As stocks continue to crash, you can blame the Federal Reserve, because the Fed is more responsible for creating the current financial bubble that we are living in than anyone else. When the Federal Reserve pushed interest rates all the way to the floor and injected lots of hot money into the financial markets during their quantitative easing programs, this pushed stock prices to wildly artificial levels. The only way that it would have been possible to keep stock prices at those wildly artificial levels would have been to keep interest rates ultra-low and to keep recklessly creating lots of new money. But now the Federal Reserve has ended quantitative easing and has embarked on a program of very slowly raising interest rates. This is going to have very severe consequences for the markets, but Janet Yellen doesn’t seem to care.
There is a reason why the financial world hangs on every single word that is issued by the Fed. That is because the massively inflated stock prices that we see today were a creation of the Fed and are completely dependent on the Fed for their continued existence.
Right now, stock prices are still 30 to 40 percent above what the economic fundamentals say that they should be based on historical averages. And if we are now plunging into a very deep recession as I contend, stock prices should probably fall by a total of more than 50 percent from where they are now.
The only way that stock prices could have ever gotten this disconnected from economic reality is with the help of the Federal Reserve. And since the U.S. dollar is the primary reserve currency of the entire planet, the actions of the Fed over the past few years have created stock market bubbles all over the globe.
But the only way to keep the party going is to keep the hot money flowing. Unfortunately for investors, Janet Yellen and her friends at the Fed have chosen to go the other direction. Not only has quantitative easing ended, but the Fed has also decided to slowly raise interest rates. The Fed left rates unchanged on Wednesday, but we were told that we are probably still on schedule for another rate hike in March.
So how did the markets respond to the Fed?
Well, after attempting to go green for much of the day, the Dow started plunging very rapidly and ended up down 222 points.
The markets understand the reality of what they are now facing. They know that stock prices are artificially high and that if the Fed keeps tightening that it is inevitable that they will fall back to earth.
In a true free market system, stock prices would be far, far lower than they are right now. Everyone knows this – including Jim Cramer. Just check out what he told CNBC viewers earlier today…
Jim Cramer was tempted to resurface his “they know nothing” rant after hearing the Fed speak on Wednesday. He was hoping that a few boxes on his market bottom checklist might be checked off, but it seems that the bear market has not yet run its course.
“The Fed’s wishy-washy statement on interest rates today left stocks sinking back into oblivion after a nice rally yesterday,” the “Mad Money” host said.
Without artificial help from the Fed, stocks will most definitely continue to sink into oblivion.
That is because these current stock prices are not based on anything real.
And so as this new financial crisis continues to unfold, the magnitude of the crash is going to be much worse than it otherwise would have been.
It has often been said that the higher you go the farther you have to fall. Because the Federal Reserve has pumped up stock prices to ridiculously high levels, that just means that the pain on the way down is going to be that much worse.
It is also important to remember that stocks tend to fall much more rapidly than they rise. And when we see a giant crash in the financial markets, that creates a tremendous amount of fear and panic. The last time there was great fear and panic for an extended period of time was during the crisis of 2008 and 2009, and this created a tremendous credit crunch.
During a credit crunch, financial institutions because very hesitant to lend to one another or to anyone else. And since our economy is extremely dependent on the flow of credit, economic activity slows down dramatically.
As this current financial crisis escalates, you are going to notice certain things begin to happen. If you own a business or you work at a business, you may start to notice that fewer people are coming in, and those people that do come in are going have less money to spend.
As economic activity slows, employers will be forced to lay off workers, and many businesses will shut down completely. And since 63 percent of all Americans are living paycheck to paycheck, many will suddenly find themselves unable to meet their monthly expenses. Foreclosures will skyrocket, and large numbers of people will go from living a comfortable middle class lifestyle to being essentially out on the street very, very rapidly.
At this point, many experts believe that the economic outlook for the coming months is quite grim. For example, just consider what Marc Faber is saying…
It won’t come as a surprise to market watchers that “Dr. Doom” Marc Faber isn’t getting any more cheerful.
But the noted bear at least found a sense of humor on Wednesday into which he could channel his bleakness.
The publisher of the “Gloom, Boom & Doom Report” told attendees at the annual “Inside ETFs” conference that the medium-term economic outlook has become “so depressing” that he may as well fill a newly installed pool with beer instead of water.
If the Federal Reserve had left interest rates at more reasonable levels and had never done any quantitative easing, we would have been forced to address our fundamental economic problems more honestly and stock prices would be far, far lower today.
But now that the Fed has created this giant artificial financial bubble, the coming crash is going to be much worse than it otherwise would have been. And the tremendous amount of panic that this crash will cause will paralyze much of the economy and will ultimately lead to a far deeper economic downturn than we witnessed last time around.
Once the Fed started wildly injecting money into the system, they had no other choice but to keep on doing it.
By removing the artificial support that they had been giving to the financial markets, they are making a huge mistake, and they are setting the stage for an economic tragedy that will affect the lives of every man, woman and child in America.
Was last week a preview of things to come? There are quite a few people out there that believe that the stock market would begin to decline in July, and that appears to be precisely what is happening. Last week, the Dow Jones Industrial Average fell by more than 530 points. It was the biggest one week decline that we have seen so far in 2015, and some are suggesting that this could only be just the beginning. By just about any measurement that you might want to use, the stock market is overvalued. But we have been in this bubble for so long that many people have come to believe that this is “the new normal”. In fact, earlier today someone that I know dropped me a line and suggested that our financial overlords may be able to use the tools at their disposal to get this current bubble to persist indefinitely. Unfortunately, the truth is that no financial bubble ever lasts forever, and right now some very alarming things are starting to happen behind the scenes. Over the past couple of weeks, the smart money has been dumping stocks like crazy, and the lack of liquidity in the bond markets is beginning to become acute. Could it be possible that another great financial crisis is just around the corner?
Last week took a lot of investors by surprise. The following is how Zero Hedge summarized the carnage…
-Russell 2000 -3.1% – worst week since Oct 2014 (Bullard)
-Dow -2.8% – worst week since Dec 2014
-S&P -2.1% – worst week since Jan 2015
-Trannies -2.8% – worst week since Mar 2015
-Nasdaq -2.2% – worst week since Mar 2015
The talking heads on television were not quite sure what to make of this sudden downturn. On CNBC, analysts mainly blamed the usual suspects…
“I think the market’s very much concerned about the commodity (decline),” said John Lonski, chief economist at Moody’s. “The contraction in China manufacturing activity is gaining momentum and the credit market has yet to signal that rates are not about to go higher.”
He also noted a surprising decline in new home sales and continued lack of revenue growth in earnings. Nearly all the commodities are in a bear market and gold and crude settled at lows Friday.
“You’ve got some major growth concerns and that is what’s weighing on investors minds,” said Peter Boockvar, chief market strategist at The Lindsey Group.
And without a doubt, there are some new numbers that are deeply troubling for Wall Street. For example, it is being projected that S&P 500 companies will collectively report a 2.2 percent decline in earnings for the second quarter of 2015. If this comes to pass, it will be the first drop that we have seen since the third quarter of 2012.
The biggest reason for this decline in earnings is the implosion of U.S. energy companies due to the crash in oil prices. The following comes from CNBC…
Thanks to a collapse in the price of oil, the energy sector is slated to report a monster 54 percent drop in earnings and 28 percent swoon in revenue, compared to the second quarter in the year prior.
Hmm – unlike what so many others were saying initially, it turns out that the oil crash is bad for the U.S. economy after all.
But just like at this time of the year in 2008, most people fully expect that everything is going to be just fine. So many of the exact same patterns that we witnessed the last time around are playing out once again, and yet most of the “experts” refuse to see what is happening right in front of their eyes.
When things crash this time, it won’t just be stocks that collapse. As I have been writing about so frequently, we are also headed for an implosion of the bond markets as well. The following comes from Dr. David Eifrig…
In the U.S. Treasury securities market, financial-services giant JPMorgan Chase estimates that five years ago, you could move about $280 million worth of Treasury securities before your trades moved the market’s price. Now, that’s down to $80 million… a decline of more than 70%.
When a panic sets in, reduced liquidity can cause big swings in market prices.
There is that word “liquidity” again. This is something that I have repeatedly been taking about. Just check out this article from a little over a month ago. A bond is only worth what someone else is willing to pay for it, and if the market runs out of buyers that can cause seismic shifts in price very rapidly. Here is more from Eifrig…
In a run-of-the-mill bear market, you just have a downward trend… When enough investors are selling bonds, it drives down prices. Falling prices lead more investors to start selling. We see that all the time.
A liquidity crisis goes even further. It’s like a classic run on a bank… Without sufficient liquidity, the sellers don’t just see lower prices… they see no prices. Since no one wants to buy bonds at this particular time, the price for them effectively becomes zero.
There has been a lot of speculation about what will happen in the second half of 2015.
We only have a little over five months to go in the year, so it won’t be too long before we see who was right and who was wrong.
Our perceptions of the future are very much shaped by our worldviews. All the time, I get “Obamabots” that come to my website and leave comments on my articles telling me how Barack Obama has “turned the economy around” and has set the stage for a new era of prosperity in America.
Despite all the evidence to the contrary, they choose to believe that things are in great shape because that is what they want to believe. Just check out the results from one recent survey…
While 55 percent of Democrats reported feeling positive about the economy, for example, just 25 percent of Republicans felt the same from March 25 to May 27.
When asked if they thought the economy would improve over the next 12 months, 53 percent of Democrats said yes. Only 23 percent of the Republicans in the survey agreed.
The same perception gap extends to the far future, with 41 percent of Democrats believing that the next generation will be better off than their parents, and just 24 percent of Republicans saying the same.
To me, those numbers are quite striking.
Many Democrats very much want to believe that things are getting better because Barack Obama is in the White House.
Many Republicans very much want to believe that things are totally falling apart because Barack Obama is in the White House.
So who is right and who is wrong?
Please feel free to share what you think by posting a comment below…
Are stocks overvalued? By just about any measure that you could possibly name, stocks are at historically high prices right now. From a technical standpoint, the stock market is more overvalued today than it was just prior to the last financial crisis. The only two moments in U.S. history that even compare to our current state of affairs are the run up to the stock market crash of 1929 and the peak of the hysteria just before the dotcom bubble burst. It is so obvious that stocks are in a bubble that even Janet Yellen has talked about it, but of course she will never admit that the Federal Reserve has played a key role in creating this bubble. They say that hindsight is 20/20, but what is happening right in front of our eyes in 2015 is so obvious that everyone should be able to see it. Just like with all other financial bubbles throughout our history, someday people will look back and talk about how stupid we all were.
Why can’t we ever learn from history? We just keep on making the same mistakes over and over again. And without a doubt, some of the smartest members of our society are trying to warn us about what is coming. For example, Yale economics professor Robert Shiller has repeatedly tried to warn us that stocks are overvalued…
I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.
But the CAPE ratio is not the only metric I watch. In my book Irrational Exuberance (3rd Ed., Princeton 2015) I discuss several metrics that help judge what’s going on in the market. These include my stock market confidence indices. One of the indicators in that series is based on a single question that I have asked individual and institutional investors over the years along the lines of, “Do you think the stock market is overvalued, undervalued, or about right?” Lately, what I call “valuation confidence” captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000.
Other analysts prefer to use different valuation indicators than Shiller does. But no matter which indicators you use, they all show that stocks are tremendously overvalued in mid-2015. For instance, just consider the following chart. It comes from Doug Short, and it shows the average of four of his favorite valuation indicators. As you can see, there is only one other time in all of our history when stocks have been more overvalued than they are today according to the average of these four indicators…
Another danger sign that many analysts are pointing to is the dramatic rise in margin debt that we have seen in recent years. Investors are borrowing tremendous amounts of money to fund purchases of stock. This is something that we witnessed during the dotcom bubble, it was something that we witnessed just prior to the financial collapse of 2008, and now it is happening again. In fact, margin debt just surged to a brand new all-time record high. Once again, the following chart comes from Doug Short…
All of this margin debt has helped drive stocks to ridiculous highs, but it can also serve to drive stock prices down very rapidly when the market turns. This was noted by Henry Blodget of Business Insider in a recent editorial…
What is “margin debt”?
It’s the amount of money stock investors have collectively borrowed via traditional margin accounts to fund stock purchases.
In a bull market, the growth of margin debt serves as a turbocharger that helps drive stock prices higher.
As with a home mortgage, the more investors borrow, the more house or stock they can buy. So as margin debt grows, collective buying power grows. The borrowed money gets used to fund new stock purchases, which helps drives the prices of those stocks higher. The higher prices, in turn, allow traders to borrow more money to fund additional purchases. And so on.
It’s a self-reinforcing cycle.
The trouble is that it’s a self-reinforcing cycle on the way down, too.
If the overall U.S. economy was absolutely booming, these ultra-high stock prices would not be as much of a concern. But the truth is that the financial markets have become completely divorced from economic reality. Right now, corporate profits are actually falling and our exports are way down. U.S. GDP shrunk during the first quarter, and there are a whole host of economic trouble signs on the horizon. I am calling this a “recession within a recession“, and I believe that we are heading into another major economic downturn.
Unfortunately, our “leaders” are absolutely clueless about what is coming. They assure us that everything is going to be just fine – just like they did back in 2008 before everything fell apart. But the truth is that things are already so bad that even the big banks are sounding the alarm. For instance, just consider the following words from Deutsche Bank…
At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood.
Ultimately, most people believe what they want to believe.
Our politicians want to believe that the economy is going to get better, and so do the bureaucrats over at the Federal Reserve. The mainstream media wants to put a happy face on things, and they want all of us to continue to have faith in the system.
Unfortunately for them, the system is failing. I truly do hope that this bubble can last for a few more months, but I don’t see it going on for much longer than that.
The greatest financial crisis in U.S. history is fast approaching, and it is going to be extraordinarily painful.
When it arrives, it is not just going to destroy faith in the system. In the end, it is going to destroy the system altogether.
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.
The higher financial markets rise, the harder they fall. By any objective measurement, the stock market is currently well into bubble territory. Anyone should be able to see this – all you have to do is look at the charts. Sadly, most of us never seem to learn from history. Most of us want to believe that somehow “things are different this time”. Well, about the only thing that is different this time is that our economy is in far worse shape than it was just prior to the last major financial crisis. That means that we are more vulnerable and will almost certainly endure even more damage this time around. It would be one thing if stocks were soaring because the U.S. economy as a whole was doing extremely well. But we all know that isn’t true. Instead, what we have been experiencing is clearly artificial market behavior that has nothing to do with economic reality. In other words, we are dealing with an irrational financial bubble, and all irrational financial bubbles eventually burst. And as I wrote about yesterday, the way that stocks have moved so far this year is eerily reminiscent of the way that stocks moved in early 2008. The warning signs are there – if you are willing to look at them.
The first chart that I want to share with you today comes from Doug Short. It is a chart that shows that the ratio of corporate equities (stocks) to GDP is the second highest that it has been since 1950. The only other time it has been higher was just before the dotcom bubble burst…
Does that look like a bubble to you?
It sure looks like a bubble to me.
In order for the corporate equities to GDP ratio to get back to the mean (average) level, stock prices would have to fall nearly 50 percent.
If that happens, people will be calling it a crash, but in truth it would just be a return to normalcy.
This next chart comes from Phoenix Capital Research. The CAPE ratio (cyclically adjusted price-to-earnings ratio) is considered to be an extremely accurate measure of the true value of stocks…
As I’ve noted before, the single best predictor of stock market performance is the cyclically adjusted price-to-earnings ratio or CAPE ratio.
Corporate earnings are heavily influenced by the business cycle. Typically the US experiences a boom and bust once every ten years or so. As such, companies will naturally have higher P/E’s at some points and lower P/E’s at other. This is based solely on the business cycle and nothing else.
CAPE adjusts for this by measuring the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation. By doing this, it presents you with a clearer, more objective picture of a company’s ability to produce cash in any economic environment.
Based on a study completed Vanguard, CAPE was the single best metric for measuring future stock returns.
When the CAPE ratio is too high, that means that stocks are overpriced and are not a good value. And right now the CAPE ratio is the 3rd highest that it has been since 1890. That only times it has been higher than this were in 1929 (we all remember what happened then) and just before the dotcom bubble burst…
The funny thing is that stocks have continued to rise even as corporate revenues have begun to fall.
According to Wolf Richter, in the first quarter of 2015 corporate revenues are projected to decline at the fastest pace that we have seen since the depths of the last recession…
Week after week, corporations and analysts have been whittling down their estimates. By now, revenues of the S&P 500 companies are expected to decline 2.8% in Q1 from a year ago – the worst year-over-year decline since Q3 of crisis year 2009.
This next chart I want to share with you shows how the Nasdaq has performed over the past decade. Looking at this chart alone, you would think that the U.S. economy must have been absolutely roaring since the end of the last recession. But what is really going on is rampant speculation. Some of the tech companies that make up the Nasdaq are not making any profits at all and yet they are supposedly worth billions of dollars. If you cannot see a bubble in this chart, you need to get your vision checked…
And this kind of irrational euphoria is not just happening in the United States.
For example, Chinese stocks are up nearly 80 percent over the past nine months.
Meanwhile, the overall Chinese economy is growing at the slowest pace that we have seen in about 20 years.
Right now, we are in the calm before the storm. We are right at the door of the next great financial crisis, and most of the people that work in the industry know this.
And once in a while they let the cat out of the bag.
For example, consider what Hans-Jörg Vetter, the CEO of Landesbank Baden-Württemberg in Germany, had to say during one recent press conference…
“Risk is no longer priced in,” he said. And these investors aren’t paid for the risks they’re taking. This applies to all asset classes, he said. The stock and the bond markets, he said, are now both seeing “the mother of all bubbles.”
This can’t go on forever. Or for very long. But he couldn’t see the future either and pin down a date, which is what everyone wants to know so that they can all get out in time. “I cannot tell you when it will rumble,” he said, “but eventually it will rumble again.”
By “again” he meant the sort of thing that had taken the bank down last time, the Financial Crisis. It had been triggered by horrendous risk-taking, where risks hadn’t been priced into all kinds of securities. When those securities – mortgage-backed securities, for example, that were hiding the inherent risks under a triple-A rating – blew up, banks toppled.
What Vetter is telling us is what I have been warning about for a long time.
Another great stock market crash is coming.
It is just a matter of time.
None of the problems that caused the last financial crisis have been fixed. In fact, they have all gotten worse. The total amount of debt in the world has grown by more than 40 percent since 2007, the too big to fail banks have gotten 37 percent larger, and the colossal derivatives bubble has spiraled so far out of control that the only thing left to do is to watch the spectacular crash landing that is inevitably coming. Unfortunately, most people do not know the information that I am about to share with you in this article. Most people just assume that the politicians and the central banks have fixed the issues that caused the last great financial crisis. But the truth is that we are in far worse shape than we were back then. When this financial bubble finally bursts, the devastation that we will witness is likely to be absolutely catastrophic.
Too Much Debt
One of the biggest financial problems that the world is facing is that there is simply way too much debt. Never before in world history has there ever been a debt binge anything like this.
You would have thought that we would have learned our lesson from 2008 and would have started to reduce debt levels.
Instead, we pushed the accelerator to the floor.
It is hard to believe that this could possibly be true, but according to the Bank for International Settlements the total amount of debt in the world has increased by more than 40 percent since 2007…
The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates, according to the Bank for International Settlements.
The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion in the same period, according to data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S.’s gross domestic product.
That is a recipe for utter disaster, and yet we can’t seem to help ourselves.
And of course the U.S. government is the largest offender.
Back in September 2008, the U.S. national debt was sitting at a total of 10.02 trillion dollars.
As I write this, it is now sitting at a total of 17.49 trillion dollars.
Is there anyone out there that can possibly conceive of a way that this ends other than badly?
Too Big To Fail Is Now Bigger Than Ever
During the last great financial crisis we were also told that one of our biggest problems was the fact that we had banks that were “too big to fail”.
Well, guess what?
Those banks are now much larger than they were back then. In fact, the six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger since the last financial crisis.
Meanwhile, 1,400 smaller banks have gone out of business during that time frame, and only one new bank has been started in the United States in the last three years.
So the problem of “too big to fail” is now much worse than it was back in 2008.
The following are some more statistics about our “too big to fail” problem that come from a previous article…
-The U.S. banking system has 14.4 trillion dollars in total assets. The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.
-Approximately 1,400 smaller banks have disappeared over the past five years.
-JPMorgan Chase is roughly the size of the entire British economy.
-The four largest banks have more than a million employees combined.
-The five largest banks account for 42 percent of all loans in the United States.
-Bank of America accounts for about a third of all business loans all by itself.
-Wells Fargo accounts for about one quarter of all mortgage loans all by itself.
-About 12 percent of all cash in the United States is held in the vaults of JPMorgan Chase.
The Derivatives Bubble
Most people simply do not understand that over the past couple of decades Wall Street has been transformed into the largest and wildest casino on the entire planet.
Nobody knows for sure how large the global derivatives bubble is at this point, because derivatives trading is lightly regulated compared to other types of trading. But everyone agrees that it is absolutely massive. Estimates range from $600 trillion to $1.5 quadrillion.
And what we do know is that four of the too big to fail banks each have total exposure to derivatives that is in excess of $40 trillion.
The numbers posted below may look similar to numbers that I have included in articles in the past, but for this article I have updated them with the very latest numbers from the U.S. government. Since the last time that I wrote about this, these numbers have gotten even worse…
Total Assets: $1,989,875,000,000 (nearly 2 trillion dollars)
Total Exposure To Derivatives: $71,810,058,000,000 (more than 71 trillion dollars)
Total Assets: $1,344,751,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $62,963,116,000,000 (more than 62 trillion dollars)
Bank Of America
Total Assets: $1,438,859,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $41,386,713,000,000 (more than 41 trillion dollars)
Total Assets: $111,117,000,000 (just a shade over 111 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $47,467,154,000,000 (more than 47 trillion dollars)
During the coming derivatives crisis, several of those banks could fail simultaneously.
If that happened, it would be an understatement to say that we would be facing an “economic collapse”.
Credit would totally freeze up, nobody would be able to get loans, and economic activity would grind to a standstill.
It is absolutely inexcusable how reckless these big banks have been.
Just look at those numbers for Goldman Sachs again.
Goldman Sachs has total assets worth approximately 111 billion dollars (billion with a little “b”), but they have more than 47 trillion dollars of total exposure to derivatives.
That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 427 times greater than their total assets.
I don’t know why more people aren’t writing about this.
This is utter insanity.
During the next great financial crisis, it is very likely that the rest of the planet is going to lose faith in the current global financial system that is based on the U.S. dollar and on U.S. debt.
When that day arrives, and the U.S. dollar loses reserve currency status, the shift in our standard of living is going to be dramatic. Just consider what Marin Katusa of Casey Research had to say the other day…
It will be shocking for the average American… if the petro dollar dies and the U.S. loses its reserve currency status in the world there will be no middle class.
The middle class and the low class… wow… what a game changer. Your cost of living will quadruple.
The debt-fueled prosperity that we are enjoying now will not last forever. A day of reckoning is fast approaching, and most Americans will not be able to handle the very difficult adjustments that they will be forced to make. Here is some more from Marin Katusa…
Imagine this… take a country like Croatia… the average worker with a university degree makes about 1200 Euros a month. He spends a third of that, after tax, on keeping his house warm and filling up his gas tank to get to work and get back from work.
In North America, we don’t make $1200 a month, and we don’t spend a third of our paycheck on keeping our house warm and driving to work… so, the cost of living… food will triple… heat, electricity, everything subsidized by the government will triple overnight… and it will only get worse even if you can get the services.
All of this could have been prevented if we had done things the right way.
Unfortunately, we didn’t learn any of the lessons that we should have learned from the last financial crisis, and our politicians and the central banks have just continued to do the same things that they have always done.
So now we all get to pay the price.
When QE1 ended there was a substantial stock market correction, and when QE2 ended there was a substantial stock market correction. And if you will remember, the financial markets threw a massive hissy fit a few months ago when Federal Reserve Chairman Ben Bernanke suggested that the Fed may soon start tapering QE3. Clearly Wall Street does not like it when their supply of monetary heroin is interrupted. The Federal Reserve has tricked the American people into supporting quantitative easing by insisting that it is about “stimulating the economy”, but that has turned out to be a massive hoax. In fact, I just wrote an article that contained 37 statistics that prove that things just keep getting even worse for ordinary Americans. But quantitative easing has been exceptionally good for Wall Street. During QE1, the S&P 500 rose by about 300 points. During QE2, the S&P 500 rose by about 200 points. And during QE3, the S&P 500 has risen by about 400 points. The S&P 500 is now in unprecedented territory, and stock prices have become completely and totally divorced from reality. In essence, we are in the midst of the largest financial bubble this nation has ever seen. So what is going to happen when the Fed starts pulling back the monetary crack and the bubble bursts?
A lot of people out there are claiming that the Federal Reserve will never end this round of quantitative easing. They are suggesting that the Fed may hint at tapering from time to time, but that when push comes to shove they will just keep printing more money.
There is just one big problem with that theory.
The rest of the world is watching, and they are very troubled by quantitative easing. Therefore the Fed must end it at some point because they desperately need the rest of the world to keep playing our game.
Our current economic prosperity greatly depends upon the rest of the planet using our dollars as the reserve currency of the world and lending trillions of dollars to us at ultra-low interest rates. If the rest of the world decides to stop going along with the program, the system would come crashing down very rapidly.
That is why it was so alarming when China recently announced that they are going to quit stockpiling more U.S. dollars. For a long time China has been warning us to quit recklessly printing money, and now China is starting to make moves that will make them more independent of us financially.
If the Fed does not bring quantitative easing to an end soon, other nations may start doing the same thing.
So the Fed knows that they are on borrowed time. Faith in the U.S. financial system is declining very fast.
But the Fed also knows that ending QE3 is going to be very tricky for the financial markets. The other times that the Fed has ended quantitative easing, it has turned out to be very painful for Wall Street.
So this time, the Fed seems to be trying to do what it can to use the media to mentally prepare investors ahead of time. For example, the following is what Jon Hilsenrath of the Wall Street Journal wrote just a few days ago…
Markets are positioned more to the Fed’s liking today than they were in September, when it put off reducing, or “tapering,” the monthly bond purchases. Most notably, the Fed’s message is sinking in that a wind down of the program won’t mean it’s in a hurry to raise short-term interest rates. Futures markets place a very low probability on Fed rate increases before 2015, in contrast to September, when fed funds futures markets indicated rate increases were expected by the end of 2014. The Fed has been trying to drive home the idea that “tapering is not tightening” for months and is likely to feel comforted that investors believe it as a pullback gets serious consideration.
In case you missed the subtle messages contained in that paragraph, here is a rough translation…
“Don’t worry. The Federal Reserve is your friend and they say that everything is going to be okay. Investors believe what the Fed says and you should too. Pay no attention to the man behind the curtain. Tapering is not tightening, and when the Federal Reserve does decide to taper the financial markets are going to take it very calmly.”
The Fed (and their messengers) very much want to avoid a repeat of what has happened before. As you can see from the chart posted below, every round of quantitative easing has driven the S&P 500 much higher. And when each round has ended, there has been a substantial stock market correction. The following chart was originally produced by DayOnBay.org…
And of course the chart above is incomplete. As you can see below, the S&P 500 is now sitting at about 1,800…
So let’s recap.
From the time that QE1 was announced to the time that it ended, the S&P 500 rose from about 900 to about 1,200.
When QE1 ended, the S&P 500 fell back below 1,100.
In a panic, the Federal Reserve first hinted at QE2 and then finally formally announced it. That round of QE drove the S&P 500 up to a bit above the 1,300 mark.
Once QE2 ended, there was another market correction. The S&P 500 fell all the way down to 1,123 at one point.
In another panic, the Federal Reserve first announced “Operation Twist” and then later added QE3. Since that time, the S&P 500 has been on an unprecedented tear. At this point, the S&P is sitting at about 1,800.
And of course those massively inflated stock prices have absolutely no relation to what is going on in the U.S. economy as a whole. In fact, the truth is that economic conditions for most of the country are steadily getting worse. Just today we found out that for the week ending November 30th, U.S. rail traffic was down 16.3 percent from the same week one year earlier. That is a hugely negative sign. It means that the flow of goods is slowing down substantially.
So the Federal Reserve has created this massive financial bubble that is totally disconnected from reality. The only way that the Federal Reserve can keep this bubble going is to keep printing lots more money, but they also know that they cannot do that indefinitely because the rest of the world is watching.
In essence, the Federal Reserve is caught between a rock and a hard place.
When the Fed does ultimately decide to taper (whether it be December, January, February, etc.), the consequences are likely to be quite dramatic for the financial markets. The following is a brief excerpt from a recent article by Howard Kunstler…
But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and real estate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go. China alone announced very loudly last month that US Treasury debt paper was giving them a migraine and they were done buying anymore of it. Japan is in a financial psychotic delirium scarfing up its own debt paper to infinity. Who’s left out there? Burkina Faso and the Kyrgystan Cobblers’ Union Pension Fund?
The interest rate on the US 10-year bond is close to bumping up on the ominous 3.0 percent level again. Apart from the effect on car and house loans, readers have pointed out to dim-little-me that the real action will be around the interest rate swaps. Last time this happened, in late summer, the too-big-to-fail banks wobbled from their losses on these bets, providing a glimpse into the aperture of a black hole compressive deflation where cascading chains of unmet promises blow financial systems past the event horizon of universal default and paralysis where money stops moving anywhere and people must seriously reevaluate what money actually is.
What Kunstler is talking about is something that I have written about previously many times. When QE3 slows down (or ends), that is likely going to cause the yield on 10 year U.S. Treasuries to rise substantially, and that would have a whole host of negative consequences for the U.S. economy.
Most notably, it would threaten to blow up the quadrillion dollar derivatives casino that Wall Street usually manages to keep so delicately balanced.
The truth is that we are going to have massive problems no matter what the Federal Reserve does now.
If the Federal Reserve keeps wildly printing money, our financial system will become a massive joke to the rest of the planet and other nations will stop using our dollars and will stop lending us money.
That would be absolutely disastrous.
If the Federal Reserve stops wildly printing money, the massive financial bubble that Wall Street is enjoying right now will burst and we could have a financial crisis even greater than what we experienced back in 2008.
That would also be absolutely disastrous.
So does anyone out there see an easy way out of this under the current system? If you think that you have such a plan, please feel free to share it below…
Are you ready for Janet Yellen? Wall Street wants her, the mainstream media wants her and it appears that her confirmation would be a slam dunk. She would be the first woman ever to chair the Federal Reserve, and her philosophy is that a little bit of inflation is actually good for an economy. She was reportedly the architect for many of the unprecedented monetary decisions that Ben Bernanke made during his tenure, and that has many on Wall Street and in the media very excited. Noting that we “already know that Yellen is on board with Bernanke’s easy money policies”, CNN recently even went so far as to publish a rabidly pro-Yellen article with this stunning headline: “Dear Mr. President: Name Yellen now!” But after watching what a disaster Bernanke has been, do we really want more of the same? It doesn’t really matter whether she is a woman, a man, a giant lizard or a robot, the question is whether or not she is going to continue to take us down the path to ruin that Bernanke has taken us. As I have written about so many times, the Federal Reserve is at the very heart of our economic problems, and under Bernanke the Fed has created a mammoth financial bubble unlike anything that we have ever seen before. If Yellen keeps us going down that road, financial disaster is inevitable.
Sadly, Yellen is not a woman that believes in free markets. She had the following to say back in 1999…
“Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not.”
Yellen believes that without the “routine intervention” of the central planners at the Fed, our economy will not produce satisfactory results.
So if you thought that Bernanke was an “interventionist”, you haven’t seen anything yet. In fact, according to Time Magazine, Yellen was continually urging Bernanke to do even more “to help stimulate the economy”…
But as the most recent financial crisis proved, a good Fed chief needs to be willing to think outside the box to achieve its goals of low, steady inflation and full employment. This is exactly what Bernanke did — using the powers of his office to launch a massive bond-buying program aimed at lowering interest rates further down the yield curve and promising to keep short-term interest rates at near zero for years. Bernanke, however, didn’t launch these programs immediately. Behind the scenes, it was reportedly Yellen who was the most forceful advocate for the Fed doing more to help stimulate the economy.
It is truly frightening to think that Yellen might turn out to be “Bernanke on steroids”.
Let’s hope that she is not the choice.
But the media is endlessly hyping her. They keep proclaiming that she has a “good track record” when it comes to forecasting future economic conditions.
Back in February 2007, before the housing crash and the last financial crisis, she made the following statement…
“The bottom line for housing is that the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—while not fully allayed have diminished. Moreover, while the future for housing activity remains uncertain, I think there is a reasonable chance that housing is in the process of stabilizing, which would mean that it would put a considerably smaller drag on the economy going forward.”
And during a speech in December 2007 she offered up this gem…
“To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level.”
And in front of the Financial Crisis Inquiry Commission in 2010 she openly admitted that she did not see the last financial crisis coming…
“For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.”
So if she didn’t see the last crisis coming, will she see the next one coming?
Right now, she insists that everything is going to be just fine in our immediate future.
Do you believe her?
Meanwhile, economic warning flags are popping up all over the place. As Zero Hedge recently noted, perhaps this is why a lot of high profile candidates don’t want the Fed job. Perhaps they don’t want to be blamed for the giant economic mess that is about to happen…
With so many candidates dropping out of the race, one has to wonder why the attraction of the ‘most-powerful’ job in the world is fading. Perhaps it is not wanting to stuck between the rock of the ‘broken-market-diminishing-returns’ of moar QE and the hard place of an economy/market that is sputtering and needs moar. As Bloomberg’s Rich Yamarone notes, There’s a little known rule of thumb in the economics world: when the annual growth rate of key U.S. indicators falls below 2 percent, the economy slides into recession in the next 12 months… and more than one of them is flashing red.
But we have far bigger worries on our hands than just another recession.
Over the past several years, Fed intervention has been systematically destroying confidence in the U.S. dollar and has been making U.S. government debt less desirable. Foreigners are already starting to dump U.S. debt, and it is only a matter of time before the U.S. dollar loses its status as the de facto reserve currency of the world.
By “kicking the can down the road”, the Fed has created tremendous structural problems which are going to come back to bite us big time in the long run.
Recklessly printing money, monetizing debt and driving interest rates down to ridiculously low levels may have had some benefits in the short-term, but in the end this giant Ponzi scheme is going to collapse in spectacular fashion. The following is how James Howard Kunstler puts it…
The Fed can only pretend to try to get out of this self-created hell-hole. The stock market is a proxy for the economy and a handful of giant banks are proxies for the American public, and all they’ve really got going is a hideous high-frequency churn of trades in conjectural debentures that pretend to represent something hidden in the caboose of a choo-choo train of wished-for value — and hardly anyone in the nation, including those with multiple graduate degrees in abstruse crypto-sciences, can even pretend to understand it all.
When reality crosses the finish line ahead of poor, exhausted Mr. Bernanke, havoc must ensue. All the artificial props fall away and the so-called American economy is revealed for what it is: a surreal landscape of ruin with nothing left but salvage value. Very few people will get a living off of the salvage operations, and there will be fights and skirmishes everywhere by one gang or another for control of the pickings. The utility of money itself may be bygone, along with the legitimacy of anyone or anything claiming institutional authority. This is what comes of all attempts to get something for nothing.
The American people deserve to know the truth.
The Fed is not our “savior”. The truth is that the Fed is the primary cause of many of our biggest economic problems. For much more on this, please see my previous article entitled “25 Fast Facts About The Federal Reserve – Please Share With Everyone You Know“.
Unfortunately, Wall Street and the mainstream media love the Fed and they appear to very much love Janet Yellen.
Yellen would be an absolutely horrifying choice for Fed Chairman, but so would any of the other names that have been floated.
America has embraced the foolishness of the financial central planners at the Federal Reserve, and in the end we will all pay a great price for that.