When financial markets crash, they do not do so in a vacuum. There are always patterns, signs and indicators that tell us that something is about to happen. In this article, I am going to share with you four patterns that are happening right now that also happened just prior to the great financial crisis of 2008. These four signs are very strong evidence that a deflationary financial collapse is right around the corner. Instead of the hyperinflationary crisis that so many have warned about, what we are about to experience is a collapse in asset prices, a massive credit crunch and a brief period of absolutely crippling deflation. The response by national governments and global central banks to this horrific financial crisis will cause tremendous inflation down the road, but that comes later. What comes first is a crisis that will initially look a lot like 2008, but will ultimately prove to be much worse. The following are 4 things that are happening right now that indicate that a deflationary financial collapse is imminent…
#1 Commodities Are Crashing
In mid-2008, just before the U.S. stock market crashed in the fall, commodities started crashing hard. Well, now it is happening again. In fact, the Bloomberg Commodity Index just hit a 13 year low, which means that it is already lower than it was at any point during the last financial crisis…
#2 Oil Is Crashing
On Monday, the price of oil dipped back below $50 a barrel. This has surprised many analysts, because a lot of them thought that the price of oil would start to rebound by now.
In early 2014, the price of a barrel of oil was sitting above $100 a barrel and the future of the industry looked very bright. Since that time, the price of oil has fallen by more than 50 percent.
There is only one other time in all of history when the price of oil has fallen by more than $50 a barrel in such a short period of time. That was in 2008, just before the great financial crisis that erupted later that year. In the chart posted below, you can see how similar that last oil crash was to what we are experiencing right now…
#3 Gold Is Crashing
Most people don’t remember that the price of gold took a very serious tumble in the run up to the financial crisis of 2008. In early 2008, the price of gold almost reached $1000 an ounce, but by October it had fallen to nearly $700 an ounce. Of course once the stock market finally crashed it ultimately propelled gold to unprecedented heights, but what we are concerned about for this article is what happens before a crisis arrives.
Just like in 2008, the price of gold has been hit hard in recent months. And on Monday, the price of gold absolutely got slammed. The following comes from USA Today…
The yellow metal has tumbled to a five-year low amid a combination of diminishing investor fears related to foreign headwinds in Greece and China, and stronger growth in the U.S. which is leading to a stronger dollar and coming interest rate hikes from the Federal Reserve. Investors have been dumping shares of gold-related investments as other bearish signs, such as less demand from China and the breaking of key price support levels, add up.
Earlier today, an ounce of gold fell below $1,100 an ounce to $1,080, its lowest level since February 2010. Gold peaked around $1,900 an ounce back in 2011.
For years, I have been telling people that we were going to see wild swings in the prices of gold and silver.
And to be honest, the party is just getting started. Personally, I particularly love silver for the long-term. But you have got to be able to handle the roller coaster ride if you are going to get into precious metals. It is not for the faint of heart.
#4 The U.S. Dollar Index Is Surging
Before the U.S. stock market crashed in the fall of 2008, the U.S. dollar went on a very impressive run. This is something that you can see in the chart posted below. Now, the U.S. dollar is experiencing a similar rise. For a while there it looked like the rally might fizzle out, but in recent days the dollar has started to skyrocket once again. That may sound like good news to most Americans, but the truth is that a strong dollar is highly deflationary for the global financial system as a whole for a variety of reasons. So just like in 2008, this is not the kind of chart that we should want to see…
If a 2008-style financial crisis was imminent, these are the kinds of things that we would expect to see happen. And of course these are not the only signs that are pointing to big problems in our immediate future. For example, the last time there was a major stock market crash in China, it came just before the great U.S. stock market crash in the fall of 2008. This is something that I covered in my previous article entitled “Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?”
As an attorney, I was trained to follow the evidence and to only come to conclusions that were warranted by the facts. And right now, it seems abundantly clear that things are lining up in textbook fashion for another major financial crisis.
But even though what is happening right in front of our eyes is so similar to what happened back in 2008, most people do not see it.
And the reason why they do not see it is because they do not want to see it.
Just like with most things in life, most people end up believing exactly what they want to believe.
Yes, there is a segment of the population that are actually honest truth seekers. If you have felt drawn to this website, you are probably one of them. But overall, most people in our society are far more concerned with making themselves happy than they are about pursuing the truth.
So even though the signs are obvious, most people will never see what is coming in advance.
I hope that does not happen to you.
I have never done anything like this before. Ever since I started The Economic Collapse Blog in late 2009, I have never issued any kind of “red alert” for any specific period of time. As an attorney, I was trained to be level-headed and to only come to conclusions that were warranted by the evidence. So this is not something that I am doing lightly. Based on information that I have received, things that I have been told, and thousands of hours of research that have gone into the publication of more than 1,300 articles about our ongoing economic collapse, I have come to the conclusion that a major financial collapse is imminent. Therefore, I am issuing a RED ALERT for the last six months of 2015.
To clarify, when I say “imminent” I do not mean that it will happen within the next 48 hours. And I am not saying that our problems will be “over” once we get to the end of 2015. In fact, I believe that the truth is that our problems will only be just beginning as we enter 2016.
What I am attempting to communicate is that we are right at the door of a major turning point. About this time of the year back in 2008, my wife and I went to visit her parents. As we sat in their living room, I explained to them that we were on the verge of a major financial crisis, and of course the events that happened a few months later showed that I was right on the money.
This time around, I wish that I could visit the living rooms of all of my readers and explain to them why we are on the verge of another major financial crisis. Unfortunately, that is not possible, but hopefully this article will suffice. Please share it with your friends, your family and anyone else that you want to warn about what is coming.
Let’s start with a little discussion about the U.S. economy. Most of the time, when I use the term “economic collapse” what most people are actually thinking of is a “financial collapse”. And we will talk about the imminent “financial collapse” later on in this article. But just because stocks have recently been hitting all-time record highs does not mean that the overall economy has been doing well. This is a theme that I have hammered on over and over again. It is my contention that we are in the midst of a long-term economic collapse that has been happening for many years, that is happening as you read this article, and that will greatly accelerate over the coming months.
Let me give you just one quick example. When an economy is healthy, money tends to circulate fairly rapidly. I buy something from you, then you take that money and buy something from someone else, etc. In a stable and growing economy, people generally feel good about things and they are not afraid to spend. But during hard times, the exact opposite happens. That is why the velocity of money almost always slows down during a recession. As you can see from the chart below, the velocity of money has indeed gone down during every recession since 1960. Once a recession is over, the velocity of money is supposed to go back up. But a funny thing happened after the last recession ended. The velocity of money continued to go down, and it has now hit an all-time record low…
This is the kind of chart that you would expect from a very sick economy. And without a doubt, our economy is sick. Even the official government numbers paint a picture of an economy that is deeply troubled. Corporate profits have declined for two quarters in a row, U.S. exports plunged by 7.6 percent during the first quarter of 2015, U.S. GDP contracted by 0.7 percent during the first quarter, and factory orders have declined year over year for six months in a row.
If the stock market was connected to reality, it would be going down. But instead, it has just kept going up. As I discussed yesterday, this is a classic case of an irrational financial bubble. If I was writing an economic textbook and I wanted to include an example of what a run up to a major financial crash looks like, it would be hard to come up with anything more ideal than what we have watched unfold over the last six months. Just about every pattern that has popped up prior to previous stock markets crashes is happening again, and this is something that I have written about so much that many of my readers are sick of it.
And without a doubt, our financial markets are primed for a crash.
Only two times before has the S&P 500 been up by more than 200 percent over a six year time frame.
The first was in 1929, and the stock market subsequently crashed.
The second was in 2000, right before the dotcom bubble burst.
And by just about any measure that you can possibly imagine, stocks are massively overvalued right now.
For instance, just check out the chart posted below. It comes from Doug Short, and it shows that the ratio of corporate equity prices to GDP has only been higher one time since 1950. That was in 2000 just before the dotcom bubble burst…
Let’s take a look at another chart. This one comes from Phoenix Capital Research, and it shows that the CAPE ratio (cyclically adjusted price-to-earnings ratio) has rarely been higher. In fact, the only times that it has been higher we have seen stock market crashes immediately afterwards…
Yale economics professor Robert Shiller is also deeply concerned about the CAPE ratio…
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 valuation indicators produce similar results. This next chart is another one 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 when stocks have been more overvalued than they are today according to the average of his four favorite indicators, and that was just before the stock market crashed when the dotcom bubble burst…
Another one of the things that indicates that a financial bubble is happening is the level of margin debt. Whenever margin debt has gone over 2.25% of GDP a stock market crash has always followed, and today it is far above that level. As you can see from the chart below, there have been three major peaks in margin debt in modern U.S. history. One was just before the dotcom bubble burst, one was just before the financial crisis of 2008, and the third is happening right now…
Something else that we would expect to see prior to a major financial crisis is a decoupling of high yield debt and stocks. This is something that happened just prior to the stock market crash of 2008, and it is happening again right now. The following chart comes from Zero Hedge, and it demonstrates this brilliantly…
Are you starting to get the picture?
And as I discussed yesterday, the smart money is beginning to pull their money out of stocks while they still can. According to USA Today, mutual fund investors have pulled more money out of stocks than they have put into stocks for 16 weeks in a row…
In a sign of stock market nervousness on Main Street, mutual fund investors have yanked more money out of U.S. stock funds than they put in for 16 straight weeks.
The last time domestic stock funds had positive net cash inflows was in the week ending Feb. 25, according to data from the Investment Company Institute, a mutual fund trade group.
In the week ended June 17, the most recent data available, mutual funds that invest in U.S. stocks suffered net outflows of $3.45 billion, according to the ICI.
Since late February, U.S. stock funds have suffered estimated outflows of nearly $55 billion. Those net withdrawals come despite the fact the benchmark Standard & Poor’s 500 hit a fresh record high of 2130.82 on May 21 and the Dow Jones industrial average notched a fresh record on May 19.
But it isn’t just stocks that are going to crash during the next financial crisis. Bonds are going to crash as well, but what I am concerned about most of all are derivatives.
Derivatives are going to play a starring role in the next major financial crisis. I cannot emphasize this enough. In fact, if you want to listen for just one word on the news that will let you know that things have started to really unravel, just listen for the word “derivatives”. This form of legalized gambling is going to crush “too big to fail” banks all over the planet during the next major financial downturn. The “too big to fail” banks in the U.S. alone have 278 trillion dollars of total exposure to derivatives, but they only have 9.8 trillion dollars in total assets. To say that they are being “reckless” is a massive understatement.
For much more on the coming derivatives crisis, please see my previous article entitled “Warren Buffett: Derivatives Are Still Weapons Of Mass Destruction And ‘Are Likely To Cause Big Trouble’“.
Of course I am not the only one that is sounding the alarm about what is coming. Just consider what some very prominent individuals have been saying recently…
Ron Paul has just released a new video in which he warned all of us to “prepare for a bear market in bonds“.
Carl Icahn says that financial markets are “extremely overheated—especially high-yield bonds“.
Max Keiser recently told Alex Jones that a great financial collapse is coming.
Martin Armstrong says that his Economic Confidence Model predicts that the “Big Bang” is coming in “2015.75“.
Jeff Berwick of the Dollar Vigilante says that “we’re getting very, very close to the next crisis collapse” and he has specifically pointed to the month of September.
James Howard Kunstler has predicted that stocks are going to “crater in Q3 as faith in paper and pixels erodes“.
Lindsey Williams recently sent out an email alert in which he warned that his elite friend has told him that “they have a World Wide Financial Collapse scheduled between September and the end of December 2015“.
Gerald Celente has warned about “the Great Panic of 2015“.
Bill Fleckenstein has said that 2015 could be the year of the “big accident“.
Ray Gano has stated that we will see a financial collapse “probably starting in the third quarter of 2015″.
Legendary investor Jim Rogers recently said that he believes that “we will see some kind of major, major problems in the world financial markets” within the next year or two.
Alex Jones recently released a video in which he explained that he recently received “two different calls” from “extremely prominent wealthy people” warning him about what is coming by the end of this year and asking him why he isn’t leaving the United States “before October”.
Bible prophecy expert Joel C. Rosenberg has posted an ominous message on his personal blog in which he warned that “something is coming” and that “we must be ready”…
I feel a tremendous sense of urgency about this column.
The United States is hurtling towards severe trouble, and the events of the past few months — and what may be coming over the next few months — grieves me a great deal.
Something is coming. I don’t know what. But we all must be ready in every possible way.
When I read what Rosenberg wrote, it struck me that it was precisely how I have been feeling too.
In my entire life, I have never had such an ominous feeling about any period of time as I have about the last six months of 2015. Like Rosenberg, I feel a “tremendous sense of urgency”, and I feel a great need to warn as many people as I can.
And it isn’t just a financial collapse that I am concerned about. In a previous article, I detailed seven key events that we are going to witness before the end of this September…
Late June/Early July – It is expected that this is when the U.S. Supreme Court will reveal their gay marriage decision. Most believe that the court will rule that gay marriage is a constitutional right in all 50 states. There are some that believe that this will be a major turning point for our nation.
July 15th to September 15th – A “realistic military training exercise” known as “Jade Helm” will be conducted by the U.S. Army. More than 1,000 members of the U.S. military will take part in this exercise. The list of states slated to be involved in these drills includes Texas, Colorado, New Mexico, Arizona, Nevada, Utah, California, Mississippi and Florida.
July 28th – On May 28th, Reuters reported that countries in the European Union were being given a two month deadline to enact “bail-in” legislation. Any nation that does not have “bail-in” legislation in place by that time will face legal action from the European Commission. So why is the European Union in such a rush to get this done? Are the top dogs in the EU anticipating that another great financial crisis is about to erupt?
September 13th – This is Elul 29 on the Biblical calendar – the last day of the Shemitah year. Many are concerned about this date because we have seen giant stock market crashes on the last day of the previous two Shemitah cycles.
On September 17th, 2001 (which was Elul 29 on the Biblical calendar), we witnessed the greatest one day stock market crash in U.S. history up until that time. The Dow plummeted 684 points, and it was a record that held for exactly seven years until the end of the next Shemitah cycle.
On September 29th, 2008 (which was also Elul 29 on the Biblical calendar), the Dow fell by an astounding 777 points, which still today remains the greatest one day stock market crash of all time.
Now we are approaching the end of another Shemitah year. So will the stock market crash on September 13th, 2015? Well, no, because that day is a Sunday. So I guarantee that the stock market will not crash on that particular day. But as Jonathan Cahn has pointed out in his book on the Shemitah, sometimes stock market crashes happen just before the end of the Shemitah year and sometimes they happen within just a few weeks after the end of the Shemitah. So we are not just looking at one particular date.
September 15th – The 70th session of the UN General Assembly begins on this date. It is being reported that France plans to introduce a resolution which would give formal UN Security Council recognition to a Palestinian state. Up until now, the United States has always been the one blocking such a resolution, but Barack Obama is indicating that things may be much different this time around.
September 25th to September 27th – The United Nations is going to launch a brand new sustainable development agenda for the entire planet. Some have called this “Agenda 21 on steroids”. But this new agenda is not just about the environment. It also includes provisions regarding economics, agriculture, education and gender equality. On September 25th, the Pope will travel to New York to give a major speech kicking off the UN conference where this new agenda will be unveiled.
September 28th – This is the date for the last of the four blood moons that fall on Biblical festival dates during 2014 and 2015. This blood moon falls on the very first day of the Feast of Tabernacles, it will be a “supermoon”, and it will actually be visible in the city of Jerusalem. There are many that dismiss the blood moon phenomenon, but we have seen similar patterns before. For example, a similar pattern of eclipses happened just before and just after the destruction of the Jewish temple by the Romans in 70 AD.
In addition to everything above, quite a number of economic cycle theories that were developed by secular economists all point to big trouble for America between the years of 2015 and 2020. For more on this, please see my previous article entitled “If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Pure Hell For The United States“.
Earlier today, I publicly announced that I was issuing a RED ALERT for the last six months of 2015 on the Alex Jones radio show. You can watch video of that interview right here. In this article (which is about three times as long as one of my normal articles) I have only shared a small fraction of the information that has led me to issue this red alert. But if you want to know more, and you are not afraid to really go down the rabbit hole, I would encourage you to check out a full two hour presentation that I did down in Dallas, Texas on the nightmarish years that are coming.
The period of relative stability that we have been enjoying is ending. What comes next is going to lead us into the worst period of time in modern American history. I wish that I was wrong about this.
But the goal is not to scare you. My wife and I live our lives with absolutely no fear, and that is my desire for all of my readers. There is hope in understanding what is happening and there is hope in getting prepared. Personally, my wife and I believe that the greatest chapters of our lives are ahead of us, and I hope that you have a similar outlook.
We need a generation of people that are willing to rise up and do great things even in the midst of all the chaos and darkness that is coming. It is when times are the darkest that the greatest heroes are needed.
So what will you choose to do when the next crisis comes?
Will you cower in fear, or will you rise up to meet the challenge?
Please feel free to tell us what you think by posting a comment below…
After all these years, the most famous investor in the world still believes that derivatives are financial weapons of mass destruction. And you know what? He is exactly right. The next great global financial collapse that so many are warning about is nearly upon us, and when it arrives derivatives are going to play a starring role. When many people hear the word “derivatives”, they tend to tune out because it is a word that sounds very complicated. And without a doubt, derivatives can be enormously complex. But what I try to do is to take complex subjects and break them down into simple terms. At their core, derivatives represent nothing more than a legalized form of gambling. A derivative is essentially a bet that something either will or will not happen in the future. Ultimately, someone will win money and someone will lose money. There are hundreds of trillions of dollars worth of these bets floating around out there, and one of these days this gigantic time bomb is going to go off and absolutely cripple the entire global financial system.
Back in 2002, legendary investor Warren Buffett shared the following thoughts about derivatives with shareholders of Berkshire Hathaway…
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so
far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Those words turned out to be quite prophetic. Derivatives have definitely multiplied in variety and number since that time, and it has become abundantly clear how toxic they are. Derivatives played a substantial role in the financial meltdown of 2008, but we still haven’t learned our lessons. Today, the derivatives bubble is even larger than it was just before the last financial crisis, and it could absolutely devastate the global financial system at any time.
During one recent interview, Buffett was asked if he is still convinced that derivatives are “weapons of mass destruction”. He told the interviewer that he believes that they are, and that “at some point they are likely to cause big trouble”…
Thirteen years after describing derivatives as “weapons of mass destruction” Warren Buffett has reaffirmed his view that they pose a threat to the global economy and financial markets.
In an interview with Chanticleer this week, Buffett said that “at some point they are likely to cause big trouble“.
“Derivatives, lend themselves to huge amounts of speculation,” he said.
Most of the time, the big banks that do most of the trading in these derivatives do very well. They use extremely sophisticated computer algorithms that help them come out on the winning end of these bets most of the time.
But when there is some sort of unforeseen event that suddenly causes a massive shift in the marketplace, that can cause tremendous problems. This is something that Buffett discussed during his recent interview…
“The problem arises when there is a discontinuity in the market for some reason or another.
“When the markets closed like it was for a few days after 9/11 or in World War I the market was closed for four or five months – anything that disrupts the continuity of the market when you have trillions of dollars of nominal amounts outstanding and no ability to settle up and who knows what happens when the market reopens,” he said.
So if the markets behave fairly calmly and predictably, the derivatives bubble probably will not burst.
But no balancing act of this nature ever lasts forever. Just remember what happened in 2008. Lehman Brothers collapsed and then the financial system virtually froze up. According to Forbes, at that time almost everyone was afraid to deal with the big banks because nobody was quite sure how much exposure they had to these risky derivatives…
Fast forward to the financial meltdown of 2008 and what do we see? America again was celebrating. The economy was booming. Everyone seemed to be getting wealthier, even though the warning signs were everywhere: too much borrowing, foolish investments, greedy banks, regulators asleep at the wheel, politicians eager to promote home-ownership for those who couldn’t afford it, and distinguished analysts openly predicting this could only end badly. And then, when Lehman Bros fell, the financial system froze and world economy almost collapsed. Why?
The root cause wasn’t just the reckless lending and the excessive risk taking. The problem at the core was a lack of transparency. After Lehman’s collapse, no one could understand any particular bank’s risks from derivative trading and so no bank wanted to lend to or trade with any other bank. Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode.
After the crisis, we were promised that something would be done about the “too big to fail” problem.
But instead, the problem of “too big to fail” is now larger than ever.
Since the last financial crisis, the four largest banks in the country have gotten approximately 40 percent larger. Today, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system. Without those banks, we would not have much of an economy left at all.
Meanwhile, smaller banks have been going out of business or have been swallowed up by the big banks at a staggering rate. Incredibly, there are 1,400 fewer small banks in operation today than there were when the last financial crisis erupted.
So we cannot afford for these “too big to fail” banks to actually fail. Even the failure of a single one would cause a national financial nightmare. The “too big to fail” banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo. When you total up the exposure to derivatives that all of them currently have, it comes to a grand total of more than 278 trillion dollars. But when you total up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars. In other words, the “too big to fail” banks have exposure to derivatives that is more than 28 times the size of their total assets.
I have shared the following numbers with my readers before, but it is absolutely crucial that we all understand how exceedingly vulnerable our financial system really is. These numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is almost beyond words…
Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)
Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)
Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)
Total Assets: $856,301,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)
Bank Of America
Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)
Total Assets: $801,382,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)
Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)
Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)
Since the United States was first established, the U.S. government has run up a total debt of a bit more than 18 trillion dollars. It is the biggest mountain of debt in the history of the planet, and it has grown so large that it is literally impossible for us to pay it off at this point.
But the top five banks in the list above each have exposure to derivatives that is more than twice the size of the national debt, and several of them have exposure to derivatives that is more than three times the size of the national debt.
That is why I keep saying that there will not be enough money in the entire world to bail everyone out when this derivatives bubble finally implodes.
Warren Buffett is entirely correct about derivatives – they truly are weapons of mass destruction that could destroy the entire global financial system at any time.
So as we move into the second half of this year and beyond, you will want to watch for terms like “derivatives crisis” or “derivatives crash” in news reports. When derivatives start making front page news, that will be a really, really bad sign.
Our financial system has been transformed into the largest casino in the history of the planet. For the moment, the roulette wheels are still spinning and everyone is happy. But sooner or later, a “black swan event” will happen that nobody expected, and then all hell will break loose.
The Greek financial system is in the process of totally imploding, and the rest of Europe will soon follow. Neither the Greeks nor the Germans are willing to give in, and that means that there is very little chance that a debt deal is going to happen by the end of June. So that means that we will likely see a major Greek debt default and potentially even a Greek exit from the eurozone. At this point, credit default swaps on Greek debt have risen 456 percent in price since the beginning of this year, and the market has priced in a 75 percent chance that a Greek debt default will happen. Over the past month, the yield on two year Greek bonds has skyrocketed from 20 percent to more than 30 percent, and the Greek stock market has fallen by a total of 13 percent during the last three trading days alone. This is what a financial collapse looks like, and if Greece does leave the euro, we are going to see this kind of carnage happen all over Europe.
Officials over in Europe are now openly speaking of the need to prepare for a “state of emergency” now that negotiations have totally collapsed. At one time, it would have been unthinkable for Greece to leave the euro, but now it appears that this is precisely what will happen unless a miracle happens…
Greece is heading for a state of emergency and an exit from the euro following the collapse of talks to agree a bailout deal, senior EU officials warned last night.
Europe must be prepared to step in otherwise Greek society would face an unprecedented crisis with power blackouts, medicine shortages and no money to pay for police, they said.
In the past, the Greeks have always buckled under pressure. But this new Greek government was elected with a mandate to end austerity, and so far they have shown a remarkable amount of resolve. In order for a debt deal to happen, one side is going to have to blink, and at this point it does not look like it will be the Greeks…
The world’s financial markets are facing up to the possibility that Greece could soon become the first country to crash out of Europe’s single currency. Talks between Athens and its eurozone creditors have collapsed in acrimony just days before a final deadline for Greece to unlock the €7.2bn (£5.2bn) in bailout funds it needs to avoid a catastrophic debt default.
The Greek Prime Minister, Alexis Tsipras, accused the creditor powers of hidden “political motives” in their demands that Greece make further cuts to public pension payments in return for the financial aid. “We are shouldering the dignity of our people, as well as the hopes of the people of Europe,” Mr Tsipras said in a defiant statement. “We cannot ignore this responsibility. This is not a matter of ideological stubbornness. This is about democracy.”
As we approach the point of no return, both sides are preparing for the endgame.
In Greece, members of parliament have been studying what happened in Iceland a few years ago. Many of them believe that a Greek debt default combined with a nationalization of Greek banks and a Greek exit from the euro could set the nation back on the path to prosperity fairly rapidly. The following comes from the Telegraph…
The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers.
Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.
The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.
Meanwhile, in a desperate attempt to get the Greeks to give in at the last moment, Greek’s creditors are preparing to pull out all the stops in order to put as much financial pressure on Greece as possible…
Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.
For a long time, most in the financial world assumed that a debt deal would eventually happen. But now reality is setting in. As I mentioned at the top of this article, the cost to insure Greek debt has risen by an astounding 456 percent since the beginning of this year…
Given these dramatic stakes, the risk of a Greek default has gone way up. One way to measure that risk is by looking at the skyrocketing price of insurance policies that would pay out if Greek bonds go bust. The cost to insure Greek debt for one year against the risk of default has skyrocketed 456% since the start of the 2015, according to FactSet data.
These insurance-like contracts, known as credit default swaps, imply there is a 75% to 80% probability of Greece defaulting on its debt, according to Jigar Patel, a credit strategist at Barclays.
The probability of a Greek default soars to a whopping 95% for five-year CDS, Patel said.
“Default is looking more and more likely,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a note to clients on Tuesday.
And in recent days, we have also seen Greek stocks and Greek bonds totally crash. The following comes from CNN…
The Greek stock market has plummeted 13% over the past three trading days, including a 3% drop on Tuesday alone.
In the bond market, the yield on Greek two-year debt has skyrocketed to 30.2%. A month ago, the yield was only 20%. Yields rise as bond prices fall.
Of course if there is a Greek debt default and Greece does leave the euro, it won’t just be Greece that pays the price.
As I have written about previously, there are tens of trillions of dollars in derivatives that are directly tied to currency exchange rates and 505 trillion dollars in derivatives that are directly tied to interest rates. A “Grexit” would cause the euro to drop like a rock and interest rates all over the continent would start to go crazy. The financial chaos that a “Grexit” would cause should not be underestimated.
And there are signs that some of Europe’s biggest banks are already on the verge of collapse. For example, just consider what has been going on at the biggest bank in Germany. Both of the co-CEOs at Deutsche Bank recently resigned, and it is increasingly looking as if it could soon become Europe’s version of Lehman Brothers. The following summary of the recent troubles at Deutsche Bank comes from an article that was posted on NotQuant…
Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:
- In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
- 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock – at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
- Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
- In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
- In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
- June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
- June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
- June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)
And that’s where we are now. How bad is it? We don’t know because we won’t be permitted to know. But these are not the moves of a healthy company.
For a very long time, I have been warning that a major financial crisis was coming to Europe, and for a very long time the authorities in Europe have been able to successfully kick the can down the road.
But now it looks like we have reached the end of the road, and a day of reckoning is finally here.
Nobody is quite sure what is going to happen next, but almost everyone agrees that it isn’t going to be pretty.
So you better buckle up, because it looks like we are all in for a wild ride as we enter the second half of this year.
Is the financial collapse that so many are expecting in the second half of 2015 already starting? Many have believed that we would see bonds crash before the stock market crashes, and that is precisely what is happening right now. Since mid-April, the yield on 10 year German bonds has shot up from 0.05 percent to 0.89 percent. But much of that jump has come this week. Just a couple of days ago, the yield on 10 year German bonds was sitting at just 0.54 percent. And it isn’t just Germany – bond yields are going crazy all over Europe. So far, it is being estimated that global investors have lost more than half a trillion dollars, and there is much more room for these bonds to fall. In the end, the overall losses could be well into the trillions even before the stock market collapses.
I know that for most average Americans, talk about “bond yields” is rather boring. But it is important to understand these things, because we could very well be looking at the beginning of the next great financial crisis. The following is an excerpt from an article by Wolf Richter in which he details the unprecedented carnage that we have witnessed over the past few days…
On Tuesday, ahead of the ECB’s policy announcement today, German Bunds sagged, and the 10-year yield soared from 0.54% to 0.72%, drawing a squiggly diagonal line across the chart. In just one day, yield increased by one-third!
Makes you wonder to which well-connected hedge funds the ECB had once again leaked its policy statement and the all-important speech by ECB President Mario Draghi that the rest of us got see today.
And today, the German 10-year yield jump to 0.89%, the highest since October last year. From the low in mid-April of 0.05% to today’s 0.89% in just seven weeks! Bond prices, in turn, have plunged! This is the definition of a “rout.”
Other euro sovereign bonds have gone through a similar rout, with the Spanish 10-year yield soaring from 1.05% in March to 2.07% today, and the Italian 10-year yields jumping from a low in March of 1.03% to 2.17% now.
What this means is that the central banks are losing control.
In particular, the European Central Bank has been trying very hard to force yields down, and now the exact opposite is happening.
This is very bad news for a global financial system that is absolutely teeming with red ink. Since the last financial crisis, our planet has been on the greatest debt binge of all time. If we are moving into a time of higher interest rates, that is going to cause enormous problems. Unfortunately, CNBC says that is precisely where things are headed…
The wild breakout in German yields is rocking global debt markets, and giving investors an early glimpse of the uneasy future for bonds in a world of higher interest rates.
The shakeout also carries a message for corporate bond investors, who have snapped up a record level of new issuance this year, and are now seeing negative total returns in the secondary market for the first time this year.
So why is this happening?
Why are bond yields going crazy?
According to the Wall Street Journal, financial regulators in Europe are blaming the ECB’s quantitative easing program…
A recent surge in government bond market volatility can be blamed on the quantitative easing program of the European Central Bank, according to one of Europe’s top financial regulators.
EIOPA, the body responsible for regulating insurers and pension funds in the European Union, has warned that the ECB’s decision to buy billions of euros’ worth of sovereign bonds, to kick-start the region’s economy, has caused markets to become choppier.
And actually this is what should be happening. When central banks start creating money out of thin air and pumping it into the markets, investors should rationally demand a higher return on their money. This didn’t really happen when the Federal Reserve tried quantitative easing, so the Europeans thought that they might as well try to get away with it too. Unfortunately for them, investors are starting to catch up with the scam.
So what happens next?
Well, European bond yields are probably going to keep heading higher over the coming weeks and months. This will especially be true if the Greek crisis continues to escalate. And unfortunately for Europe, that appears to be exactly what is happening…
Greece will not make a June 5 repayment to the International Monetary Fund if there is no prospect of an aid-for-reforms deal with its international creditors soon, the spokesman for the ruling Syriza party’s lawmakers said on Wednesday.
The payment of 300 million euros ($335 million) is the first of four this month totaling 1.6 billion euros from a country that depends on foreign aid to stay afloat.
Greece owes a total of about 320 billion euros, of which about 65 percent to euro zone governments and the IMF, and about 8.7 percent to the European Central Bank.
On Tuesday, Greece’s creditors drafted the broad outlines of an agreement to put to the leftist government in Athens in a bid to conclude four months of negotiations and release aid before the country runs out of money.
“If there is no prospect of a deal by Friday or Monday, I don’t know by when exactly, we will not pay,” Nikos Filis told Mega TV.
In fact, there are reports that both the ECB and the Greek government are talking about Greece going to a “parallel domestic currency”…
Biagio Bossone and Marco Cattaneo write that according to several recent media reports, both the Greek government and the ECB are taking into consideration the possibility (for Greece) to issue a parallel domestic currency to pay for government expenditures, including civil servant salaries, pensions, etc. This could happen in the coming weeks as Greece faces a severe shortage of euros. A new domestic currency would help make payments to public employees and pensioners while freeing up the euros needed to pay out creditors.
If Greece defaults and starts using another currency, the value of the euro is going to absolutely plummet and bond yields all over the continent are going to start heading into the stratosphere.
That is why it is so important to keep an eye on what is going on in Greece.
But no matter what happens in Greece, it appears that we are moving into a time when there will be higher interest rates around the world. And since 505 trillion dollars in derivatives are directly tied to interest rate levels, that could lead to a financial unraveling unlike anything that we have ever seen before in the history of our planet.
As I have warned about so many times before, 2008 was just the warm up act.
The main event is still coming, and it is going to be extraordinarily painful.
Does a mystery that is 3,500 years old hold the key to what is going to happen to global financial markets in 2015? Could it be possible that the timing of major financial crashes is not just a matter of coincidence? In previous articles on my website, I have discussed some of the major economic and financial cycle theories and their proponents. For example, in an article entitled “If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Pure Hell For The United States“, I examined a number of economic cycle theories that seem to indicate that the second half of this decade is going to be a nightmare economically. But the cycle that I am going to discuss in this article is a lot more controversial than any of those. In his most recent book, Jonathan Cahn has demonstrated that almost all of the major financial crashes in U.S. history are very closely tied to a seven year pattern that we find in the Bible known as “the Shemitah”. Since that book was released, I have been asked about this repeatedly during radio appearances. So in this article I am going to attempt to explain what the Shemitah is, and what this Biblical pattern seems to indicate may happen in 2015. If you are an atheist, an agnostic, or are generally skeptical by nature, this article might prove quite challenging for you. I would ask that you withhold judgment until you have examined the evidence. When I first heard about these things, I had to go verify the facts for myself, because they are truly extraordinary.
So precisely what is “the Shemitah”?
In the Bible, the people of Israel were commanded to let the land lie fallow every seven years. There would be no sowing and no reaping, and this is something that God took very seriously. In fact, the failure to observe these Sabbath years was one of the main reasons cited in the Scriptures for why the Jewish people were exiled to Babylon in 586 BC.
But there was more to the Shemitah year than just letting the land lie fallow.
On the last day of the Shemitah year, the people of Israel were instructed to perform a releasing of debts. We find the following in Deuteronomy chapter 15…
At the end of every seven years you shall grant a relinquishing of debts. This is the manner of the relinquishing: Every creditor that has loaned anything to his neighbor shall relinquish it. He shall not exact it of his neighbor, or of his brother, because it is called the Lord’s relinquishment.
This happened at the end of every seven years on Elul 29 – the day right before Rosh Hashanah on the Biblical calendar.
So what does this have to do with us today?
Well, if you go back to the last day of the Shemitah year in 2001, you will find that there was an absolutely horrifying stock market crash.
On September 17th, 2001 (which was Elul 29 on the Jewish calendar), we witnessed the greatest one day stock market crash in U.S. history up to that time. The Dow fell an astounding 684 points, and it was a record that held for precisely seven years until the end of the next Shemitah year.
At the end of the next Shemitah year in 2008, another horrifying stock market crash took place. On September 29th, 2008 the Dow plummeted 777 points, which still today remains the greatest one day stock market crash of all time. It turns out that September 29th, 2008 corresponded with Elul 29 on the Jewish calendar – the precise day when the Bible calls for a releasing of debts.
So on the very last day of the last two Shemitah years, the stock market crashed so badly that it set a brand new all-time record.
And now we are in another Shemitah year. It began last fall, and it will end next September.
Could it be possible that we will see another historic market crash?
Author Jonathan Cahn has correctly pointed out that we should never put God in a box. Just because something has happened in the past does not mean that it will happen again. But we should not rule anything out either.
Perhaps God is using His calendar to make a point. Cahn believes that if we are going to see something happen, it will probably occur as the Shemitah year comes to an end…
Cahn has pointed that, according to his research, the worst of the worst usually happens at the end of the Shemitah year, not at the beginning. In fact, the last day of the year, Elul 29 on the Hebrew calendar, which will occur on Sept. 13, 2015, is the most dreaded day.
The pattern revealed in “The Mystery of the Shemitah” is that the beginning of the Shemitah’s impact is often subtle, but leads to a dramatic climax.
“The beginning may mark a change in direction, even a foreshadow of what will come to a crescendo at the Shemitah’s end,” he said.
And this time around, far more people are paying attention. Back in 2001 and 2008, most Americans had absolutely no idea what a “Shemitah year” was. But now it is being talked about on some of the most prominent alternative news websites on the Internet. For example, the following is what Joseph Farah of WND has to say about the Shemitah year…
Farah believes the date Sept. 13, 2015 bears close watching – though he is quick to admit he has no idea what, if anything, will happen in America.
“A clear pattern has been established,” he says. “I don’t believe it’s a coincidence what happened in America on Elul 29 in 2001 and 2008. It would be foolish to ignore the possibility that a greater judgment might be in the works – especially if America continues to move away from God and His Word.”
The Shemitah year that we are in now does end on September 13th, 2015 – and that falls on a Sunday so the markets will be closed.
But what it comes to the Shemitah, we aren’t just looking at one particular day.
And it is very interesting to note that there will also be a solar eclipse on September 13th, 2015. Over the past century, there have only been two other times when a solar eclipse has corresponded with the end of a Shemitah year. Those two times were in 1931 and 1987, and as Jonathan Cahn has told WND, those solar eclipses foreshadowed major financial disasters…
In 1931, a solar eclipse took place on Sept. 12 – the end of a “Shemitah” year. Eight days later, England abandoned the gold standard, setting off market crashes and bank failures around the world. It also ushered in the greatest monthlong stock market percentage crash in Wall Street history.
In 1987, a solar eclipse took place Sept. 23 – again the end of a “Shemitah” year. Less than 30 days later came “Black Monday” the greatest percentage crash in Wall Street history.
Is Cahn predicting doom and gloom on Sept. 13, 2015? He’s careful to avoid a prediction, saying, “In the past, this ushered in the worst collapses in Wall Street history. What will it bring this time? Again, as before, the phenomenon does not have to manifest at the next convergence. But, at the same time, and again, it is wise to take note.”
So what is going to happen this time?
We will just have to wait and see.
But without a doubt so many of the same patterns that we witnessed just prior to the financial crash of 2008 are happening again right before our very eyes.
It has been said that those that do not learn from history are doomed to repeat it.
Perhaps you believe that there is something to “the Shemitah”, or perhaps you think that it is all a bunch of nonsense.
But at least now you know what everyone is talking about. What you choose to do with this information is up to you.