Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market? Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing. This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever. But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.
Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics. Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.
Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008…
Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.
For this reason, Price to Sales is perhaps the single most objective and clear means of measuring stock valuations.
This metric, above all others, you can point to and say, “this is definitively accurate and has not been messed with.”
On that note, as Bill King recently noted, today the S&P 500 is sporting a P/S ratio that is massively higher than it was in 2007 and is only marginally lower than it was during the Tech Bubble (the single largest stock bubble of all time for most measures).
To me, looking at profitability is even more important than looking at sales.
Large tech companies such as Twitter certainly have lots of revenue coming in, but many of them are deeply unprofitable.
In fact, Twitter has never made a yearly profit, and over the past decade it has actually lost more than 2 billion dollars.
But despite all of that, investors absolutely love Twitter stock. As I write this article, Twitter has a market cap of 11.5 billion dollars.
How in the world is that possible?
How can a company that has never made a single penny be worth more than 11 billion dollars?
Twitter is never going to be more popular than it is now. If it can’t make a profit at the peak of its popularity, when will it ever happen?
And guess what? ABC News says that Twitter actually just reported a decline in revenue for the most recent quarter…
Twitter has never turned a profit, and for the first time since going public in 2013, it reported a decline in revenue from the previous year. Its revenue was $548.3 million, down 8 percent.
Net loss was $61.6 million, or 9 cents per share, compared with a loss of $79.7 million, or 12 cents per share, a year earlier.
The only reason why financial black holes such as Twitter can continue to exist is because investors have been willing to pour endless amounts of money into them, but now that bubble is starting to burst.
In his most recent article, Simon Black discussed how Silicon Valley investors are starting to become more cautious because so many of these “unicorns” are now going bust. One of the examples that he cited in his article was a company called Clinkle…
(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)
The company went on to burn through just about every penny of its investors’ capital.
There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.
At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.
Most of you may have never even heard of Clinkle, but I bet that you have definitely heard of Netflix.
Netflix has revolutionized how movies are delivered to our homes, and that revolution helped drive movie rental stores to the brink of extinction.
The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million.
Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015.
Netflix just keeps losing more and more money.
But even though Netflix is losing money at a pace that is exceedingly difficult to imagine, investors absolutely love the company.
I just checked, and at this moment Netflix has a market cap of 68.4 billion dollars.
Sometimes I just want to scream because of the absurdity of it all.
Companies that are losing hundreds of millions of dollars a year at the peak of their popularity should not be worth billions of dollars.
Nobody can possibly argue that these enormously inflated stock prices are sustainable. Just like with every other stock market bubble in our history, this one is going to burst too, and I have been warning about this for quite a long time.
But for the moment, the naysayers are having their time to shine. Despite the fact that U.S. consumers are 12 trillion dollars in debt, and despite the fact that corporate debt has doubled since the last financial crisis, and despite the fact that the federal government is 20 trillion dollars in debt, they seem to be convinced that this irrational stock market bubble can keep inflating indefinitely.
Perhaps they can all put their money where their mouth is by pouring all of their savings into Twitter, Netflix and other tech company stocks.
In the end, we will see who was right and who was wrong.
Stock prices just keep on falling, and many analysts are now wondering if a full-blown stock market crash is in our near future. On Thursday, the S&P 500 and the Dow both closed at 2 month lows after Donald Trump dropped “the mother of all bombs” in Afghanistan. It was the first time that one of these bombs has ever been used in live combat, and it is being reported that each of these bombs weighs 22,000 pounds and costs 16 million dollars to make. Of course Trump was trying to send a very clear message to the rest of the world by dropping this bomb, and investors interpreted it as a sign that we are getting even closer to war.
The financial markets will be closed on Friday for the long holiday weekend, and with so much uncertainty about what may happen in Syria and in North Korea, many investors wanted to get their money out of the market while they still could. The historic losing streak for S&P 500 tech stocks extended to 10 days in a row on Thursday, and all of the major stock indexes are now below their 50 day moving averages for the first time since the election.
The fear index on Thursday hit 16.22, its highest since Nov. 10, after closing above its 200-day moving average on Monday for the first time since Nov. 8.
“The VIX confirmed a breakout above its 200-day moving average [Tuesday], supporting a pickup in volatility in the days ahead,” BTIG’s chief technical strategist, Katie Stockton, said in a Wednesday note.
On Tuesday, I wrote about how geopolitical instability is causing many investors to seek out safe havens such as gold and silver, and that trend continued on Thursday. As I write this, the price of gold is sitting at $1289.20, and the price of silver is up to $18.50. Of course if the French election goes badly for the globalists or we see a full-blown shooting war erupt in either Syria or North Korea, those prices will go far, far higher.
For quite a while I have been very strongly warning that these ridiculously inflated stock prices were not sustainable. It was inevitable that they would start to decline, because the underlying economic numbers simply did not support them.
And just today we got some more bad news. According to Zero Hedge, the mortgage business at one of America’s biggest banks has been absolutely crashing…
When we reported Wells Fargo’s Q4 earnings back in January, we drew readers’ attention to one specific line of business, the one we dubbed the bank’s “bread and butter“, namely mortgage lending, and which as we then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, specifically in Q4 Wells’ mortgage applications plunged by $25bn from the prior quarter to $75bn, while the mortgage origination pipeline plunged by nearly half to just $30 billion, and just shy of all time lows recorded in late 2013 and 2014.”
Fast forward one quarter when what was already a troubling situation, just got as bad as it has been since the financial crisis for America’s largest mortgage lender, because buried deep in its presentation accompanying otherwise unremarkable Q1 results (EPS small beat, revenue small miss), Wells just reported that its ‘bread and butter’ is virtually gone, and in Q1 the amount of all-important Mortgage Applications has tumbled by a whopping 23% to just $59 billion, below the lows hit in early 2014, and at fresh lows since the financial crisis.
Unfortunately, what is going on at Wells Fargo is just part of an enormous “loan collapse” that we are witnessing all over the nation.
This is exactly what we would expect to see if a new recession was beginning. When economic conditions show down, banks and other lending institutions begin to get tighter with their money, and a tightening of credit causes economic activity to slow down even further.
It can be exceedingly difficult to break out of such a cycle once it starts.
But the mainstream media doesn’t seem to understand these things. Instead, they are pointing the blame at other sources for the emerging economic slowdown. For example, consider the following excerpt from a CNN article entitled “Americans have become lazy and it’s hurting the economy”…
Americans have become lazy, argues economist Tyler Cowen.
They don’t start businesses as much as they once did. They don’t move as often as they used to. And they live in neighborhoods that are about as segregated as they were in the 1960s.
No, our economic problems are not the result of Americans being too lazy.
Rather, the truth is that we have accumulated way too much debt as a society, we have been way too greedy, and there has been way too much manipulation by the Federal Reserve and other central banks.
For decades we have been living way above our means. We have been able to do this by stealing trillions upon trillions of dollars from future generations of Americans, and now a day of reckoning is rapidly approaching.
Unfortunately for Donald Trump, he just happens to be the president at this moment in history, and so much of the blame for what is about to happen will be pinned on him. The following comes from a recent interview with Peter Schiff…
Trump doesn’t want to preside over a major decline in our standard of living, but ultimately that has to happen. Because this is the consequence of all this excess consumption that went on before he was president. You know, we sacrificed our future to indulge our past. The future is now the present. We’re here, and it’s time to pay the piper.
Schiff is precisely correct.
For decades we have just kept sacrificing the future in order to inflate our current standard of living.
But the funny thing about the future is that it always arrives at some point, and now we are going to pay an enormously high price for being so exceedingly reckless all these years.
S&P 500 tech stocks have now fallen for 9 days in a row. The last time tech stocks declined for so many days in a row was in 2012, and that was the only other time in history when we have seen such a long losing streak. As I have stated before, the post-election “Trump rally” is officially done, and the market is starting to roll over as investors begin to realize that all of the buying momentum has completely evaporated. Tech stocks tend to be particularly volatile, and so the fact that they are starting to lead the way down should definitely be alarming to many in the investing community.
Of course it isn’t just tech stocks that are falling. The Dow was down another 59 points on Wednesday, and the S&P 500 has closed beneath its 50 day moving average for the very first time since the election. For those that have been waiting for a key technical signal before getting out of the market, there is one for you.
The price of gold was up again, and that is definitely not surprising in this geopolitical environment. The closer we get to war the higher gold and silver prices will go, and if we actually get into a major conflict we will see them blast into the stratosphere.
Another key indicator that I am watching very closely is the VIX. On Wednesday it shot up above 16 for the very first time since the day after Trump’s election victory, and many believe that it could soon go much higher. The following is an excerpt from a CNBC report…
The VIX measures the size of the S&P 500’s expected moves over the next 30 days, and consequently tends to run just a bit hotter than volatility over the past 30 days. Yet one-month realized volatility is just 6.7, meaning the VIX is at a roughly 9-point premium, which Chintawongvanich calls “highly unusual.”
That said, he notes that implied volatility was also at a large premium preceding the U.K. referendum to leave the EU and the U.S. presidential election. The obvious conclusion is that the market is now similarly preparing itself for the French presidential election, which is set to be held on April 23. Some fear that a populist candidate could prevail, which may cause more problems for the European Union and thus for economic stability.
As noted in that excerpt, the upcoming French election is absolutely huge. If the election goes “the wrong way” according to the globalists, it could literally mean the end of the European Union as it is configured today.
And of course of even greater concern is the global march toward war. It is being reported that North Korea is on the verge of a major nuclear weapons test, and such an act of defiance could be enough to push Donald Trump into conducting a major military strike.
But if Trump does hit North Korea, it is quite likely that North Korea will hit back. The North Koreans are promising to use nuclear weapons in any conflict with the United States, and if Trump bungles this thing we could easily be looking at a scenario in which millions of people end up dead.
Things also continue to get more tense in the Middle East. The Russians and the Iranians are promising to respond to any additional U.S. strikes “with force”, and on Wednesday Trump declared that our relationship with Russia “may be at an all-time low”.
Secretary of State Rex Tillerson and Russian President Vladimir Putin held more than two hours of “very frank” talks Wednesday in the Kremlin amid tensions over a U.S. airstrike against a Syria air base blamed for last week’s deadly chemical attack.
In remarks to reporters after the meeting, Tillerson said he told the Russian leader that current relations between the two countries are at a “low point.”
If the Trump administration conducts any more strikes on Syria, it is quite likely that the Russians and Iranians will make good on their threats and will start firing back.
And once U.S. aircraft or U.S. naval vessels come under fire, the calls for war in Washington will become absolutely deafening.
Unfortunately, Trump is not likely to back down any time soon because the recent missile strike in Syria has dramatically boosted his popularity. According to every recent survey, the American people overwhelmingly approve of what Trump did…
A Morning Consult/Politico poll released Wednesday found that 57% of Americans supported airstrikes in Syria, 58% supported establishing a no-fly zone over parts of Syria including strikes against Syria’s air-defense systems, and 63% of Americans thought the US should do more to end the Syrian conflict. Even more, 66% of respondents said they supported the Trump administration’s strike last week specifically.
Sadly, this is a time when the majority is dead wrong. Many of those that are supporting military action against Syria now were vehemently against it when Barack Obama was considering it.
Even Donald Trump spoke out very strongly against military intervention in Syria in 2013, and he was quite right to do so, and so what has suddenly changed that now makes it okay?
There is nothing to be gained in Syria, but we could very easily end up in a direct military conflict with Russia, Iran and Hezbollah which could ultimately prove to be the spark that sets off World War III.
And of course a military strike on North Korea could also potentially spark a global war. The first Korean War resulted in a direct military conflict between the United States and China, and the second Korean War could easily result in the exact same thing happening again.
Do the American people really want war with both Russia and China at the same time?
It has been said that you should be careful what you wish for, because you just might get it.
Whenever the world starts going crazy, investors instinctively begin flocking to precious metals. So it wasn’t exactly a surprise when gold and silver prices started to move upward aggressively as global leaders continued to talk about the possibility of World War III and nuclear conflict. The price of gold spiked to a five month high on Tuesday, and as I write this article gold is currently sitting at $1277.10 an ounce. Right now silver is at $18.35 an ounce, and many analysts believe that it is poised for a dramatic jump in the weeks and months to come as global tensions continue to rise. Google searches for the phrase “going to war” are the highest that they have been at any point in recent years, and many people out there are starting to understand that the U.S. could soon be facing military conflicts in Syria and in North Korea simultaneously.
In response to persistent threats from the Trump administration, the North Koreans are promising that they will not hesitate to use nuclear weapons if they are attacked by the U.S. military.
Most analysts do not believe that North Korea has any missiles that can reach the U.S. mainland, so that is probably an empty threat, but they can definitely hit Seoul, Tokyo and all U.S. military bases in South Korea and Japan.
And even if the U.S. was able to locate and take out all North Korean nukes in an overwhelming first strike, the North Koreans would still have thousands of artillery guns and rockets aimed at Seoul. Military analysts in the western world have estimated that North Korea could fire off up to half a million rounds within one hour of being attacked, and the devastation that such a barrage would cause in Seoul would be beyond anything that we have ever seen in the modern world.
Personally, I have come to the conclusion that it is going to be nearly impossible to conduct a conventional military assault on North Korea that does not result in an absolutely catastrophic death toll.
Unfortunately, Donald Trump appears determined to do something anyway. A couple of days ago we learned that he “has ordered his military advisers to be ready with a list of options to smash North Korea’s nuclear threat”, and on Tuesday he told the world that the U.S would “solve the problem” whether China helps or not…
Trump, who has urged China to do more to rein in its impoverished ally and neighbor, said in a tweet that North Korea was “looking for trouble” and the United States would “solve the problem” with or without Beijing’s help.
Just like he did with Syria, Trump’s words have now committed us to taking military action in North Korea.
Let us hope that any military action is delayed for as long as possible, but it is definitely alarming that Trump boasted to the Fox Business Network about the “very powerful” naval armada that is sailing toward North Korea right now…
“We are sending an armada. Very powerful,” Trump told Fox Business Network. “We have submarines. Very powerful. Far more powerful than the aircraft carrier. That I can tell you.”
Meanwhile, it is being reported that the Chinese have deployed 150,000 troops to their border with North Korea as they continue to warn both sides against taking military action.
Over in the Middle East, things continue to get even more tense as well.
Russia and Iran have pledged to “respond with force” to any additional U.S. attacks, but the Trump administration is not showing any signs of backing down. In fact, White House press secretary Sean Spicer has substantially lowered the threshold for more military conflict by suggesting that the use of “barrel bombs” may be enough to justify another attack. Considering the fact that everyone in the Syrian civil war has been regularly using barrel bombs for many years and that approximately 13,000 were used in 2016 alone, it is very alarming for Spicer to say such a thing.
On Tuesday, Trump told the American people that “we’re not going into Syria”, but what happens if he orders another missile strike and the Russians and Iranians respond by shooting down some U.S. aircraft or by sinking an entire aircraft carrier?
I can guarantee you that members of Congress from both parties will be absolutely screaming for war if CNN starts endlessly playing footage of a U.S. aircraft carrier sinking after it has been struck by the Russians or by the Iranians.
We are so close to World War III erupting in the Middle East, and there was no need for the U.S. to get involved in the first place. According to former CIA officer Philip Giraldi, evidence continues to mount that Assad had absolutely nothing to do with the chemical attack that Trump got so upset about…
Philip Giraldi, former CIA officer and director of the Council for the National Interest, stated on the Scott Horton show that “military and intelligence personnel” in the Middle East, who are “intimately familiar” with the intelligence, call the allegation that Assad or Russia carried out the attack a “sham.”
Giraldi said the intelligence confirms the Russian account, “which is that they [attacking aircraft] hit a warehouse where al-Qaeda rebels were storing chemicals of their own and it basically caused an explosion that resulted in the casualties.” Moreover, Giraldi noted, “Assad had no motive for doing this.”
Investors that can see the writing on the wall are already getting out of stocks and into precious metals while there is still time to do so.
Because if we get into a direct military conflict with Russia and Iran in Syria, global financial markets will crash and gold and silver will soar into the stratosphere.
And of course a similar scenario would play out if we attack North Korea and the North Koreans respond by firing off nuclear or chemical warheads at targets in South Korea and Japan.
I did not expect that we would be on the verge of World War III less than three months into the Trump administration, but here we are.
These are perilous times, and those that are wise are moving their money and are making key preparations before things spiral completely out of control.
The Dow Jones Industrial Average provides us with some pretty strong evidence that our “stock market boom” has been fueled by debt. On Wednesday, the Dow crossed the 20,000 mark for the first time ever, and this comes at a time when the U.S. national debt is right on the verge of hitting 20 trillion dollars. Is this just a coincidence? As you will see, there has been a very close correlation between the national debt and the Dow Jones Industrial Average for a very long time.
For example, when Ronald Reagan took office in 1991, the U.S. national debt had just hit 994 billion dollars and the Dow was sitting at 951. And as you can see from this chart by Matterhorn.gold via David Stockman, roughly that same ratio has held true throughout subsequent presidential administrations…
During the Clinton years the Dow raced out ahead of the national debt, but an “adjustment” during the Bush years brought things back into line.
The cold hard truth is that we have been living way above our means for decades. Our “prosperity” has been fueled by the greatest debt binge in the history of the world, and we are greatly fooling ourselves if we think otherwise.
We would never have gotten to 20,000 on the Dow if Barack Obama and Congress had not gotten us into an extra 9.3 trillion dollars of debt over the past eight years.
The average began tracking the most powerful corporate stocks in 1896, and has served as a broad measure of the market’s health through 22 presidents, 22 recessions, a Great Depression, at least two crashes and innumerable rallies, corrections, bull and bear markets. The blue chip reading finally cracked the 20,000 benchmark for the first time early Wednesday.
During the current bull market, the second longest in history, the Dow has more than tripled since March 2009.
Since Donald Trump’s surprise election victory, the Dow has now climbed by approximately 2150 points.
And it took just 64 calendar days for the Dow to go from 19,000 to 20,000. That is an astounding pace, and financial markets around the rest of the planet are doing very well right now too. In fact, global stocks rose to a 19 month high on Wednesday.
So where do we go from here?
Well, if Donald Trump wants to see Dow 30,000 during his presidency, then history tells us that he needs to take us to 30 trillion dollars in debt.
Of course that would be absolute insanity even if it was somehow possible. Each additional dollar of debt destroys the future of our country just a little bit more, and at some point this colossal bubble is going to burst.
The “market always goes higher over time,” Todd Morgan, chairman of Bel Air Investment Advisors. “The lesson here is that through wars, recessions, elections, impeachments, financial crises, and on and on, investing for the long term in high-quality stocks is the key to building wealth. … We are telling our clients that you can’t time the market. Think long term. Stay the course. We expect the market to see Dow 30,000 in my lifetime, and for my grandchildren to see Dow 50,000 in their lifetime.”
My hope is that the market will continue to go up. But nobody can deny that valuations are already at absurdly high levels, and the only way that this party can keep going is to continue to fuel it with more and more debt.
But for the moment, there is a tremendous amount of optimism out there, and most experts expect the Dow to continue to set new highs. In fact, CNBC says that whenever the Dow crosses a new threshold like this it usually means good things for investors…
CNBC looked at market data from the past 30 years and zeroed in on the times when the Dow has crossed levels like 2,000, 3,000, 4,000 … all the way up to the 19,000 level it hit in November. At those times, investors can typically expect traders to push it up even higher, according to data from Kensho. Not only does the Dow go up, but it outperforms the S&P 500 index along the way.
But as USA Today has explained, not all Americans are benefiting from this stock market rally…
The breakthrough came just four trading days into Trump’s presidency, a whirlwind in which the billionaire has reaffirmed his commitment to strengthen the U.S. economy and create more jobs and higher wages for workers. Still, nearly half of Americans have not benefited from the so-called “Trump Rally,” which has generated more than $2.2 trillion in paper gains for the Wilshire 5000 Total Stock Index since Election Day. The reason: only 52% of Americans polled by Gallup last April said they “have money invested in stocks” — the lowest stock ownership rate in the 19 years Gallup has tracked the data and down sharply from 65% in 2007 before the financial crisis.
Hopefully the good times will continue to roll for as long as possible.
But there is no possible way that they can keep going indefinitely.
For decades, our debt has been growing much faster than our GDP has. By definition, this is an unsustainable situation. At some point we will have accumulated so much debt that our financial system will no longer be able to hold up under the strain.
Many were convinced that we would reach that point before the U.S. national debt hit 20 trillion dollars, and yet here we are.
So how much higher can we go before the bubble bursts?
That is a very good question, and I don’t know if anyone has the right answer.
But for President Trump, this is going to present him with quite a dilemma.
Either he can keep the debt party going for as long as possible, or he can try to get us to take some tough financial medicine right now.
If an attempt is made to deal with our debt problems now, we will experience severe economic pain almost immediately.
But if the can keeps being kicked down the road, our long-term prognosis is just going to keep getting worse and worse.
And if we try to delay the inevitable indefinitely, at some point the laws of economics are going to make our hard choices for us.
So let us celebrate “Dow 20,000”, but let us also understand that it is far more likely that we will see “Dow 10,000” again before we ever see “Dow 30,000”.
Will the financial bubble that has been rapidly growing ever since Donald Trump won the election suddenly be popped once he takes office? Could it be possible that we are being set up for a horrible financial crash that he will ultimately be blamed for? Yesterday, I shared my thoughts on the incredible euphoria that we have seen since Donald Trump’s surprise victory on November 8th. The U.S. dollar has been surging, companies are announcing that they are bringing jobs back to the U.S., and we are witnessing perhaps the greatest post-election stock market rally in Wall Street history. In fact, the Dow, the Nasdaq and the S&P 500 all set new all-time record highs again on Thursday. What we are seeing is absolutely unprecedented, and many believe that the good times will continue to roll as we head into 2017.
What has been most surprising to me is how well the stocks of the big Wall Street banks have been doing. It is no secret that those banks poured a tremendous amount of money into Hillary Clinton’s campaign, and Donald Trump had some tough things to say about them leading up to election day.
So you wouldn’t think that it would be particularly good news for those banks that Trump won the election. However, we seem to be living in “Bizarro World” at the moment, and in so many ways things are happening exactly the opposite of what we would expect. Since Trump’s victory, all of the big banking stocks have been skyrocketing…
Financial stocks in particular have been on fire. Citigroup (C) and JPMorgan Chase (JPM) are up about 20% since Donald Trump defeated Hillary Clinton — and that makes them laggards!
Morgan Stanley (MS) has gained more than 25%. So has troubled Wells Fargo (WFC), despite the lingering fallout from its fake account scandal. Bank of America (BAC) is up more than 30%.
And so is Goldman Sachs (GS) — the former employer of both Treasury Secretary nominee Steven Mnuchin and Trump chief strategist Steve Bannon.
But are these stock prices justified by the fundamentals?
Of course not, but during times of euphoria the fundamentals never seem to matter much. Stocks were incredibly overvalued before the election, and now they are ridiculously overvalued.
Earlier today, a CNBC article pointed out that the cyclically-adjusted price to earnings ratio has only been higher than it is today at three points in our history…
“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.”
And of course a historic stock market crash immediately followed each of those three bubbles.
So are we being set up for a huge crash in early 2017?
Right now, the U.S. stock market is surging, with the Dow leaping toward 20,000, a number rooted in fiscal insanity and delusional expectations. There are no fundamentals that support a 20,000 Dow, but fundamentals have long since ceased to matter in a financial world hyperventilating on debt fumes while hallucinating about utopian economic models that will soon prove to generate fools instead of real wealth.
Today I’m going on the record with a prediction that I’ll offer with near absolute certainty: The rigged markets that now seem to defy gravity will be deliberately and destructively imploded under President Trump for all the obvious reasons. There will be financial chaos like we’ve never seen before: Investors leaping off tall buildings, banks declaring extended “holidays” that freeze transactions, and California pensioners slitting their wrists after they discover their promised pension funds were just vaporized by incompetent bureaucrats.
On the other hand, there are others that believe that Trump is just walking into a very bad situation and that a crash would be inevitable no matter who was president.
History tells us that there is no possible way that stock prices can stay at this irrational level indefinitely. But for now a wave of optimism is sweeping the nation, and many of those that are caught up in it will get seriously angry with you if you try to inject a dose of reality into the conversation.
But like I said yesterday, let’s hope that the optimists are correct. A survey that was just taken of 600 business executives found that 62 percent of them were optimistic about the U.S. economy over the next 12 months.
Incredibly, that number was sitting at just 38 percent the previous quarter.
For the moment, business leaders seem to be quite thrilled that we have a business executive in the White House.
Hopefully Donald Trump’s business experience will translate well to his new position. And it is certainly my hope that he is as successful as possible.
But even during the campaign Trump talked about how stocks were in a giant bubble, and the euphoria that we have seen since his election victory has just made that bubble even larger.
Throughout U.S. history, every giant financial bubble has always ended very badly, and this time around will not be any exception.
Trump may get the blame for it when it bursts, but the truth is that the conditions for the coming crisis have been building for a very, very long time.
Since Donald Trump’s victory on election night we have seen the worst bond crash in 15 years. Global bond investors have seen trillions of dollars of wealth wiped out since November 8th, and analysts are warning of another tough week ahead. The general consensus in the investing community is that a Trump administration will mean much higher inflation, and as a result investors are already starting to demand higher interest rates. Unfortunately for all of us, history has shown that higher interest rates always cause an economic slowdown. And this makes perfect sense, because economic activity naturally slows down when it becomes more expensive to borrow money. The Obama administration had already set up the next president for a major recession anyway, but now this bond crash threatens to bring it on sooner rather than later.
For those that are not familiar with the bond market, when yields go up bond prices go down. And when bond prices go down, that is bad news for economic growth.
The 10-year Treasury yield jumped to 2.36% in late trading on Friday, the highest since December 2015, up 66 basis point since the election, and up one full percentage point since July!
The 10-year yield is at a critical juncture. In terms of reality, the first thing that might happen is a rate increase by the Fed in December, after a year of flip-flopping. A slew of post-election pronouncements by Fed heads – including Yellen’s “relatively soon” – have pushed the odds of a rate hike to 98%.
As I noted the other day, so many things in our financial system are tied to yields on U.S. Treasury notes. Just look at what is happening to mortgages. As Wolf Richter has noted, the average rate on 30 year mortgages is shooting into the stratosphere…
The carnage in bonds has consequences. The average interest rate of the a conforming 30-year fixed mortgage as of Friday was quoted at 4.125% for top credit scores. That’s up about 0.5 percentage point from just before the election, according to Mortgage News Daily. It put the month “on a short list of 4 worst months in more than a decade.”
If mortgage rates continue to shoot higher, there will be another housing crash.
Rates on auto loans, credit cards and student loans will also be affected. Throughout our economic system it will become much more costly to borrow money, and that will inevitably slow the overall economy down.
Why bond investors are so on edge these days is because of statements such as this one from Steve Bannon…
In a nascent administration that seems, at best, random in its beliefs, Bannon can seem to be not just a focused voice, but almost a messianic one:
“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”
Steve Bannon is going to be one of the most influential voices in the new Trump administration, and he is absolutely determined to get this “trillion dollar infrastructure plan” through Congress.
And that is going to mean a lot more borrowing and a lot more spending for a government that is already on pace to add 2.4 trillion dollars to the national debt this fiscal year.
Sadly, all of this comes at a time when the U.S. economy is already starting to show significant signs of slowing down. It is being projected that we will see a sixth straight decline in year-over-year earnings for the S&P 500, and industrial production has now contracted for 14 months in a row.
The truth is that the economy has been barely treading water for quite some time now, and it isn’t going to take much to push us over the edge. The following comes from Lance Roberts…
With an economy running at below 2%, consumers already heavily indebted, wage growth weak for the bulk of American’s, there is not a lot of wiggle room for policy mistakes.
Combine weak economics with higher interest rates, which negatively impacts consumption, and a stronger dollar, which weighs on exports, and you have a real potential of a recession occurring sooner rather than later.
Yes, the stock market soared immediately following Trump’s election, but it wasn’t because economic conditions actually improved.
If you look at history, a stock market crash almost always follows a major bond crash. So if bond prices keep declining rapidly that is going to be a very ominous sign for stock traders.
And history has also shown us that no bull market can survive a major recession. If the economy suffers a major downturn early in the Trump administration, it is inevitable that stock prices will follow.
The waning days of the Obama administration have set us up perfectly for higher interest rates, a major recession and a giant stock market crash.
Of course any problems that occur after January 20th, 2017 will be blamed on Trump, but the truth is that Obama will be far more responsible for what happens than Trump will be.
Right now so many people have been lulled into a sense of complacency because Donald Trump won the election.
That is an enormous mistake.
A shaking has already begun in the financial world, and this shaking could easily become an avalanche.
Now is not a time to party. Rather, it is time to batten down the hatches and to prepare for very rough seas ahead.
All of the things that so many experts warned were coming may have been delayed slightly, but without a doubt they are still on the way.
So get prepared while you still can, because time is running out.
On the surface, things seem pretty quiet in mid-July 2016. The biggest news stories are about the speculation surrounding Donald Trump’s choice of running mate, the stock market in the U.S. keeps setting new all-time record highs, and the media seems completely obsessed with Taylor Swift’s love life. But underneath the surface, it is a very different story. As you will see below, the conditions for a “perfect storm” are coming together very rapidly, and the rest of 2016 promises to be much more chaotic than what we have seen so far.
Let’s start with China. On Tuesday, an international tribunal in the Hague ruled against China’s territorial claims in the South China Sea. The Chinese government announced ahead of time that they do not recognize the jurisdiction of the tribunal, and they have absolutely no intention of abiding by the ruling. In fact, China is becoming even more defiant in the aftermath of this ruling. We aren’t hearing much about it in the U.S. media, but according to international news reports Chinese president Xi Jinping has ordered the People’s Liberation Army “to prepare for combat” with the United States if the Obama administration presses China to abandon the islands that they are currently occupying in the South China Sea…
“Chinese president Xi Jinping has reportedly ordered the People’s Liberation Army to prepare for combat,” reports Arirang.com. “U.S.-based Boxun News said Tuesday that the instruction was given in case the United States takes provocative action in the waters once the ruling is made.”
A U.S. aircraft carrier and fighter jets were already sent to the region in anticipation of the ruling, with the Chinese Navy also carrying out exercises near the disputed Paracel islands.
Last October, China said it was “not frightened” to fight a war with the U.S. following an incident where the guided-missile destroyer USS Lassen violated the 12-nautical mile zone China claims around Subi and Mischief reefs in the Spratly archipelago.
Meanwhile, the relationship between the United States and Russia continues to go from bad to worse. The installation of a missile defense system in Romania is just the latest incident that has the Russians absolutely steaming, and during a public appearance on June 17th Russian President Vladimir Putin tried to get western reporters to understand that the world is being pulled toward war…
“We know year by year what’s going to happen, and they know that we know. It’s only you that they tell tall tales to, and you buy it, and spread it to the citizens of your countries. You people in turn do not feel a sense of the impending danger – this is what worries me. How do you not understand that the world is being pulled in an irreversible direction? While they pretend that nothing is going on. I don’t know how to get through to you anymore.”
And of course the Russians have been feverishly updating and modernizing their military in preparation for a potential future conflict with the United States. Just today we learned that the Russians are working to develop a hypersonic strategic bomber that is going to have the capability of striking targets with nuclear warheads from outer space.
Unfortunately, the Obama administration does not feel a similar sense of urgency. The size of our strategic nuclear arsenal has declined by about 95 percent since the peak of the Cold War, and many of our installations are still actually using rotary phones and the kind of 8 inch floppy disks for computers that were widely used back in the 1970s.
But I don’t expect war with China or Russia to erupt by the end of 2016. Of much more immediate concern is what is going on in the Middle East. The situation in Syria continues to deteriorate, but it is Israel that could soon be the center of attention.
Back in March, the Wall Street Journal reported that the Obama administration wanted to revive the peace process in the Middle East before Obama left office, and that a UN Security Council resolution that would divide the land of Israel and set the parameters for a Palestinian state was still definitely on the table…
The White House is working on plans for reviving long-stalled Middle East negotiations before President Barack Obama leaves office, including a possible United Nations Security Council resolution that would outline steps toward a deal between the Israelis and Palestinians, according to senior U.S. officials.
And just this week, the Washington Post reported that there were renewed “rumblings” about just such a resolution…
Israel is facing a restive European Union, which is backing a French initiative that seeks to outline a future peace deal by year’s end that would probably include a call for the withdrawal of Israeli troops and the creation of a Palestinian state. There are also rumblings that the U.N. Security Council might again hear resolutions about the conflict.
For years, Barack Obama has stressed the need for a Palestinian state, and now that his second term is drawing to a close he certainly realizes that this is his last chance to take action at the United Nations. If he is going to pull the trigger and support a UN resolution formally establishing a Palestinian state, it will almost certainly happen before the election in November. So over the coming months we will be watching these developments very carefully.
And it is interesting to note that there is an organization called “Americans For Peace Now” that is collecting signatures and strongly urging Obama to support a UN resolution of this nature. The following comes from their official website…
Now is the time for real leadership that can revive and re-accredit the two-state solution as President Obama enters his final months in office. And he can do this – he can lay the groundwork for a two-state agreement in the future by supporting an Israeli-Palestinian two-state resolution in the United Nations Security Council.
Such a resolution would restore U.S. leadership in the Israeli-Palestinian arena. It would preserve the now-foundering two-state outcome. And it would be a gift to the next president, leaving her or him constructive options for consequential actions in the Israeli-Palestinian arena, in place of the ever-worsening, politically stalemated status quo there is today.
Sadly, a UN resolution that divides the land of Israel and that formally establishes a Palestinian state would not bring lasting peace. Instead, it would be the biggest mistake of the Obama era, and it would set the stage for a major war between Israel and her neighbors. This is something that I discussed during a recent televised appearance down at Morningside that you can watch right here…
At the same time all of this is going on, the global economic crisis continues to escalate. Even though U.S. financial markets are in great shape at the moment, the same cannot be said for much of the rest of the world.
Just look at the country that is hosting the Olympics this summer. Brazil is mired in the worst economic downturn that it has seen since the Great Depression of the 1930s, and Rio de Janeiro’s governor has declared “a state of financial emergency“.
Elsewhere, China is experiencing the worst economic downturn that they have seen in decades, the Japanese are still trying to find the end of their “lost decade”, and the banking crisis in Europe is getting worse with each passing month.
In quite a few articles recently, I have discussed the ongoing implosion of the biggest and most important bank in Germany. But I am certainly not the only one warning about this. In one of his recent articles, Simon Black also commented on the turmoil at “the most dangerous bank in Europe”…
Well-capitalized banks are supposed to have double-digit capital levels while making low risk investments.
Deutsche Bank, on the other hand, has a capital level of less that 3% (just like Lehman), and an incredibly risky asset base that boasts notional derivatives exposure of more than $70 trillion, roughly the size of world GDP.
But of course Deutsche Bank isn’t getting a lot of attention from the mainstream media right now because of the stunning meltdown of banks in Italy, Spain and Greece. Here is more from Simon Black…
Italian banks are sitting on over 360 billion euros in bad loans right now and are in desperate need of a massive bailout.
IMF calculations show that Italian banks’ capital levels are among the lowest in the world, just ahead of Bangladesh.
And this doesn’t even scratch the surface of problems in other banking jurisdictions.
Spanish banks have been scrambling to raise billions in capital to cover persistent losses that still haven’t healed from the last crisis.
In Greece, over 35% of all loans in the banking system are classified as “non-performing”.
Even though U.S. stocks are doing well for the moment, the truth is that trillions of dollars of stock market wealth has been lost globally since this time last year. If you are not familiar with what has been going on around the rest of the planet, this may come as a surprise to you. During my recent appearance at Morningside, I shared some very startling charts which show how dramatically global markets have shifted over the past 12 months. You can view the segment in which I shared these charts right here…
I would really like it if the rest of 2016 was as quiet and peaceful as the past couple of days have been.
Unfortunately, I don’t believe that is going to be the case at all.
The storm clouds are rising and the conditions for a “perfect storm” are brewing. Sadly, most people are not going to understand what is happening until it is far too late.
The Dow and the S&P 500 both closed at all-time record highs on Tuesday, and that is very good news. You might think that is an odd statement coming from the publisher of The Economic Collapse Blog, but the truth is that I am not at all eager to see the financial system crash and burn. We all saw what took place when it happened in 2008 – millions of people lost their jobs, millions of people lost their homes, and economic suffering was off the charts. So no, I don’t want to see that happen again any time soon. All of our lives will be a lot more comfortable if the financial markets are stable and stocks continue to go up. If the Dow and the S&P 500 can keep on soaring, that will suit me just fine. Unfortunately, I don’t think that is going to be what happens.
Of course I never imagined we would be talking about new record highs for the stock market in mid-July 2016. We have seen some crazy ups and downs for the financial markets over the last 12 months, and the downs were pretty severe. Last August, we witnessed the greatest financial shaking since the historic financial crisis of 2008, and that was followed by an even worse shaking in January and February. Then in June everyone was concerned that the surprising result of the Brexit vote would cause global markets to tank, and that did happen briefly, but since then we have seen an unprecedented rally.
So what is causing this sudden surge?
We’ll get to that in a moment, but first let’s review some of the numbers from Tuesday. The following comes from USA Today…
All three major indexes gained 0.7% apiece, as the Dow jumped 121 points to a new all-time closing high and the S&P 500 built upon its record close notched Monday. The blue chips now stand at 18,347.67, about 35 points above the previous record set May 19, 2015.
The new mark for the S&P 500 is 2,152.14, a 15-point improvement on its Monday close.
Overall, we have seen stocks shoot up more than eight percent over the last two weeks. Normally, a rise of 10 percent for an entire yearis considered to be quite healthy…
Interior Minister Theresa May is set to become the U.K.’s prime minister on Wednesday. Stock markets across the globe have risen sharply, after a steep sell-off, following the United Kingdom’s decision to leave the European Union.
“In the past two weeks, post Brexit, the S&P 500 has vaulted over 8 percent,” said Adam Sarhan, CEO at Sarhan Capital. “Typically, a 10 percent move for the entire year is considered normal.”
What makes all of this even stranger is the fact that investors have been pulling money out of stocks as if it was 2008 all over again. In fact, Zero Hedge tells us that on balance investors have been taking money out of equity funds for 17 weeks in a row.
So why are stocks still going up?
If your guess is “central bank intervention”, you are right on the nose.
Across the Pacific, the Bank of Japan has been voraciously gobbling up assets, and the architect of “Abenomics” just won a major electoral victory which has fueled a huge market rally over there…
Meanwhile, in Japan, Prime Minister Shinzo Abe ordered new stimulus after his coalition won an election in Japan’s upper chamber by a landslide. Japan’s Nikkei 225 rose nearly 2.5 percent overnight, while the yen erased all of its post-Brexit gains against the dollar.
“In the short term, I think it’s going to help, but in the long term, we’ll see,” said JJ Kinahan, chief strategist at TD Ameritrade. “I feel like a lot of people are getting themselves into situations that they can’t get out of.”
Fast forward six months when Matt King reports that “many clients have been asking for an update of our usual central bank liquidity metrics.”
What the update reveals is “a surge in net global central bank asset purchases to their highest since 2013.”
And just like that the mystery of who has been buying stocks as everyone else has been selling has been revealed.
So now you know the rest of the story.
The economic fundamentals have not changed. China is still slowing down. Japan is still mired in a multi-year economic crisis. Much of Europe is still dealing with a full-blown banking crisis. Much of South America is still experiencing a full-blown depression.
The economic and financial suffering that are coming are inevitable, but they are not going to be pleasant for any of us. So let us all hope that we still have a little bit more time before the party is over and it is time to turn out the lights.