. This is happening all over the globe, and many analysts are now openly wondering if the 76 trillion dollar global bond bubble is finally imploding. For instance, just consider what Deutsche Bank strategist Jim Reid recently told the Telegraph…
Financial regulations introduced since the crisis have required banks to hold more bonds, as quantitative easing schemes have meant central banks hold many on their own balance sheets, reducing the number available to trade on the open market.
Simultaneously, central banks have attempted to boost so-called “high money liquidity” with quantitative easing schemes and their close to zero interest rates. “What has become increasingly clear over the last couple of years is that the combination of high money liquidity and low trading liquidity creates air pockets,” said Mr Reid.
He continued: “It’s a worry that these events are occurring in relatively upbeat markets. I can’t helping thinking that when the next downturn hits the lack of liquidity in various markets is going to be chaotic. These increasingly regular liquidity issues we’re seeing might be a mild dress rehearsal.”
Those are sobering words.
And without a doubt, we are in the midst of a massive stock market bubble as well. The chaos that is coming is not just going to affect bonds. In fact, I believe that the greatest stock market crash in U.S. history is coming.
So when will it happen?
Well, Phoenix Capital Research seems to think that we have reached an extremely important turning point…
This is something of a last hurrah for stocks. We are now officially in May. And historically the period from May to November has been one of the worst periods for stocks from a seasonal perspective.
Moreover, the fundamentals are worsening dramatically for the markets. By the look of things, 2014 represented the first year in which corporate sales FELL since 2009. Sales track actual economic activity much more closely than earnings: either the money comes in or it isn’t. The fact that sales are falling indicates the economy is rolling over and the “recovery” has ended.
Having cut costs to the bone and issued debt to buyback shares, we are likely at peak earnings as well. Thus far 90% of companies in the S&P 500 have reported earnings. Year over year earnings are down 11.9%.
So sales are falling and earnings are falling… at a time when stocks are so overvalued that even the Fed admits it. This has all the makings of a serious market collapse. And smart investors are preparing now BEFORE it hits.
Personally, I have a really bad feeling about the second half of 2015. Everything seems to be gearing up for a repeat of 2008 (or even worse). Let’s hope that does not happen, but let’s not be willingly blind to the great storm on the horizon either.
And once the next great crisis does hit us, governments around the world will have a lot less “ammunition” to fight it than the last time around. For example, the U.S. national debt has approximately doubled since the beginning of the last recession, and the Federal Reserve has already pushed interest rates down as far as they can. Similar things could also be said about other governments all over the planet. This is something that HSBC chief economist Stephen King recently pointed out in a 17 page report entitled “The world economy’s titanic problem”. The following is a brief excerpt from that report…
“Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.”
For a long time, I have had a practice of ending my articles by urging people to get prepared. But now time for preparing is rapidly running out. My new book entitled “Get Prepared Now” was just released, but honestly my co-author and I should have had it out last year. In the very small amount of time that we have left before the financial markets crash, the amount of “prepping” that people are going to be able to do will be fairly limited.
I am not just pointing to a single event. Once the financial markets crash this time, I believe that there is not going to be any sort of a “recovery” like we experienced after 2008. I believe that the long-term economic collapse that we have been experiencing will accelerate very greatly, and it will usher in a horrible period of time for the United States unlike anything that we have ever seen before.
So what do you think?
Could I be wrong?
Please feel free to share your thoughts by posting a comment below…
Warren Buffett believes “that bonds are very overvalued“, and a recent survey of fund managers found that 80 percent of them are convinced that bonds have become “badly overvalued“. The most famous bond expert on the planet, Bill Gross, recently confessed that he has a sense that the 35 year bull market in bonds is “ending” and he admitted that he is feeling “great unrest”. Nobel Prize–winning economist Robert Shiller has added a new chapter to his bestselling book in which he argues that bond prices are “irrationally high”. The global bond bubble has ballooned to more than 76 trillion dollars, and interest rates have never been lower in modern history. In fact, 25 percent of all government bonds in Europe actually have a negative rate of return at this point. There is literally nowhere for the bond market to go except for the other direction, and when this bull market turns into a bear it will create chaos and financial devastation all over the planet.
In a recent piece entitled “A Sense Of Ending“, bond guru Bill Gross admitted that the 35 year bull market in bonds that has made him and those that have invested with him so wealthy is now coming to an end…
Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.
And the way that he ended his piece sounds rather ominous…
I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.
Bill Gross is someone that knows what he is talking about. I would consider his words very carefully.
Another renowned financial expert, Yale professor Robert Shiller, warned us about the stock bubble in 2000 and about the real estate bubble in 2005. Now, he is warning about the danger posed by this bond bubble…
In the first edition of his landmark book “Irrational Exuberance,” published in 2000, the Yale professor of economics and 2013 Nobel Laureate presciently warned that stocks looked especially expensive. In the second edition, published in 2005 shortly before the real estate bubble crashed, he added a chapter about real estate valuations. And in the new edition, due out later this month, Shiller adds a fresh chapter called “The Bond Market in Historical Perspective,” in which he worries that bond prices might be irrationally high.
For years, ultra-low interest rates have enabled governments around the world to go on a debt binge unlike anything the world has ever seen. Showing very little restraint since the last financial crisis, they have piled up debts that are exceedingly dangerous. If interest rates were to return to historical norms, it would instantly create the greatest government debt crisis in history.
A recent letter from IceCap Asset Management summarized where we basically stand today…
1) governments are unable to eliminate deficits
2) global government debt is increasing exponentially
3) 0% interest rates are allowing governments to borrow more to pay off old loans and fund deficits
4) Global growth is declining despite money printing and bailouts And, we’ve saved the latest and greatest fact for last: as stunning as 0% interest rates sound, the mathematically-challenged-fantasyland called Europe has just one upped everyone by introducing NEGATIVE INTEREST RATES.
As of writing, over 25% of all bonds issued by European governments has a guaranteed negative return for investors.
Germany can borrow money for 5 years at an interest rate of NEGATIVE 0.10%. Yes, instead of Germany paying you interest when you lend them money, you have to pay them interest.
These same negative interest rate conditions exist across many of the Eurozone countries, as well as Denmark, Sweden and Switzerland.
Negative interest rates are by nature irrational.
Why in the world would you pay someone to borrow money from you?
It doesn’t make any sense at all, and this irrational state of affairs will not last for too much longer.
At some point, investors are going to come to the realization that the 35 year bull market for bonds is finished, and then there will be a massive rush for the exits. This rush for the exits will be unlike anything the bond market has ever seen before. Robert Wenzel of the Economic Policy Journal says that this coming rush for the exits will set off a “death spiral”…
Anyone who holds the view that the Fed will not soon raise interest rates,and soon, fails to understand the nature of the developing crisis. It will be led by a collapse of the bond market.
Market forces, somewhat misleadingly called bond-vigilantes, will lead the charge.
I am not as bearish in the short-term on the stock market. The equity markets will be volatile because of the climb in rates and look scary at times but the death spiral will be in the bond market.
As this death spiral accelerates, we are going to see global interest rates rise dramatically. And considering the fact that more than 400 trillion dollars in derivatives are directly tied to interest rates, that is a very scary thing.
And in case you are wondering, the stock market will be deeply affected by all of this as well. I believe that we are going to witness a stock market crash even greater than what we experienced in 2008, and other experts are projecting similar things. For example, just consider what Marc Faber recently told CNBC…
“For the last two years, I’ve been thinking that U.S. stocks are due for a correction,” Faber said Wednesday on CNBC’s “Trading Nation.” “But I always say a bubble is a bubble, and if there’s no correction, the market will go up, and one day it will go down, big time.”
“The market is in a position where it’s not just going to be a 10 percent correction. Maybe it first goes up a bit further, but when it comes, it will be 30 percent or 40 percent minimum!” Faber asserted.
Where we are right now is at the end of the party. There are some that want to keep on dancing to the music for as long as possible, but most can see that things are winding down and people are starting to head for the exits.
The irrational global financial bubble that investors have been enjoying for the past few years has stretched on far longer than it should have. But that is the way irrational bubbles work – they just keep going even when everyone can see that they have become absolutely absurd. However, eventually something always comes along and bursts them, and once that happens markets can crash very, very rapidly.
Well, the Nasdaq finally did it. It has climbed all the way back to where it was at the peak of the dotcom bubble. Back in March 2000, the Nasdaq set an all-time record high of 5,048.62. On Thursday, after all these years, that all-time record was finally eclipsed. The Nasdaq closed at 5056.06, and Wall Street greatly rejoiced. So if you invested in the Nasdaq at the peak of the dotcom bubble, you are just finally breaking even 15 years later. Unfortunately, the truth is that stocks have not been soaring because the U.S. economy is fundamentally strong. Just like the last two times, what we are witnessing is an irrational financial bubble. Sometimes these irrational bubbles can last for a surprisingly long time, but in the end they always burst. And even now there are signs of economic trouble bubbling to the surface all around us. The following are 11 signs that we are entering the next phase of the global economic crisis…
#1 It is being projected that half of all fracking companies in the United States will be “dead or sold” by the end of this year.
#2 The rig count just continues to fall as the U.S. oil industry implodes. Incredibly, the number of rigs in operation in the United States has fallen for 19 weeks in a row.
#3 McDonald’s has announced that it will be closing 700 “poor performing” restaurants in 2015. Why would McDonald’s be doing this if the economy was actually getting better?
#4 As I wrote about the other day, we could be right on the verge of a Greek debt default. In fact, we learned on Thursday that the Greek government has been “running on empty” for months…
Greece warned it will go bankrupt next week after failing to stump up enough cash to pay millions of public sector workers and its international debts.
Deputy finance minister Dimitras Mardas set alarm bells ringing yesterday when he declared the country had been ‘running on empty’ since February.
With a debt repayment deadline looming on May 1, Greece faces the deeply damaging prospect of having to snub its own employees to make a €200m payment to the International Monetary Fund.
#5 Coal accounts for approximately 40 percent of all electrical generation on the entire planet. When the price of coal starts to drop, that is a sign that economic activity is slowing down. Just prior to the last financial crisis in 2008, the price of coal shot up dramatically and then crashed really hard. Well, guess what? The price of coal has been crashing again, and it is already lower than it was at any point during the last recession.
#6 The price of iron ore has been crashing as well. It is down 35 percent in the last nine months, and David Stockman believes that this is because of a major deflationary crisis that is brewing in China…
There is no better measure of the true contraction underway in China than the price of iron ore. The Wall Street stock peddlers will tell you not to be troubled by the 70% plunge from the 2012 highs and the 35% drop just in the last nine months. According to them, its all the fault of the big global miners who went overboard opening up massive new iron ore pits and mining infrastructure.
#7 At this point, China accounts for more total global trade than anyone else in the world. That is why it is so alarming that Chinese imports and exports are both absolutely collapsing…
China’s monthly trade data shows exports fell in March from a year ago by 14.6% in yuan terms, compared to expectations for a rise of more than 8%.
Imports meanwhile fell 12.3% in yuan terms compared to forecasts for a fall of more than 11%.
#8 The number of publicly traded companies in the United States that filed for bankruptcy during the first quarter of 2015 was more than double the number that filed for bankruptcy during the first quarter of 2014.
#9 New home sales in the United States just declined at their fastest pace in almost two years.
#10 U.S. manufacturing data has been shockingly weak lately…
On the heels of weak PMIs from Europe and Asia, Markit’s US Manufacturing PMI plunged to 54.2 in April (from 55.7). Against expectations of a rise to 55.6, this is the biggest miss on record. Of course, this is ‘post-weather’ so talking-heads will need to find another excuse as New Orders declined for the first time since Nov 2014.
#11 When priced according to “the average blue-collar hourly wage“, U.S. stocks are the most expensive that they have ever been in history right now. To say that this financial bubble is overdue to burst is a massive understatement.
For a long time, I have been pointing to 2015 as a major “turning point” for the global financial system, and I still feel that way.
But for the first four months of this year, things have been surprisingly quiet – at least on the surface.
So what is going on?
Well, I believe that what we are experiencing right now is the proverbial “calm before the storm”. There is all sorts of turmoil brewing just beneath the surface, but for the moment things seem like they are running along just fine to most people. Unfortunately, this period of quiet is not going to last much longer.
And those that are “in the know” are already moving their money in anticipation of what is coming. For example, consider the words of Snapchat founder and CEO Evan Spiegel…
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets – at these values, however, all tech stocks are expensive – even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won’t be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks.
It may not happen next week, or even next month, but big financial trouble is coming.
And when it finally arrives, it is going to shock the world, even though anyone with any sense can see the coming crisis approaching from a mile away.
If a major financial crisis was approaching, we would expect to see the “smart money” getting out of stocks and pouring into government bonds that are traditionally considered to be “safe” during a crisis. This is called a “flight to safety” or a “flight to quality“. In the past, when there has been a “flight to quality” we have seen yields for German government bonds and U.S. government bonds go way down. As you will see below, this is exactly what we witnessed during the financial crisis of 2008. U.S. and German bond yields plummeted as money from the stock market was dumped into bonds at a staggering pace. Well, it is starting to happen again. In recent months we have seen U.S. and German bond yields begin to plummet as the “smart money” moves out of the stock market. So is this another sign that we are on the precipice of a significant financial panic?
Back in 2008, German bonds actually began to plunge well before U.S. bonds did. Does that mean that European money is “smarter” than U.S. money? That would certainly be a very interesting theory to explore. As you can see from the chart below, the yield on 10 year German bonds started to fall significantly during the summer of 2008 – several months before the stock market crash in the fall…
So what are German bonds doing today?
As you can see from this next chart, the yield on 10 year German bonds has been steadily falling since the beginning of last year. At this point, the yield on 10 year German bonds is just barely above zero…
And amazingly, most German bonds that have a maturity of less than 10 years actually have a negative yield right now. That means that investors are going to get back less money than they invest. This is how bizarre the financial markets have become. The “smart money” is so concerned about the “safety” of their investments that they are actually willing to accept negative yields. I don’t know why anyone would ever put their money into investments that have a negative yield, but it is actually happening. The following comes from Yahoo…
The world’s scarcest resource right now is safe yield, and the shortage is getting more extreme. Most German government bonds that mature in less than 10 years now have negative yields – part of some $2 trillion worth of paper with yields below zero.
This is what happens when the European Central Bank begins a trillion-euro bond-buying binge with rates already miniscule.
Yesterday, ECB boss Mario Draghi – unfazed by the protest stunt at his press conference – reaffirmed his plan to keep bidding for paper that yields more than -0.2% – that’s minus 0.2%.
Yes, the ECB is driving a lot of this, but it is still truly bizarre.
So what about the United States?
Well, first let’s take a look at what happened back in 2008. In the chart below, you can see the “flight to safety” that took place in late 2008 as investors started to panic…
And we have started to witness a similar thing happen in recent months. The yield on 10 year U.S. Treasuries has plummeted as investors have looked for safety. This is exactly the kind of chart that we would expect to see if a financial crisis was brewing…
What makes all of this far more compelling is the fact that so many other patterns that we have witnessed just prior to past financial crashes are happening once again.
Yes, there are other potential explanations for why bond yields have been going down. But when you add this to all of the other pieces of evidence that a new financial crisis is rapidly approaching, quite a compelling case emerges.
For those that do not follow my website regularly, I encourage you to check out the following articles to get an idea of what I am talking about…
-“Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”
-“Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?…”
-“10 Key Events That Preceded The Last Financial Crisis That Are Happening Again RIGHT NOW”
-“Guess What Happened The Last Time The U.S. Dollar Skyrocketed In Value Like This?…”
-“7 Signs That A Stock Market Peak Is Happening Right Now”
-“Guess What Happened The Last Two Times The S&P 500 Was Up More Than 200% In Six Years?”
Of course no two financial crashes ever look exactly the same.
The crisis that we are moving toward is not going to be precisely like the crisis of 2008.
But there are similarities and patterns that we can look for. When things start to get bad, investors act in predictable ways. And so many of the things that we are watching right now are just what we would expect to see in the lead up to a major financial crisis.
Sadly, most people are not willing to learn from history. Even though it is glaringly apparent that we are in a historic financial bubble, most investors on Wall Street cannot see it because they do not want to see it. They want to believe that somehow “things are different this time” and that stocks will just continue to go up indefinitely so that they can keep making lots and lots of money.
And despite what you may think, I actually want this bubble to continue for as long as possible. Despite all of our problems, life is still relatively good in America today – at least compared to what is coming.
I like to refer to this next crisis as our “third strike”.
Back in 2000 and 2001, the dotcom bubble burst and we experienced a painful recession, but we didn’t learn any lessons. That was strike number one.
Then came the financial crash of 2008 and the worst economic downturn since the Great Depression. But we didn’t learn any lessons from that either. Instead, we just reinflated the same old financial bubbles and kept on making the exact same mistakes as before. That was strike number two.
This next financial crisis will be strike number three. After this next crisis, I don’t believe that there will ever be a return to “normal” for the United States. I believe that this is going to be the crisis that unleashes hell in our nation.
So no, I am not eager for that to come. Even though there is no way that this bubble of debt-fueled false prosperity can last indefinitely, I would like for it to last at least a little while longer.
Because what comes after it is going to be truly terrible.
Get ready for another major worldwide credit crunch. Today, the entire global financial system resembles a colossal spiral of debt. Just about all economic activity involves the flow of credit in some way, and so the only way to have “economic growth” is to introduce even more debt into the system. When the system started to fail back in 2008, global authorities responded by pumping this debt spiral back up and getting it to spin even faster than ever. If you can believe it, the total amount of global debt has risen by $35 trillion since the last crisis. Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is starting to happen once again. For example, just a few days ago the IMF warned regulators to prepare for a global “liquidity shock“. And on Friday, Chinese authorities announced a ban on certain types of financing for margin trades on over-the-counter stocks, and we learned that preparations are being made behind the scenes in Europe for a Greek debt default and a Greek exit from the eurozone. On top of everything else, we just witnessed the biggest spike in credit application rejections ever recorded in the United States. All of these are signs that credit conditions are tightening, and once a “liquidity squeeze” begins, it can create a lot of fear.
Over the past six months, the Chinese stock market has exploded upward even as the overall Chinese economy has started to slow down. Investors have been using something called “umbrella trusts” to finance a lot of these stock purchases, and these umbrella trusts have given them the ability to have much more leverage than normal brokerage financing would allow. This works great as long as stocks go up. Once they start going down, the losses can be absolutely staggering.
That is why Chinese authorities are stepping in before this bubble gets even worse. Here is more about what has been going on in China from Bloomberg…
China’s trusts boosted their investments in equities by 28 percent to 552 billion yuan ($89.1 billion) in the fourth quarter. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.
In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks.
Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.
Overall, China has seen more debt growth than any other major industrialized nation since the last recession. This debt growth has been so dramatic that it has gotten the attention of authorities all over the planet…
Wolfgang Schaeuble, Germany’s finance minister says that “debt levels in the global economy continue to give cause for concern.”
Singling out China in particular, Schaeuble noted that “debt has nearly quadrupled since 2007″, adding that it’s “growth appears to be built on debt, driven by a real estate boom and shadow banks.”
According to McKinsey’s research, total outstanding debt in China increased from $US7.4 trillion in 2007 to $US28.2 trillion in 2014. That figure, expressed as a percentage of GDP, equates to 282% of total output, higher than the likes of other G20 nations such as the US, Canada, Germany, South Korea and Australia.
This credit boom in China has been one of the primary engines for “global growth” in recent years, but now conditions are changing. Eventually, the impact of what is going on in China right now is going to be felt all over the planet.
Over in Europe, the Greek debt crisis is finally coming to a breaking point. For years, authorities have continued to kick the can down the road and have continued to lend Greece even more money.
But now it appears that patience with Greece has run out.
For instance, the head of the IMF says that no delay will be allowed on the repayment of IMF loans that are due next month…
IMF Managing Director Christine Lagarde roiled currency and bond markets on Thursday as reports came out of her opening press conference saying that she had denied any payment delay to Greece on IMF loans falling due next month.
Unless Greece concludes its negotiations for a further round of bailout money from the European Union, however, it is not likely to have the money to repay the IMF.
And we are getting reports that things are happening behind the scenes in Europe to prepare for the inevitable moment when Greece will finally leave the euro and go back to their own currency.
For example, consider what Art Cashin told CNBC on Friday…
First, “there were reports in the media [saying] that the ECB and/or banking authorities suggested to banks to get rid of any sovereign Greek debt they had, which suggests that maybe the next step will be Greece exiting,” Cashin told CNBC.
Also, one of Greece’s largest newspapers is reporting that neighboring countries are forcing subsidiaries of Greek banks that operate inside their borders to reduce their risk to a Greek debt default to zero…
According to a report from Kathimerini, one of Greece’s largest newspapers, central banks in Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia have all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk — including bonds, treasury bills, deposits to Greek banks, and loans — down to zero.
Once Greece leaves the euro, that is going to create a tremendous credit crunch in Europe as fear begins to spread like wildfire. Everyone will be wondering which nation will be “the next Greece”, and investors will want to pull their money out of perceived danger zones before they get hammered.
In the past, other European nations have been willing to bend over backwards to accommodate Greece and avoid this kind of mess, but those days appear to be finished. In fact, the finance minister of France openly admits that the French “are not sympathetic to Greece”…
Greece isn’t winning much sympathy from its debt-wracked European counterparts as the country draws closer to default for failing to make bailout repayments.
“We are not sympathetic to Greece,” French Finance Minister Michael Sapin said in an interview at the International Monetary Fund-World Bank spring meetings here.
“We are demanding because Greece must comply with the European (rules) that apply to all countries,” Sapin said.
Yes, it is possible that another short-term deal could be reached which could kick the can down the road for a few more months.
But either way, things in Europe are going to continue to get worse.
Meanwhile, very disappointing earnings reports in the U.S. are starting to really rattle investors.
For example, we just learned that GE lost 13.6 billion dollars in the first quarter…
One week following the announcement that it would dismantle most of its GE Capital financing operations to instead focus on its industrial roots, General Electric reported a first quarter loss of $13.6 billion.
The results were impacted by charges relating to the conglomerate’s strategic shift. A year ago GE reported a first quarter profit of $3 billion.
That is a lot of money.
How in the world does a company lose 13.6 billion dollars in a single quarter during an “economic recovery”?
Other big firms are reporting disappointing earnings numbers too…
In earnings news, American Express Co. late Thursday said its results were hurt by the strong U.S. dollar, which reduced revenue booked in other countries. Chief Executive Kenneth Chenault reiterated the company’s forecast that 2015 earnings will be flat to modestly down year over year. Shares fell 4.6%.
Advanced Micro Devices Inc. said its first-quarter loss widened as revenue slumped. The company said it was exiting its dense server systems business, effective immediately. Revenue and the loss excluding items missed expectations, pushing shares down 13%.
And just like we saw just before the financial crisis of 2008, Americans are increasingly having difficulty meeting their financial obligations.
For instance, the delinquency rate on student loans has reached a very frightening level…
More borrowers are failing to make payments on their student loans five years after leaving college, painting a grim picture for borrowers, according to the Federal Reserve Bank of New York.
Student debt continues to increase, especially for people who took out loans years ago. Those who left school in the Great Recession, which ended in 2009, had particular difficulty with repayment, with many defaulting, becoming seriously delinquent or not being able to reduce their balances, the New York Fed said today.
Only 37 percent of borrowers are current on their loans and are actively paying them down, and 17 percent are in default or in delinquency.
At this point, the American consumer is pretty well tapped out. If you can believe it, 56 percent of all Americans have subprime credit today, and as I mentioned above, we just witnessed the biggest spike in credit application rejections ever recorded.
We have reached a point of debt saturation, and the credit crunch that is going to follow is going to be extremely painful.
Of course the biggest provider of global liquidity in recent years has been the Federal Reserve. But with the Fed pulling back on QE, this is creating some tremendous challenges all over the globe. The following is an excerpt from a recent article in the Telegraph…
The big worry is what will happen to Russia, Brazil and developing economies in Asia that borrowed most heavily in dollars when the Fed was still flooding the world with cheap liquidity. Emerging markets account to roughly half of the $9 trillion of offshore dollar debt outside US jurisdiction.
The IMF warned that a big chunk of the debt owed by companies is in the non-tradeable sector. These firms lack “natural revenue hedges” that can shield them against a double blow from rising borrowing costs and a further surge in the dollar.
So what is the bottom line to all of this?
The bottom line is that we are starting to see the early phases of a liquidity squeeze.
The flow of credit is going to begin to get tighter, and that means that global economic activity is going to slow down.
This happened during the last financial crisis, and during this next financial crisis the credit crunch is going to be even worse.
This is why it is so important to have an emergency fund. During this type of crisis, you may have to be the source of your own liquidity. At a time when it seems like nobody has any cash, those that do have some will be way ahead of the game.
The very same people that caused the last economic crisis have created a 278 TRILLION dollar derivatives time bomb that could go off at any moment. When this absolutely colossal bubble does implode, we are going to be faced with the worst economic crash in the history of the United States. During the last financial crisis, our politicians promised us that they would make sure that “too big to fail” would never be a problem again. Instead, as you will see below, those banks have actually gotten far larger since then. So now we really can’t afford for them to fail. The six banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo. When you add up all of their exposure to derivatives, it comes to a grand total of more than 278 trillion dollars. But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars. In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets. This is complete and utter insanity, and yet nobody seems too alarmed about it. For the moment, those banks are still making lots of money and funding the campaigns of our most prominent politicians. Right now there is no incentive for them to stop their incredibly reckless gambling so they are just going to keep on doing it.
So precisely what are “derivatives”? Well, they can be immensely complicated, but I like to simplify things. On a very basic level, a “derivative” is not an investment in anything. When you buy a stock, you are purchasing an ownership interest in a company. When you buy a bond, you are purchasing the debt of a company. But a derivative is quite different. In essence, most derivatives are simply bets about what will or will not happen in the future. The big banks have transformed Wall Street into the biggest casino in the history of the planet, and when things are running smoothly they usually make a whole lot of money.
But there is a fundamental flaw in the system, and I described this in a previous article…
The big banks use very sophisticated algorithms that are supposed to help them be on the winning side of these bets the vast majority of the time, but these algorithms are not perfect. The reason these algorithms are not perfect is because they are based on assumptions, and those assumptions come from people. They might be really smart people, but they are still just people.
Today, the “too big to fail” banks are being even more reckless than they were just prior to the financial crash of 2008.
As long as they keep winning, everyone is going to be okay. But when the time comes that their bets start going against them, it is going to be a nightmare for all of us. Our entire economic system is based on the flow of credit, and those banks are at the very heart of that system.
In fact, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system.
So that is why they are called “too big to fail”. We simply cannot afford for them to go out of business.
As I mentioned above, our politicians promised that something would be done about this. But instead, the four largest banks in the country have gotten nearly 40 percent larger since the last time around. The following numbers come from an article in the Los Angeles Times…
Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.
And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.
During this same time period, 1,400 smaller banks have completely disappeared from the banking industry.
So our economic system is now more dependent on the “too big to fail” banks than ever.
To illustrate how reckless the “too big to fail” banks have become, I want to share with you some brand new numbers which come directly from the OCC’s most recent quarterly report (see Table 2)…
Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)
Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)
Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)
Total Assets: $856,301,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)
Bank Of America
Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)
Total Assets: $801,382,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)
Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)
Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)
Compared to the rest of them, Wells Fargo looks extremely prudent and rational.
But of course that is not true at all. Wells Fargo is being very reckless, but the others are being so reckless that it makes everyone else pale in comparison.
And these banks are not exactly in good shape for the next financial crisis that is rapidly approaching. The following is an excerpt from a recent Business Insider article…
The New York Times isn’t so sure about the results from the Federal Reserve’s latest round of stress tests.
In an editorial published over the weekend, The Times cites data from Thomas Hoenig, vice chairman of the FDIC, who, in contrast to the Federal Reserve, found that capital ratios at the eight largest banks in the US averaged 4.97% at the end of 2014, far lower than the 12.9% found by the Fed’s stress test.
That doesn’t sound good.
So what is up with the discrepancy in the numbers? The New York Times explains…
The discrepancy is due mainly to differing views of the risk posed by the banks’ vast holdings of derivative contracts used for hedging and speculation. The Fed, in keeping with American accounting rules and central bank accords, assumes that gains and losses on derivatives generally net out. As a result, most derivatives do not show up as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets.
Mr. Hoenig uses stricter international accounting rules to value the derivatives. Those rules do not assume that gains and losses reliably net out. As a result, large derivative holdings are shown as assets on the balance sheet, an addition that reduces the ratio of capital to assets to the low levels reported in Mr. Hoenig’s analysis.
And you know what?
The guys running these big banks can see what is coming.
Just consider the words that JPMorgan Chase chairman and CEO Jamie Dimon wrote to his shareholders not too long ago…
Some things never change — there will be another crisis, and its impact will be felt by the financial market.
The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets
In the same letter, Dimon mentioned “derivatives moved by enormous players and rapid computerized trades” as part of the reason why our system is so vulnerable to another crisis.
If this is what he truly believes, why is his firm being so incredibly reckless?
Perhaps someone should ask him that.
Interestingly, Dimon also discussed the possibility of a Greek exit from the eurozone…
“We must be prepared for a potential exit,” J. P. Morgan Chief Executive Officer Jamie Dimon said. in his annual letter to shareholders. “We continually stress test our company for possible repercussions resulting from such an event.”
This is something that I have been warning about for a long time.
And of course Dimon is not the only prominent banker warning of big problems ahead. German banking giant Deutsche Bank is also sounding the alarm…
With a U.S. profit recession expected in the first half of 2015 and investors unlikely to pay up for stocks, the risk of a stock market drop of 5% to 10% is rising, Deutsche Bank says.
That’s the warning Deutsche Bank market strategist David Bianco zapped out to clients today before the opening bell on Wall Street.
Bianco expects earnings for the broad Standard & Poor’s 500-stock index to contract in the first half of 2015 — the first time that’s happened since 2009 during the financial crisis. And the combination of soft earnings and his belief that investors won’t pay top dollar for stocks in a market that is already trading at above-average valuations is a recipe for a short-term pullback on Wall Street.
The truth is that we are in the midst of a historic stock market bubble, and we are witnessing all sorts of patterns in the financial markets which also emerged back in 2008 right before the financial crash in the fall of that year.
When some of the most prominent bankers at some of the biggest banks on the entire planet start issuing ominous warnings, that is a clear sign that time is running out. The period of relative stability that we have been enjoying has been fun, and hopefully it will last just a little while longer. But at some point it will end, and then the pain will begin.