The long-anticipated collapse of the euro is here. When European Central Bank president Mario Draghi unveiled an open-ended quantitative easing program worth at least 60 billion euros a month on Thursday, stocks soared but the euro plummeted like a rock. It hit an 11 year low of $1.13, and many analysts believe that it is going much, much lower than this. The speed at which the euro has been falling in recent months has been absolutely stunning. Less than a year ago it was hovering near $1.40. But since that time the crippling economic problems in southern Europe have gone from bad to worse, and no amount of money printing is going to avert the financial nightmare that is slowly unfolding right before our eyes. Yes, there may be some temporary euphoria for a few days, but it is important to remember that reckless money printing worked for the Weimar Republic for a little while too before it turned into an utter disaster. Now that the ECB has decided to go this route, it is essentially out of ammunition. The only thing that it could potentially do beyond this is to print even larger quantities of money. As the global financial crisis begins to unfold over the next couple of years, the ECB is pretty much going to be powerless to do anything about it. Over the next couple of months, we can expect the euro to continue to head toward parity with the U.S. dollar, and eventually it is going to go to all-time lows. Meanwhile, the future of the eurozone itself is very much in doubt. If it does break up, the elite of Europe will probably try to put it back together in some sort of new configuration, but the damage will already have been done.
Over the next 18 months, the European Central bank will create more than a trillion euros out of thin air and will use that money to buy debt. The following is how this new QE program for Europe was described by the Telegraph…
“The combined monthly purchases of public and private sector securities will amount to €60bn euros,” said Mr Draghi at a press conference following a meeting of the ECB’s governing council.
“They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation,” he added, meaning the package will amount to at least €1.1 trillion.
Mr Draghi’s package of asset purchases, including bonds issued by national governments and EU institutions such as the European Commission, is intended to boost the eurozone’s flagging economy and to ward off the spectre of deflation.
When you print more money, you drive down the value of your currency. And the euro has already been crashing for months as you can see from the chart below…
As I write this, the euro is down to $1.13. And most analysts seem to agree that it is likely heading even lower.
How low could it ultimately go?
One prominent currency strategist recently told CNBC that he believes that it is actually heading beneath parity with the U.S. dollar…
The euro plunged to an 11-year low on Thursday, after the European Central Bank announced that it would begin a 60-euro monthly asset purchasing program. But it could still have a ways to fall.
Brown Brothers Harriman global head of currency strategy Marc Chandler predicts that the euro, which fell as low as 1.1362 on Thursday after trading near 1.4000 in May, is heading below 1.0. That widely watched level is the point at which it will just take a single U.S. dollar to purchase a euro, a condition known in the currency markets as “parity.”
I totally agree with Chandler.
In fact, I believe that the euro is ultimately going to break the all-time record low against the dollar.
I also believe that the current configuration of the eurozone is eventually going to fall to pieces. The euro may survive as a currency, but Europe is ultimately going to look a whole lot different than it does right now.
In fact, we could see things start to come apart for the eurozone as soon as Sunday. If Syriza wins a decisive victory in the upcoming Greek elections, it could create all sorts of chaos…
The polls put Alexis Tsipras and Syriza ahead of the ruling New Democracy party of Greek Prime Minister Antonis Samaras.
Tsipras has vowed to convince the ECB and euro zone to write down the value of their Greek debt holdings to allow him to increase public spending and stimulate job growth.
“There is a good chance they could win, and if they begin moving away from fiscal austerity, other members of the EU are going to say: ‘No more lending, no more life support.’ On Monday morning you’ll know,” De Clue said.
But of course Europe is far from alone. Financial problems are erupting all over the planet, and central banks are getting desperate.
Over the past week, seven major central banks have made moves to fight deflation. But the more that they cut interest rates and print money, the less effect that it has. And eventually, the people of the world are going to seriously lose confidence in these central banks as they realize what a sham the system really is.
I think that these recent words from Marc Faber are very wise…
“My belief is that the big surprise this year is that investor confidence in central banks collapses. And when that happens — I can’t short central banks, although I’d really like to, and the only way to short them is to go long gold, silver and platinum,” he said. “That’s the only way. That’s something I will do.”
So what do you think?
Do you agree with Marc Faber?
And what do you think is next for the euro?
Do you agree with me that it is going to record lows?
Please feel free to share what you think by posting a comment below…
Central banks lie. That is what they do. Not too long ago, the Swiss National Bank promised that it would defend the euro/Swiss franc currency peg with the “utmost determination”. But on Thursday, the central bank shocked the financial world by abruptly abandoning it. More than three years ago, the Swiss National Bank announced that it would not allow the Swiss franc to fall below 1.20 to the euro, and it has spent a mountain of money defending that peg. But now that it looks like the EU is going to launch a very robust quantitative easing program, the Swiss National Bank has thrown in the towel. It was simply going to cost way too much to continue to defend the currency floor. So now there is panic all over Europe. On Thursday, the Swiss franc rose a staggering 30 percent against the euro, and the Swiss stock market plunged by 10 percent. And all over the world, investors, hedge funds and central banks either lost or made gigantic piles of money as currency rates shifted at an unprecedented rate. It is going to take months to really measure the damage that has been done. Meanwhile, the euro is in greater danger than ever. The euro has been declining for months, and now the number one buyer of euros (the Swiss National Bank) has been removed from the equation. As things in Europe continue to get even worse, expect the euro to go to all-time record lows. In addition, it is important to remember that the Asian financial crisis of the late 1990s began when Thailand abandoned its currency peg. With this move by Switzerland set off a European financial crisis?
Of course this is hardly the first time that we have seen central banks lie. In the United States, the Federal Reserve does it all the time. The funny thing is that most people still seem to trust what central banks have to say. But at some point they are going to start to lose all credibility.
Financial markets like predictability. And gigantic amounts of money had been invested based on the repeated promises of the Swiss National Bank to use “unlimited amounts” of money to defend the currency floor. Needless to say, there are a lot of people in the financial world that feel totally betrayed by the Swiss National Bank today. The following comes from an analysis of the situation by Bruce Krasting…
Thomas Jordan, the head of the SNB has repeated said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.
The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.
The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP!
Most experts are calling this an extremely bad move by the Swiss National Bank.
But in the end, they may have had little choice.
The euro is falling apart, and the Swiss did not want to be married to it any longer. Unfortunately, when any marriage ends the pain can be enormous. The following comes from CNBC…
How do you know you’re looking at a bad marriage?
Well if one or both of the spouses can’t wait to get out as soon as the smallest crack in the door opens, you have a pretty good clue.
Something like that just happened in Europe as we learned the real reason why so many traders were still invested in the euro: They had nowhere else to go.
As the Swiss National Bank unlocked the doors on its cap on trading euros for Swiss francs, the rush to exit the euro was faster than one of those French bullet trains.
But this move has not been bad for everyone. In fact, for many of those that live in Switzerland but work in neighboring countries what happened on Thursday was very fortuitous…
“I heard the news this morning. I’m so happy!” Vanessa, who refused to give her last name, told AFP outside of one of many mobbed exchange offices in Geneva.
She has reason to be extatic: she is one of some 280,000 people working in Switzerland but living and paying bills in eurozone countries France, Germany or Italy.
These so-called “frontaliers”, or border-crossers, are the biggest winners in Thursday’s Swiss franc surge, seeing their incomes jump 30 percent in the blink of an eye.
In normal times, things like this very rarely happen.
But in times of crisis, things can change very rapidly. We are moving into a time of great volatility in global financial markets, and great volatility is often a sign that a great crash is coming.
This move by the Swiss National Bank is just the beginning. Expect more desperate moves on the global economic chessboard in the days ahead. But in the end, none of those moves is going to prevent what is coming.
And one of these days, another extremely important currency peg is going to end. Right now, the Chinese have tied their currency very tightly to the U.S. dollar. This has helped to artificially inflate the value of the dollar. Unfortunately, as Robert Wenzel has noted, someday the Chinese could suddenly pull the rug out from under our currency, and that would be really bad news for us…
In other words, the SNB is no People’s Bank of China type patsy, where the PBOC has taken on massive amounts of dollar reserves to prop up the dollar.
Will the PBOC learn anything from SNB? If so, this will not be good for the US dollar.
So keep a close eye on what happens in Europe next.
It is going to be a preview of what is eventually coming to America.
This is the big problem with fiat currency – eventually the temptation to print more of it when you are in a jam becomes too powerful to resist. In a surprise move on Friday, the Bank of Japan dramatically increased the size of the quantitative easing program that it has been conducting. This sent Japanese stocks soaring and the Japanese yen plunging. The yen had already fallen by about 11 percent against the dollar over the last year before this announcement, and news of the BOJ’s surprise move caused the yen to collapse to a seven year low. Essentially what the Bank of Japan has done is declare a currency war. And as you will see below, in every currency war there are winners and there are losers. Let’s just hope that global financial markets do not get shredded in the crossfire.
Without a doubt, the Japanese are desperate. Their economic decline has lasted for decades, and their debt levels are off the charts. In such a situation, printing more money seems like such an easy solution. But as history has shown us, wild money printing always ends badly. Just remember what happened in the Weimar Republic and in Zimbabwe.
At this point, the Bank of Japan is already behaving so recklessly that it is making the Federal Reserve look somewhat responsible in comparison. The following is how David Stockman summarized what just happened…
This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.
Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.
The Japanese are absolutely destroying the credibility of their currency in a last ditch effort to boost short-term economic growth.
So why would they want to devalue their currency?
Well, there are too main reasons why nations do this.
One reason is that it makes it easier to pay off debt. The government debt to GDP ratio in Japan is approximately 250 percent at the moment, and the total debt to GDP ratio is approximately 600 percent. When you have lots more money floating around, servicing crippling levels of debt becomes more feasible.
Secondly, nations like to devalue their currencies because it makes their products less expensive on the world stage.
In other words, it helps them sell more stuff to other people.
But in the process, this hurts other exporters. For example, what the Bank of Japan just did is already having serious consequences for South Korean automakers…
In Seoul, shares of auto makers Hyundai Motor and Kia Motors fell 5.9% and 5.6%, respectively, on Monday.
South Korean and Japanese companies often compete head-to-head in the same product groups in global markets, notably cars and electronics goods.
From the Bank of Japan’s standpoint, “you’re giving your industry a head start relative to someone else’s,” said Markus Rosgen, regional head of equity strategy at Citi in Hong Kong. “The perception in the equity market will be that they [South Korea] will have to take a hit from the lack of competitiveness versus the Japanese.”
This is why I said that there are winners and there are losers in every currency war.
If you boost your exports by devaluing your currency, you take away business from someone else. And ultimately other nations start devaluing their currencies in an attempt to stay competitive. That is why they call it a currency war.
For now, the Japanese are celebrating. On Friday, Japanese stocks surged almost five percent for the day and reached a seven year high. Investors tend to love quantitative easing, and they were very pleasantly surprised by what the Bank of Japan decided to do.
But of course rising stock prices are not always a good thing. As Kyle Bass recently explained, wild money printing caused Zimbabwe’s stock market to skyrocket to unprecedented heights as well and that turned out very, very badly…
Amid the euphoria… Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC’s Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected).
However, he caveats that nominally bullish statement with a critical point, “Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs” as purchasing power is crushed. Investors, he says, are “too focused on nominal prices” as the rate of growth of the monetary base is destroying true wealth. Bass is convinced that cost-push inflation is coming (as the velocity of money will move once psychology shifts) and investors must not take their eye off the insidious nature of underlying inflation – no matter what we are told by the government (as they will always lie when its critical). Own ‘productive assets’, finance them at low fixed rates (thank you Ben)…
And just like we have experienced with quantitative easing in the United States, Japan’s money printing has done very little to help the real economy. Here is more from David Stockman…
Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south.
So up to this point Japan’s experiment in crazy money printing has been a dismal failure.
Will printing even more money turn things around?
We shall see, but I wouldn’t hold your breath.
Meanwhile, there are reports that the European Central Bank is getting ready for more quantitative easing. Central banks all over the planet are becoming increasingly desperate for answers, and the temptation to print, print and print some more is extremely strong.
Nobody is quite sure how this currency war will play out, but I have a feeling that it isn’t going to be pretty.
Mark this day on your calendars. The Dow is at 16974, the S&P 500 is at 1982 and the NASDAQ is at 4549. From this day forward, we will be looking to see how the stock market performs without the monetary heroin that the Federal Reserve has been providing to it. Since November 2008, the Fed has created about 3.5 trillion dollars and pumped it into the financial system. An excellent chart illustrating this in graphic format can be found right here. Pretty much everyone agrees that this has been a tremendous boon for the financial markets. As you will see below, even former Fed chairman Alan Greenspan says that quantitative easing was “a terrific success” as far as boosting stock prices. But he also says that QE has not been very helpful to the real economy at all. In essence, the entire quantitative easing program was a massive 3.5 trillion dollar gift to Wall Street. If that sounds unfair to you, that is because it is unfair.
So why is the Federal Reserve finally ending quantitative easing?
Well, officially the Fed says that it is because there has been so much improvement in the labor market…
The Fed’s language, however, did suggest that they were getting more comfortable with the economy’s improvement. It cited “solid job gains,” citing a “substantial improvement in the outlook for the labor market,” as well as pointing out that “underutilization” of labor resources is “gradually diminishing.”
But that is not true at all.
The percentage of Americans that are working right now is about the same as it was during the depths of the last recession. Just check out this chart…
So there has been no “employment recovery” to speak of at all.
And as I wrote about yesterday, the percentage of Americans that are homeowners has been steadily falling throughout the quantitative easing era…
So let’s put the lie that quantitative easing helped the “real economy” to rest. It did no such thing.
Instead, what QE did do was massively inflate stock prices.
The following is an excerpt from a Wall Street Journal report about a speech that former Fed chairman Alan Greenspan made to the Council on Foreign Relations on Wednesday…
Mr. Greenspan’s comments to the Council on Foreign Relations came as Fed officials were meeting in Washington, D.C., and expected to announce within hours an end to the bond purchases.
He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.
“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”
Moving forward, what did Greenspan tell the members of the Council on Foreign Relations that they should do with their money?
This might surprise you…
Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.
It almost sounds like Greenspan has been reading the Economic Collapse Blog.
Since November 2008, every time there has been an interruption in the Fed’s quantitative easing program, the stock market has gone down substantially.
Will that happen again this time?
Well, the market is certainly primed for it. We are repeating so many of the very same patterns that we saw just prior to the last two financial crashes.
For example, there have been three dramatic peaks in margin debt in the last twenty years.
One of those peaks came early in the year 2000 just before the dotcom bubble burst.
The second of those peaks came in the middle of 2007 just before the subprime mortgage meltdown happened.
And the third of those peaks happened earlier this year.
You can view a chart that shows these peaks very clearly right here.
The Federal Reserve appears to be confident that the stock market will be okay without the monetary heroin that it has been supplying.
We shall see.
But it should be deeply troubling to all Americans that this unelected, unaccountable body of central bankers has far more power over our economy than anyone else does. During election season, our politicians get up and give speeches about what they will “do for the economy”, but the truth is that they are essentially powerless compared to the immense power that the Federal Reserve wields. Just a few choice words from Janet Yellen can cause the financial markets to rise or fall dramatically. The same cannot be said of any U.S. Senator.
We are told that monetary policy is “too important” to be exposed to politics.
We are told that the independence of the Federal Reserve is “sacred” and must never be interfered with.
I say that is a bunch of nonsense.
No organization should have the power to print up trillions of dollars out of thin air and give it to their friends.
The Federal Reserve is completely and totally out of control, and Congress needs to start exerting power over it.
The first step is to get in there and do a comprehensive audit of the Fed’s books. This is something that U.S. Senator Ted Cruz called for in a recent editorial for USA Today…
Americans are seeing near-zero interest rates on their savings accounts while median incomes are falling, and millions of people are facing higher gas prices, food prices, electricity prices, health insurance prices. Enough is enough, the Federal Reserve needs to open its books — Americans deserve a sound and stable dollar.
Whether you agree with Ted Cruz on other issues or not, this is one issue that all Americans should be able to agree on.
If you study any of our major economic problems, usually you will find that the Federal Reserve is at the heart of that problem.
So if we ever hope to solve the issues that are plaguing our economy, the Fed is going to need to be dealt with.
Hopefully the American people will start to send more representatives to Washington D.C. that understand this.
It is widely expected that the Federal Reserve is going to announce the end of quantitative easing this week. Will this represent a major turning point for the stock market? As you will see below, since 2008 stocks have risen dramatically throughout every stage of quantitative easing. But when the various phases of quantitative easing have ended, stocks have always responded by declining substantially. The only thing that caused stocks to eventually start rising again was a new round of quantitative easing. So what will happen this time? That is a very good question. What we do know is that the the performance of the stock market has become completely divorced from economic reality, and in recent weeks there have been signs of market turmoil that we have not seen in years. Could the end of quantitative easing be the thing that finally pushes the financial markets over the edge?
After all this time, many Americans still don’t understand what quantitative easing actually is. Since the end of 2008, the Federal Reserve has injected approximately 3.5 trillion dollars into the financial system. Of course the Federal Reserve didn’t actually have 3.5 trillion dollars. The Fed created all of this money out of thin air and used it to buy government bonds and mortgage-backed securities.
If that sounds like “cheating” to you, that is because it is cheating. If you or I tried to print money, we would be put in prison. When the Federal Reserve does it, it is called “economic stimulus”.
But the overall economy has not been helped much at all. If you doubt this, just look at these charts.
Instead, what all of this “easy money” has done is fuel the greatest stock market bubble in history.
As you can see from the chart below, every round of quantitative easing has driven the S&P 500 much higher. And when each round of quantitative easing has finally ended, stocks have declined substantially…
And of course the chart above tells only part of the story. Since April 2013, the S&P 500 has gone much higher…
If someone from another planet looked at that chart, they would be tempted to think that the U.S. economy must be expanding like crazy.
But of course that is not happening.
This market binge has been solely fueled by reckless money printing by the Federal Reserve. It is not backed up by economic fundamentals in any way, shape or form.
And now that quantitative easing is ending, many are wondering if the party is over.
For example, just check out what CNN is saying about the matter…
Even in this bull market, all good things must come to an end.
The Federal Reserve is expected to close a chapter in history this week and announce the conclusion of its massive stimulus program. Known as quantitative easing, the program is widely credited with driving investors back into stocks in the aftermath of the financial crisis.
“I think to some extent quantitative easing has provided an assurance to investors that (has) kept them optimistic,” said Bruce McCain, Chief Investment Strategist of Key Private Bank in Cleveland, Ohio. “Now we’re going to have to see whether investors can ride without training wheels.”
Everyone knows that quantitative easing was a massive gift to those that own stocks.
So how will the stock market respond now that the monetary heroin is ending?
We shall see.
Meanwhile, deflationary pressures are already starting to take hold around the rest of the globe. The following is an excerpt from a recent Reuters report…
After months of focus on slack in U.S. labor markets, the Federal Reserve faces a new challenge: the possibility that weak inflation may be so firmly entrenched it upends the return to normal monetary policy.
The soft global inflation backdrop, from sliding oil prices to stagnant wages in advanced economies, has triggered debate over whether the Fed and its peers merely need to wait for a slow-motion business cycle to improve, or face a shift in the underlying nature of inflation after the global recession.
That uncertainty has become the Fed’s chief concern in recent weeks, likely to shape upcoming policy statements and delay even further the moment when interest rates, pinned near zero for nearly six years, will start rising again.
If the Federal Reserve and other global central banks were not printing money like mad, the global economy would have almost certainly entered a deflationary depression by now.
But all the Federal Reserve and other global central banks have done is put off the inevitable and make our long-term problems even worse.
Instead of fixing the fundamental problems that caused the great financial crash of 2008, the central bankers decided to try to paper over our problems instead. They flooded the global financial system with easy money, but today our financial system is shakier than ever.
In fact, we just learned that 10 percent of the biggest banks in Europe have failed their stress tests and must raise more capital…
The European Central Bank says 13 of Europe’s 130 biggest banks have flunked an in-depth review of their finances and must increase their capital buffers against losses by 10 billion euros ($12.5 billion).
The ECB said 25 banks in all were found to need stronger buffers — but that 12 have already made up their shortfall during the months in which the ECB was carrying out its review. The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers.
Most people do not realize how vulnerable our financial system truly is. It is essentially a pyramid of debt and credit that could fall apart at any time.
Right now, the “too big to fail” banks account for 42 percent of all loans and 67 percent of all banking assets in the United States.
Without those banks, we essentially do not have an economy.
But instead of being careful, those banks have taken recklessness to unprecedented heights.
At this moment, five of the “too big to fail” banks each have more than 40 trillion dollars of exposure to derivatives.
Most Americans don’t even understand what derivatives are, but when the next great financial crisis strikes we are going to be hearing a whole lot about them.
The big banks have transformed Wall Street into the biggest casino in the history of the planet, and there is no way that this is going to end well.
A great collapse is coming.
It is just a matter of time.
All of a sudden, the Nasdaq is absolutely tanking. On Monday, it fell more than 1 percent after dropping 3.6 percent on Thursday and Friday combined. At this point, the Nasdaq is off to the worst start to a year that we have seen since 2008, and we all remember what happened back then. So why is this happening? In recent years, the Nasdaq has been ground zero for “dotcom bubble 2.0″. The hottest stocks in the entire world are on the Nasdaq – we are talking about stocks like Yahoo, Netflix, Apple, Tesla, Google and Facebook. Those stocks have gone to absolutely incredible heights, but now they are starting to fall. Some are blaming insider selling, and without a doubt the “smart money” is starting to flee the stock market. Just check out this chart. Others are blaming low expectations for first-quarter earnings or the tapering of quantitative easing by the Federal Reserve. But whatever is causing this decline, it is starting to get alarming. The Nasdaq just experienced its largest three day fall since November 2011.
No stock can resist gravity forever. What goes up must eventually come down. This is especially true for stock prices that become grotesquely distorted.
On Wall Street, a price to earnings ratio of 20 to 25 is usually considered fairly normal. In recent years, the price to earnings ratios for many of these “hot tech stocks” have gone way, way beyond that. For example, posted below is a screen capture from Bloomberg TV that was featured in a recent Zero Hedge article…
There is no way in the world that such valuations are justified.
We have been living in another dotcom bubble, and it was inevitable that it was going to burst at some point.
The following is how one financial industry insider described the carnage that we have seen on the Nasdaq over the past few days…
Gary Kaltbaum, president of money-management firm Kaltbaum Capital Management, describes the carnage of once high-flying “growth” names in the Nasdaq composite, that have come crashing down to earth: “The best we can describe what we have been recently seeing in ‘growth-land’ is a 50-car pileup,” Kaltbaum told clients in a morning research note. “Call them what you want … risk areas, growth stocks, froth areas … they are melting away.“
And of course it isn’t just the Nasdaq that has been seeing declines over the past few days. On Monday, some of the biggest names on the Dow also fell precipitiously…
Visa, Goldman Sachs and Boeing are among the biggest drags on the Dow Monday, falling 2.1%, 2.9% and 1.4% respectively. Weakness in these stocks is especially problematic since the Dow gives greatest weight to the stocks with the highest per-share prices. And at $203.41, $158.56 and $125.59 respectively, Visa, Goldman and Boeing are the stocks that really matter to the measure.
And the trouble in these stocks isn’t just today. So far this year, Visa is down 8.7%, Goldman is off 10.5% and Boeing is down 8.0%.
This recent decline has many analysts groping for answers.
Some believe that it is simply a “rotation” as investors leave growth stocks that have become overvalued and move into safer, more traditional stocks.
Others are pointing their fingers at the Federal Reserve…
Peter Boockvar, chief market strategist at Lindsey Group, believes it’s all about the Fed. “I’m still amazed at the complacency with the Fed taper, and a lot of people still don’t think it’s a big deal,” he said. “I just don’t think it’s a coincidence that the high-fliers are getting popped when the Fed is half way done with QE. We’ve got tightening smack in front of your face with the taper.”
In fact, some believe that the really big stock market decline will happen later this year when the Fed starts to wrap up quantitative easing completely…
Once the Fed begins to truly reduce its massive bond buying program later this year, markets could see a quarter of their value wiped off the books, a private equity pro told CNBC on Friday.
Jay Jordan, founder of the Jordan Company, issued the dire warning during an interview on CNBC’s “Squawk Box,” saying a 25 percent drop could extend to all asset classes. He blames the monetary policies of former Fed chair Ben Bernanke for artificially inflating asset prices through super-low interest rates.
Yet others point to the fact that we are now moving into earnings season, and it is being projected that corporate earnings will come in at very poor levels. In fact, it is being estimated that overall earnings for companies in the S&P 500 for the first quarter will be down 1.2 percent.
So what should we expect to see next?
Whether it happens this month or not, at some point a massive stock market correction is coming. In recent years, the financial markets have become completely and totally divorced from economic reality, and that is a state of affairs that cannot last indefinitely.
Many have compared the current state of affairs to 2008, but to me what is happening right now is eerily reminiscent of 2007. The Dow soared to record heights quite a few times that year, but there were constant rumblings of economic trouble in the background. Stocks began to drop steadily late in the year, and 2008 ultimately turned out to be an utter bloodbath.
I believe that what is happening right now is setting the stage for another financial bloodbath. I truly believe that we will look back on this two year time period and regard it as a major “turning point” for America.
And as I have written about previously, we are in far worse shape as a nation than we were back in 2008. We have far more debt, the “too big to fail banks” have a much larger share of the banking industry, the derivatives bubble has gotten completely and totally out of control, and our overall economy is far weaker than it was back then.
In other words, we are now even more vulnerable. When the next great financial crisis strikes us, it is going to be absolutely crippling.
Now is not the time to get complacent.
Now is the time to get prepared, because time is running out.
Will this be the year when the Fed’s quantitative easing program finally ends? For a long time, many analysts were proclaiming that the Fed would never taper. But then it started happening. Then a lot of them started talking about how “the untaper” was right around the corner. That hasn’t happened either. It looks like that under Janet Yellen the Fed is quite determined to bring the quantitative easing program to a close by the end of this year. Up until now, the financial markets have been slow to react because there has been a belief that the Fed would reverse course on tapering the moment that the U.S. economy started to slow down again. But even though the U.S. middle class is in horrible shape, and even though there are lots of signs that we are heading into another recession, the Fed has continued tapering.
Of course it is important to note that the Fed is still absolutely flooding the financial system with money even after the announcement of more tapering on Wednesday. When you are talking about $55,000,000,000 a month, you are talking about a massive amount of money. So the Fed is not exactly being hawkish.
But when Yellen told the press that quantitative easing could end completely this fall and that the Fed could actually start raising interest rates about six months after that, it really spooked the markets.
The Dow was down 114 points on Wednesday, and the yield on 10 year U.S. Treasuries shot up to 2.77%. The following is how CNBC described the reaction of the markets on Wednesday…
Despite a seemingly dovish tone, markets recoiled at remarks from Yellen, who said interest rate increases likely would start six months after the monthly bond-buying program ends. If the program winds down in the fall, that would put a rate hike in the spring of 2015, earlier than market expectations for the second half of the year.
Stocks tumbled as Yellen spoke at her initial post-meeting news conference, with the Dow industrials at one point sliding more than 200 points before shaving those losses nearly in half. Short-term interest rates rose appreciably, with the five-year note moving up 0.135 percentage points. The seven-year note tumbled more than one point in price.
But this is just the beginning. When it finally starts sinking in, and investors finally start realizing that the Fed is 100% serious about ending the flow of easy money, that is when things will start getting really interesting.
Can the financial markets stand on their own without massive Fed intervention?
We shall see. Even now there are lots of signs that a market crash could be coming up in the not too distant future. For much more on this, please see my previous article entitled “Is ‘Dr. Copper’ Foreshadowing A Stock Market Crash Just Like It Did In 2008?”
And what is going to happen to the market for U.S. Treasuries once the Fed stops gobbling them up?
Where is the demand going to come from?
In recent months, foreign demand for U.S. debt has really started to dry up. Considering recent developments in Ukraine, it is quite certain that Russia will not be accumulating any more U.S. debt, and China has announced that it is “no longer in China’s favor to accumulate foreign-exchange reserves” and China actually dumped about 50 billion dollars of U.S. debt during the month of December alone.
Collectively, Russia and China account for about a quarter of all foreign-owned U.S. debt. If you take them out of the equation, foreign demand for U.S. debt is not nearly as strong.
Will domestic sources be enough to pick up the slack? Or will we see rates really start to rise once the Fed steps to the sidelines?
And of course rates on U.S. government debt should actually be much higher than they are right now. It simply does not make sense to loan the U.S. government massive amounts of money at interest rates that are far below the real rate of inflation.
If free market forces are allowed to prevail, it is inevitable that interest rates on U.S. debt will go up substantially, and that will mean higher interest rates on mortgages, cars, and just about everything else.
Of course the central planners at the Federal Reserve could choose to reverse course at any time and start pumping again. This is the kind of thing that can happen when you don’t have a true free market system.
The truth is that the Federal Reserve is at the very heart of the economic and financial problems of this country. When the Fed intervenes and purposely distorts the operation of free markets, the Fed creates economic and financial bubbles which inevitably burst later on. We saw this happen during the great financial crisis of 2008, and now it is happening again.
This is what happens when you allow an unelected, unaccountable group of central planners to have far more power over our economy than anyone else in our society does.
Most people don’t realize this, but the greatest period of economic growth in all of U.S. history was when there was no central bank.
We don’t need a Federal Reserve. In fact, the performance of the Federal Reserve has been absolutely disastrous.
Since the Fed was created just over 100 years ago, the U.S. dollar has lost more than 96 percent of its value, and the size of the U.S. national debt has gotten more than 5000 times larger. The Fed is at the very center of a debt-based financial system that has trapped us, our children and our grandchildren in an endless spiral of debt slavery.
And now we are on the verge of the greatest financial crisis that the United States has ever seen. The economic and financial storm that is about to unfold is ultimately going to be even worse than the Great Depression of the 1930s.
Things did not have to turn out this way.
Congress could have shut down the Federal Reserve long ago.
But our “leaders” never seriously considered doing such a thing, and the mainstream media kept telling all of us how much we desperately needed central planners to run our financial system.
Well, now those central planners have brought us to the brink of utter ruin, and yet only a small minority of Americans are calling for change.
Soon, we will all get to pay a great price for this foolishness. A great financial storm is fast approaching, and it is going to be exceedingly painful.
The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing. On Wednesday, the Fed announced that monthly purchases of U.S. Treasury bonds will be reduced from $45 billion to $40 billion, and monthly purchases of mortgage-backed securities will be reduced from $35 billion to $30 billion. When this news came out, it sent shockwaves through financial markets all over the planet. But the truth is that not that much has really changed. The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace. It will just be slightly less than before. However, this very well could represent a very important psychological turning point for investors. It is a signal that “the party is starting to end” and that the great bull market of the past four years is drawing to a close. So what is all of this going to mean for average Americans? The following are 8 ways that “the taper” is going to affect you and your family…
1. Interest Rates Are Going To Go Up
Following the announcement on Wednesday, the yield on 10 year U.S. Treasuries went up to 2.89% and even CNBC admitted that the taper is a “bad omen for bonds“. Thousands of other interest rates in our economy are directly affected by the 10 year rate, and so if that number climbs above 3 percent and stays there, that is going to be a sign that a significant slowdown of economic activity is ahead.
2. Home Sales Are Likely Going To Go Down
Mortgage rates are heavily influenced by the yield on 10 year U.S. Treasuries. Because the yield on 10 year U.S. Treasuries is now substantially higher than it was earlier this year, mortgage rates have also gone up. That is one of the reasons why the number of mortgage applications just hit a new 13 year low. And now if rates go even higher that is going to tighten things up even more. If your job is related to the housing industry in any way, you should be extremely concerned about what is coming in 2014.
3. Your Stocks Are Going To Go Down
Yes, I know that stocks skyrocketed today. The Dow closed at a new all-time record high, and I can’t really provide any rational explanation for why that happened. When the announcement was originally made, stocks initially sold off. But then they rebounded in a huge way and the Dow ended up close to 300 points.
A few months ago, when Fed Chairman Ben Bernanke just hinted that a taper might be coming soon, stocks fell like a rock. I have a feeling that the Fed orchestrated things this time around to make sure that the stock market would have a positive reaction to their news. But of course I absolutely cannot prove this at all. I hope someday we learn the truth about what actually happened on Wednesday afternoon. I have a feeling that there was some direct intervention in the markets shortly after the announcement was made and then the momentum algorithms took over from there.
In any event, what we do know is that when QE1 ended stocks fell dramatically and the same thing happened when QE2 ended. If you doubt this, just check out this chart.
Of course QE3 is not being ended, but this tapering sends a signal to investors that the days of “easy money” are over and that we have reached the peak of the market.
And if you are at the peak of the market, what is the logical thing to do?
Sell, sell, sell.
But in order to sell, you are going to need to have buyers.
And who is going to want to buy stocks when there is no upside left?
4. The Money In Your Bank Account Is Constantly Being Devalued
When a new dollar is created, the value of each existing dollar that you hold goes down. And thanks to the Federal Reserve, the pace of money creation in this country has gone exponential in recent years. Just check out what has been happening to M1. It has nearly doubled since the financial crisis of 2008…
The Federal Reserve has been behaving like the Weimar Republic, and this tapering does not change that very much. Even with this tapering, the Fed is still going to be creating money out of thin air at an absolutely insane rate.
And for those that insist that what the Federal Reserve is doing is “working”, it is important to remember that the crazy money printing that the Weimar Republic did worked for them for a little while too before ending in complete and utter disaster.
5. Quantitative Easing Has Been Causing The Cost Of Living To Rise
The Federal Reserve insists that we are in a time of “low inflation”, but anyone that goes to the grocery store or that pays bills on a regular basis knows what a lie that is. The truth is that if the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.
Most of the new money created by quantitative easing has ended up in the hands of the very wealthy, and it is in the things that the very wealthy buy that we are seeing the most inflation. As one CNBC article recently stated, we are seeing absolutely rampant inflation in “stocks and bonds and art and Ferraris and farmland“.
6. Quantitative Easing Did Not Reduce Unemployment And Tapering Won’t Either
The Federal Reserve actually first began engaging in quantitative easing back in late 2008. As you can see from the chart below, the percentage of Americans that are actually working is lower today than it was back then…
The mainstream media continues to insist that quantitative easing was all about “stimulating the economy” and that it is now okay to cut back on quantitative easing because “unemployment has gone down”. Hopefully you can see that what the mainstream media has been telling you has been a massive lie. According to the government’s own numbers, the percentage of Americans with a job has stayed at a remarkably depressed level since the end of 2010. Anyone that tries to tell you that we have had an “employment recovery” is either very ignorant or is flat out lying to you.
7. The Rest Of The World Is Going To Continue To Lose Faith In Our Financial System
Everyone else around the world has been watching the Federal Reserve recklessly create hundreds of billions of dollars out of thin air and use it to monetize staggering amounts of government debt. They have been warning us to stop doing this, but the Fed has been slow to listen.
The greatest damage that quantitative easing has been causing to our economy does not involve the short-term effects that most people focus on. Rather, the greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.
Right now, far more U.S. dollars are used outside the country than inside the country. The rest of the world uses U.S. dollars to trade with one another, and major exporting nations stockpile massive amounts of our dollars and our debt.
We desperately need the rest of the world to keep playing our game, because we have become very dependent on getting super cheap exports from them and we have become very dependent on them lending us trillions of our own dollars back to us.
If the rest of the world decides to move away from the U.S. dollar and U.S. debt because of the incredibly reckless behavior of the Federal Reserve, we are going to be in a massive amount of trouble. Our current economic prosperity greatly depends upon everyone else using our dollars as the reserve currency of the world and lending trillions of dollars back to us at ultra-low interest rates.
And there are signs that this is already starting to happen. In fact, China recently announced that they are going to quit stockpiling more U.S. dollars. This is one of the reasons why the Fed felt forced to do something on Wednesday.
But what the Fed did was not nearly enough. It is still going to be creating $75 billion out of thin air every single month, and the rest of the world is going to continue to lose more faith in our system the longer this continues.
8. The Economy As A Whole Is Going To Continue To Get Even Worse
Despite more than four years of unprecedented money printing by the Federal Reserve, the overall U.S. economy has continued to decline. If you doubt this, please see my previous article entitled “37 Reasons Why ‘The Economic Recovery Of 2013′ Is A Giant Lie“.
And no matter what the Fed does now, our decline will continue. The tragic downfall of small cities such as Salisbury, North Carolina are perfect examples of what is happening to our country as a whole…
During the three-year period ending in 2009, Salisbury’s poverty rate of 16% was about 3% higher than the national rate. In the following three-year period between 2010 and 2012, the city’s poverty rate was approaching 30%. Salisbury has traditionally relied heavily on the manufacturing sector, particularly textiles and fabrics. In recent decades, however, manufacturing activity has declined significantly and continues to do so. Between 2010 and 2012, manufacturing jobs in Salisbury — as a percent of the workforce — shrank from 15.5% to 8.3%.
But the truth is that you don’t have to travel far to see evidence of our economic demise for yourself. All you have to do is to go down to the local shopping mall. Sears has experienced sales declines for 27 quarters in a row, and at this point Sears is a dead man walking. The following is from a recent article by Wolf Richter…
The market share of Sears – including K-Mart – has dropped to 2% in 2013 from 2.9% in 2005. Sales have declined for years. The company lost money in fiscal 2012 and 2013. Unless a miracle happens, and they don’t happen very often in retail, it will lose a ton in fiscal 2014, ending in January: for the first three quarters, it’s $1 billion in the hole.
Despite that glorious track record, and no discernible turnaround, the junk-rated company has had no trouble hoodwinking lenders into handing it a $1 billion loan that matures in 2018, to pay off an older loan that would have matured two years earlier.
And J.C. Penney is suffering a similar fate. According to Richter, the company has lost a staggering 1.6 billion dollars over the course of the last year…
Then there’s J.C. Penney. Sales plunged 27% over the last three years. It lost over $1.6 billion over the last four quarters. It installed a revolving door for CEOs. It desperately needed to raise capital; it was bleeding cash, and its suppliers and landlords had already bitten their fingernails to the quick. So the latest new CEO, namely its former old CEO Myron Ullman, set out to extract more money from the system, borrowing $1.75 billion and raising $785 million in a stock sale at the end of September that became infamous the day he pulled it off.
So don’t believe the hype.
The economy is getting worse, not better.
Quantitative easing did not “rescue the economy”, but it sure has made our long-term problems a whole lot worse.
And this “tapering” is not a sign of better things to come. Rather, it is a sign that the bubble of false prosperity that we have been enjoying for the past few years is beginning to end.
When QE1 ended there was a substantial stock market correction, and when QE2 ended there was a substantial stock market correction. And if you will remember, the financial markets threw a massive hissy fit a few months ago when Federal Reserve Chairman Ben Bernanke suggested that the Fed may soon start tapering QE3. Clearly Wall Street does not like it when their supply of monetary heroin is interrupted. The Federal Reserve has tricked the American people into supporting quantitative easing by insisting that it is about “stimulating the economy”, but that has turned out to be a massive hoax. In fact, I just wrote an article that contained 37 statistics that prove that things just keep getting even worse for ordinary Americans. But quantitative easing has been exceptionally good for Wall Street. During QE1, the S&P 500 rose by about 300 points. During QE2, the S&P 500 rose by about 200 points. And during QE3, the S&P 500 has risen by about 400 points. The S&P 500 is now in unprecedented territory, and stock prices have become completely and totally divorced from reality. In essence, we are in the midst of the largest financial bubble this nation has ever seen. So what is going to happen when the Fed starts pulling back the monetary crack and the bubble bursts?
A lot of people out there are claiming that the Federal Reserve will never end this round of quantitative easing. They are suggesting that the Fed may hint at tapering from time to time, but that when push comes to shove they will just keep printing more money.
There is just one big problem with that theory.
The rest of the world is watching, and they are very troubled by quantitative easing. Therefore the Fed must end it at some point because they desperately need the rest of the world to keep playing our game.
Our current economic prosperity greatly depends upon the rest of the planet using our dollars as the reserve currency of the world and lending trillions of dollars to us at ultra-low interest rates. If the rest of the world decides to stop going along with the program, the system would come crashing down very rapidly.
That is why it was so alarming when China recently announced that they are going to quit stockpiling more U.S. dollars. For a long time China has been warning us to quit recklessly printing money, and now China is starting to make moves that will make them more independent of us financially.
If the Fed does not bring quantitative easing to an end soon, other nations may start doing the same thing.
So the Fed knows that they are on borrowed time. Faith in the U.S. financial system is declining very fast.
But the Fed also knows that ending QE3 is going to be very tricky for the financial markets. The other times that the Fed has ended quantitative easing, it has turned out to be very painful for Wall Street.
So this time, the Fed seems to be trying to do what it can to use the media to mentally prepare investors ahead of time. For example, the following is what Jon Hilsenrath of the Wall Street Journal wrote just a few days ago…
Markets are positioned more to the Fed’s liking today than they were in September, when it put off reducing, or “tapering,” the monthly bond purchases. Most notably, the Fed’s message is sinking in that a wind down of the program won’t mean it’s in a hurry to raise short-term interest rates. Futures markets place a very low probability on Fed rate increases before 2015, in contrast to September, when fed funds futures markets indicated rate increases were expected by the end of 2014. The Fed has been trying to drive home the idea that “tapering is not tightening” for months and is likely to feel comforted that investors believe it as a pullback gets serious consideration.
In case you missed the subtle messages contained in that paragraph, here is a rough translation…
“Don’t worry. The Federal Reserve is your friend and they say that everything is going to be okay. Investors believe what the Fed says and you should too. Pay no attention to the man behind the curtain. Tapering is not tightening, and when the Federal Reserve does decide to taper the financial markets are going to take it very calmly.”
The Fed (and their messengers) very much want to avoid a repeat of what has happened before. As you can see from the chart posted below, every round of quantitative easing has driven the S&P 500 much higher. And when each round has ended, there has been a substantial stock market correction. The following chart was originally produced by DayOnBay.org…
And of course the chart above is incomplete. As you can see below, the S&P 500 is now sitting at about 1,800…
So let’s recap.
From the time that QE1 was announced to the time that it ended, the S&P 500 rose from about 900 to about 1,200.
When QE1 ended, the S&P 500 fell back below 1,100.
In a panic, the Federal Reserve first hinted at QE2 and then finally formally announced it. That round of QE drove the S&P 500 up to a bit above the 1,300 mark.
Once QE2 ended, there was another market correction. The S&P 500 fell all the way down to 1,123 at one point.
In another panic, the Federal Reserve first announced “Operation Twist” and then later added QE3. Since that time, the S&P 500 has been on an unprecedented tear. At this point, the S&P is sitting at about 1,800.
And of course those massively inflated stock prices have absolutely no relation to what is going on in the U.S. economy as a whole. In fact, the truth is that economic conditions for most of the country are steadily getting worse. Just today we found out that for the week ending November 30th, U.S. rail traffic was down 16.3 percent from the same week one year earlier. That is a hugely negative sign. It means that the flow of goods is slowing down substantially.
So the Federal Reserve has created this massive financial bubble that is totally disconnected from reality. The only way that the Federal Reserve can keep this bubble going is to keep printing lots more money, but they also know that they cannot do that indefinitely because the rest of the world is watching.
In essence, the Federal Reserve is caught between a rock and a hard place.
When the Fed does ultimately decide to taper (whether it be December, January, February, etc.), the consequences are likely to be quite dramatic for the financial markets. The following is a brief excerpt from a recent article by Howard Kunstler…
But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and real estate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go. China alone announced very loudly last month that US Treasury debt paper was giving them a migraine and they were done buying anymore of it. Japan is in a financial psychotic delirium scarfing up its own debt paper to infinity. Who’s left out there? Burkina Faso and the Kyrgystan Cobblers’ Union Pension Fund?
The interest rate on the US 10-year bond is close to bumping up on the ominous 3.0 percent level again. Apart from the effect on car and house loans, readers have pointed out to dim-little-me that the real action will be around the interest rate swaps. Last time this happened, in late summer, the too-big-to-fail banks wobbled from their losses on these bets, providing a glimpse into the aperture of a black hole compressive deflation where cascading chains of unmet promises blow financial systems past the event horizon of universal default and paralysis where money stops moving anywhere and people must seriously reevaluate what money actually is.
What Kunstler is talking about is something that I have written about previously many times. When QE3 slows down (or ends), that is likely going to cause the yield on 10 year U.S. Treasuries to rise substantially, and that would have a whole host of negative consequences for the U.S. economy.
Most notably, it would threaten to blow up the quadrillion dollar derivatives casino that Wall Street usually manages to keep so delicately balanced.
The truth is that we are going to have massive problems no matter what the Federal Reserve does now.
If the Federal Reserve keeps wildly printing money, our financial system will become a massive joke to the rest of the planet and other nations will stop using our dollars and will stop lending us money.
That would be absolutely disastrous.
If the Federal Reserve stops wildly printing money, the massive financial bubble that Wall Street is enjoying right now will burst and we could have a financial crisis even greater than what we experienced back in 2008.
That would also be absolutely disastrous.
So does anyone out there see an easy way out of this under the current system? If you think that you have such a plan, please feel free to share it below…