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.
Why is the global economy in so much trouble? How can so many people be so absolutely certain that the world financial system is going to crash? Well, the truth is that when you take a look at the cold, hard numbers it is not difficult to see why the global financial pyramid scheme is destined to fail. In the United States today, there is approximately 56 trillion dollars of total debt in our financial system, but there is only about 9 trillion dollars in our bank accounts. So you could take every single penny out of the banks, multiply it by six, and you still would not have enough money to pay off all of our debts. Overall, there is about 190 trillion dollars of total debt on the planet. But global GDP is only about 70 trillion dollars. And the total notional value of all derivatives around the globe is somewhere between 600 trillion and 1500 trillion dollars. So we have a gigantic problem on our hands. The global financial system is a very shaky house of cards that has been constructed on a foundation of debt, leverage and incredibly risky derivatives. We are living in the greatest financial bubble in world history, and it isn’t going to take much to topple the entire thing. And when it falls, it is going to be the largest financial disaster in the history of the planet.
The global financial system is more interconnected today than ever before, and a crisis at one major bank or in one area of the world can spread at lightning speed. As I wrote about yesterday, the entire European banking system is leveraged 26 to 1 at this point. A decline in asset values of just 4 percent would totally wipe out the equity of many of those banks, and once a financial panic begins we could potentially see major financial institutions start to go down like dominoes.
We got a small taste of what that is like back in 2008, and it is inevitable that it will happen again.
Anyone that would tell you that the current global financial system is sustainable does not know what they are talking about. Just look at the numbers that I have posted below.
The following is the global financial pyramid scheme by the numbers…
–$9,283,000,000,000 – The total amount of all bank deposits in the United States. The FDIC has just 25 billion dollars in the deposit insurance fund that is supposed to “guarantee” those deposits. In other words, the ratio of total bank deposits to insurance fund money is more than 371 to 1.
–$10,012,800,000,000 – The total amount of mortgage debt in the United States. As you can see, you could take every penny out of every bank account in America and it still would not cover it.
–$10,409,500,000,000 – The M2 money supply in the United States. This is probably the most commonly used measure of the total amount of money in the U.S. economy.
–$15,094,000,000,000 – U.S. GDP. It is a measure of all economic activity in the United States for a single year.
–$16,749,269,587,407.53 – The size of the U.S. national debt. It has grown by more than 10 trillion dollars over the past ten years.
–$32,000,000,000,000 – The total amount of money that the global elite have stashed in offshore banks (that we know about).
–$50,230,844,000,000 – The total amount of government debt in the world.
–$56,280,790,000,000 – The total amount of debt (government, corporate, consumer, etc.) in the U.S. financial system.
–$61,000,000,000,000 – The combined total assets of the 50 largest banks in the world.
–$70,000,000,000,000 – The approximate size of total world GDP.
–$190,000,000,000,000 – The approximate size of the total amount of debt in the entire world. It has nearly doubled in size over the past decade.
–$212,525,587,000,000 – According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States. But those banks only have total assets of about 8.9 trillion dollars combined. In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.
–$600,000,000,000,000 to $1,500,000,000,000,000 – The estimates of the total notional value of all global derivatives generally fall within this range. At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.
Are you starting to get the picture?
Every single day, the total amount of debt will continue to grow faster than the total amount of money until the day that this bubble bursts.
What we witnessed back in 2008 was just a little “hiccup” in the system. It caused the worst economic downturn since the Great Depression, but global financial authorities were able to get things stabilized.
Next time it won’t be so easy.
The next wave of the economic collapse is quickly approaching. A full-blown economic depression has already started in southern Europe. Unemployment is at record highs and economic activity is contracting rapidly.
The major offshore banking centers in Cyprus are on the verge of collapsing. It was just announced that they will now be closed until Tuesday, but nobody really knows for sure when they will be allowed to reopen. And there is already talk that when they do reopen that there will be strict limits on how much money people can take out.
And now the IMF is warning that the three biggest banks in Slovenia are failing and that a billion euros will be needed to bail them out.
The dominoes are starting to tumble, and the United States won’t be immune. In fact, the greatest financial problems that the United States has ever seen are on the horizon.
But you can just have faith that Ben Bernanke, Barack Obama and the U.S. Congress know exactly what they are doing and will be able to save us from the coming financial collapse if you want.
The mainstream media will provide you with all of the positive economic news that you could possibly want. They are giddy about the fact that the Dow keeps hitting all-time highs and they would have us all believe that we are in the midst of a robust economic recovery. You can listen to them if you want to.
But when you are tempted to believe that everything is going to be “okay” somehow, just go back and look at the numbers there were posted above one more time.
There is no way that the global financial pyramid scheme is going to be able to hold up for too much longer. At some point it is going to totally collapse. When that happens, will you be ready?
Will this be the last normal holiday season that Americans ever experience? To many Americans, such a notion would be absolutely inconceivable. After all, in the affluent areas of the country restaurants and malls are absolutely packed. Beautiful holiday decorations are seemingly everywhere this time of the year and children all over the United States are breathlessly awaiting the arrival of Santa Claus. Even though poverty is exploding to unprecedented levels, most families will still have mountains of presents under their Christmas trees. Of course a whole lot of those presents were purchased with credit cards, but people don’t like to talk about that. It kind of spoils the illusion. Sadly, the truth is that our entire economy is a giant illusion. The extreme prosperity that we have been enjoying has been fueled by debt, and any future prosperity that we will experience is completely dependent on our ability to go into even more debt. The total amount of debt in our economy is almost 10 times larger than it was just 30 years ago, but we don’t like to think about that too much. Most Americans are way too busy living the good life to be bothered with “doom and gloom”. Well, get ready to say goodbye to normal. As history has shown us, no financial bubble lasts forever, and time is rapidly running out for us.
You know that the hour is late when even mainstream news sources start publishing articles with titles such as this: “Will 2013 Mark the Beginning of American Decline?”
That article appeared on Bloomberg.com the other day, and it was written by Simon Johnson, a former chief economist at the International Monetary Fund. He is convinced that a day of reckoning is coming for U.S. government finances, and he seems resigned to the fact that we will not be ready when that day arrives…
“Sooner or later, it will be America’s turn to fall out of favor with investors and to see its own interest rates rise. It is hard to know when that day will come, or precisely what pressures the country will face.
Let me only venture one forecast: We will not be ready.”
Other analysts are far more pessimistic. For example, the following is what Gerald Celente said about the “bond bubble” during a recent interview with King World News…
Eric King: “Gerald, I wanted to take a look at this upcoming issue you have coming out. (In here it says,) ‘Bonds Away! The bond bomb is ready to explode … threatening to make the real estate and dot-com bubbles, and even the Great Recession, look like market corrections.’ Can you talk about that?”
Celente: “Yes. This piece is being penned by Dr. Paul Craig Roberts, the former Assistant Treasury Secretary under Ronald Reagan. And he is convinced that the bond bubble is about to burst. This cannot continue to go on the way it is. Everyone knows that the whole game is rigged, and so is this….”
“The whole game is rigged. It’s ready to go down, and Dr. Paul Craig Roberts believes it’s ‘Bonds Away’ in 2013 as the bond bubble explodes and brings about a financial disaster even worse than the Great Depression.”
Eric King: “He’s saying here it’s a road to financial collapse that we are going to head down when this thing bursts.”
Celente: “It is. Because the whole world is being propped up by these phony bonds and it’s going to collapse. It has to happen. Interest rates are going to start going up, and when they do the bond bubble explodes. You cannot keep interest rates at zero for this amount of time and expect anything other than disaster to follow.”
For much more on all this, you can listen to another excellent interview with Gerald Celente right here.
Our politicians just assume that we will be able to borrow trillions upon trillions of dollars far into the future at super low interest rates, but that is a very dangerous assumption.
As I noted the other day, the average rate of interest on U.S. government debt was 2.534 percent at the end of November. If that number just rose to where it was about a decade earlier we would be in a massive amount of trouble.
Back in the year 2000, the average rate of interest on U.S. government debt was 6.638 percent. If we were at that level today, the U.S. government would be paying out more than a trillion dollars a year just in interest on the national debt.
But our politicians just keep borrowing and spending as if we could do this forever.
From the time that George Washington was inaugurated (1789) to the time that George W. Bush was inaugurated (2001), the U.S. government accumulated about 5.7 trillion dollars of debt.
During the first four years of the Obama administration, the U.S. government accumulated about 5.7 trillion dollars of debt.
How can anyone support this kind of insanity?
You can see an excellent video demonstrating the vastness of our national debt right here. In the end, all of this debt will absolutely destroy the U.S. dollar, our economic system and the bright futures that our children and our grandchildren were supposed to have.
As if all of that was not enough to be concerned about, there is also the threat that Wall Street could implode at any time. Most Americans have no idea that Wall Street has been transformed into the largest casino in the history of the world. The “too big to fail” banks are the ringleaders, and the derivatives bubble hangs over our financial system like a “sword of Damocles” that could fall at virtually any moment.
Everything will remain fine as long as the spiral of derivatives that our bankers have constructed remains perfectly balanced. But if something happens and it becomes unbalanced and starts to collapse, the consequences could be unlike anything we have ever seen before.
A recent Zero Hedge article entitled “1000x Systemic Leverage: $600 Trillion In Gross Derivatives ‘Backed’ By $600 Billion In Collateral” detailed how there is barely any collateral backing up the hundreds of trillions of dollars of derivatives that are out there…
But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world’s combined GDP, because as the “derivative” name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled “Shadow Banking: Economics and Policy” where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: a whopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage.
Our entire economy has become a giant pyramid of debt, risk and leverage. At some point there is going to be a giant crash. When that happens, people are going to become very desperate.
When people become very desperate, they often accept “solutions” that they were not willing to consider previously.
We need to learn some lessons from history. This is exactly the kind of thing that happened back in the 1930s.
For example, an elderly woman named Kitty Werthmann is telling audiences what life was like in Austria back in the late 1930s…
“In 1938, Austria was in deep Depression. Nearly one-third of our workforce was unemployed. We had 25 percent inflation and 25 percent bank loan interest rates.”
“Farmers and business people were declaring bankruptcy daily. Young people were going from house to house begging for food. Not that they didn’t want to work; there simply weren’t any jobs.”
The Austrian people were really hurting and they were desperate for answers. When Hitler came to them with “solutions”, they were ready to embrace him with open arms…
“We looked to our neighbor on the north, Germany, where Hitler had been in power since 1933.” she recalls. “We had been told that they didn’t have unemployment or crime, and they had a high standard of living.”
“Nothing was ever said about persecution of any group – Jewish or otherwise. We were led to believe that everyone in Germany was happy. We wanted the same way of life in Austria. We were promised that a vote for Hitler would mean the end of unemployment and help for the family. Hitler also said that businesses would be assisted, and farmers would get their farms back.””Ninety-eight percent of the population voted to annex Austria to Germany and have Hitler for our ruler.”
“We were overjoyed,” remembers Kitty, “and for three days we danced in the streets and had candlelight parades. The new government opened up big field kitchens and everyone was fed.”
Sadly, America is already starting to go down the same path in many ways. If you doubt this, you can read the rest of her account right here.
Right now, things are still relatively good in America. Yes, there are a whole host of economic numbers that look really bad, but what we are experiencing right now is nothing compared to the horrific economic pain that is coming.
When our economy finally crashes, nobody is going to be able to press a button and restore things to how they were previously. We will be told that we have to “adjust” and consider “new solutions” to our “new challenges”. Someday we will look back on the good life that we were enjoying in 2010, 2011 and 2012 and wish that we could go back to those days.
So enjoy the relative peacefulness and prosperity of these times while you still can. A horrific economic collapse is on the way, and once it strikes none of our lives will ever be the same.