Did you know that the sixth largest bank in Spain failed in spectacular fashion just a few days ago? Many are comparing the sudden implosion of Banco Popular to the collapse of Lehman Brothers in 2008, and EU regulators hastily arranged a sale of the failed bank to Santander in order to avoid a full scale financial panic. Sadly, most Americans have no idea that a new financial crisis is starting to play out over in Europe, because most Americans only care about what is going on in America. But we should be paying attention, because the EU is the second largest economy on the entire planet, and the euro is the second most used currency on the entire planet. The U.S. financial system is already teetering on the brink of disaster, and this new financial crisis in Europe could turn out to be enough to push us over the edge.
If EU regulators had not arranged a “forced sale” of Banco Popular to Santander, we would probably be witnessing panic on a scale that we haven’t seen since 2008 in Europe right about now. The following comes from the Telegraph…
Spanish banking giant Santander has stepped in to the rescue ailing rival Banco Popular by taking over the failing lender for €1 in a watershed deal masterminded by EU regulators to avoid a damaging collapse.
Santander will tap its shareholders for €7bn in a rights issue to raise the capital needed to shore-up Popular’s finances in a dramatic private sector rescue of Spain’s sixth-largest lender.
It will inflict losses of approximately €3.3bn on bond investors and shareholders but crucially will avoid a taxpayer bailout.
But now that a “too big to fail” bank like Banco Popular has failed, investors are immediately trying to figure out which major Spanish banks may be the next to collapse. According to Wolf Richter, many have identified Liberbank as an institution that is highly vulnerable…
After its most tumultuous week since the bailout days of 2012, Spain’s banking system is gripped by a climate of fear, uncertainty and distrust. Rather than allaying investor nerves, the shotgun bail-in and sale of Banco Popular to Santander on Tuesday has merely intensified them. For the first time since the Global Financial Crisis, shareholders and subordinate bondholders of a failing Spanish bank were not bailed out by taxpayers; they took risks in order to make a buck, and they bore the consequences. That’s how it should be. But bank investors don’t like not getting bailed out.
Now they’re worrying it could happen again. As Popular’s final days showed, once confidence and trust in a bank vanishes, it’s almost impossible to restore them. The fear has now spread to Spain’s eighth largest lender, Liberbank, a mini-Bankia that was spawned in 2011 from the forced marriage of three failed cajas (savings banks), Cajastur, Caja de Extremadura and Caja Cantabria.
On Thursday, shares of Liberbank dropped by an astounding 20 percent, and that was followed up by another 19 percent decline on Friday.
Spanish authorities responded by banning short sales of Liberbank shares, and that caused a short-term rebound in the stock price.
But we haven’t seen this kind of chaos in European financial markets in a very long time.
Meanwhile, Nick Giambruno is sounding the alarm about a much bigger bubble. At this moment, more than a trillion dollars worth of Italian government bonds have negative yields…
Over $1 trillion worth of Italian bonds actually have negative yields.
It’s a bizarre and perverse situation.
Lending money to the bankrupt Italian government carries huge risks. So the yields on Italian government bonds should be near record highs, not record lows.
Negative yields could not exist in a free market. They’re only possible in the current “Alice in Wonderland” economy created by central bankers.
You see, the European Central Bank (ECB) has been printing money to buy Italian government bonds hand over fist. Since 2008, the ECB and Italian banks have bought over 88% of Italian government debt, according to a recent study.
The moment that the ECB stops wildly buying Italian bonds, the party will be over and the Italian financial system will crash. Unfortunately for Italy, the Germans are pressuring the ECB to quit printing so much money, and the Germans usually get their way in these things.
But if the Germans get their way this time, we could be facing a complete and utter nightmare very quickly. Here is more from Nick Giambruno…
Once the ECB—the only large buyer—steps away, Italian government bonds will crash and rates will soar.
Soon it will be impossible for the Italian government to finance itself.
Italian banks—which are already insolvent—will be decimated. They hold an estimated €235 billion worth of Italian government bonds. So the coming bond crash will pummel their balance sheets.
It’s shaping up to be a lovely train wreck.
And all of this is happening in the context of a global economy that appears to be headed for a major downturn.
For example, the last time that global credit growth showed down this rapidly was during the last financial crisis…
From peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis (-6% of global GDP), even if the dispersion of the decline is much narrower. Currently 55% of the countries in our sample have experienced a -0.3 standard deviation deterioration in their credit impulse (median over 12 months) compared to 77% of countries in Dec ’09 when the median decline was -1.4 stdev.”
Of course the last time global credit growth decelerated this dramatically, global central banks intervened on a scale that was unlike anything that we had ever seen before.
But this time around it is happening at a time when global central banks are very low on ammo…
More importantly, back in 2009, not only China, but the Fed and other central banks unleashed the biggest injection of credit, i.e. liquidity, the world has ever seen resulting in the biggest asset bubble the world has ever seen. And, this time around, the Fed is set to hike for the third time in the past year, even as the ECB and BOJ are forced to soon taper as they run out of eligible bonds to monetize. All this comes at a time when US loan growth is weeks away from turning negative.
As such, what “kickstarts” the next spike in the credit impulse is unclear. What is clear is that if the traditional 3-6 month lag between credit inflection points, i.e. impulse, and economic growth is maintained, the global economy is set for a dramatic collapse some time in the second half.
There are so many experts that are warning about big economic trouble in our immediate future. I would like to say that all of the experts that are freaking out are wrong, but I can’t do that.
I have not seen an atmosphere like this since 2008 and 2009, and everything points to an acceleration of the crisis as we enter the second half of this year.
I keep hearing from people that think that the stock market is going to crash by the end of the year. Hopefully that will not happen, but the ridiculous stock prices that we are seeing right now certainly cannot last forever. On Sunday, I was chatting with a friend that had just been to a financial conference. He was quite surprised that one of the things being taught to the attendees of this conference was how to position themselves to make an enormous amount of money when the stock market crashes dramatically in the near future. Markets tend to go down a lot faster than they go up, and so when the inevitable market crash does take place those that have made large bets against the market will make huge fortunes. It happened in 2008, and it will happen again. But it was unsettling to my friend Robert that there were so many people that were gleefully looking forward to this.
Of course some of the biggest names in the investing world are also anticipating a major downturn very soon. I have previously written about how Warren Buffett’s Berkshire Hathaway Inc. is sitting on a pile of 86 billion dollars in cash right now. Nobody ever knows exactly what Buffett is thinking, but it isn’t too hard to figure out that he plans to use those billions to buy up stocks for a song after a big market crash happens.
I have also previously written about many other big names throughout the financial world that are warning that a new financial crisis is imminent. The last time I saw so many prominent investors sounding the alarm was just before the market crash of 2008, but most people didn’t listen that time around either.
And of course those that believe that a market crash is coming are doing a lot more than just talking about it. According to Zero Hedge, there are now more short positions betting against the Russell 2000 than we have seen at any time in the last six years…
The Russell 2000 Index posted a 2.2% decline in May, its worst month since October, and it appears a large swath of investors is now betting it has further to fall.
As Bloomberg notes, hedge funds and other major speculators have a combined net short position of 73,030 contracts in the small-cap index’s futures, according to the latest data from the Commodity Futures Trading Commission.
Russell 2000 sentiment has sharply declined since January, when future contract positioning reached record bullishness. It’s now the most short since May 2011.
The last time investors were this short the Russell 2000, it fell by almost 30 percent.
Can we expect something similar this time?
We will just have to wait and see.
Meanwhile, there has also been a surge in the number of investors betting that we will soon see increased market volatility…
As Bloomberg notes, with the VIX down more than 30% this year through the end of last week, investors have been using options to bet on volatility.
As the chart above shows, the volume of contracts wagering on a resurgence of market turmoil has reached its highest level since last February relative to those calling for a drop in price movements.
Because markets tend to go down much faster than they go up, most of those that bet on increased volatility are typically doing so because they believe that a stock market crash is coming very soon.
And it is also interesting to note that hedge funds are jumping into gold at a rate that we have not seen since 2007…
Hedge funds are jumping back into gold.
Money managers boosted their long positions in U.S. futures by the most in almost a decade in the week ended May 23, Commodity Futures Trading Commission data show.
Gold is a safe haven asset, and it is a very good place to be during a major financial crisis. So if hedge funds are anticipating that we are on the verge of a major market downturn, it would make sense for them to be piling into gold.
All of the moves that I have discussed above will end up looking quite foolish if stocks just keep going up and up and up.
But if the market crashes, those that have positioned themselves ahead of time will end up making a killing.
Today the stock market bears absolutely no resemblance to economic reality, but at some point that will change. And with each passing day we just continue to get more bad economic news.
Yesterday, I showed that according to official U.S. government figures there are 102 million working age Americans that do not have a job right now. Today, we got more confirmation that the U.S. economy is slowing down. We learned that new vehicle sales fell on a year-over-year basis for the fifth month in a row in May, and we learned that factory orders and new orders for durable goods both declined last month. And for a lot more numbers just like those, please see this article.
The U.S. economy is not “healthy” and it hasn’t been for a very long time. Because we have shipped so many jobs overseas, manufacturing’s share of U.S. employment has fallen to an all-time record low. The middle class is shrinking, and somewhere around two-thirds of the country is living paycheck to paycheck. We have been able to maintain our national standard of living by going on the greatest debt binge of all time, but every additional dollar of debt that we take on makes our long-term outlook even worse.
Just because he is living in the White House does not mean that Donald Trump can automatically turn things around. Without the help of Congress, he cannot cut taxes, repeal Obamacare, eliminate unnecessary federal agencies or implement many of the other items on his economic agenda.
And the truth is that because of the way that our system is structured, the Federal Reserve actually has much, much more power over the economy than Donald Trump does. When the financial markets crash and we officially enter the next recession, most of the blame will be placed on Trump, but it won’t be his fault. Instead, it will be primarily the Federal Reserve’s fault, and we need to educate the American people about this ahead of time.
What goes up must come down, and this irrational stock bubble has been living on borrowed time for quite a while now.
It isn’t going to take much to push things over the edge, and there are all sorts of candidates for what the next “trigger event” will be.
How can a company that is going to generate $2,000,000,000 in negative free cash flow in 2017 be worth 70 billion dollars? Netflix has soared in popularity in recent years, but so have their financial losses. Just like during the original tech bubble, investors are ignoring basic fundamentals and are greatly rewarding firms that are bleeding giant mountains of cash year after year just because they are trendy “tech companies”. But somewhere along the line you actually have to quit losing money if you are going to survive. Just ask tech bubble 1.0 victims Pets.com, Webvan and Etoys.com. The investors that poured enormous amounts of money into those companies ended up losing everything, and similar tragedies will play out as tech bubble 2.0 bursts.
So far in 2017, the S&P 500 is up about 8 percent, but FANG stocks (Facebook, Amazon, Netflix and Google) are up a whopping 30 percent.
But at least Facebook, Amazon and Google are making money.
Netflix is not.
So why in the world has the stock shot up by more than 30 percent so far this year? It just doesn’t make any sense at all. According to CNBC, during the first quarter Netflix had $423 million in negative free cash flow, and for the entire year it is being projected that it will have $2 billion in negative free cash flow…
The California-based company is now dumping cash into original content to maintain its dominance over its growing field of rivals. The company’s had $423 million negative free cash flow during the quarter, wider than the $261 million negative free cash flow a year ago. Netflix expects to have $2 billion in negative free cash flow this year.
The bleeding of cash at Netflix only seems to be accelerating. The number for the first quarter of 2017 was 62 percent worse than the number for the first quarter of 2016, and it was more than twice as bad as the number for the first quarter of 2015.
It is hard to imagine that Netflix will ever be more popular than it is right now.
So if Netflix is not making a profit at this point, when will it ever make a profit?
Similar things could be said about Twitter. This is a company that has never made a yearly profit and that is actually starting to see revenues decline. But somehow the stock just continues to go up. Since the last time I wrote about Twitter, the market cap has shot up another 1.5 billion dollars.
At this point, the market values Twitter at 13 billion dollars, but in the entire history of the company it has actually lost 2 billion dollars.
What we are witnessing is a modern day version of “tulip mania”, and at some point this irrational euphoria will come to a sudden end. In fact, there are already some signs that tech bubble 2.0 may be in a significant amount of trouble. The following is an excerpt from a Bloomberg article entitled “Investors Go All-In on Tech Giants”…
The tech-powered rally has catapulted the sector to a price-to-earnings ratio of 24.4, or 41 percent above the 10-year average. But as Google and Amazon stretch to nearly $1,000 a share, not everyone is comfortable with the valuations. Investors pulled more than $716 million from the most popular technology exchange-traded fund last week — the $17.4 billion Technology Select Sector SPDR Fund, or XLK — its largest weekly outflow in over a year, data compiled by Bloomberg show.
“Most everybody remembers 2000, so they might be getting a little nervous with this development,” said Maley. “I just wonder how many people have said to themselves, ‘If AMZN gets to $1,000, I’m going to take at least some profits.’”
All over the financial world, prominent voices are warning that the enormous financial bubbles that we see all around us are not sustainable and that a major crisis is heading our way. I wrote about some of these voices yesterday, and today we can add Paul Singer to the list…
Given groupthink and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like…), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital.
When the financial markets collapse, Donald Trump will likely get most of the blame.
But Donald Trump did not create the stock market bubble, and he will not be responsible for ending it either.
Since the Federal Reserve was created in 1913, we have seen this same story play out over and over again. There have been 18 distinct recessions or depressions since the Fed was established, and the more the Fed interferes in the marketplace the larger the booms and busts tend to be.
And it could be argued that this time around the Fed has manipulated financial markets more than ever before. Interest rates were pushed as low as possible and trillions of dollars were pumped into the financial system during the Fed’s quantitative easing programs. Of course those actions were going to create a huge bubble, and of course that bubble is going to inevitably burst.
Unfortunately, this is not just a game. Real people with real hopes and real dreams are going to be absolutely devastated. Millions of Americans that were carefully saving for retirement are going to be financially crippled, and pension funds all over the nation are going to be wiped out.
I don’t know why we can’t seem to learn from history. And I am not talking about events that happened decades ago. The build up to this coming crisis is so similar to what we witnessed just before the crashes of 2000 and 2008, but we just keep getting fooled over and over again.
But once things fall apart this time, I think that the American people will finally be fed up. I think that they will be sick and tired of an unelected, unaccountable central bank that creates endless booms and busts, and I think that they will finally be ready to push Congress to shut the Federal Reserve down for good.
If everything is going to be “just fine”, why are so many big names in the financial community warning about an imminent meltdown? I don’t think that I have seen so many simultaneous warnings about a market crash since just before the great financial crisis of 2008. And at this point, you would have to be quite blind not to see that stocks are absurdly overvalued and that a correction is going to happen at some point. And when stocks do start crashing, lots of fingers are going to start pointing at President Trump, but it won’t be his fault. The Federal Reserve and other central banks are primarily responsible for creating this bubble, and they should definitely get the blame for what is about to happen to global financial markets.
My regular readers are quite familiar with my thoughts on where the market is headed, so today let me share some thoughts from five highly respected financial experts…
#1 When Altair Asset Management’s chief investment officer Philip Parker was asked if a market crash was coming to Australia, he said that he has “never been more certain of anything in my life”. In fact, he is so sure that the investments that his hedge fund is managing are going to crash that a decision was made to liquidate the fund “and return ‘hundreds of millions’ of dollars to its clients”…
While hardly a novel claim – in the past many have warned that Australia’s housing and stock market are massive asset bubbles (which local banks have been forced to deny as their fates are closely intertwined with asset prices even as the RBA is increasingly worried) – so far few if any have gone the distance of putting their money where their mouth was. That changed, when Australian asset manager Altair Asset Management made the extraordinary decision to liquidate its Australian shares funds and return “hundreds of millions” of dollars to its clients according to the Sydney Morning Herald, citing an impending property market “calamity” and the “overvalued and dangerous time in this cycle”.
“Giving up management and performance fees and handing back cash from investments managed by us is a seminal decision, however preserving client’s assets is what all fund managers should put before their own interests,” Philip Parker, who serves as Altair’s chairman and chief investment officer, said in a statement on Monday quoted by the SMH.
#2 Seth Klarman leads one of the biggest hedge funds in the United States, and he believes that U.S. investors are greatly underestimating the amount of risk in the market right now…
“When share prices are low, as they were in the fall of 2008 into early 2009, actual risk is usually quite muted while perception of risk is very high,” Klarman wrote. “By contrast, when securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.”
Klarman oversees one of the US’s largest hedge fund firms, with some $30 billion under management. He has a huge following on Wall Street — investors named his book, “Margin of Safety,” their favorite investment book in a recent SumZero survey.
#3 Bill Blain is a strategist at Mint Partners, and he is actually specifically pointing to October 12th as the date when things will start to get “horribly interesting”…
But…. Catch a falling knife, why don’t you… I shall spend the summer wondering just how long the Stock Market games continue. When, not if.
At the moment, my prediction is October 12th. Around that day its going to get horribly interesting..
Why that particular day?
Gut feel and knowing how the Bowl of Petunias felt in Hitchhikers. (“Not again.”)
There are just too many contradictory currents out there. The unsustainability of burgeoning consumer debt, unfeasibly tight credit spreads, the sandcastle foundations of student loans, autos, housing and the CLO market, China, Trump, politics.. worries about what follows Brazil in the EM market, and whatever… The risks of a massive consumer sentiment dump..
#4 David Stockman has also been warning about what may happen this fall. According to Stockman, this current stock market bubble “is the greatest sucker’s rally we have ever seen”…
“The market is insanely valued right now. They were trying to tag, the robo machines and day traders, they were trying to tag 2,400 on the S&P 500. They ended up at 2,399, I think, but the point is that represents about 25 times trailing earnings for 2016. We are at a point in the so-called recovery that has already lasted 96 months. It’s almost the longest one in history. What the market is saying is we have reached the point of full employment forever. There will never be another recession or any kind of economic surprise or upset or dislocation. The market is pricing itself for perfection for all of eternity. This is crazy. . . . I think the market could easily drop to 1,600 or 1,300. It could drop by 40% or even more once the fantasy ends. When the government shows its true colors, that it’s headed for a fiscal bloodbath when this crazy notion that there is going to be some Trump fiscal stimulus is put to rest once and for all. I mean it’s not going to happen. They can’t pass a tax cut that big without a budget resolution that incorporated $10 trillion or $15 trillion in debt over the next decade. It’s just not going to pass Congress. . . . I think this is the greatest sucker’s rally we have ever seen.“
#5 Last but certainly not least, David Kranzler seems quite certain “that the stock market bubble is getting ready to pop”…
Anyone happen to notice that several market commentators have argued that is a bubble but the same stock “experts” look the other way as the U.S. stock market becomes more overvalued by the day vs. the deteriorating underlying fundamentals? Bitcoin going “parabolic” triggers alarm bells but it’s okay if the stock price of Amazon.com Inc (NASDAQ:) is hurtling toward parity with the price of one ounce of . Tesla (NASDAQ:) burns a billion per year in cash. It sold 76,000 cars last year vs. 10 million worldwide for General Motors (NYSE:). Yet Tesla’s market cap is $51.7 billion vs. $48.8 billion for GM.
This insanity is the surest sign that the stock market bubble is getting ready to pop. If you read between the lines of the the comments from certain Wall Street analysts, the only justification for current valuations is “Central Bank liquidity” and “Fed support of asset values.” This is the most dangerous stage of a market top because it draws in retail “mom & pop” investors who can’t stop themselves from missing out on the next “sure thing.” There will be millions of people who are permanently damaged financially when the Fed loses control of this market. Or, as legendary “vulture” investor Asher Edelman stated on CNBC, “I don’t want to be in the market because I don’t know when the plug is going to be pulled.”
Could all of these top experts be wrong?
It’s possible, but I wouldn’t bet on it.
Every stock market bubble of this magnitude in U.S. history has ended in a spectacular crash, and this one will not be any different. We can certainly have some good arguments about the exact timing of the next crash, but what everyone should be able to agree on is that a crash is coming.
You only make money in the stock market if you get out at the right time. Many of those that timed things well have made a tremendous amount of money, but most investors will be entirely caught off guard by the market implosion that is rapidly approaching.
As I have explained to my readers repeatedly, markets tend to go down a whole lot faster than they go up, and in the not too distant future we are going to see trillions of dollars of investor wealth wiped out very, very quickly.
Let’s hope that the coming crisis will not be as bad as 2008, but I have a feeling that it is going to be much worse.
We didn’t learn our lessons the last time around, and so now we are going to pay a very high price for our stubbornness.
A stock market crash is coming, and the Democrats and the mainstream media are going to blame Donald Trump for it even though it won’t be his fault. The truth is that we were headed for a major financial crisis no matter who won the election. The Dow Jones Industrial Average is up a staggering 230 percent since the lows of 2009, and no stock market rally in our history has ever reached the 10 year mark without at least a 20 percent downturn. At this point stocks are about as overvalued as they have ever been, and every other time we have seen a bubble of this magnitude a historic stock market crash has always followed. Those that are hoping that this time will somehow be different are simply being delusional.
Since November 7th, the Dow is up by about 3,000 points. That is an extremely impressive rally, and President Trump has been taking a great deal of credit for it.
But perhaps he should not have been so eager to take credit, because what goes up must come down. The following is an excerpt from a recent Vanity Fair article…
According to Douglas Ramsay, chief investment officer of the Leuthold Group, Trump administration officials will come to regret gloating about the market’s performance. That’s because Trump enters the White House during one of the most richly valued stock markets in U.S. history. The last president to come in at such valuations was George W. Bush, and the dot-com bubble burst soon afterward. Bill Clinton began his second term in a more overvalued stock market in 1997, and exited unscathed. But if his timing were different by just a year, he would have been blamed for the early-aughts market crash.
This stock market bubble was not primarily created by Barack Obama, Donald Trump or any other politician. Rather, the Federal Reserve was primarily responsible for creating it by pushing interest rates all the way to the floor during the Obama era and by flooding the financial system with hot money during several stages of quantitative easing.
But now the economy is slowing down. Economic growth on an annual basis was just 0.7 percent during the first quarter, and yet the Federal Reserve is talking about raising interest rates anyway.
The Federal Reserve also raised interest rates in a slowing economy in the late 1930s, and that had the effect of significantly extending the economic problems during that decade.
As I noted in my article entitled “The Federal Reserve Must Go”, there have been 18 recessions or depressions since the Federal Reserve was created in 1913, and now we stand on the precipice of another one.
After this next crisis, hopefully Congress will finally understand that it is time to shut the Federal Reserve down for good, and I am going to do all that I can to make that happen.
Ron Paul is someone that I look up to greatly, and he also agrees that the blame for the coming crisis should be placed on the Federal Reserve instead of on Trump…
“There are some dire predictions that say in the next year, or 18 months, we have something arriving worse than 2008 and 2009, the downturn is much worse,” Paul said in a recent interview with liberty-minded anti-globalist radio host Alex Jones. “They’ll say, ah, it’s all Trump’s fault. No. It wasn’t. 08 and 09 wasn’t Obama’s fault. It was the fault of the Federal Reserve, it was the fault of the Keynesian economic model, the spending too much, the deficit. So, unfortunately, there’s nothing he can do — Trump can’t do it.”
Paul, a medical doctor who took a keen interest in economics throughout his celebrated career as a constitutionalist in Congress, said Trump could “help” the situation by pursuing good policies. “But you can’t avoid the correction, the correction is locked in place, because the deficits are there, the malinvestment, everybody agrees interest rates have been too low too long,” he said in the late January interview. “The only thing he can do is allow the recession to come, get it over with, liquidate the debt. Politically, nobody wants that, so you’re going to see runaway inflation before you see this country wake up.”
Over the past decade, the U.S. economy has grown at an average rate of just 1.33 percent, and there is no possible way to put a positive spin on that.
And now the economy appears to be entering a fresh slowdown. A couple of months ago, banking giant UBS warned about “a sudden slowdown in new credit”…
There’s been a sudden slowdown in new credit extended to businesses over the last year, one that strategists at UBS are calling “drastic” and “highly uncommon outside of economic downturns.”
And since that time, lending has tightened up even more. The following comes from Zero Hedge…
According to the latest Fed data , the all-important C&I loan growth contraction has not only continued, but over the past two months, another 50% has been chopped off, and what in early March was a 4.0% annual growth is now barely positive, down to just 2.0%, and set to turn negative in just a few weeks. This was the lowest growth rate since May 2011, right around the time the Fed was about to launch QE2.
At the same time, total loan growth has likewise continued to decline, and as of the second week of May was down to 3.8%, the weakest overall loan creation in three years.
This is exactly what we would expect to see if we were entering a new recession. Neil Howe, one of the authors of The Fourth Turning, recently warned that “winter is coming” and I have to admit that I agree with him.
So when the stock market finally crashes, how bad could it be?
Well, one analyst that spoke to CNBC said that other historic market crashes have averaged “about 42 percent”…
“If you look at the market historically, we have had, on average, a crash about every eight to 10 years, and essentially the average loss is about 42 percent,” said Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason.
And as I have explained many times in the past, stocks would have to fall about 40 to 50 percent from current levels just for the stock market to get back to “normal” again. The valuations that we are seeing today are absolutely insane, and there is no possible way that they are sustainable.
When the crash happens, many people will be pointing their fingers at Trump, but it won’t be his fault.
Instead, it will be the Federal Reserve that will be at fault, and hopefully this coming crisis will convince the American people that it is time to end this insidious debt-based central bank for good.
Next month, citizens of Puerto Rico are going to vote on statehood, and the absolutely devastating economic collapse that is gripping the island could be enough to push pro-statehood forces over the edge to victory. Of course Congress has the final say on whether Puerto Rico becomes a state or not, but it is going to be very difficult to deny Puerto Rico’s 3.4 million residents statehood if they strongly insist that they want it. Needless to say, if Puerto Rico becomes the 51st U.S. state that would greatly benefit the Democrats, because the population of Puerto Rico is very liberal.
Puerto Rico does not get to vote in presidential elections, but they do help select the nominees for both parties. In 2016, 58,764 votes were cast in the Democratic caucuses held in Puerto Rico, and only 36,660 votes were cast in the Republican primary. As a state, it is doubtful whether Puerto Rico would send any Republican lawmakers to Washington for decades to come.
So if Puerto Rico becomes a state, the Democrats would add two new senators and probably four or five representatives.
Puerto Rico would be the 30th largest state in the entire country, and so it would instantly have more political power than 21 other U.S. states.
This upcoming vote on June 11th is going to be extremely important, and pro-statehood forces are working very hard to get a positive result. The following info about the referendum in June comes from Wikipedia…
The fifth referendum will be held on June 11, 2017 and will offer two options: “Statehood” and “Independence/Free Association.” It will be the first referendum not to offer the choice of “Commonwealth.” Newly-elected Governor Ricardo Rosselló is strongly in favor of statehood for Puerto Rico to help develop the economy and help to “solve our 500-year-old colonial dilemma … Colonialism is not an option …. It’s a civil rights issue … 3.5 million citizens seeking an absolute democracy,” he told the news media. Benefits of statehood include an additional $10 billion per year in federal funds, the right to vote in presidential elections, higher Social Security and Medicare benefits, and a right for its government agencies and municipalities to file for bankruptcy. The latter is currently prohibited.
At approximately the same time as the referendum, Puerto Rico’s legislators are also expected to vote on a bill that would allow the Governor to draft a state constitution and hold elections to choose senators and representatives to the federal Congress.
Over the past decade, Puerto Rico has been suffering through a nightmarish economic recession that never seems to end. The island was recently forced to declare the equivalent of bankruptcy because it is facing $123 billion in debt and pension obligations. At this moment 46 percent of the residents of Puerto Rico are living below the poverty line, the unemployment rate is 11 percent, and authorities just announced that another 179 public schools will be closing down.
It has been argued that the Obama administration could have done much more to alleviate the economic problems in Puerto Rico but that it purposely chose not to do so.
Well, the worse economic conditions get in Puerto Rico, the better it is for pro-statehood forces. Puerto Ricans are being told that becoming a state is the key to Puerto Rico’s long-term economic future, and at this point many are willing to do just about anything to get the economic suffering to end. The following is a short excerpt from a New York Times article entitled “Amid Puerto Rico’s Fiscal Ruins, a New Push for Statehood“…
A vigorous push for statehood was a central campaign promise of Gov. Ricardo Rosselló, 38, who was inaugurated in January. Next month, he will ask residents to vote, in a nonbinding referendum, for statehood as part of a long-term fix for a commonwealth facing a period of severe austerity that is likely to include shuttered public schools, frozen salaries, slashed pensions and crimped investments in public health. The island remains in the grip of a recession that has lingered for much of the past decade.
Could it be possible that this is what liberals have wanted all along?
Could it be possible that Obama and his minions saw Puerto Rico as a chess piece that could be used to permanently shift the balance of power in Congress?
Of course if Puerto Rico becomes a state that would have implications for presidential elections as well.
In the end, it will be Congress that decides what the fate of Puerto Rico will be, but if the people of Puerto Rico truly want to become the 51st U.S. state it is going to be really hard to deny them that opportunity indefinitely.
Last year at their national conventions, the Democrats and the Republicans both took the position that the citizens of Puerto Rico should be able to make this decision for themselves. But once faced with a final decision, it is inevitable that many Republican members of Congress would be opposed to statehood.
Personally, I believe that either independence or “free association” would be much better for Puerto Rico, and let us hope that the people of Puerto Rico choose that direction.
But when people are really hurting, they will often grasp any sort of olive branch that is being offered to them, and right now the progressives are really pushing statehood.
Of course for strategists on the left, the goal is not to help the suffering people of Puerto Rico.
Rather, the endgame is complete domination of the U.S. political system by any means necessary.
The recklessness of the “too big to fail” banks almost doomed them the last time around, but apparently they still haven’t learned from their past mistakes. Today, the top 25 U.S. banks have 222 trillion dollars of exposure to derivatives. In other words, the exposure that these banks have to derivatives contracts is approximately equivalent to the gross domestic product of the United States times twelve. As long as stock prices continue to rise and the U.S. economy stays fairly stable, these extremely risky financial weapons of mass destruction will probably not take down our entire financial system. But someday another major crisis will inevitably happen, and when that day arrives the devastation that these financial instruments will cause will be absolutely unprecedented.
During the great financial crisis of 2008, derivatives played a starring role, and U.S. taxpayers were forced to step in and bail out companies such as AIG that were on the verge of collapse because the risks that they took were just too great.
But now it is happening again, and nobody is really talking very much about it. In a desperate search for higher profits, all of the “too big to fail” banks are gambling like crazy, and at some point a lot of these bets are going to go really bad. The following numbers regarding exposure to derivatives contracts come directly from the OCC’s most recent quarterly report (see Table 2), and as you can see the level of recklessness that we are currently witnessing is more than just a little bit alarming…
Total Assets: $1,792,077,000,000 (slightly less than 1.8 trillion dollars)
Total Exposure To Derivatives: $47,092,584,000,000 (more than 47 trillion dollars)
Total Assets: $2,490,972,000,000 (just under 2.5 trillion dollars)
Total Exposure To Derivatives: $46,992,293,000,000 (nearly 47 trillion dollars)
Total Assets: $860,185,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $41,227,878,000,000 (more than 41 trillion dollars)
Bank Of America
Total Assets: $2,189,266,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $33,132,582,000,000 (more than 33 trillion dollars)
Total Assets: $814,949,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $28,569,553,000,000 (more than 28 trillion dollars)
Total Assets: $1,930,115,000,000 (more than 1.9 trillion dollars)
Total Exposure To Derivatives: $7,098,952,000,000 (more than 7 trillion dollars)
Collectively, the top 25 banks have a total of 222 trillion dollars of exposure to derivatives.
If you are new to all of this, you might be wondering what a “derivative” actually is.
When you buy a stock you are purchasing an ownership interest in a company, and when you buy a bond you are purchasing the debt of a company. But when you buy a derivative, you are not actually getting anything tangible. Instead, you are simply making a side bet about whether something will or will not happen in the future. These side bets can be extraordinarily complex, but at their core they are basically just wagers. The following is a pretty good definition of derivatives that comes from Investopedia…
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Those that trade derivatives are essentially engaged in a form of legalized gambling, and some of the brightest names in the financial world have been warning about the potentially destructive nature of these financial instruments for a very long time.
In a letter that he wrote to shareholders of Berkshire Hathaway in 2003, Warren Buffett actually referred to derivatives as “financial weapons of mass destruction”…
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Warren Buffett was right on the money when he made that statement, and of course the derivatives bubble is far larger today than it was back then.
In fact, the total notional value of derivatives contracts globally is in excess of 500 trillion dollars.
This is a disaster that is just waiting to happen, and investors such as Buffett are quietly positioning themselves to take advantage of the giant crash that is inevitably coming.
According to financial expert Jim Rickards, Buffett’s Berkshire Hathaway Inc. is hoarding 86 billion dollars in cash because he is likely anticipating a major stock market downturn…
Far from a bullish sign, Buffett’s cash hoard could mean he’s preparing for a market crash. When the crash comes, Buffett can walk through the wreckage with his checkbook open and buy great companies for a fraction of their current value.
That’s the real Buffett style, but you won’t hear that from your broker or wealth manager. If Buffett has a huge cash allocation, shouldn’t you?
He knows what’s coming. Now you do too.
Warren Buffett didn’t become one of the wealthiest men in the entire world by being stupid. He knows that stocks are ridiculously overvalued at this point, and he is poised to make his move after the pendulum swings in the other direction.
And he might not have too long to wait. In recent weeks I have been writing about many of the signs that the U.S. economy is slowing down substantially, and today we received even more bad news…
Despite high levels of economic confidence expressed by business owners and consumers, one key indicator shows that it has not translated into much action yet.
Loan issuance declined in the first quarter from the previous three-month period, the first time that has happened in four years, according to an SNL Financial analysis of bank earnings reports filed for the period. The total of recorded loans and leases fell to $9.297 trillion from $9.305 trillion in the fourth quarter of 2016.
This is precisely what we would expect to see if a new economic downturn was beginning. Our economy is very highly dependent on the flow of credit, and when that flow begins to diminish that is a very bad sign.
For the moment, financial markets continue to remain completely disconnected from the hard economic data, but as we saw in 2008 the markets can plunge very rapidly once they start catching up with the real economy.
Warren Buffett is clearly getting prepared for the crisis that is ahead.
If you want to permanently fix America’s economy, there really is no other choice. Even before Ron Paul’s rallying cry of “End The Fed” shook America during the peak of the Tea Party movement, I was a huge advocate of shutting down the Federal Reserve. Because no matter how hard we try to patch it up otherwise, the truth is that our debt-based financial system has been fundamentally flawed from the very beginning, and the Federal Reserve is the very heart of that system. The following is a free preview of an upcoming book that I am working on about how to turn this country is a more positive direction…
As the publisher of The Economic Collapse Blog, there have been times when I have been criticized for focusing too much on our economic problems and not enough on the solutions. But I believe that in order to be willing to accept the solutions that are necessary, people need to have a full understanding of the true severity of our problems. It isn’t by accident that we ended up 20 trillion dollars in debt. In 1913, a bill was rushed through Congress right before Christmas that was based on a plan that had been secretly developed by very powerful Wall Street bankers. G. Edward Griffin did an amazing job of documenting the development of this plan in his groundbreaking book “The Creature from Jekyll Island: A Second Look at the Federal Reserve”. At that time, most Americans had no idea what a central bank does or what one would mean for the U.S. economy. Sadly, even though more than a century has passed since that time, most Americans still do not understand the Federal Reserve.
The Federal Reserve was designed to create debt, and of course the Wall Street bankers were very excited about such a system because it would make them even wealthier. Since the Fed was created in 1913, the U.S. national debt has gotten more than 5000 times larger and the value of the U.S. dollar has declined by about 98 percent. So the Federal Reserve is doing what it was originally designed to do. In fact, it has probably worked better than the original designers ever dreamed possible.
There is often a lot of confusion about the Federal Reserve, because a lot of people think that it is simply an agency of the federal government. But of course that is not true at all. In fact, as Ron Paul likes to say, the Federal Reserve is about as “federal” as Federal Express is.
The Fed is an independent central bank that has even argued in court that it is not an agency of the federal government. Yes, the president appoints the leadership of the Fed, but the Fed and other central banks around the world have always fiercely guarded their “independence”. On the official Fed website, it is admitted that the 12 regional Federal Reserve banks are organized “much like private corporations”, and they very much operate like private entities. They even issue shares of stock to the private banks that own them.
In case you were wondering, the federal government has zero shares.
The American people are constantly being told that Fed decisions must be “above politics” because they are “too important” to be politicized. So even though everything else in our society is up for political debate, somehow we have become convinced that the Federal Reserve should be off limits.
Today, the Federal Reserve has more power over the performance of the U.S. economy than anyone else does, and that includes the president. The Fed has become known as “the fourth branch of government”, and a single statement from the chairman of the Fed can send global financial markets soaring or tumbling.
So even though presidents tend to get most of the credit or most of the blame for how the U.S. economy is doing, the truth is that the Fed is actually the one pulling most of the strings. In conjunction with Congress, presidents can monkey around with regulations and tax rates, but at the end of the day their influence over the economy pales in comparison to what the Fed is able to do.
For those that have never encountered this material before, this can be difficult to grasp at first, so let’s start with something very simple.
Go to your wallet or purse and pull out a dollar bill.
At the very top, you will notice that it says “Federal Reserve Note” in big, bold letters.
If you ask 99 percent of the people in the United States where money comes from, they will not be able to tell you. Our money is actually created and issued by the Federal Reserve, but that is not what our founders intended. According to Article I, Section 8 of the U.S. Constitution, Congress was expressly given the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.
So why is the Federal Reserve doing it?
Many Americans are still operating under the assumption that the federal government has a “printing press” and that if we ever get into too much debt trouble the government could simply create and spend lots more money into circulation.
But that is not the way that our system currently operates.
Instead, it is the Federal Reserve that creates all new money. Once that new money is created, the federal government then borrows it and spends it into circulation.
Previously, I have written about how this works…
When the U.S. government decides that it wants to spend another billion dollars that it does not have, it does not print up a billion dollars.
Rather, the U.S. government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve.
The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. Treasury bonds.
This doesn’t seem to make any sense at all.
Why does the U.S. government have to borrow money that the Federal Reserve creates? Why can’t they just create the money themselves?
This is the big secret that nobody is supposed to know about.
Theoretically, the federal government doesn’t have to borrow a penny. Instead of borrowing money the Federal Reserve creates, it could just create money directly and spend it into circulation.
But then we wouldn’t be 20 trillion dollars in debt.
Once the Federal Reserve has received U.S. Treasury bonds in exchange for the “Federal Reserve Notes” that the federal government has requested, the Fed auctions off those bonds to the highest bidder. But as I have noted so many times before, this process always creates more debt than it does money…
The U.S. Treasury bonds that the Federal Reserve receives in exchange for the money it has created out of nothing are auctioned off through the Federal Reserve system.
There is a problem.
Because the U.S. government must pay interest on the Treasury bonds, the amount of debt that has been created by this transaction is greater than the amount of money that has been created.
So where will the U.S. government get the money to pay that debt?
Well, the theory is that we can get money to circulate through the economy really, really fast and tax it at a high enough rate that the government will be able to collect enough taxes to pay the debt.
But that never actually happens, does it?
And the creators of the Federal Reserve understood this as well. They understood that the U.S. government would not have enough money to both run the government and service the national debt. They knew that the U.S. government would have to keep borrowing even more money in an attempt to keep up with the game.
Beginning in 1913, this process has created an endless debt spiral that has resulted in the U.S. being 20 trillion dollars in debt. It is the biggest mountain of debt in the history of the world, and it didn’t have to happen.
In fact, if we had been using debt-free money all this time we could theoretically be completely out of debt.
A lot of conservatives out there are still under the illusion that if we could just grow the economy fast enough that we could possibly pay back all of this debt someday, but as I have demonstrated in a previous article, this is mathematically impossible. (http://theeconomiccollapseblog.com/archives/it-is-mathematically-impossible-to-pay-off-all-of-our-debt)
All of this debt threatens to destroy the bright future that our children and our grandchildren were supposed to have. It is absolutely immoral to pass such a large debt on to future generations, but we are doing it anyway.
Of course the United States is far from alone in this regard. Today, more than 99.9% of the population of the world lives in a country that has a central bank.
There is literally nothing else that the entire planet agrees upon almost unanimously, and yet somehow virtually the whole globe has chosen to adopt debt-based central banking.
Do you think that this is just a coincidence?
A handful of extremely small nations such as the Federated States of Micronesia still do not have a central bank, but the only large country not to have one is North Korea.
I don’t understand why more people are not talking about this. If we really want to reform how things are done economically, it should start with central banking.
The truth is that we do not need a central bank.
Let me say that again.
We do not need a central bank.
The greatest period of economic growth in all of U.S. history was when there was no income tax and no central bank. (http://theeconomiccollapseblog.com/archives/during-the-best-period-of-economic-growth-in-u-s-history-there-was-no-income-tax-and-no-federal-reserve)
Such a system would be unimaginable to many people today, but it is entirely possible.
Instead of a central bank creating debt-based currency for us, the federal government could create debt-free money directly.
And instead of socialist central planners setting our interest rates for us, we could allow the free market to set our interest rates.
We are supposed to be a free market nation with a free market economy, and so we don’t need Fed bureaucrats to run it for us.
The free market will always do a better job in the long run then bureaucrats will. As I noted earlier, the greatest period of economic growth in U.S. history was right before the Federal Reserve was created in 1913, but since that time there have been 18 distinct recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.
Now we stand poised on the brink of another major downturn, and people still aren’t getting it.
As long as the Federal Reserve exists, there will be “booms” and “busts” like this.
It is time for a change.
During the good times, criticism of the Fed tends to subside. And without a doubt, the bubble following the end of the last recession lasted much longer than a lot of people initially would have thought, but all Fed-created bubbles eventually end.
We desperately need to get free from this system, and a huge step in that direction would be a rejection of debt-based currency.
If you don’t think that this can happen, you should consider what happened in 1963. President John F. Kennedy signed Executive Order 11110 which authorized the U.S. Treasury to issue debt-free “United States Notes” which were directly created by the federal government.
Unfortunately, he was assassinated shortly after that executive order was signed.
You can still find debt-free “United States Notes” in circulation today, and they are often for sale on auction sites such as eBay because people like to collect them.
At any time, the White House could do something similar today.
All it takes is the willingness to do so.
The borrower is the servant of the lender, and the debt-based Federal Reserve system has turned all of us into debt slaves.
If we do not want future generations of Americans to be enslaved to debt, we need to shut down the Federal Reserve and start using debt-free currency. Any essential functions that the Fed is currently performing can ultimately be taken over by the U.S. Treasury, and of course we can make the transition gradual so that we don’t completely panic global financial markets.
The global elite are using central banking and debt-based currencies to dominate the planet. Today, the total amount of debt in the world has shot past 150 trillion dollars, and it will only continue to grow until humanity wakes up and realizes the insanity of using a debt-based financial system.
Here in the United States, we need people in government that understand these things and that are willing to do something about it.
The Federal Reserve must go, and I will never make any apologies for saying that.