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The Global Commodity Crash Tells Us That A Major Deflationary Financial Crisis Is Imminent

Global - Public DomainIf we really are plunging into a deflationary global financial crisis, we would expect to see commodity prices crash hard.  That happened just before the great stock market crash of 2008, and that is precisely what is happening once again right now.  On Thursday, the Bloomberg Commodity Index closed at 79.1544.  The last time that it closed this low was 16 years ago.  Not even during the worst moments of the last recession did it ever get so low.  Overall, the Bloomberg Commodity Index is down more than 28 percent over the past 12 months, and it has plummeted by more than half since mid-2011.  As a result of this stunning commodity collapse, extremely large mining companies such as Anglo American are imploding, giant commodity trading firms such as Glencore and Trafigura are in full-blown crisis mode, and huge portions of the global financial system are in danger of utterly collapsing.

In recent days, I have been trying to stress that many of the exact same patterns that we witnessed just prior to the great stock market crash of 2008 are happening once again.  This includes the staggering crash of commodity prices that we are currently witnessing, and even CNN acknowledges that there are parallels to what we experienced seven years ago…

The last time raw materials like copper and oil were this cheap, an economic depression loomed just around the corner.

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry.

But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days.

As I mentioned above, this crash in prices is hitting mining companies really hard.  Just this week, the fifth largest mining company in the entire world announced a massive restructuring and will be laying off tens of thousands of workers…

In the latest example of just how bad things have gotten, Anglo American–the world’s fifth largest miner–just kitchen sink-ed it, announcing a sweeping restructuring, a massive round of layoffs, and a dividend cut. The company will reduce its assets by some 60% while headcount will be cut by a whopping 85,000 or, nearly two-thirds. 

Overall, the U.S. has lost approximately 123,000 good paying jobs from the mining sector since the end of 2014.  And if commodity prices stay low, this sector is going to continue to bleed good paying jobs.

Meanwhile, investors have been dumping the debt of any companies that have anything to do with commodities.  This has significantly contributed to the emerging junk bond crisis that I discussed in my last article.  As I write this, a high yield bond ETF known as JNK has fallen all the way down to 34.31, which is the lowest that it has been since the last recession.  For much more on the junk bond implosion, I would encourage you to read an article that Wolf Richter just put out entitled “Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck“.

So why are commodity prices falling so rapidly?

Many analysts are pointing to the economic slowdown in China as the primary reason.  For years, the Chinese economy voraciously gobbled up commodities from sources all over the planet, but now things are changing.  The Chinese economy is really, really slowing down, and some recently released numbers give us some clues as to the true extent of that slowdown…

-Chinese exports fell 6.8 percent in November on a year over year basis after being down 6.9 percent on a year over year basis in October.

-Chinese imports were down 8.7 percent in November on a year over year basis.

-Chinese manufacturing activity has been contracting for nine months in a row.

-Last week, the China Containerized Freight Index plummeted to 718.58 – the lowest level ever recorded.

And of course it isn’t just China.  Goldman Sachs says that the seventh largest economy on the entire planet, Brazil, has plunged into a “depression“.  And as I pointed out the other day, of the 93 largest stock market indexes in the entire world, an astonishing 47 of them (more than half) are down at least 10 percent year to date.

Even though stocks slid in the U.S. this week, the major indexes still seem somewhat stable.  But this is a bit of an illusion.  Yes, the biggest names on Wall Street are still flying high for the moment, but shares of a multitude of smaller and mid-size firms have been plummeting.  At this point, nearly 70 percent of all U.S. stocks are already below their 200 day moving averages.  This is yet another thing that we would expect to see just before the bottom falls out for stocks.

Everything that I have been writing about this week (see here and here) is perfectly consistent with all of my warnings from earlier this year.

We are plunging into a deflationary financial crisis in textbook fashion.  And if the Federal Reserve actually does decide to go ahead with an interest rate hike next week that is just going to make things even worse.

But most people are not patient enough to watch a process play out.  Most people that write about “the coming economic collapse” hype it up like it is going to be some sort of big Hollywood blockbuster that is going to happen over a week or a month and then be over.  That is definitely not the way that I see things.

To me, “the economic collapse” is something that has been happening for decades, that is still in the process of happening right now, and that will continue to happen as we move forward into the future.  The long-term trends that are ripping our economy to shreds continue to intensify, and our leaders are not doing anything to fix our underlying fundamental problems.

And the financial crisis that I warned would start during 2015 and accelerate in 2016 has already begun.  More than half of all major global stock market indexes are down by at least 10 percent year to date, and some of them have plummeted by more than 30 or 40 percent.  Trillions of dollars of wealth has been wiped out around the globe, and this is just the beginning.

All of the numbers tell us the same thing.

Big trouble is ahead.

My job is to inform you of these things.  What you choose to do with this information is up to you.

This Is For The ‘Nothing Is Happening’ Crowd…

Wake Up - Public DomainA lot of people out there expected something to happen in September that did not ultimately happen.  There were all kinds of wild theories floating around, and many of them had no basis in reality whatsoever.  But without a doubt, some very important things did happen in September.  As I warned about ahead of time, we are witnessing the most significant global financial meltdown since the end of 2008.  All of the largest stock markets in the world are crashing simultaneously, and so far the amount of wealth that has been wiped out worldwide is in excess of 5 trillion dollars.  In addition to stocks, junk bonds are also crashing, and Bank of America says that it is a “slow moving trainwreck that seems to be accelerating“.  Thanks to the commodity price crash, many of the largest commodity traders on the planet are now imploding.  I wrote about the death spiral that has gripped Glencore yesterday.  On Tuesday, the stock price of the largest commodity trader in Asia, the Noble Group, plummeted like a rock and commodity trading giant Trafigura appears to be in worse shape than either Glencore or the Noble Group.  The total collapse of any of them could easily be a bigger event than the implosion of Lehman Brothers in 2008.  So I honestly do not understand the “nothing is happening” crowd.  It takes ignorance on an almost unbelievable level to try to claim that “nothing is happening” in the financial world right now.

Within the last 60 days, we have seen some things happen that we have never seen before.

For example, did you know that we witnessed the greatest intraday stock market crash in U.S. history on August 24th?

During that day, the Dow Jones Industrial Average plunged from a high of 16,459.75 to a low of 15,370.33 before rebounding substantially. That intraday point swing of 1,089 points was the largest in all of U.S. history.

Overall, the Dow has down 588.40 points that day.  When you combine that decline with the 530.94 point plunge from the previous Friday, you get a total drop of 1119.34 points over two consecutive trading days.  Never before in history had the Dow fallen by more than 500 points on two trading days in a row.  If that entire decline had fallen within one trading day, it would have been the largest stock market crash in U.S. history by a very wide margin, and everyone would be running around saying that author Jonathan Cahn was right again.

But because this massive decline fell over two consecutive trading days that somehow makes him wrong?

Are you kidding me?

Come on people – let’s use some common sense here.  We are already witnessing the greatest global stock market decline in seven years, and after a brief lull things are starting to accelerate once again.  Last night, stocks in Hong Kong were down 629 points and stocks in Japan were down 714 points.  In the U.S., the Nasdaq has had a string of down days recently, and the “death cross” that has just formed has many investors extremely concerned

The Nasdaq composite spooked investors on Monday after forming a death cross, a trading pattern that shows a decline in short-term momentum and is often a precursor to future losses.

A death cross occurs when the short-term moving average of a security or an index pierces below the long-term trend, in this case the 50-day moving average breaking through the 200-day moving average.

In the past month, similar chart patterns formed in the S&P 500, Dow and small-cap Russell 2000, but the Nasdaq avoided a death cross formation until Monday.

What we witnessed in September was not “the end” of anything.

Instead, it is just the beginning.

And if you listen carefully, some of the biggest names on Wall Street are issuing some very ominous warnings about what is coming.  For instance, just consider what Carl Icahn is saying

Danger ahead—that’s the warning from Carl Icahn in a video coming Tuesday.

The activist says low rates caused bubbles in art, real estate and high-yield bonds—with potentially dramatic consequences.

“It’s like giving somebody medicine and this medicine is being given and given and given and we don’t know what’s going to happen – you don’t know how bad it’s going to be. We do know when we did it a few years ago it caused a catastrophe, it caused ’08. Where do you draw the line?”

Even people like Jim Cramer are starting to freak out.  He recently told his audience that “we have a first-class bear market going”

Jim Cramer, the ex-hedge fund manager and host of CNBC’s show “Mad Money,” has been vocal recently on air, saying repeatedly that he doesn’t like the market now, and last week said “we have a first-class bear market going.” Similarly, Gary Kaltbaum, president of Kaltbaum Capital Management, has been sending out notes to clients and this newspaper for weeks, saying the poor price action of the stock market and many hard-hit sectors, such as energy and the recently clobbered biotech sector, has all the earmarks of a bear market. Over the weekend, Kaltbaum said: “We remain in a worldwide bear market for stocks.”

As I have warned repeatedly, there will continue to be ups and downs.  The stock market is not going to fall every day.  In fact, on some days stocks will absolutely soar.

But without a doubt, we have entered the period of time that I have warned about for so long.  The global financial system is now beginning to unravel, and any piece of major bad news will likely accelerate things.

For instance, the total collapse of Deutsche Bank, Petrobras, Glencore, the Noble Group, Trafigura or any of a number of other major financial institutions that I am currently watching could create mass panic on the global financial stage.

In addition, an unexpected natural disaster that hits a financially important major city or a massive terror attack in the western world are other examples of things that could accelerate this process.

Our world is becoming increasingly unstable, and we all need to learn to expect the unexpected.

The period of relative peace and security that we all have been enjoying for so long is ending, and now chaos is going to reign for a time.

So get prepared while you still can, because there is very little time remaining to do so…

Is Glencore The Next Lehman? The World’s Largest Commodities Trading Company Is Toast

Toast - Public DomainAre we about to witness the most important global financial event since the collapse of Lehman Brothers in 2008?  Glencore has been known as the largest commodities trading company on the entire planet, and at one time it was ranked as the 10th biggest company in the world.  It is linked to billions of dollars of derivatives trades globally, and if the firm were to implode it would be a financial disaster unlike anything that we have seen in Europe since the end of World War II.  Unfortunately, all signs are pointing to an inescapable death spiral for Glencore at this point.  The stock price was down nearly 30 percent on Monday, and overall Glencore stock has plunged nearly 80 percent since May.  There are certainly other candidates for “the next Lehman” (Petrobras and Deutsche Bank being two perfect examples), but Glencore has definitely surged to the front of the pack.  Right now many analysts are openly wondering if the firm will even be able to survive to the end of next month.

If you are not familiar with Glencore, the following is a pretty good summary of the commodity trading giant from Wikipedia

Glencore plc is an Anglo–Swiss multinational commodity trading and mining company headquartered in Baar, Switzerland, with its registered office in Saint Helier, Jersey. The company was created through a merger of Glencore with Xstrata on 2 May 2013. As of 2014, it ranked tenth in the Fortune Global 500 list of the world’s largest companies. It is the world’s third-largest family business.

As Glencore International, the company was already one of the world’s leading integrated producers and marketers of commodities. It was the largest company in Switzerland and the world’s largest commodities trading company, with a 2010 global market share of 60 percent in the internationally tradeable zinc market, 50 percent in the internationally tradeable copper market, 9 percent in the internationally tradeable grain market and 3 percent in the internationally tradeable oil market.

For months, I have been warning about the consequences of the crash that we have been witnessing in commodity prices.  We saw a similar thing happen in 2008 just before the financial crisis that erupted in the fall of that year.  If commodity prices kept going down (which they did), it was only a matter of time before firms like Glencore started imploding.

At this point, Glencore owes almost twice as much money as the entire firm is worth

Now there is every chance the merged operation could implode. If it does, it will be the resources sector’s very own Lehman Brothers moment.

With debt approaching $US30 billion and a market value of just $US16 billion, shareholders and those holding the debt are desperately looking for an exit.

The cost of Glencore’s credit default swaps – a financial instrument that insures against a default – soared overnight.

Actually, “soared” is a horrible understatement.

The cost of insuring Glencore’s debt is absolutely screaming into the stratosphere.  This is precisely what we would expect to see right before a “Lehman Brothers moment”.  Here are some of the specific details from the Wall Street Journal

Investors had to pay on Monday more than $790,000 a year to insure $10 million of Glencore debt against default for five years using credit default swaps, according to Markit, more than 40% higher than Friday. At the beginning of the year, the same insurance cost $154,000.

When Glencore goes down, they will take a whole lot of others with them.  That is because Glencore is tied to trillions of dollars worth of derivatives trades all over the planet.  According to Zero Hedge, we are looking at “the start of a self-fulfilling prophecy which leads to the Companys’s IG downgrade and the collapse of trillions in derivative notionals as what may be the trading desk of the biggest commodity counterparty quietly goes out of business.”

For years I have been ranting about the danger of derivatives.  In article after article I warned that they would play a starring role in the next financial crisis.

Now the reality of what I was warning about is staring us right in the face.

The “nothing is happening” crowd is completely and utterly clueless.  There are these people running around telling everyone that the stock market decline is “over” and that we aren’t about to experience another great financial crisis.

I don’t understand how these people can be so ignorant.  Global giants such as Glencore, Petrobras and Deutsche Bank are imploding right in front of our eyes.  As I write this, stocks in Hong Kong are down 744 points and stocks in Japan are down 677 points.  The stock markets of the 10 largest economies on the entire planet are all crashing, but the mockers are going to continue to mock.  They will continue to tell you that “nothing is happening” even in the face of undeniable evidence to the contrary.

And the sad thing is that many of these mockers are given air time on the big mainstream news networks.  They will tell you that stocks are “oversold” and that you should “buy the dip” because stocks are going to be going back to record highs really soon.

I wish that was true.  Unfortunately, the reality of the matter is that we are finally witnessing the bursting of the last great global financial bubble.  I really like how Bill Holter put it recently

In my opinion we are already well within the jaws of a meltdown/shutdown as liquidity is evaporating. There are a dozen developed countries with their stock markets already in bear markets (down 20% or more). All crashes come from oversold levels just as bank runs come on fast and are a surprise at the time. What is coming should be NO SURPRISE to anyone as we are looking at the end of not only an empire but of a flawed system which has endured for far too many years! This was a solvency problem in 2008 and “liquidity” was the incorrect tool used then. Now it is a bigger solvency problem with an illiquidity kicker attached …while the Fed has already used every tool imaginable and every last ounce of credibility. The loss of confidence in the issuer of the world’s reserve currency would be bad enough in an unlevered world, the loss of confidence in today’s “debt world” will be a DISASTER!

To wrap this up, do not let anything that may happen from here surprise you. The conditions are ripe for global currency crises and a shutdown of credit. The conditions are also ripe for hot war to explode in multiple venues. A meltdown or shutdown of markets will serve as a FINAL FLUSH of what remains left of the U.S. middle class.

We are steamrolling toward a global economic collapse that will be permanent and irreversible.

For months, I have been warning that we were witnessing a textbook example of what the lead up to a major financial crisis looks like, and now it is happening.  All of this was completely and totally predictable for those that were willing to look at the signs.

Unfortunately, there are way too many people out there that think that they know it all and that have a tremendous amount of blind faith in the system.

Now the system is failing, and that blind faith is about to be shattered.

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