Warren Buffett believes “that bonds are very overvalued“, and a recent survey of fund managers found that 80 percent of them are convinced that bonds have become “badly overvalued“. The most famous bond expert on the planet, Bill Gross, recently confessed that he has a sense that the 35 year bull market in bonds is “ending” and he admitted that he is feeling “great unrest”. Nobel Prize–winning economist Robert Shiller has added a new chapter to his bestselling book in which he argues that bond prices are “irrationally high”. The global bond bubble has ballooned to more than 76 trillion dollars, and interest rates have never been lower in modern history. In fact, 25 percent of all government bonds in Europe actually have a negative rate of return at this point. There is literally nowhere for the bond market to go except for the other direction, and when this bull market turns into a bear it will create chaos and financial devastation all over the planet.
In a recent piece entitled “A Sense Of Ending“, bond guru Bill Gross admitted that the 35 year bull market in bonds that has made him and those that have invested with him so wealthy is now coming to an end…
Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.
And the way that he ended his piece sounds rather ominous…
I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.
Bill Gross is someone that knows what he is talking about. I would consider his words very carefully.
Another renowned financial expert, Yale professor Robert Shiller, warned us about the stock bubble in 2000 and about the real estate bubble in 2005. Now, he is warning about the danger posed by this bond bubble…
In the first edition of his landmark book “Irrational Exuberance,” published in 2000, the Yale professor of economics and 2013 Nobel Laureate presciently warned that stocks looked especially expensive. In the second edition, published in 2005 shortly before the real estate bubble crashed, he added a chapter about real estate valuations. And in the new edition, due out later this month, Shiller adds a fresh chapter called “The Bond Market in Historical Perspective,” in which he worries that bond prices might be irrationally high.
For years, ultra-low interest rates have enabled governments around the world to go on a debt binge unlike anything the world has ever seen. Showing very little restraint since the last financial crisis, they have piled up debts that are exceedingly dangerous. If interest rates were to return to historical norms, it would instantly create the greatest government debt crisis in history.
A recent letter from IceCap Asset Management summarized where we basically stand today…
1) governments are unable to eliminate deficits
2) global government debt is increasing exponentially
3) 0% interest rates are allowing governments to borrow more to pay off old loans and fund deficits
4) Global growth is declining despite money printing and bailouts And, we’ve saved the latest and greatest fact for last: as stunning as 0% interest rates sound, the mathematically-challenged-fantasyland called Europe has just one upped everyone by introducing NEGATIVE INTEREST RATES.
As of writing, over 25% of all bonds issued by European governments has a guaranteed negative return for investors.
Germany can borrow money for 5 years at an interest rate of NEGATIVE 0.10%. Yes, instead of Germany paying you interest when you lend them money, you have to pay them interest.
These same negative interest rate conditions exist across many of the Eurozone countries, as well as Denmark, Sweden and Switzerland.
Negative interest rates are by nature irrational.
Why in the world would you pay someone to borrow money from you?
It doesn’t make any sense at all, and this irrational state of affairs will not last for too much longer.
At some point, investors are going to come to the realization that the 35 year bull market for bonds is finished, and then there will be a massive rush for the exits. This rush for the exits will be unlike anything the bond market has ever seen before. Robert Wenzel of the Economic Policy Journal says that this coming rush for the exits will set off a “death spiral”…
Anyone who holds the view that the Fed will not soon raise interest rates,and soon, fails to understand the nature of the developing crisis. It will be led by a collapse of the bond market.
Market forces, somewhat misleadingly called bond-vigilantes, will lead the charge.
I am not as bearish in the short-term on the stock market. The equity markets will be volatile because of the climb in rates and look scary at times but the death spiral will be in the bond market.
As this death spiral accelerates, we are going to see global interest rates rise dramatically. And considering the fact that more than 400 trillion dollars in derivatives are directly tied to interest rates, that is a very scary thing.
And in case you are wondering, the stock market will be deeply affected by all of this as well. I believe that we are going to witness a stock market crash even greater than what we experienced in 2008, and other experts are projecting similar things. For example, just consider what Marc Faber recently told CNBC…
“For the last two years, I’ve been thinking that U.S. stocks are due for a correction,” Faber said Wednesday on CNBC’s “Trading Nation.” “But I always say a bubble is a bubble, and if there’s no correction, the market will go up, and one day it will go down, big time.”
“The market is in a position where it’s not just going to be a 10 percent correction. Maybe it first goes up a bit further, but when it comes, it will be 30 percent or 40 percent minimum!” Faber asserted.
Where we are right now is at the end of the party. There are some that want to keep on dancing to the music for as long as possible, but most can see that things are winding down and people are starting to head for the exits.
The irrational global financial bubble that investors have been enjoying for the past few years has stretched on far longer than it should have. But that is the way irrational bubbles work – they just keep going even when everyone can see that they have become absolutely absurd. However, eventually something always comes along and bursts them, and once that happens markets can crash very, very rapidly.
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.
To illustrate how reckless the “too big to fail” banks have become, I want to share with you some brand new numbers which come directly from the OCC’s most recent quarterly report (see Table 2)…
Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)
Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)
Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)
Total Assets: $856,301,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)
Bank Of America
Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)
Total Assets: $801,382,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)
Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)
Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)
Compared to the rest of them, Wells Fargo looks extremely prudent and rational.
But of course that is not true at all. Wells Fargo is being very reckless, but the others are being so reckless that it makes everyone else pale in comparison.
And these banks are not exactly in good shape for the next financial crisis that is rapidly approaching. The following is an excerpt from a recent Business Insider article…
The New York Times isn’t so sure about the results from the Federal Reserve’s latest round of stress tests.
In an editorial published over the weekend, The Times cites data from Thomas Hoenig, vice chairman of the FDIC, who, in contrast to the Federal Reserve, found that capital ratios at the eight largest banks in the US averaged 4.97% at the end of 2014, far lower than the 12.9% found by the Fed’s stress test.
That doesn’t sound good.
So what is up with the discrepancy in the numbers? The New York Times explains…
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
In the same letter, Dimon mentioned “derivatives moved by enormous players and rapid computerized trades” as part of the reason why our system is so vulnerable to another crisis.
If this is what he truly believes, why is his firm being so incredibly reckless?
Perhaps someone should ask him that.
Interestingly, Dimon also discussed the possibility of a Greek exit from the eurozone…
“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.
The truth is that we are in the midst of a historic stock market bubble, and we are witnessing all sorts of patterns in the financial markets which also emerged back in 2008 right before the financial crash in the fall of that year.
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.
When an economic crisis is coming, there are usually certain indicators that appear in advance. For example, commodity prices usually start to plunge before a recession begins. And as you can see from the Bloomberg Commodity Index which you can find right here, this has already been happening. In addition, I have previously written about how the U.S. dollar went on a great run just before the financial collapse of 2008. This is something that has also been happening over the past few months. Some people would have you believe that nobody can anticipate the next great economic downturn and that to try to do so is just an exercise in “guesswork”. But that is not the case at all. We can look back over history and see patterns that keep repeating. And a lot of the exact same patterns that happened just before previous stock market crashes are happening again right now.
For example, let’s talk about the price of oil. There are only two times in history when the price of oil has fallen by more than 50 dollars in a six month time period. One was just before the financial crisis in 2008, and the other has just happened…
As a result of crashing oil prices, we are witnessing oil rigs shut down in the United States at a blistering pace. In fact, almost half of all oil rigs in the U.S. have already shut down. The following commentary and chart come from Wolf Richter…
In the latest week, drillers idled another 41 oil rigs, according to Baker Hughes. Only 825 rigs were still active, down 48.7% from October. In the 23 weeks since, drillers have idled 784 oil rigs, the steepest, deepest cliff-dive in the history of the data:
We are looking at a full-blown fracking bust, and this bust is already having a dramatic impact on the economies of states that are heavily dependent on the energy industry.
For example, just check out the disturbing number that just came out of Texas…
The crash in oil prices is hammering the Texas economy.
The latest manufacturing outlook index from the Dallas Fed plunged again in March, to -17.4 from -11.2 in February, indicating deteriorating business conditions in the state.
But this pain is going to be felt far beyond Texas. In recent years, Wall Street banks have made a massive amount of money packaging up energy industry loans, bonds, etc. and selling them off to investors.
If that sounds similar to the kind of behavior that preceded the subprime mortgage meltdown, that is because it is.
Now those loans, bonds, etc. are going bad as the fracking bust intensifies, and whoever is left holding all of this worthless paper at the end of the day is going to lose an extraordinary amount of money. Here is more from Wolf Richter…
It suited Wall Street just fine: according to Dealogic, banks extracted $31 billion in fees from the US oil and gas industry and its investors over the past five years by handling IPOs, spin-offs, “leveraged-loan” transactions, the sale of bonds and junk bonds, and M&A.
That’s $6 billion in fees per year! Over the last four years, these banks made over $4 billion in fees on just “leveraged loans.” These loans to over-indebted, junk-rated companies soared from about $40 billion in 2009 to $210 billion in 2014 before it came to a screeching halt.
For Wall Street it doesn’t matter what happens to these junk bonds and leveraged loans after they’ve been moved on to mutual funds where they can decompose sight-unseen. And it doesn’t matter to Wall Street what happens to leverage loans after they’ve been repackaged into highly rated Collateralized Loan Obligations that are then sold to others.
At the same time, we are also witnessing a slowdown in global trade. This usually happens when economic conditions are about to turn sour, and that is why it is so alarming that the total volume of global trade in January was down 1.4 percent from December. According to Tyler Durden of Zero Hedge, that was the largest drop since 2011…
Presenting the latest data from the CPB Netherlands Bureau for Economic Policy Analysis, according to which in January world trade by volume dropped by a whopping 1.4% from December: the biggest drop since 2011!
We are seeing some troubling signs in the U.S. as well.
I shared the following chart in a previous article, but it bears repeating. It comes from Charles Hugh Smith, and it shows that new orders for consumer goods are falling at a rate not seen since the last recession…
Well, what about the stock market? It was up more than 200 points on Monday. Isn’t that good news?
Yes, but the euphoria on Wall Street will not last for long.
When corporate earnings per share either start flattening out or start to decline, that is a huge red flag. We saw this just prior to the stock market crash of 2008, and it is happening again right now. The following commentary and chart come from Phoenix Capital Research…
Take a look at the below chart showing current stock levels and changes in forward Earnings Per Share (EPS). Note, in particular how divergences between EPS and stocks tend to play out (hint look at 2007-2008).
We all know what came next.
And guess what?
According to CNBC, a lot of the “smart money” is pulling their money out of the stock market right now while the getting is good…
Recent market volatility has sent stock market investors rushing for the exits and into cash.
Outflows from equity-based funds in 2015 have reached their highest level since 2009, thanks to a seesaw market that has come under pressure from weak economic data, a stronger dollar and the the prospect of monetary tightening.
Funds that invest in stocks have seen $44 billion in outflows, or redemptions, year to date, according to Bank of America Merrill Lynch. Equity funds have seen outflows in five of the last six weeks, including $6.1 billion in just the last week.
It doesn’t matter if you are a millionaire “on paper” today.
What matters is if the money is going to be there when you really need it.
At the moment, a whole lot of people have been lulled into a false sense of complacency by the soaring stock market and by the bubble of false economic stability that we have been enjoying.
But under the surface, there is a whole lot of turmoil going on.
Those that are looking for the signs are going to see the next crisis approaching well in advance.
Those that are not are going to get absolutely blindsided by what is coming.
Don’t let that happen to you.
Just a few days ago, the bull market for the S&P 500 turned six years old. This six year period of time has been great for investors, but what comes next? On March 9th, 2009 the S&P 500 hit a low of 676.53. Since that day, it has risen more than 200 percent. As you will see below, there are only two other times within the last 100 years when the S&P 500 performed this well over a six year time frame. In both instances, the end result was utter disaster. And as you take in this information, I want you to keep in mind what I said in my previous article entitled “7 Signs That A Stock Market Peak Is Happening Right Now“. What we are witnessing at this moment is classic “peaking behavior”, and there is a long way to go down from here. So if historical patterns hold up, those with lots of money in the stock market could soon be in for a whole lot of trouble.
According to Societe Generale analyst Andrew Lapthorne, there was an S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1929.
We all know what happened that year.
And there was another S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1999. In the end, all of those gains were wiped out when the dotcom bubble burst.
And now we are near the end of another great bull market for the S&P 500. The following is an excerpt from a recent Business Insider article…
“Such a strong six year run up in US equities has only been seen twice since 1900, i.e., back in 1929 and 1999, neither of which ended well,” Lapthorne wrote.
It’s anyone’s guess what happens next. But Lapthorne and his colleagues have slanted bearish.
So how will this current bull market end?
Needless to say, a lot of people are not very optimistic about that right now.
And there was another very interesting bull market that ended in 1987…
On Aug. 12, the S&P 500 dipped to 102.42, setting the stage for the third-biggest bull market in stocks since 1929. Inflation and unemployment fell. In 1984, President Reagan would cruise to reelection with an ad telling voters “It’s morning again in America.” By 1987, the stock market had tripled. Shareholders who were able to see beyond the gloom of the early 1980s reaped a huge return.
Of course a lot of those huge stock market returns were eliminated in a single day. On October 19th, 1987 the Dow declined by more than 22 percent during a single trading session. That day is still known as “Black Monday” up to this present time.
Markets tend to go down a lot faster than they go up. So if your stock portfolio has gone up substantially over the past few years, good for you. But keep in mind that all of your gains can be wiped out very rapidly. Millions of people experienced this during the last financial crisis, and millions more will experience this during the next one.
And as I keep reminding people, so many of the exact same patterns that we witnessed just prior to the last great stock market collapse are happening once again.
For example, just yesterday I explained that there has been only one other time over the past decade when we have seen the U.S. dollar surge in value in such a short period of time.
That was in 2008, just prior to the last financial crisis.
Another example is what has happened to the price of oil. Since the middle of last year, the price of oil has fallen by more than 50 dollars a barrel.
In all of history, that has happened only one other time.
That was in 2008, just prior to the last financial crisis.
I could go on and on. I could talk about margin debt, price/earnings ratios, industrial commodities, etc.
But you know what? Despite all of the warning signs there are still people out there that are eagerly pouring money into the stock market.
Back in 2005 and 2006, I knew people that were hurrying to buy homes before they got “priced out of the market”. So they did everything that they could to scrape together down payments and they took on mortgages that were larger than they could really afford.
And in the end they got burned.
Today, people are doing similar things. For instance, my friend Bob recently sent me an article that I could hardly believe. It turns out that an “expert” on CNBC is encouraging people “to take out a 7 year loan with a rapidly amortizing asset as collateral in order to buy stocks.”
Let me be clear. The really, really, really dumb money is jumping into the stock market right now. Those that are pouring money into stocks today are really going to get hit hard when the crash comes.
And it isn’t just me saying this.
Just consider the words of billionaire hedge fund manager Crispin Odey…
Mr Odey is best known for his big macroeconomic calls, including foreseeing the 2008 global credit crisis; piling into insurers in the wake of September 2001 attacks; and picking the recent oil price rout. He famously paid himself £28 million in 2008 after shorting credit crisis casualties, including British lender Bradford & Bingley. Mr Odey’s fund returned 54.8 per cent that year.
“The market’s reaction to all of this is leave it to the professionals, leave it to those great guys, the central bankers, because they saved the day in 2009,” he said. “These guys are kind of relying on central banks pulling a rabbit out of a hat.”
The risk is that this time, monetary policy may be ineffective: “We need the crisis to reformulate policy. Central banks are not all singing and all dancing, they cannot basically avoid the natural consequences of what we are doing.”
An inadequate supply-side response to the plunge in commodity prices as the resources industry declines to reduce production was in effect stimulating supply into falling demand.
“The trouble is today the players, whether they are the miners or the oil companies or the Saudis or anybody else, they are not doing the right things. This is the first time in my career where economics 101 doesn’t work at all.”
But it was also true that the world has not had a major recession for 25 years and thanks to frequent interventions, “there is a sensation we don’t have a business cycle”. Stocks are enjoying a six-year bull market but he also hinted at liquidity issues bubbling under the surface.
“I just think that you and I have got grandstand seats here [to an imminent market shock] and my point is having found myself in the second quarter of last year selling a lot of equities and starting to go short, I found out just how illiquid it all was. You never actually see it until people try and get out of these things.”
It was unclear to Mr Odey what central banks could do to prevent a crash.
The warning signs are clear.
Soon the time for warning will be over and the crisis will be here.
I hope that you are getting ready.
Central banks lie. That is what they do. Not too long ago, the Swiss National Bank promised that it would defend the euro/Swiss franc currency peg with the “utmost determination”. But on Thursday, the central bank shocked the financial world by abruptly abandoning it. More than three years ago, the Swiss National Bank announced that it would not allow the Swiss franc to fall below 1.20 to the euro, and it has spent a mountain of money defending that peg. But now that it looks like the EU is going to launch a very robust quantitative easing program, the Swiss National Bank has thrown in the towel. It was simply going to cost way too much to continue to defend the currency floor. So now there is panic all over Europe. On Thursday, the Swiss franc rose a staggering 30 percent against the euro, and the Swiss stock market plunged by 10 percent. And all over the world, investors, hedge funds and central banks either lost or made gigantic piles of money as currency rates shifted at an unprecedented rate. It is going to take months to really measure the damage that has been done. Meanwhile, the euro is in greater danger than ever. The euro has been declining for months, and now the number one buyer of euros (the Swiss National Bank) has been removed from the equation. As things in Europe continue to get even worse, expect the euro to go to all-time record lows. In addition, it is important to remember that the Asian financial crisis of the late 1990s began when Thailand abandoned its currency peg. With this move by Switzerland set off a European financial crisis?
Of course this is hardly the first time that we have seen central banks lie. In the United States, the Federal Reserve does it all the time. The funny thing is that most people still seem to trust what central banks have to say. But at some point they are going to start to lose all credibility.
Financial markets like predictability. And gigantic amounts of money had been invested based on the repeated promises of the Swiss National Bank to use “unlimited amounts” of money to defend the currency floor. Needless to say, there are a lot of people in the financial world that feel totally betrayed by the Swiss National Bank today. The following comes from an analysis of the situation by Bruce Krasting…
Thomas Jordan, the head of the SNB has repeated said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.
The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.
The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP!
Most experts are calling this an extremely bad move by the Swiss National Bank.
But in the end, they may have had little choice.
The euro is falling apart, and the Swiss did not want to be married to it any longer. Unfortunately, when any marriage ends the pain can be enormous. The following comes from CNBC…
How do you know you’re looking at a bad marriage?
Well if one or both of the spouses can’t wait to get out as soon as the smallest crack in the door opens, you have a pretty good clue.
Something like that just happened in Europe as we learned the real reason why so many traders were still invested in the euro: They had nowhere else to go.
As the Swiss National Bank unlocked the doors on its cap on trading euros for Swiss francs, the rush to exit the euro was faster than one of those French bullet trains.
But this move has not been bad for everyone. In fact, for many of those that live in Switzerland but work in neighboring countries what happened on Thursday was very fortuitous…
“I heard the news this morning. I’m so happy!” Vanessa, who refused to give her last name, told AFP outside of one of many mobbed exchange offices in Geneva.
She has reason to be extatic: she is one of some 280,000 people working in Switzerland but living and paying bills in eurozone countries France, Germany or Italy.
These so-called “frontaliers”, or border-crossers, are the biggest winners in Thursday’s Swiss franc surge, seeing their incomes jump 30 percent in the blink of an eye.
In normal times, things like this very rarely happen.
But in times of crisis, things can change very rapidly. We are moving into a time of great volatility in global financial markets, and great volatility is often a sign that a great crash is coming.
This move by the Swiss National Bank is just the beginning. Expect more desperate moves on the global economic chessboard in the days ahead. But in the end, none of those moves is going to prevent what is coming.
And one of these days, another extremely important currency peg is going to end. Right now, the Chinese have tied their currency very tightly to the U.S. dollar. This has helped to artificially inflate the value of the dollar. Unfortunately, as Robert Wenzel has noted, someday the Chinese could suddenly pull the rug out from under our currency, and that would be really bad news for us…
In other words, the SNB is no People’s Bank of China type patsy, where the PBOC has taken on massive amounts of dollar reserves to prop up the dollar.
Will the PBOC learn anything from SNB? If so, this will not be good for the US dollar.
So keep a close eye on what happens in Europe next.
It is going to be a preview of what is eventually coming to America.
Are we about to see U.S. stocks take a significant tumble? If you are looking for a “canary in the coal mine” for the U.S. stock market, just look at high yield bonds. In recent years, almost every single time junk bonds have declined substantially there has been a notable stock market correction as well. And right now high yield bonds are steadily moving lower. The biggest reason for this is falling oil prices. As I wrote about the other day, energy companies now account for about 20 percent of the high yield bond market. As the price of oil falls, investors are understandably becoming concerned about the future prospects of those companies and are dumping their bonds. What is happening cannot be described as a “crash” just yet, but there has been a pretty sizable decline for junk bonds over the past month. And as I noted above, junk bonds and stocks usually move in tandem. In fact, junk bonds usually start falling before stocks do. So does the decline in high yield bonds that we are witnessing at the moment indicate that we are on the verge of a significant stock market correction?
That is a question that CNBC asked in a recent article entitled “Near perfect sell signal says stocks should drop“…
The S&P 500 and the iShares iBoxx High Yield Corporate Bond ETF are a mirror image since the start of the year, but since the end of October, high yield has diverged to the lower right, and yet the S&P 500 has continued to record highs. Since separating in October, the S&P 500 is up 3 percent, while the high-yield ETF is down 4 percent.
On 10 occasions since 2007, the high-yield ETF dropped 5 percent in 30 trading days. During nine of those instances, the S&P 500 fell as well, with an average return of negative 9 percent, according to CNBC analysis using Kensho.
Only once did high yield give a false sell signal. That was last year, when the market was already entranced by the Federal Reserve’s quantitative easing program, which has seemed to elevate stocks with an abnormal consistency. And even then, the S&P 500 managed just a 0.4 percent climb amid the junk debt rout.
Personally, I am convinced that this correlation between junk bonds and stocks is very significant.
Let’s just go back and look at what happened during the financial crash of 2008 for a moment.
In the chart posted below, you can see that high yield bonds began crashing in the middle of September that year…
But U.S. stocks did not crash at the same time. In fact, the chart below shows that they did not really begin crashing until early October…
That is why analysts often refer to junk bonds as a “leading indicator”. What happens to high yield debt is often a really good indicator of what is about to happen to stocks.
Now let’s take a look at what is happening today.
Since the beginning of November, junk bonds have been falling steadily…
Meanwhile, the Dow has continued to reach new heights…
This is not a state of affairs that can persist indefinitely. Either junk bonds will rebound or U.S. stocks will start falling.
If the U.S. economy was on solid footing, you could perhaps argue that it could go either way.
Unfortunately, that is not the case. At this point, the stock market has become completely divorced from economic fundamentals. Price to earnings ratios are at absurd levels, margin debt is hovering near record highs, and the “real economy” continues to fall apart. We are enjoying a massively inflated standard of living which is being propped up by the largest mountain of debt in world history, and it is only a matter of time before reality starts catching up with us.
And the signs of our long-term economic decline are all around us if you are willing to look at them. For example, the lead headline on the Drudge Report today was about how China has now overtaken us and has become the largest economy on the planet…
Hang on to your hats, America.
And throw away that big, fat styrofoam finger while you’re about it.
There’s no easy way to say this, so I’ll just say it: We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world. For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.
It just happened — and almost nobody noticed.
The International Monetary Fund recently released the latest numbers for the world economy. And when you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A.
Meanwhile, some of the most iconic companies in the United States continue to struggle deeply. For instance, Sears has just announced that the number of store closings for this year is going to reach a total of 235 and that the company lost more than half a billion dollars during the third quarter of 2014 alone…
Sears Holdings Corp., posted a disappointing third quarter Thursday that saw revenue, earnings, and sales at stores open at least a year all fall as the retailer tries to salvage its business.
Sears, which owns Kmart, lost $548 million, or $5.15 a share, for the period ended Nov. 1. That’s up from a loss of $534 million, or $5.03 a share, in the year-ago period.
Even though Sears is losing more than 500 million dollars a quarter, banks and investors continue to inject new money into the corporation. That is a crying shame, because Sears is a company that is going to zero. Anyone that is investing in Sears at this point is just pouring their money into a black hole. As Kevin O’Leary would say, they are guilty of murdering money.
And of course what is happening to Sears is just part of the broader “retail apocalypse” that I keep writing about. In order for retailers to thrive they need healthy consumers, and consumers are not financially healthy because the real economy is a disaster zone.
But these days so many people are in denial. The stock market has been soaring for so long that many skeptics are now proclaiming that another 2008-style crash will never happen. Even though the fact that we are in the midst of an absolutely insane financial bubble should be glaringly obvious to anyone with half a brain, these skeptics have convinced themselves that the current state of affairs can persist indefinitely.
Sadly, it looks like what is about to hit us in 2015 is going to serve as a very rude wake up call for them and for the millions of other Americans that currently have their heads in the sand.
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.
Is the price of copper trying to tell us something? Traditionally, “Dr. Copper” has been a very accurate indicator of where the global economy is heading next. For example, back in 2008 the price of copper dropped from nearly $4.00 to under $1.50 in just a matter of months. And now it appears that another big decline in the price of copper is starting to happen. So far this year, the price of copper has dropped from a high of $3.40 back in January to a price of $2.95 as I write this article, and many analysts are warning that this is just the beginning. By itself, this should be quite alarming to investors, but as you will see below there are a whole host of other signs that a stock market crash may be rapidly approaching.
But before we get to those other signs, let us discuss copper a bit more first. I cannot remember a time since 2008 when there has been such an overwhelming negative consensus about where the price of copper is heading. The following is from a CNBC article that was posted this week…
Cascading copper prices have multiple root causes that lead to one conclusion: The anticipated global economic recovery may not be all it’s cracked up to be.
Consequently, analysts are in virtual unison that the extended-term trajectory is lower for the metal often used as a growth barometer. Copper futures are off more than 12 percent in 2014 and 7 percent over just the past three days, though they rose less than 1 percent in Wednesday trading.
A slowdown in the global economy, forced selling by Chinese banks and technical factors have converged in multiple calls for more weakness in a commodity known by traders and economists as “Dr. Copper” for its ability to accurately make economic prognoses.
Of course there are some out there that are trying to claim that “this time is different” and that the price of copper is no longer a useful indicator for the global economy as a whole.
We shall see.
Meanwhile, there are lots of other signs that the financial markets are repeating patterns that we have seen in the past. For instance, the level of margin debt on Wall Street just soared to another brand new record high…
The amount of money investors borrowed from Wall Street brokers to buy stocks rose for a seventh straight month in January to a record $451.3 billion, a potential warning sign that in the past has coincided with irrational exuberance and stock market tops.
We saw margin debt spike dramatically like this just prior to the crash of the dotcom bubble in 2000 and just before the great financial crisis of 2008. Just check out the chart in this article.
Shouldn’t we be alarmed that it is happening again?
If you listen carefully, there are many prominent voices in the financial world that are trying to warn us about this. Here is one example…
“One characteristic of getting closer to a market top is a major expansion in margin debt,” says Gary Kaltbaum, president of Kaltbaum Capital Management. “Expanding market debt fuels the bull market and is an investors’ best friend when stocks are rising. The problem is when the market turns (lower), it is the market’s worst enemy.“
And of course margin debt is far from the only sign that indicates that we are in a massive stock market bubble that is about to crash. The following is a list of 10 signs that comes from a recent article by Lance Roberts of STA Wealth Management…
I was recently discussing the market, current sentiment and other investing related issues with a money manager friend of mine in California. (Normally, I would include a credit for the following work but since he works for a major firm he asked me not to identify him directly.) However, in one of our many email exchanges he sent me the following note detailing the 10 typical warning signs of stock market exuberance.
(1) Expected strong OR acceleration of GDP and EPS (40% of 2013’s EPS increase occurred in the 4th quarter)
(2) Large number of IPOs of unprofitable AND speculative companies
(3) Parabolic move up in stock prices of hot industries (not just individual stocks)
(4) High valuations (many metrics are at near-record highs, a few at record highs)
(5) Fantastic high valuation of some large mergers (e.g., Facebook & WhatsApp)
(6) High NYSE margin debt
Margin debt/gdp (March 2000: 2.7%, July 2007: 2.6%, Jan 2014: 2.6%)
Margin debt/market cap (March 2000: 1.8%, July 2007: 2.3%, Jan 2014: 2.0%)
(7) Household direct holdings of equities as % of total financial assets at 24%, second-highest level (data back to 1953, highest was 1998-2000)
(8) Highly bullish sentiment (down slightly from year-end peaks; still high or near record high, depending on the source)
(9) Unusually high ratio of selling to buying by corporate senior managers (the buy/sell ratio of senior corporate officers is now at the record post-1990 lows seen in Summer 2007 and Spring 2011)
(10) Stock prices rise following speculative press releases (e.g., Tesla will dominate battery business after they get partner who knows how to build batteries and they build a big factory. This also assumes that NO ONE else will enter into that business such as GM, Ford or GE.)
All are true today, and it is the third time in the last 15 years these factors have occurred simultaneously which is the most remarkable aspect of the situation.
And for even more technical indicators such as these, please see Charles Hugh Smith’s excellent article entitled “Why 2014 Is Beginning to Look A Lot Like 2008“.
So do all of these numbers and charts actually prove that something is about to happen?
But if we do not learn from the past then we are doomed to repeat it.
At this point, even representatives from the big Wall Street banks are warning about the “euphoria” on Wall Street…
The stock market entered “euphoria mode” late last year and has remained there, except for a week in February, as “speculative froth” bubbles around the market’s hottest sectors, Citi’s chief equity strategist told CNBC on Tuesday.
And even market cheerleader Jim Cramer is warning that the stock market is now exhibiting “top behavior“…
The parabolic moves of stocks such as Plug Power and FuelCell Energy have the stock market exhibiting “top behavior,” CNBC’s Jim Cramer said Wednesday.
Cramer said he has tracked the fuel cells stocks since his days as a hedge fund manager. Runups in Freddie Mac and Fannie Mae also had him worried.
None of what you just read above guarantees that the stock market will crash this week, this month or even this year.
And nobody knows the exact date when the next stock market crash will happen.
But one thing is for certain – this massive stock market bubble will burst at some point, and when it does our economy is far less equipped to handle it than it was the last time.
Based on my research, I am entirely convinced that the coming economic crisis is going to be substantially worse than the last one, and that is very bad news for the United States.
So what do you think?
Do you agree or do you think that I am nuts?
Please feel free to share your opinion by posting a comment below…