Is this the start of the next major financial crisis? The nightmarish collapse of the price of oil is creating panic in financial markets all over the planet. On June 16th, U.S. oil was trading at a price of $107.52. Since then, it has fallen by almost 50 dollars in less than 6 months. This has only happened one other time in our history. In the summer of 2008, the price of oil utterly collapsed and we all remember what happened after that. Well, the same patterns that we witnessed back in 2008 are happening again. As the price of oil crashed in 2008, so did prices for a whole host of other commodities. That is happening again. Once commodities started crashing, the market for junk bonds started to implode. That is also happening again. Finally, toward the end of 2008, we witnessed a horrifying stock market crash. Could we be on the verge of another major one? Last week was the worst week for the Dow in more than three years, and stock markets all over the world are crashing right now. Bad financial news continues to roll in from the four corners of the globe on an almost hourly basis. Have we finally reached the “tipping point” that so many have been warning about?
What we witnessed last week is being described as “a bloodbath” that was truly global in scope. The following is how Zero Hedge summarized the carnage…
- WTI’s 2nd worst week in over 3 years (down 10 of last 11 weeks)
- Dow’s worst worst week in 3 years
- Financials worst week in 2 months
- Materials worst week since Sept 2011
- VIX’s Biggest week since Sept 2011
- Gold’s best week in 6 months
- Silver’s last 2 weeks are best in 6 months
- HY Credit’s worst 2 weeks since May 2012
- IG Credit’s worst week in 2 months
- 10Y Yield’s best week since June 2012
- US Oil Rig Count worst week in 2 years
- The USDollar’s worst week since July 2013
- USDJPY’s worst week since June 2013
- Portugal Bonds worst week since July 2011
- Greek stocks worst week since 1987
The stock market meltdown in Greece is particularly noteworthy. After peaking in March, the Greek stock market is down 40 percent since then. That includes a 20 percent implosion in just the past three trading days.
And it isn’t just Greece. Financial markets all over Europe are in turmoil right now. In addition to crashing oil prices, there is also renewed concern about the fundamental stability of the eurozone. Many believe that it is inevitable that it is headed for a break up. As a result of all of this fear, European stocks also had their worst week in over three years…
European stock markets closed sharply lower on Friday, posting their biggest weekly loss since August 2011, as commodity prices continued to fall and and shares in oil-related firms came under renewed pressure from the weak price for crude.
The pan-European FTSEurofirst 300 unofficially ended 2.6 percent lower, down 5.9 percent on the week as the energy sector once again weighed heavily on wider benchmarks, falling over 3 percent.
But despite all of the carnage that we witnessed in the U.S. and in Europe last week, things are actually far worse for financial markets in the Middle East.
Just check out what happened on the other side of the planet on Sunday…
Stock markets in the Persian Gulf got drilled Sunday as worries about further price declines grew. The Dubai stock index fell 7.6% Sunday, the equivalent of a 1,313-point plunge in the Dow Jones industrial average. The Saudi Arabian market fell 3.3%.
Overall, Dubai stocks are down a whopping 23 percent over the last two weeks, and full-blown stock market crashes are happening in Qatar and Kuwait too.
Like I said, this is turning out to be a truly global financial panic.
Another region to keep an eye on is South America. Argentina is a financial basket case, the Brazilian stock market is tanking big time, and the implied probability of default on Venezuelan debt is now up to 93 percent…
Swaps traders are almost certain that Venezuela will default as the rout in oil prices pressures government finances and sends bond prices to a 16-year low.
Benchmark notes due 2027 dropped to 43.75 cents on the dollar as of 11:35 a.m. in New York, the lowest since September 1998, as crude extended a bear market decline. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years is at 59 percent, bringing the implied probability of default to 93 percent, the highest in the world.
So what does all of this mean for the future?
Are we experiencing a repeat of 2008?
Could what is ahead be even worse than that?
Or could this just be a temporary setback?
Recently, Howard Hill shared a few things that he looks for to determine whether a major financial crisis is upon us or not…
The first condition is a serious market sector correction.
According to some participants in the market for energy company bonds and loans, such a correction is already underway and heading toward a meltdown (the second condition). Others are more sanguine, and expect a recovery soon.
That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18% ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.
If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.
The third condition, which we can’t determine directly, would be pressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.
I think that he makes some really good points.
In particular, I think that watching how junk bonds perform over the next few weeks will be extremely telling.
Last week was truly a bloodbath for high yield debt.
But perhaps things will stabilize this week.
Let’s hope so, because this is the closest that we have been to another major financial crisis since 2008.
It isn’t just the price of oil that is collapsing. The last time commodity prices were this low was during the immediate aftermath of the last financial crisis. The Bloomberg Commodity Index fell to 110.4571 on Monday – the lowest that it has been since April 2009. Just like junk bonds, industrial commodities are a very reliable leading indicator. In other words, prices for industrial commodities usually start to move in a particular direction before the overall economy does. We witnessed this in the summer of 2008 when a crash in commodity prices preceded the financial crisis in the fall by a couple of months. And right now, we are witnessing what may be another major collapse in commodity prices. In recent weeks, the price of copper has declined substantially. So has the price of iron ore. So has the price of nickel. So has the price of aluminum. You get the idea. So this isn’t just about oil. This is a broad-based commodity decline, and if it continues it is really bad news for the U.S. economy.
Of course most Americans would much rather read news stories about Kim Kardashian, but what is happening to the prices of these industrial metals at the moment is actually far more important to their daily lives. For example, when the price of iron ore goes down that is a strong indication that economic activity is slowing down. And that is why it is so troubling that the price of iron ore has almost sunk to a five year low. The following comes from an Australian news source…
The price of iron ore has held below $US70 a tonne in overnight trade, leaving its five-year low within reach.
At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US69.40 a tonne, down 0.4 per cent from its previous close of $US69.70 a tonne and only 2 per cent above the five-year low of $US68 reached a fortnight ago.
This week’s dip back under $US70 a tonne has followed revised forecasts from JPMorgan that suggest the commodity will average just $US67 a tonne next year, about $US20 below the investment bank’s previous expectation.
Copper is probably an even better economic indicator than iron ore is. Economists commonly refer to it as “Dr. Copper”, and there is a really good reason for that. Looking back over history, the price of copper often makes a significant move in one direction or the other before the economy does. And now that the price of copper just hit the lowest level that we have seen since the last financial crash, alarm bells are going off. The following comes from an article by CNBC contributor Ron Insana…
Copper prices are now below $3 a pound and there’s an expression that “the economy is topped with a copper roof.” More simply put, copper tends to top out in price, before it becomes obvious that, in this case, the global economy is about to weaken.
So is the global economy heading for rough waters?
Could 2015 be a very rough year economically?
According to Insana, the signs are all around us…
We already have evidence that the commodity crash has ominous portents for the rest of the world:
* Japan’s recession is deeper than previously thought.
* China’s demand for basic materials, amid a glut of uneconomic construction projects, appears to be plummeting.
* Russia’s ruble has collapsed and the country is on the brink, if not already in, a recession.
* India’s economic recovery is beginning to look shaky.
* Europe’s growth rate and inflation rate, for the next two years, were just revised downward by the European Central Bank, suggesting that Europe’s economic crisis is far from over. In fact, at least one former European leader with whom I recently spoke, believes the crisis in Europe may just be in its early stages.
* Brazil and other emerging market nations are struggling with a variety of issues, from recessions at home, to the rising value of the dollar, which is complicating how emerging markets conduct economic policies at home, given how closely their currencies are tied to the greenback.
In addition, the Baltic Dry Index is now at the lowest point that we have seen at this time of the year since 2008…
Simply put, with collapsing commodity prices (iron ore for instance) and massive fleets of credit-driven mal-investment-based vessels, it should surprise no one that the shipping index just plunged back below 1000, now at its lowest for this time of year since 2008. Furthermore, the seasonal bounce always seen in Q3 was among the weakest ever.
What does all of this mean?
It is commonly said that those that do not learn from history are doomed to repeat it.
So many of the exact same patterns that we witnessed leading up to the financial crash of 2008 are happening again.
Unfortunately, very few people saw the last crash coming, and this next crash will take most Americans by surprise as well.
I have written more than 1,200 articles about the economy on my website since 2009, and right now our financial system is more primed for a crash than at any other time since I started The Economic Collapse Blog.
Hopefully we have at least a couple more months of relative stability, but without a doubt 2015 is shaping up to be the most “interesting” year that we have seen in the financial world in a very long time.
All of the signs are there. But most people choose to believe that everything is going to be okay somehow. When the next crash comes, those people are going to be absolutely blindsided by it.
When you see storm clouds on the horizon, the logical thing to do is to prepare. And the number one thing that most people should be working on is an emergency fund. So don’t be frittering your money away on frivolous things. In the early stages of this next crisis, you are going to need money to pay the mortgage, to put food on the table and to take care of your family.
Just remember what happened back in 2008. A lot of middle class families were living on the financial edge every month, and because they didn’t have any cushion to fall back on, millions of those families ended up losing their homes when their jobs disappeared.
You need to have an emergency fund that can cover at least six months of expenses. You don’t want a job loss or a major emergency to put you into a situation where your family could be put out into the street.
And for those that still have lots of money invested in the stock market – I really hope that you know what you are doing.
The market giveth, and the market taketh away.
And when the market taketh away, the consequences can often be exceedingly cruel.
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.
Is the stock market about to crash? Hopefully not, and there definitely have been quite a few “false alarms” over the past few years. But without a doubt we have been living through one of the greatest financial bubbles in U.S. history, and the markets are absolutely primed for a full-blown crash. That doesn’t mean that one will happen now, but we are starting to see some ominous things happen in the financial world that we have not seen happen in a very long time. So many of the same patterns that we witnessed just prior to the bursting of the dotcom bubble and just prior to the 2008 financial crisis are repeating themselves again. Hopefully we still have at least a little bit more time before stocks completely crash, because when this market does implode it is going to be a doozy.
The following are 9 ominous signals coming from the financial markets that we have not seen in years…
#1 By the time the markets closed on Monday, we had witnessed the biggest three day decline for U.S. stocks since 2011.
#2 On Monday, the S&P 500 moved below its 200 day moving average for the first time in about two years. The last time this happened after such an extended streak of success, the S&P 500 ended up declining by a total of 22 percent.
#3 This week the put-call ratio actually moved higher than it was at any point during the collapse of Lehman Brothers in 2008. This is an indication that there is a tremendous amount of fear on Wall Street right now.
#4 Everybody is watching the VIX at the moment. According to the Economic Policy Journal, the VIX has now risen to the highest level that it has been since the heart of the European debt crisis. This is another indicator that there is extraordinary fear on Wall Street…
US stock market volatility has jumped to the highest since the eurozone debt crisis, according to a closely watched index, the the CBOE Vix index of implied US share price volatility.
It jumped to 24.6 late on Monday and is up again this morning. On Thursday, it was as low as 15.
That’s a very strong move, but things have been much worse. At height of the recent financial crisis – the Vix index peaked at 80.1 in November 2008.
Could we get there again? Yeah.
#5 The price of oil is crashing. This also happened in 2008 just before the financial crisis erupted. At this point, the price of oil is now the lowest that it has been in more than two years.
#6 As Chris Kimble has pointed out, the chart for the Dow has formed a “Doji Star topping pattern”. We also saw this happen in 2007. Could this be an indication that we are on the verge of another stock market crash similar to what happened in 2008?
#7 Canadian stocks are actually doing even worse than U.S. stocks. At this point, Canadian stocks have already dropped more than 10 percent from the peak of the market.
#8 European stocks have also had a very rough month. For example, German stocks have already dropped about 10 percent since July, and there are growing concerns about the overall health of the German economy.
#9 The wealthy are hoarding cash and precious metals right now. In fact, one British news report stated that sales of gold bars to wealthy customers are up 243 percent so far this year.
So what comes next?
Some experts are saying that this is the perfect time to buy stocks at value prices. For example, USA Today published a story with the following headline on Tuesday: “Time to ‘buy’ the fear? One Wall Street pro says yes“.
Other experts, however, believe that this could represent a major turning point for the financial markets.
Just consider what Abigail Doolittle recently told CNBC…
Technical strategist Abigail Doolittle is holding tight to her prediction of market doom ahead, asserting that a recent move in Wall Street’s fear gauge is signaling the way.
Doolittle, founder of Peak Theories Research, has made headlines lately suggesting a market correction worse than anyone thinks is ahead. The long-term possibility, she has said, is a 60 percent collapse for the S&P 500.
In early August, Doolittle was warning both of a looming “super spike” in the CBOE Volatility Index as well as a “death cross” in the 10-year Treasury note. The former referenced a sharp move higher in the “VIX,” while the latter used Wall Street lingo for an event that already occurred in which the fixed income benchmark saw its 50-day moving average cross below its 200-day trend line.
Both, she said, served as indicators for trouble ahead.
So what do you think?
Are we about to witness a stock market crash and another major financial crisis?
Or is this just another “false alarm” that will soon fade?
Please feel free to share what you think by posting a comment below…
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.
The U.S. economy has had six full years to bounce back since the financial collapse of 2008, and it simply has not happened. Median household income has declined substantially since then, total household wealth for middle class families is way down, the percentage of the population that is employed is still about where it was at the end of the last recession, and the number of Americans that are dependent on the government has absolutely exploded. Even those that claim that the economy is “recovering” admit that we are not even close to where we used to be economically. Many hope that someday we will eventually get back to that level, but the truth is that this is about as good as things are ever going to get for the middle class. And we should enjoy this period of relative stability while we still can, because when the next great financial crisis strikes things are going to fall apart very rapidly.
The U.S. Census Bureau has just released some brand new numbers, and they are quite sobering. For example, after accounting for inflation median household income in the United States has declined a total of 8 percent from where it was back in 2007.
That means that middle class families have significantly less purchasing power than they did just prior to the last major financial crisis.
And one research firm is projecting that it is going to take until 2019 for median household income to return to the level that we witnessed in 2007…
For everybody wondering why the economic recovery feels like a recession, here’s the answer: We’re still at least five years away from regaining everything lost during the 2007-2009 downturn.
Forecasting firm IHS Global Insight predicts that real median household income — perhaps the best proxy for middle-class living standards — won’t reach the prior peak from 2007 until 2019. Since the numbers are adjusted for inflation, that means the typical family will wait 12 years until their purchasing power is as strong as it was before the recession. That would be the longest period of stagnation, by far, since the Great Depression of the 1930s.
Of course that projection assumes that the economy will continue to “recover”, which is a very questionable assumption at best.
Meanwhile, total household wealth has been declining for middle class families as well.
According to the New York Times, the “typical American household” is now worth 36 percent less than it was worth a decade ago.
That is a pretty substantial drop. But you never hear our politicians (especially the Democrats) bring up numbers like that because they want us to feel good about things.
So why is all of this happening?
The biggest reason why the middle class is struggling so much is the lack of good jobs.
As the chart posted below demonstrates, the percentage of the working age population that is actually employed is still way, way below where it was prior to the last recession…
The “employment recovery” (the tiny little bump at the end of the chart) has been so miniscule that it is hardly even worth mentioning.
At the moment, we still have 1.4 million fewer full-time jobs than we did in 2008 even though more than 100,000 people are added to the U.S. population each month.
And a lot of the workers that have lost jobs since the start of the last recession have never been able to find a new one.
According to a brand new survey conducted by Rutgers University, more than 20 percent of all workers that have been laid off in the past five years still have not found a new job.
Meanwhile, the control freak bureaucrats that run this country continue to kill off small businesses.
In recent years we have seen large numbers of small businesses fail, and at this point the rate of small business ownership in the United States is at an all-time low.
As a result of everything that you have just read, the middle class is shrinking and dependence on the government is soaring.
Today, there are 49 million Americans that are dealing with food insecurity, and Americans received more than 2 trillion dollars in benefits from the federal government last year alone.
For many more statistics just like this, please see my previous article entitled “30 stats to show to anyone that does not believe the middle class is being destroyed“.
Without a doubt, things are not that good for the middle class in America these days.
Unfortunately, the next great wave of financial trouble is rapidly approaching, and once it strikes things are going to get substantially worse for the middle class.
Yes, the stock market set record high after record high this summer. But what we have observed is classic bubble behavior. So many of the exact same patterns that occurred just prior to previous stock market crashes are happening once again.
And it is interesting to note that September 22nd has marked important market peaks at various times throughout history…
For traders, September 22 is one of those days with a notorious history. UBS’s Art Cashin notes that September 22 marked various market highs in 1873, 1929, 1980, and even as recent as 2008.
Could the coming months be the beginning of the next major stock market decline?
Small-cap stocks are already starting to show signs of real weakness. In fact, the Russell 2000 just hit a “death cross” for the first time in more than 2 years…
The Russell 2000 has been diverging from the broader market over the last several weeks, and now technicians point out it has flashed a bearish signal. For the first time in more than two years, the small-cap index has hit a so-called death cross.
A death cross occurs when a nearer-term 50-day moving average falls below a longer-term, 200-day moving average. Technicians argue that a death cross can be a bearish sign.
None of us knows what the market is going to do tomorrow, but a lot of the “smart money” is getting out of the market right now while the getting is good.
So where is the “smart money” putting their assets?
In a previous article, I discussed how sales of gold bars to wealthy clients is way up so far this year.
And CNBC has just reported that the ultra-wealthy “are holding mountains of cash” right now…
Billionaires are holding mountains of cash, offering the latest sign that the ultra-wealthy are nervous about putting more money into today’s markets.
According to the new Billionaire Census from Wealth-X and UBS, the world’s billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica.
Why are they doing this?
Are they concerned about the potential of a market crash?
And if we do see another market crash like we witnessed back in 2008, what is that going to mean for the rest of us?
2008 certainly did not destroy our economy.
But it did cause an immense amount of damage that we have never recovered from.
Now the next wave is approaching, and most people don’t even see it coming.
Did you know that a major event just happened in the financial markets that we have not seen since the financial crisis of 2008? If you rely on the mainstream media for your news, you probably didn’t even hear about it. Just prior to the last stock market crash, a massive amount of money was pulled out of junk bonds. Now it is happening again. In fact, as you will read about below, the market for high yield bonds just experienced “a 6-sigma event”. But this is not the only indication that the U.S. economy could be on the verge of very hard times. Retail sales are extremely disappointing, mortgage applications are at a 14 year low and growing geopolitical storms around the world have investors spooked. For a long time now, we have been enjoying a period of relative economic stability even though our underlying economic fundamentals continue to get even worse. Unfortunately, there are now a bunch of signs that this period of relative stability is about to end. The following are 14 reasons why the U.S. economy’s bubble of false prosperity may be about to burst…
#1 The U.S. junk bond market just experienced “a 6-sigma event” earlier this month. In other words, it is an event that is only supposed to have a chance of 1 in 500 million of happening. Billions of dollars are being pulled out of junk bonds right now, and that has some analysts wondering if a financial crash is right around the corner.
#2 The last time that we saw a junk bond rout of this magnitude was back during the financial crash of 2008. In fact, as the Telegraph recently explained, bonds usually crash before stocks do…
The credit market usually leads the equity market during turning points, as happened when credit markets cracked first in 2008.
Will the same thing happen this time around?
#3 Retail sales have missed expectations for three months in a row and we just had the worst reading since January.
#4 Things have gotten so bad that even Wal-Mart is really struggling. Same-store sales at Wal-Mart have declined for five quarters in a row and the outlook for the future is not particularly promising.
#5 The four week moving average for mortgage applications just hit a 14 year low. It is now even lower than it was during the worst moments of the financial crisis of 2008.
#6 The tech industry is supposed to be booming, but mass layoffs in the tech industry are actually 68 percent ahead of last year’s pace.
#7 According to the Federal Reserve, 40 percent of all households in the United States are currently showing signs of financial stress.
#8 The U.S. homeownership rate has fallen to the lowest level since 1995.
#9 According to one survey, 76 percent of Americans do not have enough money saved to cover six months of expenses.
#10 Rumblings of a stock market correction have become so loud that even the mainstream media is reporting on it. For example, just check out this CNN headline from earlier this month: “Is a correction near? Wall Street on edge“.
#11 The civil war in Iraq is spiraling out of control, and Barack Obama has just announced that he is going to send 130 troops to the country in a “humanitarian” capacity. Iraq is the 7th largest oil producing nation on the entire planet, and if the flow of oil is disrupted that could have serious consequences.
#12 As a result of the conflict in Ukraine, the United States, Canada and the European Union have slapped sanctions on Russia. In return, Russia has slapped sanctions on them. Will this slowdown in global trade significantly harm the U.S. economy?
#13 The three day cease-fire between Hamas and Israel is about to end, and Hamas officials are saying that they are preparing for a “long battle“. If a resolution is not found soon, we could potentially see a full-blown regional war erupt in the Middle East.
#14 The number of Ebola deaths continues to grow at an exponential rate, and if the virus starts spreading inside the United States it has the potential to pretty much shut down our entire economy.
Meanwhile, things look even more dire in much of the rest of the globe.
For example, the economic slowdown has gotten so bad in some nations over in Europe that they are actually experiencing deflation…
Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral.
The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS.
And in Japan, GDP just contracted at a 6.8 percent annual rate during the second quarter…
Japan’s economy suffered its worst contraction since 2011 in the second quarter as consumer spending on big items slumped in the wake of a sales tax rise.
Gross domestic product shrunk by an annualized 6.8% in the three months ended June, Japan’s Cabinet Office said Wednesday. The result was actually better than the 7% contraction expected by economists.
On a quarterly basis, Japan’s GDP dropped by 1.7% as business and housing investment declined. Japan’s economy last suffered a hit of this magnitude after the 2011 tsunami and nuclear disaster.
There is no way that this bubble of false prosperity was going to last forever. It was never real to begin with. It was just based on a pyramid of debt and false promises. In fact, the condition of the global financial system is now far worse than it was just prior to the financial crisis of 2008.
Sadly, most people do not understand these things. Most people just assume that our leaders have fixed whatever caused the problems last time. And when the next crisis arrives, they will be totally blindsided by it.
Has the next major economic downturn already started? The way that you would answer that question would probably depend on where you live. If you live in New York City, or the suburbs of Washington D.C., or you work for one of the big tech firms in the San Francisco area, you would probably respond to such a question by saying of course not. In those areas, the economy is doing great and prices for high end homes are still booming. But in most of the rest of the nation, evidence continues to mount that the next recession has already begun for the poor and the middle class. As you will read about below, major retailers had an absolutely dreadful start to 2014 and home sales are declining just as they did back in 2007 before the last financial crisis. Meanwhile, the U.S. economy continues to lose more good jobs and 20 percent of all U.S. families do not have a single member that is employed at this point. 2014 is turning out to be eerily similar to 2007 in so many ways, but most people are not paying attention.
During the first quarter of 2014, earnings by major U.S. retailers missed estimates by the biggest margin in 13 years. The “retail apocalypse” continues to escalate, and the biggest reason for this is the fact that middle class consumers in the U.S. are tapped out. And this is not just happening to a few retailers – this is something that is happening across the board. The following is a summary of how major U.S. retailers performed in the first quarter of 2014 that was put together by Jim Quinn…
Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%
Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%
Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%
JC Penney Thrilled With Loss of Only $358 Million For the Quarter
Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%
Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%
Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores
Gap Income Drops 22% as Same Store Sales Fall
American Eagle Profits Tumble 86%, Will Close 150 Stores
Aeropostale Losses $77 Million as Sales Collapse by 12%
Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%
Macy’s Profit Flat as Comparable Store Sales decline by 1.4%
Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%
Urban Outfitters Earnings Collapse by 20% as Sales Stagnate
McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%
Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster
TJX Misses Earnings Expectations as Sales & Earnings Flat
Dick’s Misses Earnings Expectations as Golf Store Sales Plummet
Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%
Lowes Misses Earnings Expectations as Customer Traffic was Flat
That is quite a startling list.
But plummeting retail sales are not the only sign that the U.S. middle class is really struggling right now. Home sales have also been extremely disappointing for quite a few months. This is how Wolf Richter described what we have been witnessing…
This is precisely what shouldn’t have happened but was destined to happen: Sales of existing homes have gotten clobbered since last fall. At first, the Fiscal Cliff and the threat of a US government default – remember those zany times? – were blamed, then polar vortices were blamed even while home sales in California, where the weather had been gorgeous all winter, plunged more than elsewhere.
Then it spread to new-home sales: in April, they dropped 4.7% from a year ago, after March’s year-over-year decline of 4.9%, and February’s 2.8%. Not a good sign: the April hit was worse than February’s, when it was the weather’s fault. Yet April should be the busiest month of the year (excellent brief video by Lee Adler on this debacle).
We have already seen that in some markets, in California for example, sales have collapsed at the lower two-thirds of the price range, with the upper third thriving. People who earn median incomes are increasingly priced out of the market, and many potential first-time buyers have little chance of getting in. In San Diego, for example, sales of homes below $200,000 plunged 46% while the upper end is doing just fine.
As Richter noted, sales of upper end homes are still doing fine in many areas.
But how long will that be able to continue if things continue to get even worse for the poor and the middle class? Traditionally, the U.S. economy has greatly depended upon consumer spending by the middle class. If that continues to dry up, how long can we avoid falling into a recession? For even more numbers that seem to indicate economic trouble for the middle class, please see my previous article entitled “27 Huge Red Flags For The U.S. Economy“.
Other analysts are expressing similar concerns. For example, check out what John Williams of shadowstats.com had to say during one recent interview…
We’re turning down anew. The first quarter should revise into negative territory… and I believe the second quarter will report negative as well.
That will all happen by July 30 when you have the annual revisions to the GDP. In reality the economy is much weaker than that. Economic growth is overstated with the GDP because they understate inflation, which is used in deflating the number…
What we’re seeing now is just… we’ve been barely stagnant and bottomed out… but we’re turning down again.
The reason for this is that the consumer is strapped… doesn’t have the liquidity to fuel the growth in consumption.
Income… the median household income, net of inflation, is as low as it was in 1967. The average guy is not staying ahead of inflation…
This has been a problem now for decades… You were able to buy consumption from the future by borrowing more money, expanding your debt. Greenspan saw the problem was income, so he encouraged debt expansion.
That all blew apart in 2007/2008… the income problems have continued, but now you don’t have the ability to borrow money the way you used to. Without that and the income problems remaining, there’s no way that consumption can grow faster than inflation if income isn’t.
As a result – personal consumption is more than two thirds of the economy – there’s no way you can have positive sustainable growth in the U.S. economy without the consumer being healthy.
The key to the health of the middle class is having plenty of good jobs.
But the U.S. economy continues to lose more good paying jobs.
For example, Hewlett-Packard has just announced that it plans to eliminate 16,000 more jobs in addition to the 34,000 job cuts that have already been announced.
Today, there are 27 million more working age Americans that do not have a job than there were in 2000, and the quality of our jobs continues to decline.
This is absolutely destroying the middle class. Unless the employment situation in this country starts to turn around, there does not seem to be much hope that the middle class will recover any time soon.
Meanwhile, there are emerging signs of trouble for the wealthy as well.
For instance, just like we witnessed back in 2007, things are starting to look a bit shaky at the “too big to fail” banks. The following is an excerpt from a recent CNBC report…
Citigroup has joined the ranks of those with trading troubles, as a high-ranking official told the Deutsche Bank 2014 Global Financial Services Investor Conference Tuesday that adjusted trading revenue probably will decline 20 percent to 25 percent in the second quarter on an annualized basis.
“People are uncertain,” Chief Financial Officer John Gerspach said of investor behavior, according to an account from the Wall Street Journal. “There just isn’t a lot of movement.”
In recent weeks, officials at JPMorgan Chase and Barclays also both reported likely drops in trading revenue. JPMorgan said it expected a decline of 20 percent of the quarter, while Barclays anticipates a 41 percent drop, prompting it to announce mass layoffs that will pare 19,000 jobs by the end of 2016.
Remember, very few people expected a recession the last time around either. In fact, Federal Reserve Chairman Ben Bernanke repeatedly promised us that we would not have a recession and then we went on to experience the worst economic downturn since the Great Depression.
It will be the same this time as well. Just like in 2007, we will continue to get an endless supply of “hopetimism” from our politicians and the mainstream media, and they will continue to fill our heads with visions of rainbows, unicorns and economic prosperity for as far as the eyes can see.
But then the next recession will strike and most Americans will be completely blindsided by it.