A lot of people were expecting some really big things to happen in 2015, and most of them did not happen. But what did happen? It is my contention that a global financial crisis began during the second half of 2015, and it threatens to greatly accelerate as we enter 2016. During the last six months of the year that just ended, financial markets all over the planet crashed, trillions of dollars of global wealth was wiped out, and some of the largest economies in the world plunged into recession. Here in the United States, 2015 was the worst year for stocks since 2008, nearly 70 percent of all investors lost money last year, and it is being projected that the final numbers will show that close to 1,000 hedge funds permanently shut down within the last 12 months. This is what the early stages of a financial crisis look like, and the worst is yet to come.
If we were entering another 2008-style crisis, we would expect to see junk bonds crashing. When financial trouble starts, it usually doesn’t start with the biggest and strongest companies. Instead, it usually starts percolating on the periphery. And right now bonds of firms that are considered to be on the risky side of things are rapidly losing value.
In the chart below, you can see that a high yield bond ETF that I track very closely known as JNK started crashing in the middle of 2008. This crash began to unfold before the horrific crash of stocks in the fall. Investors that saw junk bonds crashing in advance and pulled their money out of stocks in time saved an enormous amount of money.
Now, for the very first time since the last financial crisis, we are seeing junk bonds crash again. In December, there was finally a sustained crash through the psychologically-important 35.00 level, and at this point JNK is sitting a bit below 34.00. This stunning decline is a giant red flag that tells us that stocks will soon follow in the exact same direction…
In 2015, Third Avenue Management shocked Wall Street when they froze withdrawals from a 788 million dollar mutual fund that was highly focused on junk bonds. Investors that couldn’t get their money out began to panic, and other mutual funds now find themselves under siege. If junk bonds continue to crash, this will just be the beginning of the carnage.
One of the big reasons why junk bonds are crashing is because of the crash in the price of oil. Over the past 18 months, the price of oil has plummeted from $108 a barrel to $37 a barrel.
There has only been one other time in all of history when we have ever seen an oil price crash of this magnitude. That was in 2008 – just before the greatest financial crisis since the Great Depression…
Why can’t people see the parallels?
Crashes are happening all around us, and yet so many of the “experts” seem completely blind to what is going on.
Unlike 2008, the price of oil is not expected to rapidly rebound any time soon. The following comes from CNN…
Crude prices dropped a whopping 35% last year and are hovering around $37 a barrel. That’s a level not seen since the global financial crisis.
It won’t get better any time soon. Most oil experts believe prices will bounce back in late 2016, but they expect more pain first.
Goldman Sachs forecasts that oil will average about $38 a barrel in February, even lower than for most of 2015.
Meanwhile, the prices of industrial commodities have been crashing as well. For example, the chart below shows that the price of copper started crashing hard just before the great financial crisis of 2008, and the exact same thing is happening once again right before our very eyes…
Things are unfolding just as we would expect they would during the initial stages of a new global financial crisis.
And we have already seen a full blown stock market crash in many of the largest economies around the planet. For instance, just look at what has been happening in Brazil. The Brazilians have the 7th largest economy in the world, and Goldman Sachs says that they have plunged into an “outright depression“. In the chart below, you can see the sharp downturn that took place in August, and Brazilian stocks actually kept falling all the way through the end of 2015…
We see a similar thing when we look at our neighbor to the north. Canada has the 11th largest economy on the entire planet, and I recently wrote a lengthy article about the economic difficulties that the Canadians are now facing. 2015 was a very bad year for Canadian stocks as well, and they just kept falling steadily all the way through December…
Of course nobody can forget what happened to China. The Chinese have the second largest economy on the globe, and news about their economic slowdown in making headlines almost every single day now.
Last summer, Chinese stocks crashed about 40 percent, and they did manage to bounce back just a bit since then. But they are still down about 30 percent from the peak of the market…
And there is plenty more that we could talk about. European stocks just had their second worst December ever, and Japanese stocks are down about 500 points in early trading as I write this article.
Here in the United States, the Dow Jones Industrial Average, Dow Transports, the S&P 500 and the Russell 2000 all had their worst years since 2008. As I mentioned the other day, 674 hedge funds shut down during the first nine months of 2015, and it is being projected that the final total for the year will be up around 1000.
But we aren’t hearing much about this financial carnage on the news yet, are we?
Many people that I talk to still think that “nothing is happening”, but don’t you dare say that to Warren Buffett.
How would you feel if you lost 7.8 billion dollars in a single year?
The truth, of course, is that signs of financial chaos are erupting all around us. Corporate profits are plunging, the bond distress ratio just hit the highest level that we have seen since the last financial crisis, and corporate debt defaults have risen to the highest level that we have seen in about seven years.
If you run a business, you may have noticed that fewer people are coming in and it seems like those that do come in have less money to spend. Economic activity is slowing down, and inventories are piling up. In fact, wholesale inventories have now risen to the highest level that we have seen since the last recession…
Do you notice a theme?
So many things that have not happened in six or seven years are now happening again.
History may not repeat, but it sure does rhyme, and it astounds me that more people cannot see that 2015/2016 is looking eerily similar to a replay of 2008/2009.
Another number that I watch closely is the velocity of money. When an economy is running well, money tends to circulate efficiently through the system. But when an economy gets into trouble, people get scared and start holding on to their money. As you can see from the chart below, the velocity of money declined during every single recession since 1960. This is precisely what one would expect. And of course during the recession that started in 2008, the velocity of money plunged precipitously. But then a funny thing happened when that recession supposedly “ended”. The velocity of money just kept going down, and now it has fallen to an all-time record low…
But if you go back to 1971, 61 percent of all Americans lived in middle class households.
Meanwhile, the share of the income pie that the middle class takes home has also continued to shrink.
In 1970, the middle class brought home approximately 62 percent of all income. Today, that number has fallen to just 43 percent.
As the middle class is systematically destroyed, the number of Americans living in poverty just continues to grow. And those that often suffer the most are the children. It may be hard for you to believe, but the number of homeless children in the U.S. has increased by 60 percent over the past six years.
How in the world can anyone dare to claim that “things are getting better”?
Anyone that says that should be ashamed of themselves.
We are in the midst of a long-term economic collapse that is now accelerating once again.
Anyone that tries to tell you that “things are getting better” and that 2016 is going to be a better year than 2015 is simply not being honest with you.
A new global financial crisis erupted during the last six months of 2015, and this new financial crisis is going to intensify throughout the early months of 2016. Financial institutions will begin falling like dominoes, and this will result in a great credit crunch around the world. Businesses will fail, unemployment will skyrocket and millions will suddenly be faced with economic despair.
By the time it is all said and done, this new financial crisis will be even worse than what we experienced back in 2008, and the suffering that we will see around the world will be off the charts.
So does that mean that I am down about this year?
Not at all. In fact, my wife and I are greatly looking forward to 2016. In the midst of all the chaos and darkness, there will be great opportunities to do good and to make a difference.
What a great shaking comes, people go looking for answers. And I think that this will be a year when millions of people start to understand that our politicians and the mainstream media are not telling them the truth.
Yes, great challenges are coming. But now is not a time to dig a hole and try to hide from the world. Instead, this will be a time for those that have prepared in advance to love others, help others and show them the truth.
What about you?
Are you ready to be a light during the dark times that are coming?
Please feel free to join the conversation by posting a comment below…
It’s official – 2015 was a horrible year for stocks. On the last day of the year, the Dow Jones Industrial Average was down another 178 points, and overall it was the worst year for the Dow since 2008. But of course the Dow was far from alone. The S&P 500, the Russell 2000 and Dow Transports also all had their worst years since 2008. Isn’t it funny how these things seem to happen every seven years? But compared to other investments, stocks had a relatively “good” year. In 2015, junk bonds, oil and industrial commodities all crashed hard – just like they all did just prior to the great stock market crash of 2008. According to CNN, almost 70 percent of all investors lost money in 2015, and things are unfolding in textbook fashion for much more financial chaos in 2016.
Globally, over the past 12 months we have seen financial shaking unlike anything that we have experienced since the last great financial crisis. During the month of August markets all over the world started to go haywire, and at one point approximately 11 trillion dollars of financial wealth had been wiped out globally according to author Jonathan Cahn.
Since that time, U.S. stocks rebounded quite a bit, but they still ended red for the year. Other global markets were not nearly as fortunate. Some major indexes finished 2015 down 20 percent or more, and European stocks just had their second worst December ever.
I honestly don’t understand the “nothing is happening” crowd. The numbers clearly tell us that a global financial crisis began in 2015, and it threatens to accelerate greatly as we head into 2016.
Actually, there are a whole lot of people out there that would be truly thankful if “nothing” had happened over the past 12 months. For example, there are five very unfortunate corporate CEOs that collectively lost 20 billion dollars in 2015…
Five CEOs of companies in the Russell 1000 index, including Nicholas Woodman of camera maker GoPro (GPRO), Sheldon Adelson of casino operator Las Vegas Sands (LVS) and even the famed investor Warren Buffett of Berkshire Hathaway (BRKA), lost more money on their companies’ shares than any other CEOs this year, according to a USA TODAY analysis of data from S&P Capital IQ.
These five CEOs were handed a whopping collective $20 billion loss on their company stock in 2015. Each and every one of these CEOs lost $1 billion or more – based on the average number of shares they’ve owned this year.
The biggest loser of the group was Warren Buffett.
He lost an astounding 7.8 billion dollars in 2015.
Do you think that he believes that “nothing happened” this past year?
And if “nothing happened”, then why are hedge funds “dropping like flies” right now? The following comes from Zero Hedge…
Two days, ago we noted that hedge funds are now dropping like flies in a year in which generating alpha has become virtually impossible for the majority of the vastly overpaid 2 and 20 “smart money” out there (and where levered beta is no longer the “sure thing” it used to be when the Fed was pumping trillions into stocks) when we reported that Seneca Capital, the $500 million multi-strat hedge fund belonging to Doug Hirsh (of Sohn Investment Conference fame), is shutting down.
And just within the last 24 hours, another very prominent hedge fund has collapsed. SAB Capital, which once managed more than a billion dollars, is shutting down after huge losses this year. Here is more from Zero Hedge…
It turns out that despite our intention, the question was not rhetorical because just a few hours later Bloomberg answered when it reported that the latest hedge fund shutdown casualty was another iconic, long-term investor: Scott Bommer’s SAB Capital, which as of a year ago managed $1.1 billion, and which after 17 years of managing money and after dropping roughly 11% in the first eight month of 2015, has decided to return all outside client money, and converting the hedge fund into a family office (after all one has to preserve one’s offshore tax benefits).
Overall, 674 hedge funds shut down during the first nine months of this year, and the final number for 2015 will actually be far higher because the rate of closings has accelerated as we have approached the end of this calendar year. When the final numbers come in, I would not be surprised to hear that 1,000 hedge funds had closed up shop in 2015.
Meanwhile, underlying economic conditions continue to deteriorate.
The Chicago purchasing manager index unexpectedly plunged to 42.9 in December, its lowest reading since July 2009.
Any reading below 50 signals a contraction in business activity.
This was down from 48.7 in November and much worse than the 50.0 expected by economists.
When the final numbers for the fourth quarter are in a few months from now, I believe that they will show that the U.S. economy officially entered recession territory at this time.
And the truth is that deep recessions have already started for some of the other biggest economies on the planet. For example, I recently wrote about the deep troubles that Canada is now experiencing, and things have already gotten so bad in Brazil that Goldman Sachs is referring to that crisis as “an outright depression“.
Many people seem to assume that since I have a website called “The Economic Collapse Blog” that I must want everything to fall apart. But that is not true at all. I love my country, I enjoy my life, and I would be perfectly content to spend 2016 peacefully passing the time here in the mountains with my wonderful wife. The longer things can stay somewhat “normal”, the better it is for all of us.
Unfortunately, for decades we have been making incredibly foolish decisions as a society, and the consequences of those decisions are now catching up with us in a major way.
Jonathan Cahn likes to say that “a great shaking is coming”, and I very much agree with him.
In fact, I think that it is going to be here a lot sooner than most people think.
So buckle up, because I believe that 2016 is going to be quite a wild ride.
On Wednesday we witnessed the third largest single day point gain for the Dow Jones Industrial Average ever. That sounds like great news until you realize that the two largest were in October 2008 – right in the middle of the last financial crisis. This is a perfect example of what I wrote about yesterday. Every time the market crashes, there are huge up days, huge down days and giant waves of market momentum. Even though the Dow was up 619 points on Wednesday, overall we are still down more than 2,000 points from the peak of the market. During the weeks and months to come, we are going to see many more wild market swings, but the overall direction of the market will be down.
Sadly, the mainstream media is still peddling the lie that everything is going to be just fine. So millions upon and millions of Americans are just going to sit there while their investments get wiped out. In the six trading days leading up to Wednesday, Americans lost a staggering 2.1 trillion dollars as stocks plunged, and the truth is that this nightmare is only just beginning.
Early on Wednesday morning, CNN published an article entitled “Why U.S. stocks aren’t headed for a crash“. I had to laugh when I saw that headline. If CNN is going to make this kind of a claim, they better have something very solid to base it on. But instead, these are the five reasons we were given for why the stock market is not going to collapse…
1. “The U.S. economy isn’t on the verge of a recession.”
Really? Go to just about any major retail store and start reading labels. You will likely find far more things that were “made in China” than you will American-made products. The global economy is more interconnected than ever before, and the Chinese stock market is the second largest on the entire planet. Of course what is happening in China is going to affect us.
3. “American businesses are doing pretty well (outside of energy).”
Actually, they were doing pretty well for a while, but now things are turning. Many large corporations are reporting declining orders, declining revenues and declining profits. Unsold inventories are beginning to pile up and the pace of layoffs is starting to increase. All of the things that we would expect to see just prior to another recession are happening.
4. “The Federal Reserve sounds cautious.”
This is laughable. Ultimately, it isn’t going to matter much at all whether the Federal Reserve barely raises rates or not. The era of “central bank omnipotence” is at an end. Just look at what is happening over in Europe. All of the quantitative easing that the ECB has been doing has not kept their markets from crashing in recent days. Those that believe that the Federal Reserve can somehow miraculously keep the stock market from crashing this time around are going to end up deeply, deeply disappointed.
5. “Stock prices aren’t crazy high anymore.”
There is some truth to this last point. Instead of stock prices being really, really, really crazy now they are just really, really crazy. But as I have pointed out in many previous articles, the technical indicators are very clearly telling us that U.S. stocks still have a long, long way to go down.
But let’s hope that CNN is actually right – at least in the short-term.
Let’s hope that markets settle down and that things stabilize for at least a few weeks.
In order for that to happen, markets need to become a lot less volatile than they are right now. The rollercoaster ride that we have been on in recent days has been extraordinary…
The Dow traveled another 1,600 points during Tuesday’s trading session, adding to the 4,900 points the index traveled in down and up moves on Monday.
Markets tend to go up slowly and steadily when things are calm, and they tend to go down rapidly when things are volatile.
If you are rooting for a return of the bull market, you should be hoping for nice, boring trading days where the Dow goes up by about 100 points or so. Wild swings like we have seen on Friday, Monday, Tuesday and Wednesday are very strong indicators that we have entered a bear market.
What we have been witnessing over the past week is almost unprecedented. Just check out this piece of analysis from Bloomberg…
By one metric, investors would have to go back 75 years to find the last time the S&P 500’s losses were this abrupt.
Bespoke Investment Group observed that the S&P 500 has closed more than four standard deviations below its 50-day moving average for the third consecutive session. That’s only the second time this has happened in the history of the index.
Of course after such a dramatic plunge it was inevitable that we were going to have a “bounce back day” where there was lots of panic buying. Initially it looked like it would be Tuesday, but it turned out to be Wednesday instead.
But if you think that the big gain on Wednesday somehow means that the crisis is “over”, you are going to be sorely mistaken.
Personally, I am hoping that we at least see a bit of a pause in the action, but there is absolutely no guarantee that we will even get that.
As the markets have been flying around, more and more Americans are becoming curious about the potential for a full-blown stock market crash. The following comes from Business Insider…
This one’s pretty easy: according to Google search trends, more Americans are searching for “stock market crash” now that at any point since the last crash.
Right now, search traffic for the term “stock market crash” is hitting about 70% of the most volume this term has ever gotten through Google search.
And so while this data doesn’t convey absolute search volume for the term, we do know that Americans appear to be looking for information about a stock market crash at the highest level in about 7 years.
In addition, Americans are also becoming more pessimistic about the overall economy. According to Gallup, the level of confidence that Americans have about the future performance of the U.S. economy is the lowest that it has been in about a year.
And remember – it isn’t just U.S. markets that are starting to go crazy. All over the planet stocks are crashing and recessions are starting. In fact, I can’t remember a time when there has been this much economic chaos erupting all over the world all at once.
So can the U.S. resist the overall trend and pull out of this market crash?
Please feel free to share what you think by posting a comment below…
What has been happening on Wall Street the past few days has been nothing short of stunning. On Thursday, the Dow Jones Industrial Average plummeted 358 points. It was the largest single day decline in a year and a half, and investors are starting to panic. Overall, the Dow is now down more than 1300 points from the peak of the market. Just yesterday, I wrote about all of the experts that are warning about a stock market crash in 2015, and after today I am sure that a lot more people will start jumping on the bandwagon. In particular, tech stocks are getting absolutely hammered lately. The Nasdaq has fallen close to 3.5% over the past two days alone, and it has dropped below its 200-day moving average. The Russell 2000 (a small-cap stock market index) is also now trading below its 200-day moving average. What all of this means is that the stock market crash of 2015 has already begun. The only question left to answer at this point is how bad it will ultimately turn out to be.
When stocks were booming, tech stocks were leading the way up.
The Dow and the S&P 500 are negative for the year. The so-called “FANG” stocks – Facebook, Apple, Netflix, and Google – were some of the biggest losers, and helped send the Nasdaq more than 2% lower. Biotechs also suffered big losses; the iShares Nasdaq Biotechnology ETF fell 4% to a three-month low. The Vix, which gauges market expectations for near-term shifts in the S&P 500, surged more than 21%.
And Twitter is absolutely imploding. It has fallen below its IPO price, and at this point it is now down 65 percent from the peak.
Of course it was inevitable that Twitter and these tech stocks would start falling eventually. I specifically warned my readers about Twitter’s stock price nearly two years ago. I hope people listened to what I was saying and got out in time.
This current market crash is happening in the context of a full-blown global financial meltdown. Stock markets all over the planet are collapsing, and currencies are being devalued left and right. The following comes from a recent piece by Wolf Richter…
Hot money is already fleeing emerging markets. Higher rates in the US will drain more capital out of countries that need it the most. It will pressure emerging market currencies and further increase the likelihood of a debt crisis in countries whose governments, banks, and corporations borrow in a currency other than their own.
This scenario would be bad enough for the emerging economies. But now China has devalued the yuan to stimulate its exports and thus its economy at the expense of others. And one thing has become clear on Wednesday: these struggling economies that compete with China are going to protect their exports against Chinese encroachment.
Hit by sharp declines in crude prices, the oil-producing nation of Kazakhstan introduced a freely floating exchange rate for the tenge, which subsequently lost more than a quarter of its value.
The State Bank of Vietnam (SBV) devalued the dong (VND) by 1 percent against the dollar on Wednesday—its third adjustment so far this year—and simultaneously widened the trading band to 3 percent from 2 percent previously, the second increase in six days.
A quarter of its value?
Now that is a devaluation.
In the coming days, we are likely to see even more emerging markets devalue their currencies in a global “race to the bottom”. But this “race to the bottom” presents a great danger to financial markets. As I have written about previously, there are 74 trillion dollars in derivatives globally that are tied to the value of currencies. As foreign exchange rates start flying around all over the place, there are going to be financial institutions out there that are going to be losing obscene amounts of money.
I cannot say the “d word” enough. Derivatives are going to play a starring role during this financial collapse, and so that is a word that you will want to be listening for very carefully in the weeks and months to come.
The meltdown that has already been affecting much of the rest of the planet is now starting to affect us. And it was inevitable that it would. I like how Clive P. Maund put it recently…
Many lesser markets around the world are toppling, but somehow the big Western markets of Europe, Japan and the US are staying aloft. If you have ever made a sand castle on the beach and watched what happened when the tide comes in, you will recall that it is the weaker outer ramparts and smaller turrets that collapse first, and the big central towers that hold out the longest. The weaker outer ramparts and smaller turrets are the Emerging Markets which are already crumbling, and it won’t be long until the big central towers – the big Western Markets, go the same way – everything is pointing to it.
The funny thing is that even though all of the signs are pointing to a nightmarish global financial crisis, the mainstream media continues to insist that everything is going to be just fine.
In fact, CNBC says that the recent dip in stock prices is a “bull indicator” and they are encouraging everyone to pour lots more money into stocks.
But of course the truth is that what financial conditions are really telling us is that stocks have much, much farther to fall.
For instance, high yield credit is starting to crash just like it did prior to the stock market crash of 2008. Stocks and high yield credit usually tend to track one another quite closely, and so when there is a divergence that is a huge red flag. And as this chart from Zero Hedge demonstrates, a very large divergence has developed in recent months…
Sadly, the 358 point plunge for the Dow on Thursday was just the beginning.
Yes, there will be up days and down days, but we are now officially entering the “danger zone” as we roll into the months of September and October.
So will 2015 soon be mentioned along with the famous market crashes of 1929, 1987, 2001 and 2008?
Please feel free to share what you think by posting a comment below…
The second largest stock market in the entire world is collapsing right in front of our eyes. Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out. Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States. From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value. It was the greatest stock market surge in Chinese history. But after hitting a peak, it began to fall dramatically. From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed. In the end, more than two-thirds of all wealth in the market was completely wiped out. You can see all of this on a chart that you can find right here. What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again. Is this yet another sign that a U.S. stock market crash is imminent?
Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008. Today, I want to share with you an excerpt from a New York Times article that was published in April 2008. At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…
The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.
Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.
This sounds almost exactly like what is happening in China right now. First we witnessed a ridiculous Chinese stock market bubble form, and now we are watching a nightmarish sell off take place. This next excerpt is from a Reuters article that was just published…
Shanghai’s benchmark share index crashed below 4,000 points for the first time since April – a key support level that analysts said had been seen as a line in the sand that Beijing had to defend, below which more conservative investors would start ejecting from their leveraged positions, widening the rout.
Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed at an incredibly rapid pace in since June 12, losing more than 20 percent in jaw-dropping volatility as money surges in and out of the market.
That drop has wiped out nearly $3 trillion in market capitalization, more than the GDP of Brazil.
Did you catch that last part?
The amount of wealth that has been wiped out during this Chinese stock market crash is already greater than the entire yearly GDP of Brazil.
Just as in 1929, flighty retail investors make up the bulk of China’s stock market and, just as in 1929 in the U.S., they have heavily margined their accounts. The Financial Times puts the number of retail investors in the Chinese stock market at 80 to 90 percent of the total market. Retail investors, unlike sophisticated institutional investors, are prone to panic selling, which explains the wild intraday swings in the Shanghai Composite over the past week.
Last night, the Shanghai Composite broke a key technical support level, closing below 4,000 at 3,912.77. The index is now down 24 percent since it peaked earlier this month and has wiped out more than $2.4 trillion in value. China’s stock market is the second largest in the world in terms of market capitalization, with the U.S. ranking number one.
Making world markets even more worried about the situation in China, its regulators are showing a similar brand of leadership as Mario Draghi. After previously pledging to trim back risky margin lending, they have now done a complete flip flop and are permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed.
I know that a lot of Americans don’t really care about what happens over in Asia, but when the second largest stock market in the entire world crashes, it is a very big deal.
1) Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.
2) The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).
3) Japan to have defaulted and very likely enter hyperinflation.
4) US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.
5) Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.
I tend to agree with most of that. I don’t agree that the euro is going to go away, but I do agree that the eurozone is going to break up and be reconstituted in a new form eventually. And yes, we are going to see tremendous inflation all over the world down the road, but I wouldn’t say that it is imminent in Japan or anywhere else. But overall, I think that is a pretty good list.
So what do you think is coming? Please feel free to join the discussion by posting a comment below…
Are we about to witness trillions of dollars of “paper wealth” vaporize into thin air? During the next financial crisis, a lot of “wealthy” investors are going to be in for a very rude awakening. The truth is that securities are only worth what someone else is willing to pay for them, and that is why liquidity is so important. Back on April 17th, I published an article entitled “The Global Liquidity Squeeze Has Begun“, but it didn’t get nearly as much attention as many of my other articles do. But now that the liquidity crisis is intensifying, hopefully people will start to grasp the implications of what is happening. The 76 trillion dollar global bond bubble is threatening to implode, and if it does, the amount of “paper wealth” that could potentially be lost during the months ahead is almost unimaginable.
For those that do not consider the emerging liquidity crisis to be important, I would suggest that they check out what the financial experts are saying. For instance, the following comes from a recent Bloomberg report…
There are three things that matter in the bond market these days: liquidity, liquidity and liquidity.
How — or whether — investors can trade without having prices move against them has become a major worry as bonds globally tanked in the past few months. As a result, liquidity, or the lack of it, is skewing markets in new and surprising ways.
Things have already gotten so bad that Zero Hedge says that some fund managers “are starting to panic” about the lack of liquidity in the marketplace…
Fund managers who together control trillions in assets are starting to panic in the face of an acute bond market liquidity shortage.
Dealer inventories have collapsed in the post-crisis regulatory regime, eliminating the traditional source of liquidity in secondary corporate credit markets, while HFTs and central banks have combined to create the conditions under which USTs and German Bunds can, at any given time, trade like penny stocks (October’s Treasury flash crash and May’s dramatic Bund rout are the quintessential examples).
For a moment, just imagine what would happen if someone yelled “fire” in a very crowded movie theater, and the only exit was a very small doggie door that only one person at a time could squeeze through. According to experts, that is what the bond market could soon look like…
“When the unwind comes, like we’ve seen in the past few months, it comes abruptly and sharply as the exit door is tiny,” said Ryan Myerberg, a London-based fund manager at Janus Capital Group Inc., which oversees about $190 billion.
Are you starting to get the picture?
In the end, I believe that those that “squeezed through the door” during this time period are going to be very glad that they got out while they still could.
Another very prominent voice that is deeply concerned about bonds is Carl Icahn. The following is what he told CNBC on Wednesday…
Carl Icahn warned investors on Wednesday that he believes the market is “extremely overheated—especially high-yield bonds.”
“I think the public is walking into a trap again as they did in 2007,” the activist investor told CNBC’s “Fast Money Halftime Report.” “I think it’s almost the duty of well-respected investors, like myself I hope, to warn people, to tell people, that really you are making errors.”
Icahn compared the current market situation to the prerecession days, when mortgage-backed securities were being widely sold. “It’s almost deja vu,” he said.
Let’s talk about high-yield bonds for a moment. Prior to the last financial crisis, they started crashing way before stocks did, and now we see the exact same pattern repeating once again.
Normally high yield credit tracks stocks very closely. When there is a disconnect, that can be a huge sign of trouble. The following chart comes from Zero Hedge, and it brilliantly demonstrates how similar things are today to the period just before the stock market crash of 2008…
It is glaringly apparent that we are due for a “correction”. And even though stocks have recently hit brand new record highs, there are rumblings under the surface that a big move down is right around the corner.
For example, USA Today is reporting that mutual fund investors have pulled more money out of stocks than they have put in for 16 weeks in a row….
In a sign of stock market nervousness on Main Street, mutual fund investors have yanked more money out of U.S. stock funds than they put in for 16 straight weeks.
The last time domestic stock funds had positive net cash inflows was in the week ending Feb. 25, according to data from the Investment Company Institute, a mutual fund trade group.
In the week ended June 17, the most recent data available, mutual funds that invest in U.S. stocks suffered net outflows of $3.45 billion, according to the ICI.
Since late February, U.S. stock funds have suffered estimated outflows of nearly $55 billion. Those net withdrawals come despite the fact the benchmark Standard & Poor’s 500 hit a fresh record high of 2130.82 on May 21 and the Dow Jones industrial average notched a fresh record on May 19.
Those that are smart are getting out while the getting is good.
In all the time that I have been publishing The Economic Collapse Blog, I have never seen stocks so primed for a crash. If you were writing up a scenario for a textbook that imagined what a lead up to a major stock market crash would look like, you could very easily use the last six months as a model.
For a long time, many people out there (including some of my readers) have been very impatiently waiting for the financial markets to crash. But this is not something that any of us should want to see. When this next great financial crisis comes, it is going to be absolutely horrible. Millions upon millions of workers will lose their jobs, and there will be tremendous economic suffering all over the planet.
Tomorrow I plan to share something that is going to shock a lot of people.
It is going to be something that I have never done before, but the time has come.
Every great con game eventually comes to an end. For years, global central banks have been manipulating the financial marketplace with their monetary voodoo. Somehow, they have convinced investors around the world to invest tens of trillions of dollars into bonds that provide a return that is way under the real rate of inflation. For quite a long time I have been insisting that this is highly irrational. Why would any rational investor want to put money into investments that will make them poorer on a purchasing power basis in the long run? And when any central bank initiates a policy of “quantitative easing”, any rational investor should immediately start demanding a higher rate of return on the bonds of that nation. Creating money out of thin air and pumping into the financial system devalues all existing money and creates inflation. Therefore, rational investors should respond by driving interest rates up. Instead, central banks told everyone that interest rates would be forced down, and that is precisely what happened. But now things have shifted. Investors are starting to behave more rationally and the central banks are starting to lose control of the financial markets, and that is a very bad sign for the rest of 2015.
And of course it isn’t just bond yields that are out of control. No matter how hard they try, financial authorities in Europe can’t seem to fix the problems in Greece, and the problems in Italy, Spain, Portugal and France just continue to escalate as well. This week, Greece became the very first nation to miss a payment to the IMF since the 1980s. We’ll discuss that some more in a moment.
Over in Asia, stocks are fluctuating very wildly. The Shanghai Composite Index plunged by 5.4 percent on Thursday before regaining all of those losses and actually closing with a gain of 0.8 percent. When we see this kind of extreme volatility, it is a very bad sign. It is during times of extreme volatility that markets crash.
Remember, stocks generally tend to go up during calm markets, and they generally tend to go down during choppy markets. So most investors do not want to see lots of volatility. Unfortunately, that is precisely what we are witnessing all over the world right now. The following comes from the Wall Street Journal…
“Volatility over the last days has been breathtaking, especially in bond markets,” said Wouter Sturkenboom, senior investment strategist at Russell Investments. He said that it rippled through equity and currency markets, which overreacted.
The yield on the benchmark German 10-year bond touched 0.99%, its highest level since September, before erasing the day’s rise and falling back to 0.84%. The 10-year U.S. Treasury yield, which hit a fresh 2015 high of 2.42% earlier Thursday, recently fell back to 2.33%. Yields rise as prices fall.
Sometimes when bond yields go up, it is because investors are taking money out of bonds and putting it into stocks because they are feeling really good about where the stock market is heading. This is not one of those times. As Peter Tchir has noted, the huge moves in the bond market that we are now seeing are the result of “sheer panic in the market”…
In a morning note before the open, Brean Capital’s Peter Tchir wrote: “It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a ‘risk on’ trade it is a ‘risk off’ trade, where low yields are viewed as a risk asset and not a safe haven.” And Tom di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets, told Bloomberg, “This is sheer panic in the market from the standpoint of what’s been happening in Europe … Most of Wall Street is guarded here as far as taking on new positions.”
But this wasn’t supposed to happen.
After watching the Federal Reserve be able to successfully use quantitative easing to drive down interest rates, the European Central Bank decided to try the same thing. Unfortunately for them, investors are starting to behave more rationally. The central banks are starting to lose control of the financial markets, and bond yields are soaring. I think that Peter Boockvar summarized where we are currently at very well when he stated the following…
I’ve said this before but I’m sorry, I need to say it again. What we are witnessing in global markets is the inherent contradiction writ large that is modern day monetary policy where dangerously ZIRP, NIRP and QE are considered conventional policies. The contradiction is simply this: the desire for higher inflation if fulfilled will result in higher interest rates that central banks are trying so hard and desperately to suppress.
Outside of the short end of the curve, markets will always win for better or worse and that is clearly evident now. The ECB is getting their first taste of the market talking back and in quite the violent way. In the US, the bond market is watching the Fed drag its feet (its never-ending) with wanting to raise interest rates and finally said enough is enough. The US Treasury market is tightening for them. Since mid April, the 5 yr note yield is higher by 40 bps, the 10 yr is up by 55 bps and the 30 yr yield is up by 65 bps.
And if global investors continue to move in a rational direction, this is just the beginning. Bond yields all over the planet should be much, much higher than they are right now. What that means is that bond prices potentially have a tremendous amount of room to go down.
One thing that could accelerate the global bond crash is the crisis in Greece. Negotiations between the Greeks and their creditors have been dragging on for four months, and no agreement has been reached. Now, Greece has missed the loan payment that was due to the IMF on June 5th, and it is asking the IMF to bundle all of the payments that are due this month into one giant payment at the end of June…
Greece has asked to bundle its four debt payments to the International Monetary Fund that fall due in June so that it can pay them in one batch at the end of the month, Greek newspaper Kathimerini reported on Thursday.
The request is expected to be approved by the IMF, the newspaper said. That would mean Greece does not have to pay the first tranche of 300 million euros that falls due on Friday.
Greece faces a total bill of 1.5 billion euros owed to the IMF over four installments this month.
Of course that payment will not be made either if a deal does not happen by then. And with each passing day, a deal seems less and less likely. At this point, the package of “economic reforms” that the creditors are demanding from Greece is completely unacceptable to Syriza. The following comes from an article in the Guardian…
Fresh from talks in Brussels, Tsipras faced outrage on Thursday from highly skeptical members of his own Syriza party. A five-page ultimatum from creditors, presented by the European commission president, Jean-Claude Juncker, was variously described as shocking, provocative, disgraceful and dishonourable.
“It will never pass,” said Greece’s deputy social security minister, Dimitris Stratoulis. “If they don’t back down, the country won’t be lost … there are alternatives that would cost less than our signing a disgraceful and dishonourable agreement.”
Ultimately, I don’t believe that we are going to see an agreement.
The Eurozone does not want to make any compromise with the current Greek government because (a) they don’t believe they need to because Greek threats to leave the euro are empty both because internal polling suggests Greeks don’t want to leave and because if they did leave that doesn’t really constitute any threat to the euro; (b) because they (particularly perhaps Angela Merkel) believe that under enough pressure the Greek government might collapse and be replaced by a more cooperative government, as has happened repeatedly before in the Eurozone crisis including in Italy and Greece itself; and (c) because any deal with Greece that is seen to involve or be presentable as any victory for the Greek government would threaten the political positions of governments in several Eurozone states including Spain, Portugal, Italy, Finland and perhaps even the Netherlands and Germany.
Furthermore, it’s not clear to me that the Eurozone creditors at this stage would have much interest in any deal based upon promises, regardless of how much the Greek had verbally surrendered. Things have gone too far now for mere words to work. They would need to see the Greeks deliver actions — tangible economic reforms and tangible, credible primary surplus targets and a sustainable change in the long-term political mood within Greece that meant other Eurozone states might eventually get their money back. That is almost certainly not doable at all with the current Greek government. The only deal possible would be with some replacement Greek government that had come in precisely on the basis that it did want to do a deal and did want to pay the creditors back.
On the Syriza side, I see no more appetite for a deal. They believe that austerity has been ruinous for the lives of Greeks and that decades more austerity would mean decades more Greek economic misery. From their point of view, default or even exit from the euro, even if economically painful in the short term, would be better than continuing with austerity now.
You can read the rest of his excellent article right here.
Without a deal, the value of the euro is going to absolutely plummet and bond yields over in Europe will go through the roof. I am fully convinced that this is the beginning of the end for the eurozone as it is currently constituted, and that we stand on the verge of a great European financial crisis.
And of course the financial crisis that is coming won’t just be in Europe. The global financial system is more interconnected than ever, and there are tens of trillions of dollars in derivatives that are tied to foreign exchange rates and 505 trillion dollars in derivatives that are tied to interest rates. When this giant house of cards collapses, the central banks won’t be able to stop it.
In the end, could we eventually see the entire central banking system itself totally collapse?
Last year (2014) will likely go down in history as the “beginning of the end” for the current global Central Banking system.
What will follow will be a gradual unfolding of the next crisis and very likely the collapse of the Central Banking system as we know it.
However, this process will not be fast by any means.
Central Banks and the political elite will fight tooth and nail to maintain the status quo, even if this means breaking the law (freezing bank accounts or funds to stop withdrawals) or closing down the markets (the Dow was closed for four and a half months during World War 1).
There will be Crashes and sharp drops in asset prices (20%-30%) here and there. However, history has shown us that when a financial system goes down, the overall process takes take several years, if not longer.
We stand at the precipice of the greatest economic transition that any of us have ever seen.
Even though things may seem very “normal” to most people right now, the truth is that the global financial system is fundamentally flawed, and cracks in the system are starting to appear all over the place.
When this system does collapse, it will take most people entirely by surprise.
But it shouldn’t.
All con games eventually fall apart in the end, and we are about to learn that lesson the hard way.
Is the financial collapse that so many are expecting in the second half of 2015 already starting? Many have believed that we would see bonds crash before the stock market crashes, and that is precisely what is happening right now. Since mid-April, the yield on 10 year German bonds has shot up from 0.05 percent to 0.89 percent. But much of that jump has come this week. Just a couple of days ago, the yield on 10 year German bonds was sitting at just 0.54 percent. And it isn’t just Germany – bond yields are going crazy all over Europe. So far, it is being estimated that global investors have lost more than half a trillion dollars, and there is much more room for these bonds to fall. In the end, the overall losses could be well into the trillions even before the stock market collapses.
I know that for most average Americans, talk about “bond yields” is rather boring. But it is important to understand these things, because we could very well be looking at the beginning of the next great financial crisis. The following is an excerpt from an article by Wolf Richter in which he details the unprecedented carnage that we have witnessed over the past few days…
On Tuesday, ahead of the ECB’s policy announcement today, German Bunds sagged, and the 10-year yield soared from 0.54% to 0.72%, drawing a squiggly diagonal line across the chart. In just one day, yield increased by one-third!
Makes you wonder to which well-connected hedge funds the ECB had once again leaked its policy statement and the all-important speech by ECB President Mario Draghi that the rest of us got see today.
And today, the German 10-year yield jump to 0.89%, the highest since October last year. From the low in mid-April of 0.05% to today’s 0.89% in just seven weeks! Bond prices, in turn, have plunged! This is the definition of a “rout.”
Other euro sovereign bonds have gone through a similar rout, with the Spanish 10-year yield soaring from 1.05% in March to 2.07% today, and the Italian 10-year yields jumping from a low in March of 1.03% to 2.17% now.
What this means is that the central banks are losing control.
In particular, the European Central Bank has been trying very hard to force yields down, and now the exact opposite is happening.
This is very bad news for a global financial system that is absolutely teeming with red ink. Since the last financial crisis, our planet has been on the greatest debt binge of all time. If we are moving into a time of higher interest rates, that is going to cause enormous problems. Unfortunately, CNBC says that is precisely where things are headed…
The wild breakout in German yields is rocking global debt markets, and giving investors an early glimpse of the uneasy future for bonds in a world of higher interest rates.
The shakeout also carries a message for corporate bond investors, who have snapped up a record level of new issuance this year, and are now seeing negative total returns in the secondary market for the first time this year.
So why is this happening?
Why are bond yields going crazy?
According to the Wall Street Journal, financial regulators in Europe are blaming the ECB’s quantitative easing program…
A recent surge in government bond market volatility can be blamed on the quantitative easing program of the European Central Bank, according to one of Europe’s top financial regulators.
EIOPA, the body responsible for regulating insurers and pension funds in the European Union, has warned that the ECB’s decision to buy billions of euros’ worth of sovereign bonds, to kick-start the region’s economy, has caused markets to become choppier.
And actually this is what should be happening. When central banks start creating money out of thin air and pumping it into the markets, investors should rationally demand a higher return on their money. This didn’t really happen when the Federal Reserve tried quantitative easing, so the Europeans thought that they might as well try to get away with it too. Unfortunately for them, investors are starting to catch up with the scam.
So what happens next?
Well, European bond yields are probably going to keep heading higher over the coming weeks and months. This will especially be true if the Greek crisis continues to escalate. And unfortunately for Europe, that appears to be exactly what is happening…
Greece will not make a June 5 repayment to the International Monetary Fund if there is no prospect of an aid-for-reforms deal with its international creditors soon, the spokesman for the ruling Syriza party’s lawmakers said on Wednesday.
The payment of 300 million euros ($335 million) is the first of four this month totaling 1.6 billion euros from a country that depends on foreign aid to stay afloat.
Greece owes a total of about 320 billion euros, of which about 65 percent to euro zone governments and the IMF, and about 8.7 percent to the European Central Bank.
On Tuesday, Greece’s creditors drafted the broad outlines of an agreement to put to the leftist government in Athens in a bid to conclude four months of negotiations and release aid before the country runs out of money.
“If there is no prospect of a deal by Friday or Monday, I don’t know by when exactly, we will not pay,” Nikos Filis told Mega TV.
Biagio Bossone and Marco Cattaneo write that according to several recent media reports, both the Greek government and the ECB are taking into consideration the possibility (for Greece) to issue a parallel domestic currency to pay for government expenditures, including civil servant salaries, pensions, etc. This could happen in the coming weeks as Greece faces a severe shortage of euros. A new domestic currency would help make payments to public employees and pensioners while freeing up the euros needed to pay out creditors.
If Greece defaults and starts using another currency, the value of the euro is going to absolutely plummet and bond yields all over the continent are going to start heading into the stratosphere.
That is why it is so important to keep an eye on what is going on in Greece.
But no matter what happens in Greece, it appears that we are moving into a time when there will be higher interest rates around the world. And since 505 trillion dollars in derivatives are directly tied to interest rate levels, that could lead to a financial unraveling unlike anything that we have ever seen before in the history of our planet.
As I have warned about so many times before, 2008 was just the warm up act.
The main event is still coming, and it is going to be extraordinarily painful.