One of the most important banks in the western world says that the 7th largest economy on the entire planet has entered a full-blown economic depression. Brazil’s economy has now contracted for three quarters in a row, and many analysts believe that things are going to get far worse before they have a chance to get any better. Earlier this year, I warned about “the South American financial crisis of 2015“, and now it is in full swing. The surging U.S. dollar is absolutely crushing emerging markets such as Brazil, and if the Fed raises interest rates this month that is going to make the pain even worse. The global financial system is more interconnected than ever before, and the decisions made by the Federal Reserve truly do have global consequences. So much of the “hot money” that was created by the Fed poured into emerging markets such as Brazil during the good times, but now the process is starting to reverse itself. At this point, it is hard to see how much of South America is going to avoid a complete and total economic disaster.
It is one thing for Michael Snyder from the Economic Collapse Blog to say that the Brazilian economy has entered a “depression”, but it is another thing entirely when Goldman Sachs comes out and publicly says it. The following comes from a Bloomberg article that was just posted entitled “Goldman Warns of Brazil Depression After GDP Plunges Again“…
Latin America’s largest economy shrank more than analysts forecast, as rising unemployment and higher inflation sapped domestic demand, pulling the nation deeper into what Goldman Sachs now calls “an outright depression.”
Gross domestic product in Brazil contracted 1.7 percent in the three months ended in September, after a revised 2.1 percent drop the previous quarter, the national statistics institute said in Rio de Janeiro. That’s worse than all but three estimates from 44 economists surveyed by Bloomberg, whose median forecast was for a 1.2 percent decline. It also marks the first three-quarter contraction since the institute’s series began in 1996, and a seasonally adjusted annual drop of 6.7 percent.
And when you look deeper into the numbers they become even more disturbing.
Unemployment is rising, consumer spending is way down, and investment spending is absolutely collapsing. Here is some of the data that Goldman Sachs just released that comes via Zero Hedge…
Private consumption has now declined for three consecutive quarters (at an average quarterly rate of -8.5% qoq sa, annualized), and investment spending for nine consecutive quarters (at an average rate of -10.0% qoq sa, annualized). Overall, gross fixed investment declined by a cumulative 21% from 2Q2013. The declining capital stock of the economy (declining capital-labor ratio) hurts productivity growth and limits even further potential GDP. The sharp contraction of real activity during 3Q was broad-based: both on the supply and final demand side. Final domestic demand weakened sharply during 3Q2015 (-1.7% qoq sa and -6.0% yoy) with private consumption down 1.5% qoq sa (-4.5% yoy) and gross fixed investment down 4.0% qoq sa (-15.0% yoy). Finally, on the supply side, we highlight that the large labor intensive services sector retrenched again at the margin (-1.0% qoq sa; -2.9% yoy).
The term “economic depression” is not something that should be used lightly, because it conjures up images of the Great Depression of the 1930s. And the Brazilian economy is very important to the global economic system. As I mentioned above, there are only six countries in the entire world that have a larger economy, and Brazil accounts for more than 242 billion dollars worth of exports every year.
So if Brazil is feeling pain, it is going to affect all of us.
Up to this point, everyone had been calling what has been going on in Brazil a “recession”, but now Goldman Sachs is the first major bank to label it “an outright economic depression”…
“What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., wrote in a report Tuesday.
Of course Brazil is far from alone. The third largest economy on the globe, Japan, has also now slipped into recession territory. So has Russia. And just today we learned that Canadian GDP is plunging…
Who could have seen that coming? It appears, for America’s northern brethren, low oil prices are unequivocally terrible. Against expectations of a flat 0.0% unchanged September, Canadian GDP plunged 0.5% – its largest MoM drop since March 2009 and the biggest miss since Dec 2008.
It is just a matter of time before this global economic downturn catches up with us here in the U.S. too.
In fact, there is evidence that this is already happening.
According to brand new numbers that just came out, manufacturing activity in the U.S. is contracting at the fastest pace that we have seen since the last recession…
Manufacturing in the U.S. unexpectedly contracted in November at the fastest pace since the last recession as elevated inventories led to cutbacks in orders and production.
The Institute for Supply Management’s index dropped to 48.6, the lowest level since June 2009, from 50.1 in October, a report from the Tempe, Arizona-based group showed Tuesday. The November figure was weaker than the most pessimistic forecast in a Bloomberg survey. Readings less than 50 indicate contraction.
Another indicator that I am watching is the velocity of money.
When an economy is healthy, money tends to flow fairly freely. I buy something from you, and then you buy something from someone else, etc.
But when economic conditions start to get tough, people start to hold on to their money. That means that money doesn’t change hands as quickly and the velocity of money goes down. As you can see below, the velocity of money has declined during every single recession since 1960…
When a recession ends, the velocity of money normally starts going back up.
But a funny thing happened when the last recession ended. The velocity of money ticked up slightly, but then it started going down steadily. In fact, it has kept on declining ever since and it has now hit a brand new all-time record low.
This is not normal. Yes, Wall Street is temporarily flying high for the moment, but the underlying economic fundamentals are all screaming that something is horribly wrong.
A global crisis has begun, and the U.S. will not be immune from it. I truly believe that we are heading toward the worst economic downturn that any of us have ever experienced.
But there are many out there that insist that nothing is the matter and that happy times are ahead.
The very same people that caused the last economic crisis have created a 278 TRILLION dollar derivatives time bomb that could go off at any moment. When this absolutely colossal bubble does implode, we are going to be faced with the worst economic crash in the history of the United States. During the last financial crisis, our politicians promised us that they would make sure that “too big to fail” would never be a problem again. Instead, as you will see below, those banks have actually gotten far larger since then. So now we really can’t afford for them to fail. The six banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo. When you add up all of their exposure to derivatives, it comes to a grand total of more than 278 trillion dollars. But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars. In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets. This is complete and utter insanity, and yet nobody seems too alarmed about it. For the moment, those banks are still making lots of money and funding the campaigns of our most prominent politicians. Right now there is no incentive for them to stop their incredibly reckless gambling so they are just going to keep on doing it.
So precisely what are “derivatives”? Well, they can be immensely complicated, but I like to simplify things. On a very basic level, a “derivative” is not an investment in anything. When you buy a stock, you are purchasing an ownership interest in a company. When you buy a bond, you are purchasing the debt of a company. But a derivative is quite different. In essence, most derivatives are simply bets about what will or will not happen in the future. The big banks have transformed Wall Street into the biggest casino in the history of the planet, and when things are running smoothly they usually make a whole lot of money.
But there is a fundamental flaw in the system, and I described this in a previous article…
The big banks use very sophisticated algorithms that are supposed to help them be on the winning side of these bets the vast majority of the time, but these algorithms are not perfect. The reason these algorithms are not perfect is because they are based on assumptions, and those assumptions come from people. They might be really smart people, but they are still just people.
Today, the “too big to fail” banks are being even more reckless than they were just prior to the financial crash of 2008.
As long as they keep winning, everyone is going to be okay. But when the time comes that their bets start going against them, it is going to be a nightmare for all of us. Our entire economic system is based on the flow of credit, and those banks are at the very heart of that system.
In fact, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system.
So that is why they are called “too big to fail”. We simply cannot afford for them to go out of business.
As I mentioned above, our politicians promised that something would be done about this. But instead, the four largest banks in the country have gotten nearly 40 percent larger since the last time around. The following numbers come from an article in the Los Angeles Times…
Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.
And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.
During this same time period, 1,400 smaller banks have completely disappeared from the banking industry.
So our economic system is now more dependent on the “too big to fail” banks than ever.
The discrepancy is due mainly to differing views of the risk posed by the banks’ vast holdings of derivative contracts used for hedging and speculation. The Fed, in keeping with American accounting rules and central bank accords, assumes that gains and losses on derivatives generally net out. As a result, most derivatives do not show up as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets.
Mr. Hoenig uses stricter international accounting rules to value the derivatives. Those rules do not assume that gains and losses reliably net out. As a result, large derivative holdings are shown as assets on the balance sheet, an addition that reduces the ratio of capital to assets to the low levels reported in Mr. Hoenig’s analysis.
And you know what?
The guys running these big banks can see what is coming.
Just consider the words that JPMorgan Chase chairman and CEO Jamie Dimon wrote to his shareholders not too long ago…
Some things never change — there will be another crisis, and its impact will be felt by the financial market.
The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets
“We must be prepared for a potential exit,” J. P. Morgan Chief Executive Officer Jamie Dimon said. in his annual letter to shareholders. “We continually stress test our company for possible repercussions resulting from such an event.”
This is something that I have been warning about for a long time.
And of course Dimon is not the only prominent banker warning of big problems ahead. German banking giant Deutsche Bank is also sounding the alarm…
With a U.S. profit recession expected in the first half of 2015 and investors unlikely to pay up for stocks, the risk of a stock market drop of 5% to 10% is rising, Deutsche Bank says.
That’s the warning Deutsche Bank market strategist David Bianco zapped out to clients today before the opening bell on Wall Street.
Bianco expects earnings for the broad Standard & Poor’s 500-stock index to contract in the first half of 2015 — the first time that’s happened since 2009 during the financial crisis. And the combination of soft earnings and his belief that investors won’t pay top dollar for stocks in a market that is already trading at above-average valuations is a recipe for a short-term pullback on Wall Street.
When some of the most prominent bankers at some of the biggest banks on the entire planet start issuing ominous warnings, that is a clear sign that time is running out. The period of relative stability that we have been enjoying has been fun, and hopefully it will last just a little while longer. But at some point it will end, and then the pain will begin.
For years, many people have suspected that the New York Fed is more or less controlled by the “too big to fail” banks. Well, now we have smoking gun evidence that this is indeed the case. A very brave lawyer named Carmen Segarra made a series of audio recordings while she was working for the New York Fed. The 46 hours of meetings and conversations that she recorded are being called “the Ray Rice video for the financial sector” because of the explosive content that they contain. What these recordings reveal are regulators that are deeply afraid to do anything that may harm or embarrass Goldman Sachs. And it is quite understandable why Segarra’s colleagues at the New York Fed would feel this way. As a recent Bloomberg article explained, it has become “common practice” for regulators to leave “their government jobs for much higher paying jobs at the very banks they were once meant to regulate.” If you think that there is going to be a cushy, high paying banking job for you at the end of the rainbow, you are unlikely to do anything that will mess that up.
To say that the culture at the New York Fed is “deferential” to big banks such as Goldman Sachs would be a massive understatement.
When Carmen Segarra was first embedded at Goldman Sachs, she was absolutely horrified by what she was seeing and hearing. But her superiors were so obsessed with covering up for Goldman that they actually pressured her to alter the notes that she took during meetings…
The job right from the start seems to have been different from what she had imagined: In meetings, Fed employees would defer to the Goldman people; if one of the Goldman people said something revealing or even alarming, the other Fed employees in the meeting would either ignore or downplay it. For instance, in one meeting a Goldman employee expressed the view that “once clients are wealthy enough certain consumer laws don’t apply to them.” After that meeting, Segarra turned to a fellow Fed regulator and said how surprised she was by that statement — to which the regulator replied, “You didn’t hear that.”
This sort of thing occurred often enough — Fed regulators denying what had been said in meetings, Fed managers asking her to alter minutes of meetings after the fact — that Segarra decided she needed to record what actually had been said.
Needless to say, someone like Segarra that did not “go along with the program” was not going to last long at the New York Fed.
In 2012, Goldman was rebuked by a Delaware judge for its behaviour during a corporate acquisition. Goldman had advised one energy company, El Paso Corp., as it sold itself to another energy company, Kinder Morgan, in which Goldman actually owned a $4-billion stake. Segarrra asked questions and was told by a Goldman executive that the bank did not have a conflict of interest policy. The Fed found some divisions of the bank did have a policy, though not a comprehensive one. The Fed pressured Segarra not to mention the inadequate conflict of interest policy at Goldman in her reports and, she alleges, fired her after she refused to recant.
If Segarra had not made the recordings that she did, we would have probably never heard much from her ever again.
After all, who is going to believe her over Goldman Sachs and the New York Fed? A minority would, of course, but the general public would have probably dismissed her accusations as the bitter ramblings of an ex-employee.
But she did make those recordings, and they are causing chaos on Wall Street right now.
The following is how Michael Lewis summarized the importance of this audio…
But once you have listened to it — as when you were faced with the newly unignorable truth of what actually happened to that NFL running back’s fiancee in that elevator — consider the following:
1. You sort of knew that the regulators were more or less controlled by the banks. Now you know.
2. The only reason you know is that one woman, Carmen Segarra, has been brave enough to fight the system. She has paid a great price to inform us all of the obvious. She has lost her job, undermined her career, and will no doubt also endure a lifetime of lawsuits and slander.
But what is there to deny? The evidence is right there in the audio recordings.
The New York Fed has been caught red-handed serving the interests of Goldman Sachs, and no number of strongly-worded denials is going to change that.
Sadly, this is not likely to change any time soon. Employees of the New York Fed are going to continue to want to get hired by the big banks, and the big banks are going to continue to hire them. So the incestuous relationship between the New York Fed and Goldman Sachs is probably not going to change in any meaningful way despite this bad publicity.
What this means is that Goldman Sachs is going to continue to do pretty much whatever it wants to do, and nobody is going to stop them.
But someone should be doing something.
As I wrote about the other day, Goldman Sachs has less than a trillion dollars in total assets, but it has more than 54 trillion dollars in exposure to derivatives.
When the derivatives crisis strikes, some of these “too big to fail” banks are going to go down very hard.
Goldman might be one of them.
And when Wall Street starts collapsing, it is going to plunge the entire U.S. economy into a complete and utter nightmare.
Much of this could have been avoided if we had good rules in place and we had regulators that were honestly trying to enforce those good rules.
But instead, the wolves are guarding the hen house and the big banks are going absolutely wild.
Ultimately, this is all going to end very, very badly.
Why has Goldman Sachs chosen this moment to publicly declare that stocks are overpriced? Why has Goldman Sachs suddenly decided to warn all of us that the stock market could decline by 10 percent or more in the coming months? Goldman Sachs has to know that when they release a report like this that it will move the market. And that is precisely what happened on Monday. U.S. stocks dropped precipitously. So is Goldman Sachs just honestly trying to warn their clients that stocks may have become overvalued at this point, or is another agenda at work here? To be fair, the truth is that all of the big banks should be warning their clients about the stock market bubble. Personally, I have stated that the stock market has officially entered “crazytown territory“. So it would be hard to blame Goldman Sachs for trying to tell the truth. But Goldman Sachs also had to know that a warning that the stock market could potentially fall by more than 10 percent would rattle nerves on Wall Street.
This report that has just been released by Goldman Sachs has gotten a lot of attention. In fact, an article about this report was featured at the top of the CNBC website for quite a while on Monday. Needless to say, news of this report spread on Wall Street like wildfire. The following is a short excerpt from the CNBC article…
A stock market correction is approaching the level of near certainty as Wall Street faces a major paradigm shift in how to achieve price gains, according to a Goldman Sachs analysis.
In a market outlook that garnered significant attention from traders Monday, the firm’s strategists called the S&P 500 valuation “lofty by almost any measure” and attached a 67 percent probability to the chance that the market would fall by 10 percent or more, which is the technical yardstick for a correction.
The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.
There is a lot of technical jargon in the paragraph above, but essentially what it is saying is that stock prices are unusually high right now according to a whole host of key indicators.
And in case you were wondering, stocks did fall dramatically on Monday. The Dow fell by 179 points, which was the biggest decline of the year by far.
So is Goldman Sachs correct about what could be coming?
Well, the truth is that there are many other analysts that are far more pessimistic than Goldman Sachs is. For example, David Stockman, the Director of the Office of Management and Budget under President Reagan, believes that the U.S. stock market is heading for “a pretty rude day of awakening”…
“This (2014) is the year of the end game. The party is over. We are now just at the point where they are rounding up the Wall Street drunks who are swilling on the fifth consecutive seasonally maladjusted phony recovery. That will become evident in the weeks and months ahead. Then I think the markets are going to have a pretty rude day of awakening.”
There are also some other signs that we are rapidly heading toward a major “turning point” in the financial world in 2014. One of those signs is the continual decline of Comex gold inventories. Someone out there (China?) is voraciously gobbling up physical gold. The following is a short excerpt from a recent article by Steve St. Angelo…
After a brief pause in the decline of Comex Gold inventories, it looks like it has continued once again as there were several big withdrawals over the past few days. Not only was there a large removal of gold from the Comex today, the Registered (Dealer) inventories are now at a new record low.
So does this mean that tough times are just around the corner?
Or perhaps things will stabilize again and this little bubble of false prosperity that we have been enjoying will be extended for a little while longer.
The important thing is to not get too caught up in the short-term numbers.
If you look at our long-term national “balance sheet numbers” and the long-term trends that are systematically destroying our economy, it becomes abundantly clear that a massive economic collapse is on the way. Our national debt is on pace to more than double during the Obama years, our “too big to fail” banks are now much bigger and much more reckless than they were before the financial crash of 2008, and the middle class in America is steadily shrinking. In other words, our long-term national “balance sheet numbers” are worse than ever.
We consume far more wealth than we produce, and our entire nation is drowning in a massive ocean of red ink that stretches from sea to shining sea.
This is not sustainable, and it is inevitable that the stock market will catch up with economic reality at some point.
The too big to fail banks have a larger share of the U.S. banking industry than they have ever had before. So if having banks that were too big to fail was a “problem” back in 2008, what is it today? As you will read about below, the total number of banks in the United States has fallen to a brand new all-time record low and that means that the health of the too big to fail banks is now more critical to our economy than ever. In 1985, there were more than 18,000 banks in the United States. Today, there are only 6,891 left, and that number continues to drop every single year. That means that more than 10,000 U.S. banks have gone out of existence since 1985. Meanwhile, the too big to fail banks just keep on getting even bigger. In fact, the six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years. If even one of those banks collapses, it would be absolutely crippling to the U.S. economy. If several of them were to collapse at the same time, it could potentially plunge us into an economic depression unlike anything that this nation has ever seen before.
Incredibly, there were actually more banks in existence back during the days of the Great Depression than there is today. According to the Wall Street Journal, the federal government has been keeping track of the number of banks since 1934 and this year is the very first time that the number has fallen below 7,000…
The number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.
And the number of active bank branches all across America is falling too. In fact, according to the FDIC the total number of bank branches in the United States fell by 3.2 percent between the end of 2009 and June 30th of this year.
Unfortunately, the closing of bank branches appears to be accelerating. The number of bank branches in the U.S. declined by 390 during the third quarter of 2013 alone, and it is being projected that the number of bank branches in the U.S. could fall by as much as 40 percent over the next decade.
Can you guess where most of the bank branches are being closed?
If you guessed “poor neighborhoods” you would be correct.
According to Bloomberg, an astounding 93 percent of all bank branch closings since late 2008 have been in neighborhoods where incomes are below the national median household income…
Banks have shut 1,826 branches since late 2008, and 93 percent of closings were in postal codes where the household income is below the national median, according to census and federal banking data compiled by Bloomberg.
It turns out that opening up checking accounts and running ATM machines for poor people just isn’t that profitable. The executives at these big banks are very open about the fact that they “love affluent customers“, and there is never a shortage of bank branches in wealthy neighborhoods. But in many poor neighborhoods it is a very different story…
About 10 million U.S. households lack bank accounts, according to a study released in September by the Federal Deposit Insurance Corp. An additional 24 million are “underbanked,” using check-cashing services and other storefront businesses for financial transactions. The Bronx in New York City is the nation’s second most underbanked large county—behind Hidalgo County in Texas—with 48 percent of households either not having an account or relying on alternative financial providers, according to a report by the Corporation for Enterprise Development, an advocacy organization for lower-income Americans.
And if you are waiting for a whole bunch of new banks to start up to serve these poor neighborhoods, you can just forget about it. Because of a whole host of new rules and regulations that have been put on the backs of small banks over the past several years, it has become nearly impossible to start up a new bank in the United States. In fact, only one new bank has been started in the United States in the last three years.
So the number of banks is going to continue to decline. 1,400 smaller banks have quietly disappeared from the U.S. banking industry over the past five years alone. We are witnessing a consolidation of the banking industry in America that is absolutely unprecedented.
Just consider the following statistics. These numbers come from a recent CNN article…
-The assets of the six largest banks in the United States have grown by 37 percent over the past five years.
-The U.S. banking system has 14.4 trillion dollars in total assets. The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.
-The five largest banks account for 42 percent of all loans in the United States.
-Bank of America accounts for about a third of all business loans all by itself.
-Wells Fargo accounts for about one quarter of all mortgage loans all by itself.
-About 12 percent of all cash in the United States is held in the vaults of JPMorgan Chase.
As you can see, without those banks we do not have a financial system.
Our entire economy is based on debt, and if those banks were to disappear the flow of credit would dry up almost completely. Without those banks, we would rapidly enter an economic depression unlike anything that the United States has seen before.
It is kind of like a patient that has such an advanced case of cancer that if you try to kill the cancer you will inevitably also kill the patient. That is essentially what our relationship with these big banks is like at this point.
Unfortunately, since the last financial crisis the too big to fail banks have become even more reckless. Right now, four of the too big to fail banks each have total exposure to derivatives that is well in excess of 40 TRILLION dollars.
Keep in mind that U.S. GDP for the entire year of 2012 was just 15.7 trillion dollars and the U.S. national debt is just 17 trillion dollars.
So when you are talking about four banks that each have more than 40 trillion dollars of exposure to derivatives you are talking about an amount of money that is almost incomprehensible.
Posted below are the figures for the four banks that I am talking about. I have written about this in the past, but in this article I have included the very latest updated numbers from the U.S. government. I think that you will agree that these numbers are absolutely staggering…
Total Assets: $1,947,794,000,000 (nearly 1.95 trillion dollars)
Total Exposure To Derivatives: $71,289,673,000,000 (more than 71 trillion dollars)
Total Assets: $1,319,359,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $60,398,289,000,000 (more than 60 trillion dollars)
Bank Of America
Total Assets: $1,429,737,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $42,670,269,000,000 (more than 42 trillion dollars)
Total Assets: $113,064,000,000 (just a shade over 113 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $43,135,021,000,000 (more than 43 trillion dollars)
Please don’t just gloss over those huge numbers.
Let them sink in for a moment.
Goldman Sachs has total assets worth approximately 113 billion dollars (billion with a little “b”), but they have more than 43 TRILLON dollars of total exposure to derivatives.
That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 381 times greater than their total assets.
Most Americans do not understand that Wall Street has been transformed into the largest casino in the history of the world. The big banks are being incredibly reckless with our money, and if they fail it will bring down the entire economy.
The biggest chunk of these derivatives contracts that Wall Street banks are gambling on is made up of interest rate derivatives. According to the Bank for International Settlements, the global financial system has a total of 441 TRILLION dollars worth of exposure to interest rate derivatives.
When that Ponzi scheme finally comes crumbling down, there won’t be enough money on the entire planet to fix it.
We had our warning back in 2008.
The too big to fail banks were in the headlines every single day and our politicians promised to fix the problem.
But instead of fixing it, the too big to fail banks are now 37 percent larger and our economy is more dependent on them than ever before.
And in their endless greed for even larger paychecks, they have become insanely reckless with all of our money.
Mark my words – there is going to be a derivatives crisis.
When it happens, we are going to see some of these too big to fail banks actually fail.
At that point, there will be absolutely no hope for the U.S. economy.
We willingly allowed the too big to fail banks to become the core of our economic system, and now we are all going to pay the price.
The too big to fail banks are now much, much larger than they were the last time they caused so much trouble. The six largest banks in the United States have gotten 37 percent larger over the past five years. Meanwhile, 1,400 smaller banks have disappeared from the banking industry during that time. What this means is that the health of JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley is more critical to the U.S. economy than ever before. If they were “too big to fail” back in 2008, then now they must be “too colossal to collapse”. Without these banks, we do not have an economy. The six largest banks control 67 percent of all U.S. banking assets, and Bank of America accounted for about a third of all business loans by itself last year. Our entire economy is based on credit, and these giant banks are at the very core of our system of credit. If these banks were to collapse, a brutal economic depression would be guaranteed. Unfortunately, as you will see later in this article, these banks did not learn anything from 2008 and are being exceedingly reckless. They are counting on the rest of us bailing them out if something goes wrong, but that might not happen next time around.
Ever since the financial crisis of 2008, our politicians have been running around proclaiming that they will not rest until they have fixed “the too big to fail problem”, but instead of fixing it those banks have rapidly gotten even larger. Just check out the following figures which come from the Los Angeles Times…
Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.
And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.
We are witnessing a consolidation of the banking industry that is absolutely stunning. Hundreds of smaller banks have been swallowed up by these behemoths, and millions of Americans are finding that they have to deal with these banking giants whether they like it or not.
Even though all they do is move money around, these banks have become the core of our economic system, and they are growing at an astounding pace. The following numbers come from a recent CNN article…
-The assets of the six largest banks in the United States have grown by 37 percent over the past five years.
-The U.S. banking system has 14.4 trillion dollars in total assets. The six largest banks now account for 67 percent of those assets and the other 6,934 banks account for only 33 percent of those assets.
-The five largest banks account for 42 percent of all loans in the United States.
As I discussed above, without these giant banks there is no economy. We should have never, ever allowed this to happen, but now that it has happened it is imperative that the American people understand this. The power of these banks is absolutely overwhelming…
One third of all business loans this year were made by Bank of America. Wells Fargo funds nearly a quarter of all mortgage loans. And held in the vaults of JPMorgan Chase is $1.3 trillion, which is 12% of our collective cash, including the payrolls of many thousands of companies, or enough to buy 47,636,496,885 of these NFL branded toaster ovens. Thanks for your business!
A lot of people tend to focus on many of the other threats to our economy, but the number one potential threat that our economy is facing is the potential failure of the too big to fail banks. As we saw in 2008, when they start to fail things can get really bad really fast.
And as I have written about so many times, the number one threat to the too big to fail banks is the possibility of a derivatives crisis.
Former Goldman Sachs banker and best selling author Nomi Prins recently told Greg Hunter of USAWatchdog.com that the global economy “could implode and have serious ramifications on the financial systems starting with derivatives and working on outward.” You can watch the full video of that interview right here.
And Nomi Prins is exactly right. Just like we witnessed in 2008, a derivatives panic can spiral out of control very quickly. Our big banks should have learned a lesson from 2008 and should have greatly scaled back their reckless betting.
Unfortunately, that has not happened. In fact, according to the OCC’s latest quarterly report on bank trading and derivatives activities, the big banks have become even more reckless since the last time I reported on this. The following figures reflect the new information contained in the latest OCC report…
Total Assets: $1,948,150,000,000 (just over 1.9 trillion dollars)
Total Exposure To Derivatives: $70,287,894,000,000 (more than 70 trillion dollars)
Total Assets: $1,306,258,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $58,471,038,000,000 (more than 58 trillion dollars)
Bank Of America
Total Assets: $1,458,091,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,543,003,000,000 (more than 44 trillion dollars)
Total Assets: $113,743,000,000 (a bit more than 113 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $42,251,600,000,000 (more than 42 trillion dollars)
That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 371 times greater than their total assets.
How in the world can anyone say that Goldman Sachs is not being incredibly reckless?
What in the world is happening to our financial markets? Trading on the Nasdaq was halted on Thursday for more than 3 hours, and the only formal explanation that we got was that it was a “technical issue”. On Tuesday, Goldman Sachs made thousands of “erroneous trades” that are now being canceled. If those trades had not been canceled, it could have cost Goldman “hundreds of millions of dollars” according to the Wall Street Journal. How nice for them that they get a “do over”. When Knight Capital made a similar “trading error”, they were not so fortunate. Our financial system has become completely and totally dependent on computers, and that means that it is extremely vulnerable. After what we have witnessed this week, how can they actually expect us to have faith in these financial markets? And what happens if these “technical issues” get even worse?
The stoppage on the Nasdaq on Thursday was unprecedented. Trading in literally thousands of stocks and options was halted. Big names like Apple, Netflix, Intel and Facebook were affected.
As of right now, officials are not telling us what caused the “technical issue”, but there are rumblings that hacking was involved.
And the Nasdaq would hardly be the first exchange to be hacked. In fact, according to NBC News, about half of all the security exchanges around the world were hacked last year.
USA Today is suggesting that a group of Iranian hackers known as “Cyber Fighters of Izz ad-Din al-Qassam” may be responsible for what happened to the Nasdaq. Apparently they have been quite active since last September…
The first wave of denial-of-service attacks attributed to the Cyber Fighters of Izz ad-Din al-Qassam began last September and lasted about six weeks. Knocked offline for various periods of time were Wells Fargo, U.S. Bank, Bank of America, JPMorgan Chase & Co. and PNC Bank.
The second wave commenced in December and lasted seven weeks, knocking out mid-tier banks and credit unions.
And a third wave of high-powered denial-of-service attacks commenced in March targeting credit card companies and financial brokerages.
But of course the Iranians have not been the only ones hacking financial institutions. According to Gartner banking security analyst Avivah Litan, some “profit-minded hackers” have had quite a bit of success attacking U.S. banks…
More recently, a copycat group of profit-minded hackers has conducted denial-of-service attacks against certain U.S. banks as a smoke screen to divert attention while they execute an Ocean’s 11-style wire transfer fraud.
Litan earlier this month blogged about that caper. These bad guys, she says, set into motion sophisticated denial-of-service attacks that overwhelmed pretty sturdy bank network security. While tech staff labored manually to get the banks’ websites back into service, the crooks scrambled behind the scenes to extract funds from a bank employee’s privileged account, which they had gained access to.
Instead of getting into one customer account at a time, the criminals used the employee’s account to control the master payment switch for wire transfers, and moved as much money as they could from as many accounts as possible for as long as possible, Litan reports.
“Considerable financial damage has resulted from these attacks,” says Litan.
However, let’s certainly not blame all of the “technical issues” in the financial markets on hackers. What happened to Goldman Sachs on Tuesday appears to be very much their own fault…
A programming error at Goldman Sachs Group Inc. caused unintended stock-option orders to flood American exchanges this morning, roiling markets and shaking confidence in electronic trading infrastructure.
An internal system that Goldman Sachs uses to help prepare to meet market demand for equity options inadvertently produced orders with inaccurate price limits and sent them to exchanges, said a person familiar with the situation, who asked not to be named because the information is private. The size of the losses depends on which trades are canceled, the person said. Some have already been voided, data compiled by Bloomberg show.
Of course if those trades had made hundreds of millions of dollars for Goldman they would have been allowed to stand.
But because Goldman was about to lose hundreds of millions of dollars authorities worked very rapidly to start “breaking” those trades.
This is just another example that shows how much of a joke our financial system has become.
Wall Street has become a massive computerized casino, and at some point this fraudulent house of cards is going to come crashing down hard.
The seeds for all of this were planted back in the late 1990s. The Glass-Steagall Act was repealed and the big banks started to go hog wild.
And according to an absolutely shocking memo uncovered by investigative reporter Greg Palast, a certain U.S. Treasury official was at the heart of the plot to make this possible…
When a little birdie dropped the End Game memo through my window, its content was so explosive, so sick and plain evil, I just couldn’t believe it.
The Memo confirmed every conspiracy freak’s fantasy: that in the late 1990s, the top US Treasury officials secretly conspired with a small cabal of banker big-shots to rip apart financial regulation across the planet. When you see 26.3 percent unemployment in Spain, desperation and hunger in Greece, riots in Indonesia and Detroit in bankruptcy, go back to this End Game memo, the genesis of the blood and tears.
The Treasury official playing the bankers’ secret End Game was Larry Summers. Today, Summers is Barack Obama’s leading choice for Chairman of the US Federal Reserve, the world’s central bank.
The year was 1997. US Treasury Secretary Robert Rubin was pushing hard to de-regulate banks. That required, first, repeal of the Glass-Steagall Act to dismantle the barrier between commercial banks and investment banks. It was like replacing bank vaults with roulette wheels.
Second, the banks wanted the right to play a new high-risk game: “derivatives trading”. JP Morgan alone would soon carry $88 trillion of these pseudo-securities on its books as “assets”.
Deputy Treasury Secretary Summers (soon to replace Rubin as Secretary) body-blocked any attempt to control derivatives.
But what was the use of turning US banks into derivatives casinos if money would flee to nations with safer banking laws?
The answer conceived by the Big Bank Five: eliminate controls on banks in every nation on the planet — in one single move. It was as brilliant as it was insanely dangerous.
To learn more about how they used the WTO to transform the global financial system into a gigantic casino, head on over and read the rest of Palast’s outstanding article right here.
Somebody out there is sure getting prepared for something really big. We have just witnessed a takedown of gold and silver unlike anything that we have witnessed in decades. On Monday, the price of gold had fallen by more than 10 percent at one point. It shocked investors all over the globe, and overall what we have just seen was the largest two day decline in the price of gold in 30 years. The price of silver dropped even more rapidly on Monday. It was down more than 14 percent at one point. There was an atmosphere of “panic selling” as investors and financial institutions raced to liquidate their holdings of silver and gold. But was this exactly what someone out there wanted? As I wrote about the other day, big banks and news outlets all over the world have been boldly proclaiming for weeks that gold is entering a “bear market” and that now is the time for all of us to sell our gold. In particular, Goldman Sachs reportedly told their clients earlier this month that they “recommend initiating a short COMEX gold position“. Was that just a “good guess” on their part, or was something else going on? Were they actually trying to help create a “selling frenzy” that would drive the price of gold much lower?
What we witnessed on Monday was absolutely jaw-dropping. Just check out this chart of the price of gold over the past 10 years. The takedown of gold on Monday sticks out like a sore thumb…
And that chart does not even show the full extent of the collapse. As I write this, the price of gold is sitting at $1355.20.
But this is just the beginning for gold and silver. As I have warned repeatedly, the price of gold and the price of silver will experience wild swings in the years ahead.
For example, the following is what I wrote about gold and silver on August 7th, 2012…
I like precious metals myself, but if you are going to invest you need to get educated so that you know what you are doing. If you go in blindly you are likely to get burned at some point.
In addition, you need to be prepared for wild fluctuations in price over the coming years. There will be times when gold and silver absolutely soar and there will be times when they drop like a rock.
So if you are going to play the game you need to be able to handle the ride.
Monday was an example of what I meant when I said that “you need to be able to handle the ride”. There are going to be a lot more days like Monday (both up and down) for gold and silver in the years ahead.
The foolish people are those that are scared out of their wits and that are selling off all of their gold and silver right now.
Sadly, there was reportedly a tremendous amount of panic selling of gold and silver during this collapse. The following is what Dennis Gartman told CNBC on Monday…
“There are a lot of people throwing up their hands. Throwing positions overboard. Panic is everywhere,” Gartman said in a “Squawk Box” interview on Monday. “I’ve never seen anything like this. I mean it.”
It just shows that there are a lot of stupid people out there. The following is an excerpt from another CNBC report about the panic selling that was happening on Monday…
“I think the last $20 has been margin selling. The market is falling like a knife. People are saying, ‘Get me out now,’ ” Phoenix Futures President Kevin Grady said. “You’re also seeing people selling energy profits to pay for metals losses. You’re seeing a tremendous amount of gold liquidation today.”
According to Dr. Paul Craig Roberts, Assistant Secretary of the Treasury under President Ronald Reagan, all of this panic selling is the result of an orchestrated takedown of gold and silver…
This is an orchestration (the smash in gold). It’s been going on now from the beginning of April. Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance.
Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on…
So who is behind all of this orchestration? Well, according to Dr. Paul Craig Roberts, it is actually the Federal Reserve…
The Federal Reserve began its April Fool’s assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the government’s own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.
According to Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can be to drive down the market price.
If any of the allegations above are even remotely true, then a whole lot of people need to be criminally investigated.
Meanwhile, many are considering this takedown of gold to be an ominous sign that another major financial crisis may be heading our way.
Just remember what happened back in 2008. As Zero Hedge noted on Monday, the price of gold suddenly plunged 21 percent in July 2008. That was just a couple of months before the U.S. stock market crashed in the fall…
The rapidity of gold’s drop is impressive, concerning, and disorderly. We have seen two other such instances of disorderly ‘hurried’ selling in the last five years. In July 2008, gold quickly dropped 21% – seemingly pre-empting the Lehman debacle and the collapse of the western banking system.
Is this collapse in the price of gold a harbinger of another major stock market crash?
Time will tell.
Meanwhile, many average Americans are wondering if they should dump their gold and silver while they still can.
As I mentioned above, gold and silver are going to experience wild fluctuations over the next few years. When the next stock market crash comes, gold and silver are probably going to go even lower than they are today for a short time. But in the long run gold and silver are going to soar to unprecedented heights.
Investing in gold and silver is not for the faint of heart. If you cannot handle the ride, you should sit on the sidelines. We are entering a period of tremendous financial instability, and holding gold and silver is going to be like riding a roller coaster. The ups and downs are going to shake a lot of people up, but the rewards are going to be great for those that stick with it the entire time.
You can thank the reckless money printing that the Federal Reserve has been doing for the incredible bull market that we have seen in recent months. When the Federal Reserve does more “quantitative easing”, it is the financial markets that benefit the most. The Dow and the S&P 500 have both hit levels not seen since 2007 this month, and many analysts are projecting that 2013 will be a banner year for stocks. But is a rising stock market really a sign that the overall economy is rapidly improving as many are suggesting? Of course not. Just because the Federal Reserve has inflated another false stock market bubble with a bunch of funny money does not mean that the U.S. economy is in great shape. In fact, the truth is that things just keep getting worse for average Americans. The percentage of working age Americans with a job has fallen from 60.6% to 58.6% while Barack Obama has been president, 40 percent of all American workers are making $20,000 a year or less, median household income has declined for four years in a row, and poverty in the United States is absolutely exploding. So quantitative easing has definitely not made things better for the middle class. But all of the money printing that the Fed has been doing has worked out wonderfully for Wall Street. Profits are soaring at Goldman Sachs and luxury estates in the Hamptons are selling briskly. Unfortunately, this is how things work in America these days. Our “leaders” seem far more concerned with the welfare of Wall Street than they do about the welfare of the American people. When things get rocky, their first priority always seems to be to do whatever it takes to pump up the financial markets.
When QE3 was announced, it was heralded as the grand solution to all of our economic problems. But the truth is that those running things knew exactly what it would do. Quantitative easing always pumps up the financial markets, and that overwhelmingly benefits those that are wealthy. In fact, a while back a CNBC article discussed a very interesting study from the Bank of England which showed a clear correlation between quantitative easing and rising stock prices…
It said that the Bank of England’s policies of quantitative easing – similar to the Fed’s – had benefited mainly the wealthy.
Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.
Many said the BOE’s easing added to social anger and unrest. Dhaval Joshi, of BCA Research wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.”
So should we be surprised that stocks are now the highest that they have been in more than 5 years?
Of course not.
And who benefits from this?
The wealthy do. In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans.
Unfortunately, all of this reckless money printing has a very negative impact on all the rest of us. When the Fed floods the financial system with money, that causes inflation. That means that the cost of living has gone up even though your paycheck may not have.
If you go to the supermarket frequently, you know exactly what I am talking about. The new “sale prices” are what the old “regular prices” used to be. They keep shrinking many of the package sizes in order to try to hide the inflation, but I don’t think many people are fooled. Our food dollars are not stretching nearly as far as they used to, and we can blame the Federal Reserve for that.
Sadly, this is what the Federal Reserve does. The system was designed to create inflation. Before the Federal Reserve came into existence, the United States never had an ongoing problem with inflation. But since the Fed was created, the United States has endured constant inflation. In fact, we have come to accept it as “normal”. Just check out the amazing chart in the video posted below…
The chart in that video kind of reminds me of a chart that I shared in a previous article…
Not that I expect the United States to enter a period of hyperinflation in the near future.
Actually, despite all of the reckless money printing that the Fed has been doing, I expect that at some point we are going to see another wave of panic hit the financial markets like we saw back in 2008. The false stock market bubble will burst, major banks will fail and the financial system will implode. It could unfold something like this…
4 – Economic activity in the United States starts to grind to a halt.
5 – Unemployment rises above 20 percent and mortgage defaults soar to unprecedented levels.
6 – Tax revenues fall dramatically and austerity measures are implemented by the federal government, state governments and local governments.
7 – The rest of the globe rapidly loses confidence in the U.S. financial system and begins to dump U.S. debt and U.S. dollars.
I write about derivatives a lot, because they are one of the greatest threats that the global financial system is facing. In fact, right now a derivatives scandal is threatening to take down the oldest bank in the world…
Banca Monte dei Paschi di Siena, the world’s oldest bank, was making loans when Michelangelo and Leonardo da Vinci were young men and before Columbus sailed to the New World. The bank survived the Italian War, which saw Siena’s surrender to Spain in 1555, the Napoleonic campaign, the Second World War and assorted bouts of plague and poverty.
But MPS may not survive the twin threats of a gruesomely expensive takeover gone bad and a derivatives scandal that may result in legal action against the bank’s former executives. After five centuries of independence, MPS may have to be nationalized as its losses soar and its value sinks.
So when you hear the word “derivatives” in the news, pay close attention. The bankers have turned our financial system into a giant casino, and at some point the entire house of cards is going to come crashing down.
In response to the coming financial crisis, I believe that our “leaders” will eventually resort to money printing unlike anything we have ever seen before in a desperate attempt to resuscitate the system. When that happens, I believe that we will see the kind of rampant inflation that so many people have been warning about.
So what do you think about all of this?
Do you believe that Federal Reserve money printing is the real reason why the stock market is soaring?
Please feel free to post a comment with your thoughts below…