On Tuesday junk bonds continued to crash, the price of oil briefly dipped below 28 dollars a barrel, Deutsche Bank was forced to deny that it is on the verge of collapse, but the biggest news was what happened in Japan. The Nikkei was down a staggering 918 points, but that stock crash made very few headlines in the western world. If the Dow had crashed 918 points today, that would have been the largest single day point crash in all of U.S. history. So what just happened in Japan is a really big deal. The Nikkei is now down 23.1 percent from the peak of the market, and that places it solidly in bear market territory. Overall, a total of 16.5 trillion dollars of global stock market wealth has been wiped out since the middle of 2015. As I stated yesterday, this is what a global financial crisis looks like.
Just as we saw during the last financial crisis, the big banks are playing a starring role, and this is definitely true in Japan. Right now, Japanese banking stocks are absolutely imploding, and this is what drove much of the panic last night. The following numbers come from Wolf Richter…
- Mitsubishi UFJ Financial Group plunged 8.7%, down 47% from June 2015.
- Mizuho Financial Group plunged 6.2%, down 38% since June 2015.
- Sumitomo Mitsui plunged 6.2%, down 26% since May 2015
- Nomura plunged a juicy 9.1%, down 42% since June 2015
A lot of analysts have been very focused on the downturn in China in recent months, but I think that it is much more important to watch Japan right now.
I have become fully convinced that the Japanese financial system is going to play a central role in the initial stages of this new global financial meltdown, and so I encourage everyone to keep a close eye on the Nikkei every single night.
Meanwhile, the stock price of German banking giant Deutsche Bank crashed to a record low on Tuesday. If you will recall, Deutsche Bank reported a loss of 7.6 billion dollars in 2015, and I wrote quite a bit about their ongoing problems yesterday.
Things have gotten so bad that now Deutsche Bank has been forced to come out and publicly deny that they are in trouble…
Deutsche Bank co-CEO John Cryan moved to quell fears about the bank’s stability Tuesday with a surprise memo saying its balance sheet “remains absolutely rock-solid.”
The comments come as investors grow increasingly nervous about the health of European banks, which have taken a hit on the fall in energy prices and which face rising concerns over their cash levels.
Of course Lehman Brothers issued the same kind of denials just before they collapsed in 2008. Cryan’s comments did little to calm the markets, and even Jim Cramer saw right through them…
“You know, Deutsche Bank puts out a note saying, ‘listen, don’t worry, all good.’ Reminds me of JPMorgan saying if you have to say that you’re creditworthy then it’s already too late.”
Another thing that Lehman Brothers did just before they collapsed in 2008 was to lay off workers. We have seen a number of major banks do this lately, including Deutsche Bank…
Cryan, 55, has been seeking to boost capital buffers and profitability by cutting costs and eliminating thousands of jobs as volatile markets undermine revenue and outstanding regulatory probes raise the specter of fresh capital measures to help cover continued legal charges. The cost of protecting Deutsche Bank’s debt against default has more than doubled this year, while the shares have dropped about 42 percent.
The following chart comes from Zero Hedge. Nobody on the Internet does a better job with charts than Zero Hedge does. I would recommend visiting them right after you visit The Economic Collapse Blog each day (wink wink). This chart shows that Deutsche Bank stock has already fallen lower than it was during any point during the last financial crisis…
Deutsche Bank is the biggest and most important bank in the biggest and most important economy in the EU, and it has exposure to derivatives that is approximately 20 times Germany’s GDP.
If that doesn’t alarm you, I don’t know what will.
The biggest financial bubble in the history of the world has entered a terminal phase, and the parallels to the last financial crisis have become so apparent that just about anyone can see them at this point. Just consider some of the ominous warnings that we have seen recently…
Billionaire Carl Icahn, for example, recently raised a red flag on a national broadcast when he declared, “The public is walking into a trap again as they did in 2007.”
And the prophetic economist Andrew Smithers warns, “U.S. stocks are now about 80% overvalued.”
Smithers backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89% and 50%, respectively.
Even the Royal Bank of Scotland says the markets are flashing stress alerts akin to the 2008 crisis. They told their clients to “Sell Everything” because “in a crowded hall, the exit doors are small.”
And let’s not forget that famous billionaire retail magnate Hugo Salinas Price has warned that the global economy “is going into a depression“.
The chaos that we have seen this week is simply a logical progression of the crisis that began during the second half of last year. If you were to create a checklist of all the things that you would expect to see during the initial stages of a new financial crisis, all of the boxes would be checked.
In the days ahead, keep your eyes on Germany and Japan.
Yes, the Italian banking system is completely collapsing right now, but I believe that what is happening in Germany is going to be the key to the meltdown of Europe, and I am convinced that Deutsche Bank is going to be the star of the show.
Meanwhile, don’t underestimate what is taking place in Japan.
The Japanese still have the third largest economy on the entire planet, and their financial system is essentially a Ponzi scheme built on top of a house of cards that has a rapidly aging population as the foundation.
As Japan falls, that will be a signal that financial Armageddon is now upon us.
And after last night, it appears that moment is a lot closer than a lot of us may have thought.
Last time around it was subprime mortgages, but this time it is oil that is playing a starring role in a global financial crisis. Since the start of 2015, 42 North American oil companies have filed for bankruptcy, 130,000 good paying energy jobs have been lost in the United States, and at this point 50 percent of all energy junk bonds are “distressed” according to Standard & Poor’s. As you will see below, some of the big banks have a tremendous amount of loan exposure to the energy industry, and now they are bracing for big losses. And the longer the price of oil stays this low, the worse the carnage is going to get.
Today, the price of oil has been hovering around 29 dollars a barrel, and over the past 18 months the price of oil has fallen by more than 70 percent. This is something that has many U.S. consumers very excited. The average price of a gallon of gasoline nationally is just $1.89 at the moment, and on Monday it was selling for as low as 46 cents a gallon at one station in Michigan.
But this oil crash is nothing to cheer about as far as the big banks are concerned. During the boom years, those banks gave out billions upon billions of dollars in loans to fund exceedingly expensive drilling projects all over the world.
Now those firms are dropping like flies, and the big banks could potentially be facing absolutely catastrophic losses. The following examples come from CNN…
For instance, Wells Fargo (WFC) is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”
JPMorgan Chase (JPM) is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months.
Citigroup is another bank that also has a tremendous amount of exposure…
Citigroup (C) built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.”
If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there.
For the moment, these big banks are telling the public that the damage can be contained.
But didn’t they tell us the same thing about subprime mortgages in 2008?
We are already seeing bank stocks start to slide precipitously. People are beginning to realize that these banks are dangerously exposed to a lot of really bad deals.
If the price of oil were to shoot back up above 50 dollars in very short order, the damage would probably be manageable. Unfortunately, that does not appear likely to happen. In fact, now that sanctions have been lifted on Iran, the Iranians are planning to flood the world with massive amounts of oil that they have been storing in tankers at sea…
Iran has been carefully planning for its return from the economic penalty box by hoarding tons of oil in tankers at sea.
Now that the U.S. and European Union have lifted some sanctions on Iran, the OPEC country can begin selling its massive stockpile of oil.
The sale of this seaborne oil will allow Iran to get an immediate financial boost before it ramps up production. The onslaught of Iranian oil is coming at a terrible time for the global oil markets, which are already drowning in an epic supply glut.
Just the other day, I explained that some of the biggest banks in the world are now projecting that the price of oil could soon fall much, much lower.
Morgan Stanley says that it could go as low as 20 dollars a barrel, the Royal Bank of Scotland says that it could go as low as 16 dollars a barrel, and Standard Chartered says that it could go as low as 10 dollars a barrel.
But the truth is that the price of oil does not need to go down one penny more to have a catastrophic impact on global financial markets. If it just stays right here, we will see an endless parade of layoffs, energy company bankruptcies and debt defaults. Without any change, junk bonds will continue to crash and financial institutions will continue to go down like dominoes.
We are already experiencing a major disaster. Things are already so bad that some forms of low quality crude oil are literally selling for next to nothing. The following comes from Bloomberg…
Oil is so plentiful and cheap in the U.S. that at least one buyer says it would pay almost nothing to take a certain type of low-quality crude.
Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a corrected list of prices posted on its website Monday. It had previously posted a price of -$0.50. The crude is down from $13.50 a barrel a year ago and $47.60 in January 2014.
While the near-zero price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch.
A chart that I saw posted on Zero Hedge earlier today can help put all of this into perspective. Whenever the price of oil falls really low relative to the price of gold, there is a major global crisis. Right now an ounce of gold will purchase more oil than ever before, and many believe that this indicates that a new great crisis is upon us…
The number of barrels of oil that a single ounce of gold can buy has never, ever been higher.
All over the planet, big banks are absolutely teeming with bad loans. And to be honest, the big banks in the U.S. are probably in better shape than some of the major banks in Europe and Asia. But once the dominoes start to fall, very few financial institutions are going to escape unscathed.
In the coming days I would expect to see more headlines like we just got out of Italy. Apparently, Italian banks are nearing full meltdown mode, and short selling has been temporarily banned. To me, it appears that we are just inches away from full-blown financial panic in Europe.
However, just like with the last financial crisis, you never quite know where the next “explosion” is going to happen next.
But one thing is for sure – the financial crisis that began during the second half of 2015 is raging out of control, and the pain that we have seen so far is just the beginning.
It was another day of utter carnage on Wall Street. The Dow was down another 364 points, the S&P 500 broke below 1900, and the Nasdaq had a much larger percentage loss than either of them. The Russell 2000 has now fallen 22 percent from the peak, and it has officially entered bear market territory. After 13 days, this remains the worst start to a year for stocks ever, and trillions of dollars of stock market wealth has already been wiped out globally. Meanwhile, junk bonds continue their collapse. JNK got hammered all the way down to 33.06 as bond investors race for the exits. In case you were wondering, this is exactly what a financial crisis look like.
Many of the “experts” had been proclaiming that “things are different this time” and that stocks could defy gravity forever.
Now we seeing that was not true at all.
So how far could stocks ultimately fall?
I have been telling my readers that stocks still need to fall about another 30 percent just to get to a level that is considered to be “normal” be historical standards, but the truth is that they could eventually fall much farther than that.
Just this week, Societe Generale economist Albert Edwards made headlines all over the world with his prediction that we could see the S&P 500 drop by a total of 75 percent…
If I am right and we have just seen a cyclical bull market within a secular bear market, then the next recession will spell real trouble for investors ill-prepared for equity valuations to fall to new lows. To bottom on a Shiller PE of 7x would see the S&P falling to around 550.
I will repeat that: If I am right, the S&P would fall to 550, a 75% decline from the recent 2100 peak. That obviously will be a catastrophe for the economy via the wealth effect and all the Feds QE hard work will turn dust.
That is why I believe the Fed will fight the next bear market with every weapon available including deeply negative Fed Funds rates in addition to more QE. Indeed, negative policy rates will become ubiquitous.
Most believe a 75% equity bear market to be impossible. But those same people said something similar prior to the 2008 Global Financial Crisis. They, including the Fed, failed to predict the vulnerability of the US economy that would fall into deep recession, well before Lehmans went bust in September 2008.
Other than stocks, there are three key areas that I want my readers to keep an eye on during the weeks ahead…
1. The Price Of Oil – The price of oil doesn’t have to go one penny lower to continue causing catastrophic damage in the financial world. If we hover around 30 dollars a barrel, we will see more bankruptcies, more defaults, more layoffs and more carnage for energy stocks. But of course it is quite conceivable that the price of oil could easily slide a lot farther. Just check out some of the predictions that some of the biggest banks in the entire world are now making…
Just this week Morgan Stanley warned that the super-strong U.S. dollar could drive crude oil to $20 a barrel. Not to be outdone, Royal Bank of Scotland said $16 is on the horizon, comparing the current market mood to the days before the implosion of Lehman Brothers in 2008.
Standard Chartered doesn’t think those dire predictions are dark enough. The British bank said in a new research report that oil prices could collapse to as low as $10 a barrel — a level unseen since November 2001.
2. Junk Bonds – This is something that I have written about repeatedly. Right now, we are witnessing an epic collapse of the junk bond market, just like we did just prior to the great stock market crash of 2008. As I mentioned above, Wednesday was a particularly brutal day for junk bonds, and Jeffrey Gundlach seems convinced that the worst is still yet to come…
He seemed to leave his most dire predictions for junk bonds, a part of the market he’s been bearish on for years. Gundlach believes hedge funds investing in risky debts face major liquidity risks if they are forced to exit positions amid investor redemptions. “We could be looking at a real ugly situation in the first quarter of 2016,” Gundlach said on a Tuesday call with investors, when referring to redemptions.
Because many hedge funds operate with leverage, he raised an alarming prospect that those who don’t redeem could be left with losses far more severe than their marks indicate. As the Federal Reserve raises rates, redemptions combined with tightening credit conditions could create major pricing dislocations.
3. Emerging Markets – We have not seen money being pulled out of emerging markets at this kind of rate in decades. We are seeing a repeat of the conditions that caused the Latin American debt crisis of the 1980s and the Asian financial crisis of the 1990s. Only this time what we are witnessing is truly global in scope, and central bankers are beginning to panic. The following comes from Wolf Richter…
“Last year was a terrible year, probably worse than 2009,” the head of Mexico’s central bank told a conference of central bankers in Paris on Tuesday. It was the first year since 1988 that emerging markets saw net capital outflows, according to the Institute of International Finance, a Washington-based association of global banks and finance houses.
In December more than $3.1 billion fled emerging market funds. If anything, the New Year has been worse.
“I don’t have any data yet for the first week of 2016 but it’s probably going to be very, very, very bad,” Carstens said. If conditions do not improve, he warned, central banks in emerging markets may have little choice but to adopt a more “radical” approach to monetary policy, including intervening in domestic bonds and securities markets.
In addition to everything that I just shared with you, we got several other very troubling pieces of news on Wednesday…
-Canadian stocks continued their dramatic plunge and have now officially entered a bear market.
-PC sales just hit an eight year low.
-GoPro just announced that it is getting rid of 7 percent of its total workforce.
The bad news is coming fast and furious now. The snowball that started rolling downhill about halfway last year has set off an avalanche, and panic has gripped the financial marketplace.
But my readers knew all of this was coming in advance. What we are witnessing right now is simply the logical extension of trends that have been building for months. The global financial crisis that started during the second half of 2015 is now bludgeoning Wall Street mercilessly, and investors are in panic mode.
So what comes next?
We have never seen a year start like this, so it is hard to say. And if there is some sort of a major “trigger event” in our near future, we could see some single day crashes that make history.
Either way, the hounds have now been released, and it is going to be exceedingly difficult to get them back into the barn.
Never before have we seen a year start like this. On Monday, Chinese stocks crashed once again. The Shanghai Composite Index plummeted another 5.29 percent, and this comes on the heels of two historic single day crashes last week. All of this chaos over in China is one of the factors that continues to push commodity prices even lower. Today the price of copper fell another 2.40 percent to $1.97, and the price of oil continued to implode. At one point the price of U.S. oil plunged all the way down to $30.99 a barrel before rebounding just a little bit. As I write this article, oil is down a total of 6.12 percent for the day and is currently sitting at $31.13. U.S. stocks were mixed on Monday, but it is important to note that the Russell 2000 did officially enter bear market territory. This is yet another confirmation of what I was talking about yesterday. And junk bonds continue to plummet. As I write this, JNK is down to 33.42. All of these numbers are huge red flags that are screaming that big trouble is ahead. Unfortunately, the mainstream media continues to insist that there is absolutely nothing to be concerned about.
A little over a year ago, I wrote an article that explained that anyone that believed that low oil prices were good for the economy was “crazy“. At the time, many people really didn’t understand what I was trying to communicate, but now it is becoming exceedingly clear. On Monday, one veteran oil and gas analyst told CNBC that “half of U.S. shale oil producers could go bankrupt” over the next couple of years…
Half of U.S. shale oil producers could go bankrupt before the crude market reaches equilibrium, Fadel Gheit, said Monday.
The senior oil and gas analyst at Oppenheimer & Co. said the “new normal oil price” could be 50 to 100 percent above current levels. He ultimately sees crude prices stabilizing near $60, but it could be more than two years before that happens.
By then it will be too late for many marginal U.S. drillers, who must drill into and break up shale rock to release oil and gas through a process called hydraulic fracturing. Fracking is significantly more expensive than extracting oil from conventional wells.
Since the last recession, the energy industry has been the number one producer of good paying jobs in this country.
Now that those firms are starting to drop like flies, what is that going to mean for employment in America?
Just today, a huge coal company filed for bankruptcy, and so did a U.S. unit of commodity trading giant Glencore. The following comes from Zero Hedge…
While the biggest bankruptcy story of the day is this morning’s chapter 11 filing by Arch Coal, one which would trim $4.5 billion in debt from its balance sheet while handing over the bulk of the post-reorg company to its first-lien holders as part of the proposed debt-for-equity exchange, the reality is that the Arch default was widely anticipated by the market.
However, another far less noted and perhaps far more significant bankruptcy filing was that of Sherwin Alumina Co., a U.S. unit of commodity trading giant Glencore PLC, whose troubles have been extensively detailed on these pages. The stated reason for this far more troubling chapter 11 was “challenging market conditions” which is one way to describe an industry in which just one remaining U.S. smelter will be left in operation after Alcoa shut down its Warrick Country smelting ops last week.
A spokesman for Glencore, which owns the entire business, said the commodities producer and trader is “supportive of the restructuring process undertaken by Sherwin and is hopeful of an outcome that will allow for the continued operation of the Sherwin facility.”
We desperately need prices for oil and other commodities to rebound significantly. Unfortunately, that does appear to be likely to happen any time soon. In fact, according to CNN we could soon see the price of oil fall quite a bit more…
The strengthening U.S. dollar could send oil plunging to $20 per barrel.
That’s the view of analysts at Morgan Stanley. In a report published Monday, they say a 5% increase in the value of the dollar against a basket of currencies could push oil down by between 10% and 25% — which would mean prices falling by as much as $8 per barrel.
If prices for oil and other commodities keep falling, what is going to happen?
Well, Gina Martin Adams of Wells Fargo Securities says that what is happening right now reminds her of the correction of 1998…
Recent market volatility has dredged up memories of previous times of turmoil, most notably the 2008 crisis. But Gina Martin Adams of Wells Fargo Securities has been reminded of another, less dramatic correction year — 1998.
Adams posits that the current economic environment is suffering from themes that also played out in 1998, including falling oil prices, a rising U.S. dollar and troubles in emerging markets. Consequently, stocks may see a similar move to the 1998 correction, which saw a 20 percent drop for stocks over six weeks.
To me, it is much more serious than that. Just before U.S. stocks crashed horribly in 2008, we saw Chinese stocks crash, the price of oil crashed, commodity prices crashed, and junk bonds crashed really hard.
All of those things are happening again, and yet most of the “experts” continue to refuse to see the warning signs.
In fact, the mainstream media is full of articles that are telling people not to panic while the financial markets crumble all around them…
There’s no need to make big moves in response to the recent volatility. “Regular folks should take on a long-term view and avoid trying to anticipate short-term market movements,” says Stephen Horan, the managing director of credentialing at CFA Institute. “There is almost no evidence to suggest that professionals can do it effectively and a plethora of evidence suggesting individuals do it poorly.”
They want “regular folks” to keep holding on to their investments as the “smart money” dumps their stocks at a staggering pace.
A little more than six months ago, I predicted that “our problems will only be just beginning as we enter 2016”, and that is turning out to be dead on correct.
The financial crisis that began during the second half of last year is greatly accelerating, and yet most of the population continues to be in denial even though the average stock price has already fallen by more than 20 percent.
Hopefully it will not take another 20 percent decline before people begin to wake up.
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.
Corporate profits are steadily falling, the bond distress ratio just hit the highest level that we have seen since September 2009, and corporate debt defaults have risen to the highest level that we have seen since the last recession.
And this week we got a couple of new numbers that indicate that the U.S. economy is slowing down much faster than anticipated.
The first big surprise was the Dallas Fed’s general business activity index…
The Dallas Fed’s general business activity index plunged to -20.1 in December from -4.9 in November. This was much worse than the -7.0 expected by economists.
Any reading below 0 signals contraction, and this index has been below 0 all year.
The next big surprise was the Chicago purchasing manager index…
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.
Just within the past few days, three major high yield funds have completely imploded, and panic is spreading rapidly on Wall Street. Funds run by Third Avenue Management and Stone Lion Capital Partners have suspended payments to investors, and a fund run by Lucidus Capital Partners has liquidated its entire portfolio. We are witnessing a race for the exits unlike anything that we have seen since the great financial crash of 2008, and many of those that choose to hesitate are going to end up getting totally wiped out. In case you are wondering, this is what a financial crisis looks like. In 2008, other global stock markets started to tumble, then junk bonds began to crash, and finally U.S. stocks followed. The exact same pattern is playing out again, and the carnage that we have seen so far is just the tip of the iceberg.
Since the end of 2009, a high yield bond ETF that I watch very closely known as JNK has been trading in a range between 36 and 42. I have been waiting all this time for it to dip below 35, because I knew that would be a sign that the next major financial crisis was imminent.
In September, it closed as low as 35.33 at one point, but that was not the signal that I was looking for. Finally, early last week JNK broke below 35 for the very first time since the last financial crisis, and since then it has just kept on falling. As I write this, JNK has plummeted all the way to 33.42, and Bloomberg is reporting that many bond managers “are predicting more carnage for high-yield investors”…
Top bond managers are predicting more carnage for high-yield investors amid a market rout that forced at least three credit funds in the past week to wind down.
Lucidus Capital Partners, a high-yield fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, said Monday it has liquidated its entire portfolio and plans to return the $900 million it has under management to investors next month. Funds run by Third Avenue Management and Stone Lion Capital Partners have stopped returning cash to investors, after clients sought to pull too much money.
When it says that those firms “have stopped returning cash to investors”, what that means is that many of those investors will be lucky to get pennies on the dollar when it is all said and done.
Like I said, now that the crisis has started, the ones that are going to lose the most are those that hesitate.
And just check out some of the very big names that are “warning of more high-yield trouble ahead”…
Scott Minerd, global chief investment officer at Guggenheim Partners, predicts 10 percent to 15 percent of junk bond funds may face high withdrawals as more investors worry about getting their money back. He joins money managers Jeffrey Gundlach, Carl Icahn, Bill Gross and Wilbur Ross in warning of more high-yield trouble ahead.
In this type of environment, the Federal Reserve would have to be completely insane to raise interest rates.
Unfortunately, that appears to be exactly what is going to happen.
If the Fed raises rates, that is going to make corporate debt defaults even more likely and will almost certainly drive high-yield bonds down even further…
Higher rates could make corporate bond defaults more likely and investors are already bailing out of the sector, pulling $3.8 billion out of high-yield funds in the week ended December 9, the biggest move in 15 weeks. The effective yield on U.S. junk bonds is now 17 percent, the highest level in five years, according to Bank of America Merrill Lynch data.
A whole host of prominent names are warning that the Fed is about to make a tragic mistake. One of them is James Rickards…
“The Fed should have raised interest rates in 2010 and 2011 and if they did that they would actually be in a position to cut them today,” said James Rickards, a central bank critic and chief global strategist at West Shore Funds. “The Fed is on the brink of committing a historic blunder that may rank with the mistakes it made in 1927 and 1929. By raising into weakness, they will likely cause a recession.”
In 2015, we have already seen stocks crash all over the globe. Coming into December, more than half of the 93 largest stock market indexes in the world were down more than 10 percent year to date, and some of them were down by as much as 30 or 40 percent. At this point, conditions are absolutely perfect for a frightening collapse of U.S. markets, and the Federal Reserve is about to pour gasoline on to the fire.
Anyone that says that “nothing is happening” is either completely misinformed or is totally crazy.
I like how James Howard Kunstler summarized what we are currently facing…
Equities barfed nearly four percent just last week, credit is crumbling (nobody wants to lend), junk bonds are tanking (as defaults loom), currencies all around the world are crashing, hedge funds can’t give investors their money back, “liquidity” is AWOL (no buyers for janky securities), commodities are in freefall, oil is going so deep into the sub-basement of value that the industry may never recover, international trade is evaporating, the president is doing everything possible in Syria to start World War Three, and the monster called globalism is lying in its coffin with a stake pointed over its heart.
The financial markets held together far longer than many people thought that they would, but now they are finally coming apart at the seams.
Moving forward, the “winners” are going to be the people that pull their money out the fastest. This is especially true for high risk funds like the three that just imploded. If you hesitate, you could end up losing everything.
And as this rush for the exits accelerates, sellers are going to greatly outnumber buyers, and this is going to push prices down at a very rapid pace. We are going to hear a lot about a “lack of liquidity” in the days ahead, but the truth is that what we will really be looking at is a good old-fashioned panic.
The extreme carnage that we are witnessing in the junk bond market right now is one of the clearest signals yet that a major U.S. stock market crash is imminent. For those that are not familiar with “junk bonds”, please don’t get put off by the name. They aren’t really “junk”. They simply have a higher risk and thus a higher return than other bonds of the same type. And yesterday, I explained why I watch them so closely. If stocks are going to crash, you would expect to see a junk bond crash first. This happened in 2008, and it is happening again right now. On Monday, a high yield bond ETF known as JNK crashed through the psychologically important 35.00 barrier for the very first time since the last financial crisis. On Tuesday, high yield bonds had their worst day in three months, and JNK plummeted all the way down to 34.44. When I saw this I was absolutely stunned. This is precisely the kind of junk bond crash that I have been anticipating that we would soon witness.
Normally, stocks and junk bonds track one another very closely, but just like before the 2008 crash, they have become decoupled in recent months. Anyone that even has an elementary understanding of the financial world knows that this cannot continue indefinitely. And when they start converging once again, the movement could be quite violent.
When I chose to use the word “carnage” to open this article, I was not exaggerating what is going on in the junk bond market one bit. On Tuesday evening, Jeffrey Gundlach used the exact same word to describe what is happening…
Jeffrey Gundlach, the widely followed investor who runs DoubleLine Capital, said on a webcast on Tuesday that the junk bond market has come under severe selling pressure ahead of the Federal Reserve’s policy meeting next week.
“We are looking at real carnage in the junk bond market,” Gundlach said. Gundlach also said it was too early to buy high-yield junk bonds and energy debt securities. “I don’t like things when they go down every single day.”
Sometimes a chart can be extremely helpful in understanding what is going on. The following chart was posted by Zero Hedge on Tuesday, and it shows that yields on the riskiest junk bonds are heading into the stratosphere…
And for those that are not familiar, it is important to note that when yields go up, bond prices go down. So the chart above is what a “crash” looks like.
Another “leading indicator” that I watch is the behavior of Dow Transports.
Dow Transports started crashing before the Dow Jones Industrial Average did back in August, and now it is happening again…
Dow Transports are in reverse. Down over 3% today, the biggest drop since the Black Monday collapse, Trannies are now below the lows of the Bullard bounce from October 2014 and down a shocking 16% in 2015. This would be the first four-quarters-in-a-row drop in Transports since 1994 and the worst year since 2008…
In addition, we are also seeing trouble signs erupt at major financial institutions just like we did during the run up to the 2008 crash. For example, I have been concerned about Morgan Stanley for quite a while, and on Tuesday we learned that they have just laid off more than a thousand workers…
Struggling Morgan Stanley slashed 1,200 jobs around the world in recent days, a person familiar with the matter told CNNMoney.
The cuts were broad-based and eliminated 25% of the positions within the fixed income and commodities businesses, the person said. Those divisions are grappling with tumbling trading revenue and shrinking fees.
Morgan Stanley also eliminated about 730 back-office jobs like human-resources and IT positions.
Virtually all of the things that we would expect to see just prior to a 2008-style stock market crash are happening right now.
If just two or three leading indicators were flashing red, we could have a really good debate about what they might mean.
But the fact that virtually all of the numbers are screaming a warning at us should mean that the debate is over. Anyone with an open mind should be able to very clearly see what is coming next.
Very quickly, let me give you just 10 signs that indicate that we are right on the precipice of a major recession and a very substantial financial downturn…
1. Global GDP growth has gone negative for the first time since 2009.
2. Corporate earnings growth has turned negative.
3. S&P 500 net profit margins are steeply declining. According to Tony Sagami, “since 1973, there has been only one 60 bps decline in S&P 500 net profit margin that didn’t lead to a recession.”
4. In October, U.S. imports of goods declined by 6.6 percent on a year over year basis.
5. In October, U.S. exports of goods declined by 10.4 percent on a year over year basis.
6. U.S. manufacturing is contracting at the fastest pace that we have seen since the last recession.
7. Corporate debt defaults have risen to the highest level that we have seen since the last recession.
8. Credit card numbers that were recently released show that holiday sales have gone negative for the first time since the last recession.
9. The velocity of money in the United States has dropped to the lowest level ever recorded.
10. Of the 93 largest stock market indexes in the entire world, 47 of them (slightly more than half) have already plunged at least 10 percent year to date.
Just like in 2008, other global financial markets are imploding ahead of a U.S. collapse.
On Tuesday, the Dow Jones Industrial Average was down another 162 points, but we are still within 1000 points of the market peak that was set earlier this year. We are still in far better shape than most of the rest of the world, but that will soon change.
I can’t think of a single leading indicator that is telling us that everything is going to be okay. All of the numbers are pointing to major trouble ahead. So I hope that you are being smart and doing what you can to get prepared while there is still time.
So many of the exact same patterns that we witnessed just before the stock market crash of 2008 are playing out once again right before our eyes. Most of the time, a stock market crash doesn’t just come out of nowhere. Normally there are specific leading indicators that we can look for that will tell us if major trouble is on the horizon. One of these leading indicators is the junk bond market. Right now, a closely watched high yield bond ETF known as JNK is sitting at 35.77. If it falls below 35, that will be a major red flag, and it will be the first time that it has done so since 2009. As you can see from this chart, JNK started crashing in June and July of 2008 – well before equities started crashing later that year. A crash in junk bonds almost always precedes a major crash in stocks, and so this is something that I am watching carefully.
And there is a reason why junk bonds are crashing. In 2015 we have seen the most corporate bond downgrades since the last financial crisis, and corporate debt defaults are absolutely skyrocketing. The following comes from a recent piece by Porter Stansberry…
So far this year, nearly 300 U.S. corporations have seen their bonds downgraded. That’s the most downgrades per year since the financial crisis of 2008-2009. The year isn’t over yet. Neither are the downgrades. More worrisome, the 12-month default rate on high-yield corporate debt has doubled this year. This suggests we are well into the next major debt-default cycle.
Another thing that I am watching closely is the price of oil.
A massive crash in the price of oil preceded the stock market crash of 2008, and over the past year we have seen another dramatic crash in the price of oil.
Many had been expecting the price of oil to bounce back, but instead we are seeing new downward momentum. In fact, according to Business Insider the price of U.S. oil briefly dipped below $43 a barrel on Wednesday…
Crude oil was down nearly 3% in morning trade on Wednesday.
West Texas Intermediate crude oil futures in New York dropped to as low as $42.97 per barrel. Futures touched a $42-handle in the last week of October, but last traded near those levels for a considerable period in August.
Another thing that I am watching is the ongoing crash of other industrial commodities. This is something that also preceded the stock market crash of 2008, and it is a clear sign that global economic activity is really slowing down.
Prices for industrial commodities such as aluminum, tin, iron ore and coal are all crashing. But the commodity that has me most alarmed personally is copper.
Economists commonly refer to it as “Dr. Copper”, and there is a very good reason for that. Looking back over history, the price of copper often makes a significant move in one direction or the other before the overall economy does. And the price of copper almost always starts declining before stocks do.
As I write this, the price of copper has fallen to $2.21, and it is already lower than at any point since the last financial crisis. To get a better perspective regarding what I am talking about, just check out this chart. This is one signal that is absolutely screaming that a major financial crisis is imminent.
One more harbinger of financial doom on the horizon is the surging U.S. dollar. The U.S. dollar surged just before the financial crisis of 2008, and now it is happening again.
Most Americans don’t understand this, but the truth is that a rising U.S. dollar puts an incredible amount of stress on emerging markets all around the globe. Since the last financial crisis, many of these emerging markets have been on a massive debt binge, and much of that debt was denominated in U.S. dollars. Now that the dollar has increased in value, emerging market borrowers are finding that it takes much more of their own local currencies to service and pay back those debts. Defaults are rapidly rising, and emerging market economies all over the world (such as Brazil) have already plunged into recession.
If the Fed does follow through with an interest rate hike in December, that is going to make things even worse. The U.S. dollar will surge even more, and emerging markets will be in even more trouble.
At the same time that the dollar is getting stronger, the euro is getting weaker. An article that was posted by CNBC on Wednesday went so far as to state that “it is now looking like the euro reaching parity with the greenback is all but guaranteed”…
The prospect of the Fed hiking interest rates in December has pushed the dollar higher, and it is now looking like the euro reaching parity with the greenback is all but guaranteed.
Strategists, however, disagree on how quickly that will happen and how much more the dollar can appreciate in the near term. That depends, they say, on the Fed, and how fast it will raise interest rates in a world where other central banks are moving in the opposite direction toward easier policy.
Goldman Sachs analysts this week reiterated that they expect euro parity with the dollar by year-end though other strategists expect the decline in the common currency against the dollar to take longer.
Let’s see, who has been warning that this would happen for more than a year? Here are just a few examples…
July 19th: “For a long time, I have been repeating my prediction that the euro would fall to parity with the U.S. dollar.”
June 28th: “As I have warned repeatedly, the euro is heading for parity with the U.S. dollar, and at some point it will drop below parity.”
May 25th: “As I have warned so many times before, the euro is headed for parity with the U.S. dollar, and then it is going to go below parity.”
In August 2014, just a little bit over a year ago, the EUR/USD was sitting above 1.30. At that time very few people out there would have ever imagined we would be talking about parity just a little more than a year later.
This is just the beginning of a time of great financial volatility. The things that we are going to witness in the months and years to come are going to be absolutely unprecedented. A massive global debt super-cycle is coming to an end, and the pain that this is going to mean for the global economy is almost too great to put into words.
A lot of people out there expected something to happen in September that did not ultimately happen. There were all kinds of wild theories floating around, and many of them had no basis in reality whatsoever. But without a doubt, some very important things did happen in September. As I warned about ahead of time, we are witnessing the most significant global financial meltdown since the end of 2008. All of the largest stock markets in the world are crashing simultaneously, and so far the amount of wealth that has been wiped out worldwide is in excess of 5 trillion dollars. In addition to stocks, junk bonds are also crashing, and Bank of America says that it is a “slow moving trainwreck that seems to be accelerating“. Thanks to the commodity price crash, many of the largest commodity traders on the planet are now imploding. I wrote about the death spiral that has gripped Glencore yesterday. On Tuesday, the stock price of the largest commodity trader in Asia, the Noble Group, plummeted like a rock and commodity trading giant Trafigura appears to be in worse shape than either Glencore or the Noble Group. The total collapse of any of them could easily be a bigger event than the implosion of Lehman Brothers in 2008. So I honestly do not understand the “nothing is happening” crowd. It takes ignorance on an almost unbelievable level to try to claim that “nothing is happening” in the financial world right now.
Within the last 60 days, we have seen some things happen that we have never seen before.
For example, did you know that we witnessed the greatest intraday stock market crash in U.S. history on August 24th?
During that day, the Dow Jones Industrial Average plunged from a high of 16,459.75 to a low of 15,370.33 before rebounding substantially. That intraday point swing of 1,089 points was the largest in all of U.S. history.
Overall, the Dow has down 588.40 points that day. When you combine that decline with the 530.94 point plunge from the previous Friday, you get a total drop of 1119.34 points over two consecutive trading days. Never before in history had the Dow fallen by more than 500 points on two trading days in a row. If that entire decline had fallen within one trading day, it would have been the largest stock market crash in U.S. history by a very wide margin, and everyone would be running around saying that author Jonathan Cahn was right again.
But because this massive decline fell over two consecutive trading days that somehow makes him wrong?
Are you kidding me?
Come on people – let’s use some common sense here. We are already witnessing the greatest global stock market decline in seven years, and after a brief lull things are starting to accelerate once again. Last night, stocks in Hong Kong were down 629 points and stocks in Japan were down 714 points. In the U.S., the Nasdaq has had a string of down days recently, and the “death cross” that has just formed has many investors extremely concerned…
The Nasdaq composite spooked investors on Monday after forming a death cross, a trading pattern that shows a decline in short-term momentum and is often a precursor to future losses.
A death cross occurs when the short-term moving average of a security or an index pierces below the long-term trend, in this case the 50-day moving average breaking through the 200-day moving average.
In the past month, similar chart patterns formed in the S&P 500, Dow and small-cap Russell 2000, but the Nasdaq avoided a death cross formation until Monday.
What we witnessed in September was not “the end” of anything.
Instead, it is just the beginning.
And if you listen carefully, some of the biggest names on Wall Street are issuing some very ominous warnings about what is coming. For instance, just consider what Carl Icahn is saying…
Danger ahead—that’s the warning from Carl Icahn in a video coming Tuesday.
The activist says low rates caused bubbles in art, real estate and high-yield bonds—with potentially dramatic consequences.
“It’s like giving somebody medicine and this medicine is being given and given and given and we don’t know what’s going to happen – you don’t know how bad it’s going to be. We do know when we did it a few years ago it caused a catastrophe, it caused ’08. Where do you draw the line?”
Even people like Jim Cramer are starting to freak out. He recently told his audience that “we have a first-class bear market going”…
Jim Cramer, the ex-hedge fund manager and host of CNBC’s show “Mad Money,” has been vocal recently on air, saying repeatedly that he doesn’t like the market now, and last week said “we have a first-class bear market going.” Similarly, Gary Kaltbaum, president of Kaltbaum Capital Management, has been sending out notes to clients and this newspaper for weeks, saying the poor price action of the stock market and many hard-hit sectors, such as energy and the recently clobbered biotech sector, has all the earmarks of a bear market. Over the weekend, Kaltbaum said: “We remain in a worldwide bear market for stocks.”
As I have warned repeatedly, there will continue to be ups and downs. The stock market is not going to fall every day. In fact, on some days stocks will absolutely soar.
But without a doubt, we have entered the period of time that I have warned about for so long. The global financial system is now beginning to unravel, and any piece of major bad news will likely accelerate things.
For instance, the total collapse of Deutsche Bank, Petrobras, Glencore, the Noble Group, Trafigura or any of a number of other major financial institutions that I am currently watching could create mass panic on the global financial stage.
In addition, an unexpected natural disaster that hits a financially important major city or a massive terror attack in the western world are other examples of things that could accelerate this process.
Our world is becoming increasingly unstable, and we all need to learn to expect the unexpected.
The period of relative peace and security that we all have been enjoying for so long is ending, and now chaos is going to reign for a time.
So get prepared while you still can, because there is very little time remaining to do so…