Some really weird things are happening in the financial world right now. If you go back to 2008, there was lots of turmoil bubbling just underneath the surface during the months leading up to the great stock market crash in the second half of that year. When Lehman Brothers finally did collapse, it was a total shock to most of the planet, but we later learned that their problems had been growing for a long time. I believe that we are in a similar period right now, and the second half of this year promises to be quite chaotic. Apparently, those that run some of the largest exchange-traded funds in the entire world agree with me, because as you will see below they are quietly preparing for a “liquidity crisis” and a “market meltdown”. About a month ago, I warned of an emerging “liquidity squeeze“, and now analysts all over the financial industry are talking about it. Could it be possible that the next great financial crisis is right around the corner?
According to Reuters, the companies that run some of the largest exchange-traded funds in existence are deeply concerned about what a lack of liquidity would mean for them during the next financial crash. So right now they are quietly “bolstering bank credit lines” so that they will be better positioned for “a market meltdown”…
The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown.
Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show.
The measures come as the Federal Reserve and other U.S. regulators express concern about the ability of fund managers to withstand a wave of investor redemptions in the event of another financial crisis. They have pointed particularly to fixed-income ETFs, which tend to track less liquid markets such as high yield corporate bonds or bank loans.
So why are Vanguard Group, Guggenheim Investments and First Trust all making these kinds of preparations right now?
Do they know something that the rest of us do not?
Over recent months, I have been writing about how so many of the exact same patterns that we witnessed just prior to previous financial crashes seem to be repeating once again in 2015.
One of the things that we would expect to see happen just before a major event would be for the “smart money” to rush out of long-term bonds and into short-term bonds and other more liquid assets. This is something that had not been happening, but during the past couple of weeks there has been a major change. All of a sudden, long-term yields have been spiking dramatically. The following comes from Martin Armstrong…
The amount of cash rushing around on the short-end is stunning. Yields are collapsing into negative territory and this is the same flight to quality we began to see at the peak in the crisis back in 2009. The big money is selling the 10 year or greater paper and everyone is rushing into the short-term. There is not enough paper around to satisfy the demands. Capital is unwilling to hold long-term even the 10 year maturities of governments including Germany. This is illustrating the crisis that is unfolding and there is a collapse in liquidity.
There is that word “liquidity” once again. It is funny how that keeps popping up.
Here is a chart that shows what has been happening to the yield on 30 year U.S. Treasuries in 2015. As you can see, there has been a big move recently…
And what this chart doesn’t show is that the yield on 30 year Treasuries shot up to about 3.08% on Wednesday.
Of course it isn’t just yields in the U.S. that are skyrocketing. This is happening all over the globe, and many analysts are now openly wondering if the 76 trillion dollar global bond bubble is finally imploding. For instance, just consider what Deutsche Bank strategist Jim Reid recently told the Telegraph…
Financial regulations introduced since the crisis have required banks to hold more bonds, as quantitative easing schemes have meant central banks hold many on their own balance sheets, reducing the number available to trade on the open market.
Simultaneously, central banks have attempted to boost so-called “high money liquidity” with quantitative easing schemes and their close to zero interest rates. “What has become increasingly clear over the last couple of years is that the combination of high money liquidity and low trading liquidity creates air pockets,” said Mr Reid.
He continued: “It’s a worry that these events are occurring in relatively upbeat markets. I can’t helping thinking that when the next downturn hits the lack of liquidity in various markets is going to be chaotic. These increasingly regular liquidity issues we’re seeing might be a mild dress rehearsal.”
Those are sobering words.
And without a doubt, we are in the midst of a massive stock market bubble as well. The chaos that is coming is not just going to affect bonds. In fact, I believe that the greatest stock market crash in U.S. history is coming.
So when will it happen?
Well, Phoenix Capital Research seems to think that we have reached an extremely important turning point…
This is something of a last hurrah for stocks. We are now officially in May. And historically the period from May to November has been one of the worst periods for stocks from a seasonal perspective.
Moreover, the fundamentals are worsening dramatically for the markets. By the look of things, 2014 represented the first year in which corporate sales FELL since 2009. Sales track actual economic activity much more closely than earnings: either the money comes in or it isn’t. The fact that sales are falling indicates the economy is rolling over and the “recovery” has ended.
Having cut costs to the bone and issued debt to buyback shares, we are likely at peak earnings as well. Thus far 90% of companies in the S&P 500 have reported earnings. Year over year earnings are down 11.9%.
So sales are falling and earnings are falling… at a time when stocks are so overvalued that even the Fed admits it. This has all the makings of a serious market collapse. And smart investors are preparing now BEFORE it hits.
Personally, I have a really bad feeling about the second half of 2015. Everything seems to be gearing up for a repeat of 2008 (or even worse). Let’s hope that does not happen, but let’s not be willingly blind to the great storm on the horizon either.
And once the next great crisis does hit us, governments around the world will have a lot less “ammunition” to fight it than the last time around. For example, the U.S. national debt has approximately doubled since the beginning of the last recession, and the Federal Reserve has already pushed interest rates down as far as they can. Similar things could also be said about other governments all over the planet. This is something that HSBC chief economist Stephen King recently pointed out in a 17 page report entitled “The world economy’s titanic problem”. The following is a brief excerpt from that report…
“Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.”
For a long time, I have had a practice of ending my articles by urging people to get prepared. But now time for preparing is rapidly running out. My new book entitled “Get Prepared Now” was just released, but honestly my co-author and I should have had it out last year. In the very small amount of time that we have left before the financial markets crash, the amount of “prepping” that people are going to be able to do will be fairly limited.
I am not just pointing to a single event. Once the financial markets crash this time, I believe that there is not going to be any sort of a “recovery” like we experienced after 2008. I believe that the long-term economic collapse that we have been experiencing will accelerate very greatly, and it will usher in a horrible period of time for the United States unlike anything that we have ever seen before.
So what do you think?
Could I be wrong?
Please feel free to share your thoughts by posting a comment below…
Over the past decade, there has been only one other time when the value of the U.S. dollar has increased by so much in such a short period of time. That was in mid-2008 – just before the greatest financial crash since the Great Depression. A surging U.S. dollar also greatly contributed to the Latin American debt crisis of the early 1980s and the Asian financial crisis of 1997. Today, the globe is more interconnected than ever. Most global trade is conducted in U.S. dollars, and much of the borrowing done by emerging markets all over the planet is denominated in U.S. dollars. When the U.S. dollar goes up dramatically, this can put a tremendous amount of financial stress on economies all around the world. It also has the potential to greatly threaten the stability of the 65 trillion dollars in derivatives that are directly tied to the value of the U.S. dollar. The global financial system is more vulnerable to currency movements than ever before, and history tells us that when the U.S. dollar soars the global economy tends to experience a contraction. So the fact that the U.S. dollar has been skyrocketing lately is a very, very bad sign.
Most of the people that write about the coming economic collapse love to talk about the coming collapse of the U.S. dollar as well.
But in the initial deflationary stage of the coming financial crisis, we are likely to see the U.S. dollar actually strengthen considerably.
As I have discussed so many times before, we are going to experience deflation first, and after that deflationary phase the desperate responses by the Federal Reserve and the U.S. government to that deflation will cause the inflationary panic that so many have written about.
Yes, someday the U.S. dollar will essentially be toilet paper. But that is not in our immediate future. What is in our immediate future is a “flight to safety” that will push the surging U.S. dollar even higher.
This is what we witnessed in 2008, and this is happening once again right now.
Just look at the chart that I have posted below. You can see the the U.S. dollar moved upward dramatically relative to other currencies starting in mid-2008. And toward the end of the chart you can see that the U.S. dollar is now experiencing a similar spike…
At the moment, almost every major currency in the world is falling relative to the U.S. dollar.
For example, this next chart shows what the euro is doing relative to the dollar. As you can see, the euro is in the midst of a stunning decline…
Instead of focusing on the U.S. dollar, those that are looking for a harbinger of the coming financial crisis should be watching the euro. As I discussed yesterday, analysts are telling us that if Greece leaves the eurozone the EUR/USD could fall all the way down to 0.90. If that happens, the chart above will soon resemble a waterfall.
And of course it isn’t just the euro that is plummeting. The yen has been crashing as well. The following chart was recently posted on the Crux…
Unfortunately, most Americans have absolutely no idea how important all of this is. In recent years, growing economies all over the world have borrowed gigantic piles of very cheap U.S. dollars. But now they are faced with the prospect of repaying those debts and making interest payments using much more expensive U.S. dollars.
Investors are starting to get nervous. At one time, investors couldn’t wait to pour money into emerging markets, but now this process is beginning to reverse. If this turns into a panic, we are going to have one giant financial mess on our hands.
The truth is that the value of the U.S. dollar is of great importance to every nation on the face of the Earth. The following comes from U.S. News & World Report…
In the early ’80s, a bullish U.S. dollar contributed to the Latin American debt crisis, and also impacted the Asian Tiger crisis in the late ’90s. Emerging markets typically have higher growth, but carry much higher risk to investors. When the economies are doing well, foreign investors will lend money to emerging market countries by purchasing their bonds.
They also deposit money in foreign banks, which facilitates higher lending. The reason for this is simple: Bond payments and interest rates in emerging markets are much higher than in the U.S. Why deposit cash in the U.S. and earn 0.25 percent, when you could earn 6 percent in Indonesia? With the dollar strengthening, the interest payments on any bond denominated in U.S. dollars becomes more expensive.
Additionally, the deposit in the Indonesian bank may still be earning 6 percent, but that is on Indonesian rupiahs. After converting the rupiahs to U.S. dollars, the extra interest doesn’t offset the loss from the exchange. As investors get nervous, the higher interest on emerging market debt and deposits becomes less alluring, and they flee to safety. It may start slowly, but history tells us it can quickly spiral out of control.
Over the past few months, I have been repeatedly stressing that so many of the signs that we witnessed just prior to previous financial crashes are happening again.
Now you can add the skyrocketing U.S. dollar to that list.
If you have not seen my previous articles where I have discussed these things, here are some places to get started…
“Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”
“Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?…”
“10 Key Events That Preceded The Last Financial Crisis That Are Happening Again RIGHT NOW”
The warnings signs are really starting to pile up.
When we look back at past financial crashes, there are recognizable patterns that can be identified.
Anyone with half a brain should be able to see that a large number of those patterns are unfolding once again right before our eyes.
Unfortunately, most people in this world end up believing exactly what they want to believe.
No matter how much evidence you show them, they will not accept the truth until it is too late.
On Monday, the price of oil fell below $50 for the first time since April 2009, and the Dow dropped 331 points. Meanwhile, the stock market declines over in Europe were even larger on a percentage basis, and the euro sank to a fresh nine year low on concerns that the anti-austerity Syriza party will be victorious in the upcoming election in Greece. These are precisely the kinds of things that we would expect to see happen if a global financial crash was coming in 2015. Just prior to the financial crisis of 2008, the price of oil collapsed, prices for industrial commodities got crushed and the U.S. dollar soared relative to other currencies. All of those things are happening again. And yet somehow many analysts are still convinced that things will be different this time. And I agree that things will indeed be “different” this time. When this crisis fully erupts, it will make 2008 look like a Sunday picnic.
Another thing that usually happens when financial markets begin to unravel is that they get really choppy. There are big ups and big downs, and that is exactly what we have witnessed since October.
So don’t expect the markets just to go in one direction. In fact, it would not be a surprise if the Dow went up by 300 or 400 points tomorrow. During the initial stages of a financial crash, there are always certain days when the markets absolutely soar.
For example, did you know that the three largest single day stock market advances in history were right in the middle of the financial crash of 2008? Here are the dates and the amount the Dow rose each of those days…
October 13th, 2008: +936 points
October 28th, 2008: +889 points
November 13th, 2008: +552 points
Just looking at those three days, you would assume that the fall of 2008 was the greatest time ever for stocks. But instead, it was the worst financial crash that we have seen since the days of the Great Depression.
So don’t get fooled by the volatility. Choppy markets are almost always a sign of big trouble ahead. Calm waters usually mean that the markets are going up.
In order to avoid a major financial crisis in the near future, we desperately need the price of oil to rebound in a substantial way.
Unfortunately, it does not look like that is going to happen any time soon. There is just way too much oil being produced right now. The following is an excerpt from a recent CNBC article…
The Morgan Stanley strategists say there are new reports of unsold West and North African cargoes, with much of the oil moving into storage. They also note that new supply has entered the global market with additional exports coming from Russia and Iraq, which is reportedly seeing production rising to new highs.
Since June, the price of oil has plummeted close to 55 percent. If the price of oil stays where it is right now, we are going to see large numbers of small producers go out of business, the U.S. economy will lose millions of jobs, billions of dollars of junk bonds will go bad and trillions of dollars of derivatives will be in jeopardy.
And the lower the price of oil goes, the worse our problems are going to get. That is why it is so alarming that some analysts are now predicting that the price of oil could hit $40 later this month…
Some traders appeared certain that U.S. crude will hit the $40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build.
‘We’re headed for a four-handle,’ said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York. ‘Maybe not today, but I’m sure when you get the inventory numbers that come out this week, we definitely will.’
Open interest for $40-$50 strike puts in U.S. crude have risen several fold since the start of December, while $20-$30 puts for June 2015 have traded, said Stephen Schork, editor of Pennsylvania-based The Schork Report.
The only way that the price of oil has a chance to move back up significantly is if global production slows down. But instead, production just continues to increase in the short-term thanks to projects that were already in the works. As a result, analysts from Morgan Stanley say that the oil glut is only going to intensify…
Morgan Stanley analysts said new production will continue to ramp up at a number of fields in Brazil, West Africa, Canada and in the U.S. Gulf of Mexico as well as U.S. shale production. Also, the potential framework agreement with Iran could mean more Iranian oil on the market.
Yes, lower oil prices mean that we get to pay less for gasoline when we fill up our vehicles.
But as I have written about previously, anyone that believes that lower oil prices are good for the U.S. economy or for the global economy as a whole is crazy. And these sentiments were echoed recently by Jeff Gundlach…
“Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.“
If the price of oil does not recover, we are going to see massive financial problems all over the planet and the geopolitical stress that this will create will be unbelievable.
To expand on this point, I want to share an excerpt from a recent Zero Hedge article. As you can see, a rapid rise or fall in the price of oil almost always correlates with a major global crisis of some sort…
Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the ‘difference this time’ is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.
So is the 45% YoY drop in oil prices about to ’cause’ contagion risk concerns for the world?
And without a doubt, we are overdue for another stock market crisis.
Between December 31st, 1996 and March 24th, 2000 the S&P 500 rose 106 percent.
Then the dotcom bubble burst and it fell by 49 percent.
Between October 9th, 2002 and October 9th, 2007 the S&P 500 rose 101 percent.
But then that bubble burst and it fell by 57 percent.
Between March 9th, 2009 and December 31st, 2014 the S&P 500 rose an astounding 204 percent.
When this bubble bursts, how far will it fall this time?
Are you waiting for the next major wave of the global economic collapse to strike? Well, you might want to start paying attention again. Three of the ten largest economies on the planet have already fallen into recession, and there are very serious warning signs coming from several other global economic powerhouses. Things are already so bad that British Prime Minister David Cameron is comparing the current state of affairs to the horrific financial crisis of 2008. In an article for the Guardian that was published on Monday, he delivered the following sobering warning: “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.” For the leader of the nation with the 6th largest economy in the world to make such a statement is more than a little bit concerning.
So why is Cameron freaking out?
Well, just consider what is going on in Japan. The economy of Japan is the 3rd largest on the entire planet, and it is a total basket case at this point. Many believe that the Japanese will be on the leading edge of the next great global economic crisis, and that is why it is so alarming that Japan has just dipped into recession again for the fourth time in six years…
Japan’s economy unexpectedly fell into recession in the third quarter, a painful slump that called into question efforts by Prime Minister Shinzo Abe to pull the country out of nearly two decades of deflation.
The second consecutive quarterly decline in gross domestic product could upend Japan’s political landscape. Mr. Abe is considering dissolving Parliament and calling fresh elections, people close to him say, and Monday’s economic report is seen as critical to his decision, which is widely expected to come this week.
Of course Japan is far from alone.
Brazil has the 7th largest economy on the globe, and it has already been in recession for quite a few months.
And the problems that the national oil company is currently experiencing certainly are not helping matters…
In the past five days, 23 powerful Brazilians have been arrested, with even more warrants still outstanding.
The country’s stock market has become a whipsaw, and its currency, the real, has hit a nine-year low.
All of this is due to a far-reaching corruption scandal at one massive company, Petrobras.
In the last month the company’s stock has fallen by 35%.
The 9th largest economy in the world, Italy, has also fallen into recession…
Italian GDP dropped another 0.1% in the third quarter, as expected.
That’s following a 0.2% drop in Q2 and another 0.1% decline in Q1, capping nine months of recession for Europe’s third-largest economy.
Like Japan, there is no easy way out for Italy. A rapidly aging population coupled with a debt to GDP ratio of more than 132 percent is a toxic combination. Italy needs to find a way to be productive once again, and that does not happen overnight.
Meanwhile, much of the rest of Europe is currently mired in depression-like conditions. The official unemployment numbers in some of the larger nations on the continent are absolutely eye-popping. The following list of unemployment figures comes from one of my previous articles…
Are you starting to get the picture?
The world is facing some real economic problems.
Another traditionally strong economic power that is suddenly dealing with adversity is Israel.
In fact, the economy of Israel is shrinking for the first time since 2009…
Israel’s economy contracted for the first time in more than five years in the third quarter, as growth was hit by the effects of a war with Islamist militants in Gaza.
Gross domestic product fell 0.4 percent in the July-September period, the Central Bureau of Statistics said on Sunday. It was the first quarterly decline since a 0.2 percent drop in the first three months of 2009, at the outset of the global financial crisis.
And needless to say, U.S. economic sanctions have hit Russia pretty hard.
The rouble has been plummeting like a rock, and the Russian government is preparing for a “catastrophic” decline in oil prices…
President Vladimir Putin said Russia’s economy, battered by sanctions and a collapsing currency, faces a potential “catastrophic” slump in oil prices.
Such a scenario is “entirely possible, and we admit it,” Putin told the state-run Tass news service before attending this weekend’s Group of 20 summit in Brisbane, Australia, according to a transcript e-mailed by the Kremlin today. Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events, he said.
Crude prices have fallen by almost a third this year, undercutting the economy in Russia, the world’s largest energy exporter.
It is being reported that Russian President Vladimir Putin has been hoarding gold in anticipation of a full-blown global economic war.
I think that will end up being a very wise decision on his part.
Despite all of this global chaos, things are still pretty stable in the United States for the moment. The stock market keeps setting new all-time highs and much of the country is preparing for an orgy of Christmas shopping.
Unfortunately, the number of children that won’t even have a roof to sleep under this holiday season just continues to grow.
A stunning report that was just released by the National Center on Family Homelessness says that the number of homeless children in America has soared to an astounding 2.5 million.
That means that approximately one out of every 30 children in the United States is homeless.
Let that number sink in for a moment as you read more about this new report from the Washington Post…
The number of homeless children in the United States has surged in recent years to an all-time high, amounting to one child in every 30, according to a comprehensive state-by-state report that blames the nation’s high poverty rate, the lack of affordable housing and the effects of pervasive domestic violence.
Titled “America’s Youngest Outcasts,” the report being issued Monday by the National Center on Family Homelessness calculates that nearly 2.5 million American children were homeless at some point in 2013. The number is based on the Education Department’s latest count of 1.3 million homeless children in public schools, supplemented by estimates of homeless preschool children not counted by the agency.
The problem is particularly severe in California, which has about one-eighth of the U.S. population but accounts for more than one-fifth of the homeless children, totaling nearly 527,000.
This is why I get so fired up about the destruction of the middle class. A healthy economy would mean more wealth for most people. But instead, most Americans just continue to see a decline in the standard of living.
And remember, the next major wave of the economic collapse has not even hit us yet. When it does, the suffering of the poor and the middle class is going to get much worse.
Unfortunately, there are already signs that the U.S. economy is starting to slow down too. In fact, the latest manufacturing numbers were not good at all…
The Federal Reserve’s new industrial production data for October show that, on a monthly basis, real U.S. manufacturing output has fallen on net since July, marking its worst three-month production stretch since March-June, 2011. Largely responsible is the automotive sector’s sudden transformation from a manufacturing growth leader into a serious growth laggard, with combined real vehicles and parts production enduring its worst three-month stretch since late 2008 to early 2009.
A lot of very smart people are forecasting economic disaster for next year.
Hopefully they are all wrong, but I have a feeling that they are going to be right.
There are some who believe that the next great financial crash will not begin in the United States. Instead, they are convinced that a financial crisis that begins in Europe or in Japan (or both) will end up spreading across the globe and take down the U.S. too. Time will tell if they are ultimately correct, but even now there are signs that financial trouble is already starting to erupt in both Germany and Japan. German stocks have declined 10 percent since July, and that puts them in “correction” territory. In Japan, the economy is a total mess right now. According to figures that were just released, Japanese GDP contracted at a 7.1 percent annualized rate during the second quarter and private consumption contracted at a 19 percent annualized rate. Could a financial collapse in either of those nations be the catalyst that sets off financial dominoes all over the planet?
This week, the worst German industrial production figure since 2009 rattled global financial markets. Germany is supposed to be the economic “rock” of Europe, but at this point that “rock” is starting to show cracks.
And certainly the civil war in Ukraine and the growing Ebola crisis are not helping things either. German investors are becoming increasingly jittery, and as I mentioned above the German stock market has already declined 10 percent since July…
German stocks, weighed down by the economic fallout spawned by the Ukraine-Russia crisis and the eurzone’s weak economy, are now down more than 10% from their July peak and officially in correction territory.
The DAX, Germany’s benchmark stock index, has succumbed to recent data points that show the German economy has ground to a halt, hurt in large part by the economic sanctions levied at its major trading partner, Russia, by the U.S. and European Union as a way to get Moscow to butt out of Ukraine’s affairs. The economic slowdown in the rest of the debt-hobbled eurozone has also hurt the German economy, considered the economic locomotive of Europe.
In trading today, the DAX fell as low as 8960.43, which put it down 10.7% from its July 3 closing high of 10,029.43 and off nearly 11% from its June 20 intraday peak of 10,050.98.
And when you look at some of the biggest corporate names in Germany, things look even more dramatic.
Just check out some of these numbers…
The hardest hit sectors have been retailers, industrials and leisure stocks with sports clothing giant Adidas down 37.7pc for the year, airline Lufthansa down 27pc, car group Volkswagen sliding 23.6pc and Deutchse Bank falling 20.2pc so far this year.
Meanwhile, things in Japan appear to be going from bad to worse.
The government of Japan is more than a quadrillion yen in debt, and it has been furiously printing money and debasing the yen in a desperate attempt to get the Japanese economy going again.
Unfortunately for them, it is simply not working. The revised economic numbers for the second quarter were absolutely disastrous. The following comes from a Japanese news source…
On an annualized basis, the GDP contraction was 7.1 percent, compared with 6.8 percent in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.
The blow from the first stage of the sales tax hike in April extended into this quarter, with retail sales and household spending falling in July. The administration signaled last week that it is prepared to boost stimulus to help weather a second stage of the levy scheduled for October 2015.
Corporate capital investment dropped 5.1 percent from the previous quarter, more than double the initial estimate of 2.5 percent.
Private consumption was meanwhile revised to a 5.1 percent drop from the initial reading of 5 percent, meaning it sank 19 percent on an annualized basis from the previous quarter, rather than the initial estimate of 18.7 percent, Monday’s report said.
For the moment, things are looking pretty good in the United States.
But as I have written about so many times, our financial markets are perfectly primed for a fall.
Other experts see things the same way. Just consider what John Hussman wrote recently…
As I did in 2000 and 2007, I feel obligated to state an expectation that only seems like a bizarre assertion because the financial memory is just as short as the popular understanding of valuation is superficial: I view the stock market as likely to lose more than half of its value from its recent high to its ultimate low in this market cycle.
At present, however, market conditions couple valuations that are more than double pre-bubble norms (on historically reliable measures) with clear deterioration in market internals and our measures of trend uniformity. None of these factors provide support for the market here. In my view, speculators are dancing without a floor.
And it isn’t just stocks that could potentially be on the verge of a massive decline. The bond market is also experiencing an unprecedented bubble right now. And when that bubble bursts, the carnage will be unbelievable. This has become so obvious that even CNBC is talking about it…
Picture this: The bond market gets spooked by a sudden interest rate scare, sending a throng of buyers streaming toward the exits, only to find a dearth of buyers on the other side.
As a result, liquidity evaporates, yields soar, and the U.S. finds itself smack in the middle of another debt crisis no one saw coming.
It’s a scenario that TABB Group fixed income head Anthony J. Perrotta believes is not all that far-fetched, considering the market had what could be considered a sneak preview in May 2013. That was the “taper tantrum,” which saw yields spike and stocks sell off after then-Federal Reserve Chairman Ben Bernanke made remarks that the market construed as indicating rates would rise sooner than expected.
If the strength of our financial markets reflected overall strength in the U.S. economy there would not be nearly as much cause for concern.
But at this point our financial markets have become completely and totally divorced from economic reality.
The truth is that our economic fundamentals continue to decay. In fact, the IMF says that China now has the largest economy on the planet on a purchasing power basis. The era of American economic dominance is ending. It is just that the financial markets have not gotten the memo yet.
Hopefully we still have at least a few more months before stock markets all over the world start crashing. But remember, we are entering the seventh year of the seven year cycle of economic crashes that so many people are talking about these days. And we are definitely primed for a global financial collapse.
Sadly, most people did not see the crash of 2008 coming, and most people will not see the next one coming either.
When is the U.S. banking system going to crash? I can sum it up in three words. Watch the derivatives. It used to be only four, but now there are five “too big to fail” banks in the United States that each have more than 40 trillion dollars in exposure to derivatives. Today, the U.S. national debt is sitting at a grand total of about 17.7 trillion dollars, so when we are talking about 40 trillion dollars we are talking about an amount of money that is almost unimaginable. And unlike stocks and bonds, these derivatives do not represent “investments” in anything. They can be incredibly complex, but essentially they are just paper wagers about what will happen in the future. The truth is that derivatives trading is not too different from betting on baseball or football games. Trading in derivatives is basically just a form of legalized gambling, and the “too big to fail” banks have transformed Wall Street into the largest casino in the history of the planet. When this derivatives bubble bursts (and as surely as I am writing this it will), the pain that it will cause the global economy will be greater than words can describe.
If derivatives trading is so risky, then why do our big banks do it?
The answer to that question comes down to just one thing.
The “too big to fail” banks run up enormous profits from their derivatives trading. According to the New York Times, U.S. banks “have nearly $280 trillion of derivatives on their books” even though the financial crisis of 2008 demonstrated how dangerous they could be…
American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them. But the 2008 crisis revealed how flaws in the market had allowed for dangerous buildups of risk at large Wall Street firms and worsened the run on the banking system.
The big banks have sophisticated computer models which are supposed to keep the system stable and help them manage these risks.
But all computer models are based on assumptions.
And all of those assumptions were originally made by flesh and blood people.
When a “black swan event” comes along such as a war, a major pandemic, an apocalyptic natural disaster or a collapse of a very large financial institution, these models can often break down very rapidly.
For example, the following is a brief excerpt from a Forbes article that describes what happened to the derivatives market when Lehman Brothers collapsed back in 2008…
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 last financial crisis, we were promised that this would be fixed.
But instead the problem has become much larger.
When the housing bubble burst back in 2007, the total notional value of derivatives contracts around the world had risen to about 500 trillion dollars.
According to the Bank for International Settlements, today the total notional value of derivatives contracts around the world has ballooned to a staggering 710 trillion dollars ($710,000,000,000,000).
And of course the heart of this derivatives bubble can be found on Wall Street.
What I am about to share with you is very troubling information.
I have shared similar numbers in the past, but for this article I went and got the very latest numbers from the OCC’s most recent quarterly report. As I mentioned above, there are now five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives…
Total Assets: $2,476,986,000,000 (about 2.5 trillion dollars)
Total Exposure To Derivatives: $67,951,190,000,000 (more than 67 trillion dollars)
Total Assets: $1,894,736,000,000 (almost 1.9 trillion dollars)
Total Exposure To Derivatives: $59,944,502,000,000 (nearly 60 trillion dollars)
Total Assets: $915,705,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $54,564,516,000,000 (more than 54 trillion dollars)
Bank Of America
Total Assets: $2,152,533,000,000 (a bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,457,605,000,000 (more than 54 trillion dollars)
Total Assets: $831,381,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $44,946,153,000,000 (more than 44 trillion dollars)
And it isn’t just U.S. banks that are engaged in this type of behavior.
As Zero Hedge recently detailed, German banking giant Deutsche Bank has more exposure to derivatives than any of the American banks listed above…
Deutsche has a total derivative exposure that amounts to €55 trillion or just about $75 trillion. That’s a trillion with a T, and is about 100 times greater than the €522 billion in deposits the bank has. It is also 5x greater than the GDP of Europe and more or less the same as the GDP of… the world.
For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.
At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.
It is like a patient with an extremely advanced case of cancer.
Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process.
The same thing could be said about our relationship with the “too big to fail” banks. If they fail, so do the rest of us.
We were told that something would be done about the “too big to fail” problem after the last crisis, but it never happened.
In fact, as I have written about previously, the “too big to fail” banks have collectively gotten 37 percent larger since the last recession.
At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.
If those banks were to disappear tomorrow, we would not have much of an economy left.
But as you have just read about in this article, they are being more reckless than ever before.
We are steamrolling toward the greatest financial disaster in world history, and nobody is doing much of anything to stop it.
Things could have turned out very differently, but now we will reap the consequences for the very foolish decisions that we have made.
People have such short memories. Even though we are repeating so many of the same patterns that we witnessed in 2000-2001 and 2007-2008, most people do not think that another financial crash is coming. In fact, with the stock market setting record high after record high lately, I have been taking quite a bit of criticism for my relentless warnings about the coming financial storm. Many of the comments go something like this: “Snyder you are a moron! Nothing you say ever comes true. The stock market is going to keep on rocking and Obama is going to lead this country back to greatness. I hope that you choke on all of your doom and gloom.” Of course these critics never offer any hard evidence that I have been wrong about anything. They just assume that since the stock market has soared to unprecedented heights that all of us “bears” must have been wrong.
But the truth is that what we are observing right now is classic bubble behavior. The stock market crashes of 1929, 1987 and 2008 were all preceded by irrational market rallies in the spring or summer. The financial markets have become completely divorced from economic reality, and such a state of affairs never lasts forever. It is just a matter of time before a correction comes.
But every time there is a bubble, most people end up getting caught up in all of the euphoria. And it is happening again. In fact, CNBC has just reported that bearishness among market newsletter writers is the lowest that it has been since 1987. But of course we all remember what happened back in 1987…
Professional investors haven’t had this little fear about stocks since Ronald Reagan was president.
It was the same year Michael Jackson told us in a song he was “Bad.” The New York Giants won the Super Bowl.
And oh yeah … by the way … the stock market crashed.
As gauged by the weekly Investors Intelligence report, bearishness among market newsletter writers has fallen to 13.3 percent, a level it has not seen since 1987 as the market continues to set new highs despite a seemingly endless call for a long-overdue correction.
People need to understand that just because something has not happened yet does not mean that it is not going to happen.
In this day and age, we have extremely short attention spans and we do not have the patience to wait for much of anything. But the financial world is not a game of checkers. It is a game of chess where things can take an extended period of time to play out.
Those that are mocking those of us that are bearish should consider where we stand financially in comparison to previous crash cycles. For example, the derivatives bubble is 20 percent larger than it was back in 2008, the “too big to fail banks” are 37 percent larger than they were back in 2008 and global debt levels are 40 percent larger than they were back in 2008.
In other words, many of our long-term economic problems are a lot worse than they were just prior to the last major financial meltdown.
But most people pay such little attention to the fundamentals these days. All they can see is that little stock market ticker going up and up and up.
Other analysts with much stronger credentials than I are issuing similar ominous warnings about what is ahead for the financial markets.
For example, Nobel Prize-winning economist Robert Shiller is warning that market valuations are tremendously bloated right now…
Shiller, a Yale University professor who is often cited as one of the most influential people in economics and finance in the world, created a metric that compares stock prices with corporate profits. The metric recently climbed above 25. That level has only been surpassed three times since 1881: 1929, 1999 and 2007.
Steep market tumbles followed each instance, including the bursting of the dotcom bubble in the early 2000s.
But it doesn’t take a genius to see this.
Just look at the chart of the NASDAQ that I have posted below. The “dotcom bubble” in 2000 is really easy to see. So why can’t more people recognize the bubble that is happening now?…
In so many ways this bubble is reminiscent of the “dotcom bubble” of 14 years ago. Consider the following numbers from a recent article by Brett Arends…
When you look at medians, or in other words the typical stock, valuations are higher today than they were at the peak in 1999-2000.
For example, the median stock today is 20 times earnings. In January 2000, it was 16 times.
The median stock today trades at 2.5 times “book” or net asset value. At the start of 2000 it was just 2.2 times.
The median stock today trades for 1.8 times annual per-share revenues. In 2000: just 1.4 times.
What we are experiencing is not normal.
And this is especially true considering the fact that our overall economic performance is tepid at best.
A stock market correction is coming.
But you don’t have to take my word for it. Some of the most prominent names in the financial world are warning about the coming correction. Two of them were recently interviewed by CNBC…
A jolt to international confidence in central banks will lead to a 30 to 60 percent market decline, David Tice, president of Tice Capital and founder of the Prudent Bear Fund, told CNBC’s “Power Lunch.” When this happens, he said, markets will face a “period of extreme turmoil.”
This crash will be precipitated, he said, by a disillusionment with the Federal Reserve’s “confidence game,” which will then see inflation rise, and the Fed scramble to raise rates. At that point, Tice added, “the Fed starts to lose control.”
Another market watcher also called for an impending fall.
The Fed’s low interest rates could bring a “scary” 50-60 percent market correction, said technical analyst Abigail Doolittle.
“Unfortunately, I think it could come on a crash similar to what happened in 2007,” Doolittle, the founder of Peak Theories Research, said on “Squawk Box” a day after the S&P 500 closed above the 2,000 level for the first time ever. “It’s tough to know what the exact catalyst will be. But that’s the very nature of that kind of selloff. They start slowly and then happen very suddenly.”
And as Zero Hedge has pointed out, billionaires such as Sam Zell, George Soros, Stan Druckenmiller and Carl Icahn all seem to be “quietly preparing” for the next crash.
Yes, the next financial crash has taken longer to come to fruition than many had anticipated. But as I have discussed so many times before, this is a very good thing. We should want this period of relative stability to last for as long as possible. The longer that things remain relatively stable, the longer that all of us have to prepare and to position ourselves for the financial chaos that is coming.
At this point, the fact that we are in the midst of a massive financial bubble has become so obvious that even the Bank for International Settlements is publicly talking about it…
Financial markets have been exuberant over the past year, […] dancing mainly to the tune of central bank decisions. Volatility in equity, fixed income and foreign exchange markets has sagged to historical lows. Obviously, market participants are pricing in hardly any risks.
Many have expected me to “change my tune” about the coming collapse because of how well the stock market has been performing.
Well, that simply is not going to happen.
Our economic fundamentals have continued to deteriorate, and our financial system is in far worse shape than it was just prior to the financial crash of 2008.
The truth is that we are right on schedule for the next great financial crash.
You can choose to ignore the warnings if you would like, but ultimately time will reveal who was right and who was wrong.
The stock market may be soaring to unprecedented heights, but things just continue to get even tougher for the middle class. In this economic environment, there is intense competition for virtually all kinds of jobs. For example, more than 1,600 applications were recently submitted for just 36 jobs at an ice cream plant in Hagerstown, Maryland. That means that those applying have about a 2 percent chance of being hired. About 98 percent of the applicants will be turned away. That is how tough things are in many areas of the country today. It is now more than five years after the great financial crash of 2008, and the level of employment in the United States is still almost exactly where it was at during the worst moments of the last recession. And this is just the beginning. The next major financial crash is rapidly approaching, and once it strikes our employment crisis is going to get much, much worse.
Working at an ice cream plant does not pay very well. But at least it beats flipping burgers or stocking shelves at Wal-Mart. And in this economy, there is no shortage of desperate workers that are willing to take just about any job that they can find. The following is how a Breitbart article described the flood of applications that were received for just 36 positions at an ice cream plant owned by Shenandoah Family Farms in Hagerstown, Maryland…
Thanks to persistent unemployment and low availability of low-skill jobs, Shenandoah Family Farms’ ice cream plant in Hagerstown, Maryland has received over 1,600 applicants for a grand total of 36 jobs. Many of those applicants are former workers at the Good Humor plant that was bought by Shenandoah Family Farms. “You’d think that after 20-some-years working someplace at least somebody would think you area a good person, that you’d show up on time every day, and that would be worth something,” Luther Brooks, a 50-year-old former worker at the plant told the Washington Post. “I can’t get nothing. I’ve tried.”
Anyone that believes that the economic crisis is “over” is just being delusional. It may be “over” for the boys and girls that work on Wall Street, but even their good times are only temporary.
Of course most Americans are not fooled by the propaganda being put out by the mainstream media. According to a recent CNN poll, 70 percent of all Americans believe that “the economy is generally in poor shape”.
And according to another survey, the economy is still the #1 concern for American voters by a good margin and unemployment is still the #2 concern for American voters by a good margin.
In other words, “It’s the economy, stupid!”
The American people can see that mid-wage jobs are disappearing and that the middle class is being systematically eviscerated. The following is a short excerpt from a recent Business Insider article…
A startling number of middle-class jobs may be headed toward extinction.
More than any other job class, mid-level positions have struggled to recover from the recession, and only a quarter of jobs created in the past three years are categorized as mid-wage. There are high-skilled professional jobs that require college degrees and low-skilled service jobs for less educated workers, but the middle is getting squeezed.
As mid-wage jobs disappear, they are being replaced by low wage jobs. As I mentioned yesterday, one recent study found that about 60 percent of the jobs that have been “created” since the end of the last recession pay $13.83 or less an hour.
And this is just the beginning of the decline of the middle class. Another great financial crisis is rapidly approaching, and once it arrives things are going to get much worse than they are right now.
A number of very prominent experts believe that this next great financial crisis could begin in 2014. For example, in a recent article entitled “Top Ten Trends 2014: A Year of Extremes“, Gerald Celente warned that “an economic shock wave” could hit the United States by the middle of the year. Here are some excerpts from that article…
-“In 33 years of forecasting trends, the Trends Research Institute has never seen a new year that will witness severe economic hardship and social unrest on one hand, and deep philosophic enlightenment and personal enrichment on the other. A series of dynamic socioeconomic and transformative geopolitical trend points are aligning in 2014 to ring in the worst and best of times.”
-“Such unforeseeable factors aside, we forecast that around March, or by the end of the second quarter of 2014, an economic shock wave will rattle the world equity markets.”
-“Nearly half of the requests for emergency assistance to stave off hunger or homelessness comes from people with full-time jobs. As government safety nets are pulled out from under them – as they will continue to be for the foreseeable future – the citizens of Slavelandia will have no recourse but action.”
You can read the rest of that article right here.
And according to the Wall Street Journal, United-ICAP chief market technician Walter Zimmerman in convinced that 2014 will mark the beginning of a massive stock market decline. In fact, he believes that over the next couple of years it could fall by more than 70 percent…
In what may be the bearish call to end all bearish calls, one technician believes 2014 will be the year of “major reversals,” with the Dow Jones Industrial Average expected to start a two-year decline that could eventually take it down more than 70% to below 5000.
If his forecast is correct, it will make what happened in 2008 look like a Sunday picnic…
“Based on our longer-term time cycles the present stock market rally must be considered the bubble to end all bubbles,” Mr. Zimmerman wrote in a note to clients.
He doesn’t believe the Dow Industrials will hit a long-term cycle low until 2016, somewhere in the 5770 to 4650 range. The Dow hasn’t seen those levels, which are 65% to 72% below current prices, since late-1995 to mid-1996.
So what do you think the rest of 2014 will bring?
Please feel free to share your thoughts by posting a comment below…