If you were waiting for a “black swan event” to come along and devastate the global economy, you don’t have to wait any longer. As I write this, the price of U.S. oil is sitting at $45.76 a barrel. It has fallen by more than 60 dollars a barrel since June. There is only one other time in history when we have seen anything like this happen before. That was in 2008, just prior to the worst financial crisis since the Great Depression. But following the financial crisis of 2008, the price of oil rebounded fairly rapidly. As you will see below, there are very strong reasons to believe that it will not happen this time. And the longer the price of oil stays this low, the worse our problems are going to get. At a price of less than $50 a barrel, it is just a matter of time before we see a huge wave of energy company bankruptcies, massive job losses, a junk bond crash followed by a stock market crash, and a crisis in commodity derivatives unlike anything that we have ever seen before. So let’s hope that a very unlikely miracle happens and the price of oil rebounds substantially in the months ahead. Because if not, the price of oil is going to absolutely rip the global economy to shreds.
What amazes me is that there are still many economic “experts” in the mainstream media that are proclaiming that the collapse in the price of oil is going to be a good thing for the U.S. economy.
The only precedent that we can compare the current crash to is the oil price collapse of 2008. You can see both crashes on the chart below…
If rapidly falling oil prices are good economic news, that collapse should have pushed the U.S. economy into overdrive.
But that didn’t happen, did it? Instead, we plunged into the deepest recession that we have seen since the Great Depression.
And unless there is a miracle rebound in the price of oil now, we are going to experience something similar this time.
Already, we are seeing oil rigs shut down at a staggering pace. The following is from Bloomberg…
U.S. oil drillers laid down the most rigs in the fourth quarter since 2009. And things are about to get much worse.
The rig count fell by 93 in the three months through Dec. 26, and lost another 17 last week, Baker Hughes Inc. data show. About 200 more will be idled over the next quarter as U.S. oil explorers make good on their promises to curb spending, according to Moody’s Corp.
But that was just the beginning of the carnage. 61 more oil rigs shut down last week alone, and hundreds more are being projected to shut down in the months ahead.
For those that cannot connect the dots, that is going to translate into the loss of large numbers of good paying jobs. Just check out what is happening in Texas…
A few days ago, Helmerich & Payne, announced that it would idle 50 more drilling rigs in February, after having already idled 11 rigs. Each rig accounts for about 100 jobs. This will cut its shale drilling activities by 20%. The other two large drillers, Nabors Industries and Patterson-UTI Energy are on a similar program. All three combined are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ,” said Oilpro Managing Director Joseph Triepke.
Unfortunately, this crisis will not just be localized to states such as Texas. There are tens of thousands of small and mid-size firms that will be affected. The following is from a recent CNBC report…
More than 20,000 small and midsize firms drive the “hydrocarbon revolution” in the U.S. that has helped the oil and gas industry thrive in recent years, and they produce more than 75 percent of the nation’s oil and gas output, according to the Manhattan Institute for Policy Research’s February 2014 Power & Growth Initiative Report. The Manhattan Institute is a conservative think tank in New York City.
A sustained decline in prices could lead to layoffs at these firms, say experts. “The energy industry has been one of the job-growth areas leading us out of the recession,” said Chad Mabry, a Houston-based analyst in the energy and natural resources research department of boutique investment bank MLV & Co. in New York City. “In 2015, that changes in this price environment,” he said. “We’re probably going to see some job losses on a fairy significant scale if this keeps up.”
If the price of oil makes a major comeback, the carnage will ultimately not be that bad.
But if it stays at this level or keeps going down for an extended period of time, it is inevitable that a whole bunch of those firms will go bankrupt and their debt will go bad.
That would mean a junk bond crash unlike anything that Wall Street has ever experienced.
And as I have written about previously, a stock market crash almost always follows a junk bond crash.
These are things that happened during the last financial crisis and that are repeating again right in front of our eyes.
Another thing that happened in 2008 that is happening again is a crash in industrial commodity prices.
At this point, industrial commodity prices have hit a 12 year low. I am talking about industrial commodities such as copper, iron ore, steel and aluminum. This is a huge sign that global economic activity is slowing down and that big trouble is on the way.
So what is driving this? The following excerpt from a recent Zero Hedge article gives us a clue…
Globally there are over $9 trillion worth of borrowed US Dollars in the financial system. When you borrow in US Dollars, you are effectively SHORTING the US Dollar.
Which means that when the US Dollar rallies, your returns implode regardless of where you invested the borrowed money (another currency, stocks, oil, infrastructure projects, derivatives).
Take a look at commodities. Globally, there are over $22 TRILLION worth of derivatives trades involving commodities. ALL of these were at risk of blowing up if the US Dollar rallied.
Unfortunately, starting in mid-2014, it did in a big way.
This move in the US Dollar imploded those derivatives trades. If you want an explanation for why commodities are crashing (aside from the fact the global economy is slowing) this is it.
Once again, much of this could be avoided if the price of oil starts going back up substantially.
Unfortunately, that does not appear likely. In fact, many of the big banks are projecting that it could go even lower…
Goldman Sachs, CitiGroup, Societe General and Commerzbank are among the latest investment banks to reduce crude oil price estimates, and without production cuts, there appears to be more room for lower prices.
“We’re going to keep on going lower,” says industry analyst Brian Milne of energy manager Schneider Electric. “Even with fresher new lows, there’s still more downside.”
OPEC could stabilize global oil prices with a single announcement, but so far OPEC has refused to do this. Many believe that the OPEC countries actually want the price of oil to fall for competitive reasons…
Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want — and are achieving — further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.
The oil producing countries in the Middle East seem to be settling in for the long haul. In fact, one prominent Saudi prince made headlines all over the world this week when he said that “I’m sure we’re never going to see $100 anymore.”
Never is a very strong word.
Could there be such a massive worldwide oil glut going on right now that the price of oil will never get that high again?
Well, without a doubt there is a huge amount of unsold oil floating around out there at the moment.
It has gotten so bad that some big trading companies are actually hiring supertankers to store large quantities of unsold crude oil at sea…
Some of the world’s largest oil traders have this week hired supertankers to store crude at sea, marking a milestone in the build-up of the global glut.
Trading firms including Vitol, Trafiguraand energy major Shell have all booked crude tankers for up to 12 months, freight brokers and shipping sources told Reuters.
They said the flurry of long-term bookings was unusual and suggested traders could use the vessels to store excess crude at sea until prices rebound, repeating a popular 2009 trading gambit when prices last crashed.
The fundamentals for the price of oil are so much worse than they were back in 2008.
We could potentially be looking at sub-$50 oil for an extended period of time.
If that is indeed the case, there will be catastrophic damage to the global economy and to the global financial system.
So hold on to your hats, because it looks like we are going to be in for quite a bumpy ride in 2015.
If you do not believe that we are heading directly toward another major financial crisis, you need to read this article. So many of the exact same patterns that preceded the great financial collapse of 2008 are happening again right before our very eyes. History literally appears to be repeating, but most Americans seem absolutely oblivious to what is going on. The mainstream media and our politicians are promising them that everything is going to be okay somehow, and that seems to be good enough for most people. But the signs that another massive financial crisis is on the horizon are everywhere. All you have to do is open up your eyes and look at them.
Bill Gross, considered by many to be the number one authority on government bonds on the entire planet, made headlines all over the world on Tuesday when he released his January Investment Outlook. I don’t know if we have ever seen Gross be more negative about a new year than he is about 2015. For example, just consider this statement…
“When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.”
And this is how he ended the letter…
And so that is why – at some future date – at some future Ides of March or May or November 2015, asset returns in many categories may turn negative. What to consider in such a strange new world? High-quality assets with stable cash flows. Those would include Treasury and high-quality corporate bonds, as well as equities of lightly levered corporations with attractive dividends and diversified revenues both operationally and geographically. With moments of liquidity having already been experienced in recent months, 2015 may see a continuing round of musical chairs as riskier asset categories become less and less desirable.
Debt supercycles in the process of reversal are not favorable events for future investment returns. Father Time in 2015 is not the babe with a top hat in our opening cartoon. He is the grumpy old codger looking forward to his almost inevitable “Ides” sometime during the next 12 months. Be cautious and content with low positive returns in 2015. The time for risk taking has passed.
So why are Gross and so many other financial experts being so “negative” right now?
It is because they can see what is happening.
They can see the same patterns that we saw in early 2008 unfolding again right in front of us. I wanted to put these patterns in a single article so that they will be easy to share with people. The following are 10 key events that preceded the last financial crisis that are happening again right now…
#1 A really bad start to the year for the stock market. During the first three trading days of 2015, the S&P 500 was down a total of 2.73 percent. There are only two times in history when it has declined by more than three percent during the first three trading days of a year. Those years were 2000 and 2008, and in both years we witnessed enormous stock market declines.
#2 Very choppy financial market behavior. This is something that I discussed yesterday. In general, calm markets tend to go up. When markets get choppy, they tend to go down. For example, the chart that I have posted below shows how the Dow Jones Industrial Average behaved from the beginning of 2006 to the end of 2008. As you can see, the Dow was very calm as it rose throughout 2006 and most of 2007, but it got very choppy as 2008 played out…
As I also mentioned yesterday, it is important not to get fooled if stocks soar on a particular day. The three largest single day stock market gains in history were right in the middle of the financial crisis of 2008. When you start to see big ups and big downs in the market, that is a sign of big trouble ahead. That is why it is so alarming that global financial markets have begun to become quite choppy in recent weeks.
#3 A substantial decline for 10 year bond yields. When investors get scared, there tends to be a “flight to safety” as investors move their money to safer investments. We saw this happen in 2008, and that is happening again right now.
In fact, according to Bloomberg, global 10 year bond yields have already dropped to low levels that are absolutely unprecedented…
Taken together, the average 10-year bond yield of the U.S., Japan and Germany has dropped below 1 percent for the first time ever, according to Steven Englander, global head of G-10 foreign-exchange strategy at Citigroup Inc.
That’s not good news. The rock-bottom rates, which fall below zero when inflation is taken into account, show “that investors think we are going nowhere for a long time,” Englander wrote in a report yesterday.
#4 The price of oil crashes. As I write this, the price of U.S. oil has dipped below $48 a barrel. But back in June, it was sitting at $106 at one point. As the chart below demonstrates, there is only one other time in history when the price of oil has declined by more than $50 in less than a year…
The only other time there has been an oil price collapse of this magnitude we experienced the greatest financial crisis since the Great Depression shortly thereafter. Are we about to see history repeat? For much more on this, please see my previous article entitled “Guess What Happened The Last Time The Price Of Oil Crashed Like This?”
#5 A dramatic drop in the number of oil and gas rigs in operation. Right now, oil and gas rigs are going out of operation at a frightening pace. During the fourth quarter of 2014, 93 oil and gas rigs were idled, and it is being projected that another 200 will shut down this quarter. As this Business Insider article demonstrates, this is also something that happened during the financial crisis of 2008 and it continued well into 2009.
#6 The price of gasoline takes a huge tumble. Millions of Americans are celebrating that the price of gasoline has plummeted in recent weeks. But they were also celebrating when it happened back in 2008 as well. But of course it turned out that there was really nothing to celebrate in 2008. In short order, millions of Americans lost their jobs and their homes. So the chart that I have posted below is definitely not “good news”…
#7 A broad range of industrial commodities begin to decline in price. When industrial commodities go down in price, that is a sign that economic activity is slowing down. And just like in 2008, that is what we are watching unfold on the global stage right now. The following is an excerpt from a recent CNBC article…
From nickel to soybean oil, plywood to sugar, global commodity prices have been on a steady decline as the world’s economy has lost momentum.
For an extended discussion on this, please see my recent article entitled “Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?”
#8 A junk bond crash. Just like in 2008, we are witnessing the beginnings of a junk bond collapse. High yield debt related to the energy industry is on the bleeding edge of this crash, but in recent weeks we have seen investors start to bail out of a broad range of junk bonds. Check out this chart and this chart in addition to the chart that I have posted below…
#9 Global inflation slows down significantly. When economic activity slows down, so does inflation. This is something that we witnessed in 2008, this is also something that is happening once again. In fact, it is being projected that global inflation is about to fall to the lowest level that we have seen since World War II…
Increases in the prices of goods and services in the world’s largest economies are slowing dramatically. Analysts are predicting that inflation will fall below 2pc in all of the countries that make up the G7 group of advanced nations this year – the first time that has happened since before the Second World War.
Indeed, Japan was the only G7 country whose inflation rate was above 2pc last year. And economists believe that was because its government increased sales tax which had the effect of artificially boosting prices.
#10 A crisis in investor confidence. Just prior to the last financial crisis, the confidence that investors had that we would be able to avoid a stock market collapse in the next six months began to decline significantly. And guess what? That is something else that is happening once again…
Investor confidence that the US will avoid a stock-market crash in the next six months has dropped dramatically since last spring.
The Yale School of Management publishes a monthly Crash Confidence Index. The index shows the proportion of investors who believe we will avoid a stock-market crash in the next six months.
Yale points out that “crash confidence reached its all-time low, both for individual and institutional investors, in early 2009, just months after the Lehman crisis, reflecting the turmoil in the credit markets and the strong depression fears generated by that event, and is plausibly related to the very low stock market valuations then.”
Are you starting to get the picture?
And of course I am not the only one warning about these things. As I wrote about earlier in the week, there are a whole host of prominent voices that are now warning of imminent financial danger.
Today, I would like to add one more name to the list. He is respected author James Howard Kunstler, and what he predicts is coming in 2015 is absolutely chilling…
Here are my financial forecast particulars for 2015:
- Early in 2015 the ECB proposes a lame QE program and is laughed out of the room. European markets tank.
- Greek elections in January produce a government that stands up to the EU and ECB and causes a fatal slippage of faith in the ability of that project to continue.
- Second half of 2015, the rest of the world gangs up and counter-attacks the US dollar.
- Bond markets in Europe implode in first half and the contagion spreads to the US as fear and distrust rises about viability of US safe haven status.
- Derivatives associated with currencies, interest rates, and junk bonds trigger a bloodbath in credit default swaps (CDS) and the appearance of countless black holes through which debt and “wealth” disappear forever.
- US stock markets continue to bid upward in the first half of 2015, crater in Q3 as faith in paper and pixels erodes. DJA and S & P fall 30 to 40 percent in the initial crash, then further into 2016.
- Gold and silver slide in the first half, then take off as debt and equity markets craters, faith in abstract instruments evaporates, faith in central bank omnipotence dissolves, and citizens all over the world desperately seek safety from currency war.
- Goldman Sachs, Citicorp, Morgan Stanley, Bank of America, DeutscheBank, SocGen, all succumb to insolvency. American government and Federal Reserve officials don’t dare attempt to rescue them again.
- By the end of 2015, central banks everywhere stand in general discredit. In the US, the Federal Reserve’s mandate is publically debated and revised back to its original mission as lender of last resort. It is forbidden to engage in further interventions and a new less-secretive mechanism is drawn up for regulating basic interest rates.
- Oil prices creep back into the $65 – $70 range by May 2015. It is not enough to halt the destruction in the shale, tar sand, and deepwater sectors. As contraction in the failing global economy accelerates, oil sinks back to the $40 range in October…
- …unless mischief in the Middle East (in particular, the Islamic State messing with Saudi Arabia) leads to gross and perhaps fatally permanent disruption in world oil markets — and then all bets are off for both the continuity of advanced economies and for peace between nations.
Personally, I don’t agree with Kunstler on all of the particulars and the timing of certain events, but overall I think that we are going to look back when the year is done and say that he was a lot more right than he was wrong.
We are moving into a time of extreme danger for the global economy. There has never been a time when I have been more concerned about a new year since I began The Economic Collapse Blog back in 2009.
Over the past couple of years, we have been very blessed to be able to enjoy a bubble of relative stability. But this period of stability also fooled many people into thinking that our economic problems had been fixed, when in reality they have only gotten worse.
We consume far more wealth than we produce, our debt levels are at record highs and we are at the tail end of the largest Wall Street financial bubble in all of history.
It is inevitable that we are heading for a tragic conclusion to all of this. It is just a matter of time.
Do you want to know if the stock market is going to crash next year? Just keep an eye on junk bonds. Prior to the horrific collapse of stocks in 2008, high yield debt collapsed first. And as you will see below, high yield debt is starting to crash again. The primary reason for this is the price of oil. The energy sector accounts for approximately 15 to 20 percent of the entire junk bond market, and those energy bonds are taking a tremendous beating right now. This panic in energy bonds is infecting the broader high yield debt market, and investors have been pulling money out at a frightening pace. And as I have written about previously, almost every single time junk bonds decline substantially, stocks end up following suit. So don’t be fooled by the fact that some comforting words from Janet Yellen caused stock prices to jump over the past couple of days. If you really want to know where the stock market is heading in 2015, keep a close eye on the market for high yield debt.
If you are not familiar with junk bonds, the concept is actually very simple. Corporations that do not have high credit ratings typically have to pay higher interest rates to borrow money. The following is how USA Today describes these bonds…
High-yield bonds are long-term IOUs issued by companies with shaky credit ratings. Just like credit card users, companies with poor credit must pay higher interest rates on loans than those with gold-plated credit histories.
But in recent years, interest rates on junk bonds have gone down to ridiculously low levels. This is another bubble that was created by Federal Reserve policies, and it is a colossal disaster waiting to happen. And unfortunately, there are already signs that this bubble is now beginning to burst…
Back in June, the average junk bond yield was 3.90 percentage points higher than Treasury securities. The average energy junk bond yielded 3.91 percentage points higher than Treasuries, Lonski says.
That spread has widened to 5.08 percentage points for junk bonds vs. 7.86 percentage points for energy bonds — an indication of how worried investors are about default, particularly for small, highly indebted companies in the fracking business.
The reason why so many analysts are becoming extremely concerned about this shift in junk bonds is because we also saw this happen just before the great stock market crash of 2008. In the chart below, you can see how yields on junk bonds started to absolutely skyrocket in September of that year…
Of course we have not seen a move of that magnitude quite yet this year, but without a doubt yields have been spiking. The next chart that I want to share is of this year. As you can see, the movement over the past month or so has been quite substantial…
And of course I am far from the only one that is watching this. In fact, there are some sharks on Wall Street that plan to make an absolute boatload of cash as high yield bonds crash.
One of them is Josh Birnbaum. He correctly made a giant bet against subprime mortgages in 2007, and now he is making a giant bet against junk bonds…
When Josh Birnbaum was at Goldman Sachs in 2007, he made a huge bet against subprime mortgages.
Now he’s betting against something else: high-yield bonds.
From The Wall Street Journal:
Joshua Birnbaum, the ex-Goldman Sachs Group Inc. trader who made bets against subprime mortgages during the financial crisis, now has more than $2 billion in wagers against high-yield bonds at his Tilden Park Capital Management LP hedge-fund firm, according to investor documents.
Could you imagine betting 2 billion dollars on anything?
If he is right, he is going to make an incredible amount of money.
And I have a feeling that he will be. As a recent New American article detailed, there is already panic in the air…
It’s a mania, said Tim Gramatovich of Peritus Asset Management who oversees a bond portfolio of $800 million: “Anything that becomes a mania — ends badly. And this is a mania.”
Bill Gross, who used to run PIMCO’s gigantic bond portfolio and now advises the Janus Capital Group, explained that “there’s very little liquidity” in junk bonds. This is the language a bond fund manager uses to tell people that no one is buying, everyone is selling. Gross added: “Everyone is trying to squeeze through a very small door.”
Bonds issued by individual energy developers have gotten hammered. For instance, Energy XXI, an oil and gas producer, issued more than $2 billion in bonds just in the last four years and, up until a couple of weeks ago, they were selling at 100 cents on the dollar. On Friday buyers were offering just 64 cents. Midstates Petroleum’s $700 million in bonds — rated “junk” by both Moody’s and Standard and Poor’s — are selling at 54 cents on the dollar, if buyers can be found.
So is there anything that could stop junk bonds from crashing?
Yes, if the price of oil goes back up to 80 dollars or more a barrel that would go a long way to settling things back down.
Unfortunately, many analysts are convinced that the price of oil is going to head even lower instead…
“We’re continuing to search for a bottom, and might even see another significant drop before the year-end,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.
As I write this, the price of U.S. oil has fallen $1.69 today to $54.78.
If the price of oil stays this low, junk bonds are going to keep crashing.
If junk bonds keep crashing, the stock market is almost certainly going to follow.
For additional reading on this, please see my previous article entitled “‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal“.
But just like in the years leading up to the crash of 2008, there are all kinds of naysayers proclaiming that a collapse will never happen.
Even though our financial problems and our underlying economic fundamentals have gotten much worse since the last crisis, they are absolutely convinced that things are somehow going to be different this time.
In the end, a lot of those skeptics are going to lose an enormous amount of money when the dominoes start falling.
Is this the start of the next major financial crisis? The nightmarish collapse of the price of oil is creating panic in financial markets all over the planet. On June 16th, U.S. oil was trading at a price of $107.52. Since then, it has fallen by almost 50 dollars in less than 6 months. This has only happened one other time in our history. In the summer of 2008, the price of oil utterly collapsed and we all remember what happened after that. Well, the same patterns that we witnessed back in 2008 are happening again. As the price of oil crashed in 2008, so did prices for a whole host of other commodities. That is happening again. Once commodities started crashing, the market for junk bonds started to implode. That is also happening again. Finally, toward the end of 2008, we witnessed a horrifying stock market crash. Could we be on the verge of another major one? Last week was the worst week for the Dow in more than three years, and stock markets all over the world are crashing right now. Bad financial news continues to roll in from the four corners of the globe on an almost hourly basis. Have we finally reached the “tipping point” that so many have been warning about?
What we witnessed last week is being described as “a bloodbath” that was truly global in scope. The following is how Zero Hedge summarized the carnage…
- WTI’s 2nd worst week in over 3 years (down 10 of last 11 weeks)
- Dow’s worst worst week in 3 years
- Financials worst week in 2 months
- Materials worst week since Sept 2011
- VIX’s Biggest week since Sept 2011
- Gold’s best week in 6 months
- Silver’s last 2 weeks are best in 6 months
- HY Credit’s worst 2 weeks since May 2012
- IG Credit’s worst week in 2 months
- 10Y Yield’s best week since June 2012
- US Oil Rig Count worst week in 2 years
- The USDollar’s worst week since July 2013
- USDJPY’s worst week since June 2013
- Portugal Bonds worst week since July 2011
- Greek stocks worst week since 1987
The stock market meltdown in Greece is particularly noteworthy. After peaking in March, the Greek stock market is down 40 percent since then. That includes a 20 percent implosion in just the past three trading days.
And it isn’t just Greece. Financial markets all over Europe are in turmoil right now. In addition to crashing oil prices, there is also renewed concern about the fundamental stability of the eurozone. Many believe that it is inevitable that it is headed for a break up. As a result of all of this fear, European stocks also had their worst week in over three years…
European stock markets closed sharply lower on Friday, posting their biggest weekly loss since August 2011, as commodity prices continued to fall and and shares in oil-related firms came under renewed pressure from the weak price for crude.
The pan-European FTSEurofirst 300 unofficially ended 2.6 percent lower, down 5.9 percent on the week as the energy sector once again weighed heavily on wider benchmarks, falling over 3 percent.
But despite all of the carnage that we witnessed in the U.S. and in Europe last week, things are actually far worse for financial markets in the Middle East.
Just check out what happened on the other side of the planet on Sunday…
Stock markets in the Persian Gulf got drilled Sunday as worries about further price declines grew. The Dubai stock index fell 7.6% Sunday, the equivalent of a 1,313-point plunge in the Dow Jones industrial average. The Saudi Arabian market fell 3.3%.
Overall, Dubai stocks are down a whopping 23 percent over the last two weeks, and full-blown stock market crashes are happening in Qatar and Kuwait too.
Like I said, this is turning out to be a truly global financial panic.
Another region to keep an eye on is South America. Argentina is a financial basket case, the Brazilian stock market is tanking big time, and the implied probability of default on Venezuelan debt is now up to 93 percent…
Swaps traders are almost certain that Venezuela will default as the rout in oil prices pressures government finances and sends bond prices to a 16-year low.
Benchmark notes due 2027 dropped to 43.75 cents on the dollar as of 11:35 a.m. in New York, the lowest since September 1998, as crude extended a bear market decline. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years is at 59 percent, bringing the implied probability of default to 93 percent, the highest in the world.
So what does all of this mean for the future?
Are we experiencing a repeat of 2008?
Could what is ahead be even worse than that?
Or could this just be a temporary setback?
Recently, Howard Hill shared a few things that he looks for to determine whether a major financial crisis is upon us or not…
The first condition is a serious market sector correction.
According to some participants in the market for energy company bonds and loans, such a correction is already underway and heading toward a meltdown (the second condition). Others are more sanguine, and expect a recovery soon.
That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18% ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.
If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.
The third condition, which we can’t determine directly, would be pressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.
I think that he makes some really good points.
In particular, I think that watching how junk bonds perform over the next few weeks will be extremely telling.
Last week was truly a bloodbath for high yield debt.
But perhaps things will stabilize this week.
Let’s hope so, because this is the closest that we have been to another major financial crisis since 2008.
Are we about to see U.S. stocks take a significant tumble? If you are looking for a “canary in the coal mine” for the U.S. stock market, just look at high yield bonds. In recent years, almost every single time junk bonds have declined substantially there has been a notable stock market correction as well. And right now high yield bonds are steadily moving lower. The biggest reason for this is falling oil prices. As I wrote about the other day, energy companies now account for about 20 percent of the high yield bond market. As the price of oil falls, investors are understandably becoming concerned about the future prospects of those companies and are dumping their bonds. What is happening cannot be described as a “crash” just yet, but there has been a pretty sizable decline for junk bonds over the past month. And as I noted above, junk bonds and stocks usually move in tandem. In fact, junk bonds usually start falling before stocks do. So does the decline in high yield bonds that we are witnessing at the moment indicate that we are on the verge of a significant stock market correction?
That is a question that CNBC asked in a recent article entitled “Near perfect sell signal says stocks should drop“…
The S&P 500 and the iShares iBoxx High Yield Corporate Bond ETF are a mirror image since the start of the year, but since the end of October, high yield has diverged to the lower right, and yet the S&P 500 has continued to record highs. Since separating in October, the S&P 500 is up 3 percent, while the high-yield ETF is down 4 percent.
On 10 occasions since 2007, the high-yield ETF dropped 5 percent in 30 trading days. During nine of those instances, the S&P 500 fell as well, with an average return of negative 9 percent, according to CNBC analysis using Kensho.
Only once did high yield give a false sell signal. That was last year, when the market was already entranced by the Federal Reserve’s quantitative easing program, which has seemed to elevate stocks with an abnormal consistency. And even then, the S&P 500 managed just a 0.4 percent climb amid the junk debt rout.
Personally, I am convinced that this correlation between junk bonds and stocks is very significant.
Let’s just go back and look at what happened during the financial crash of 2008 for a moment.
In the chart posted below, you can see that high yield bonds began crashing in the middle of September that year…
But U.S. stocks did not crash at the same time. In fact, the chart below shows that they did not really begin crashing until early October…
That is why analysts often refer to junk bonds as a “leading indicator”. What happens to high yield debt is often a really good indicator of what is about to happen to stocks.
Now let’s take a look at what is happening today.
Since the beginning of November, junk bonds have been falling steadily…
Meanwhile, the Dow has continued to reach new heights…
This is not a state of affairs that can persist indefinitely. Either junk bonds will rebound or U.S. stocks will start falling.
If the U.S. economy was on solid footing, you could perhaps argue that it could go either way.
Unfortunately, that is not the case. At this point, the stock market has become completely divorced from economic fundamentals. Price to earnings ratios are at absurd levels, margin debt is hovering near record highs, and the “real economy” continues to fall apart. We are enjoying a massively inflated standard of living which is being propped up by the largest mountain of debt in world history, and it is only a matter of time before reality starts catching up with us.
And the signs of our long-term economic decline are all around us if you are willing to look at them. For example, the lead headline on the Drudge Report today was about how China has now overtaken us and has become the largest economy on the planet…
Hang on to your hats, America.
And throw away that big, fat styrofoam finger while you’re about it.
There’s no easy way to say this, so I’ll just say it: We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world. For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.
It just happened — and almost nobody noticed.
The International Monetary Fund recently released the latest numbers for the world economy. And when you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A.
Meanwhile, some of the most iconic companies in the United States continue to struggle deeply. For instance, Sears has just announced that the number of store closings for this year is going to reach a total of 235 and that the company lost more than half a billion dollars during the third quarter of 2014 alone…
Sears Holdings Corp., posted a disappointing third quarter Thursday that saw revenue, earnings, and sales at stores open at least a year all fall as the retailer tries to salvage its business.
Sears, which owns Kmart, lost $548 million, or $5.15 a share, for the period ended Nov. 1. That’s up from a loss of $534 million, or $5.03 a share, in the year-ago period.
Even though Sears is losing more than 500 million dollars a quarter, banks and investors continue to inject new money into the corporation. That is a crying shame, because Sears is a company that is going to zero. Anyone that is investing in Sears at this point is just pouring their money into a black hole. As Kevin O’Leary would say, they are guilty of murdering money.
And of course what is happening to Sears is just part of the broader “retail apocalypse” that I keep writing about. In order for retailers to thrive they need healthy consumers, and consumers are not financially healthy because the real economy is a disaster zone.
But these days so many people are in denial. The stock market has been soaring for so long that many skeptics are now proclaiming that another 2008-style crash will never happen. Even though the fact that we are in the midst of an absolutely insane financial bubble should be glaringly obvious to anyone with half a brain, these skeptics have convinced themselves that the current state of affairs can persist indefinitely.
Sadly, it looks like what is about to hit us in 2015 is going to serve as a very rude wake up call for them and for the millions of other Americans that currently have their heads in the sand.
There has only been one other time in history when the price of oil has crashed by more than 40 dollars in less than 6 months. The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months. Well, now it is happening again, but this time the stakes are even higher. When the price of oil falls dramatically, that is a sign that economic activity is slowing down. It can also have a tremendously destabilizing affect on financial markets. As you will read about below, energy companies now account for approximately 20 percent of the junk bond market. And a junk bond implosion is usually a signal that a major stock market crash is on the way. So if you are looking for a “canary in the coal mine”, keep your eye on the performance of energy junk bonds. If they begin to collapse, that is a sign that all hell is about to break loose on Wall Street.
It would be difficult to overstate the importance of the shale oil boom to the U.S. economy. Thanks to this boom, the United States has become the largest oil producer on the entire planet.
Yes, the U.S. now actually produces more oil than either Saudi Arabia or Russia. This “revolution” has resulted in the creation of millions of jobs since the last recession, and it has been one of the key factors that has kept the percentage of Americans that are employed fairly stable.
Unfortunately, the shale oil boom is coming to an abrupt end. As a recent Vox article discussed, OPEC has essentially declared a price war on U.S. shale oil producers…
For all intents and purposes, OPEC is now engaged in a “price war” with the United States. What that means is that it’s very cheap to pump oil out of places like Saudi Arabia and Kuwait. But it’s more expensive to extract oil from shale formations in places like Texas and North Dakota. So as the price of oil keeps falling, some US producers may become unprofitable and go out of business. The result? Oil prices will stabilize and OPEC maintains its market share.
If the price of oil stays at this level or continues falling, we will see a significant number of U.S. shale oil companies go out of business and large numbers of jobs will be lost. The Saudis know how to play hardball, and they are absolutely ruthless. In fact, we have seen this kind of scenario happen before…
Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the US shale oil sector.” Even legendary oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.” This has happened once before. By the mid-1980’s, as oil output from Alaska’s North Slope and the North Sea came on line (combined production of around 5-6 million barrels a day), OPEC set off a price war to compete for market share. As a result, the price of oil sank from around $40 to just under $10 a barrel by 1986.
But the energy sector has been one of the only bright spots for the U.S. economy in recent years. If this sector starts collapsing, it is going to have a dramatic negative impact on our economic outlook. For example, just consider the following numbers from a recent Business Insider article…
Specifically, if prices get too low, then energy companies won’t be able to cover the cost of production in the US. This spending by energy companies, also known as capital expenditures, is responsible for a lot of jobs.
“The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending,” Goldman Sachs’ Amanda Sneider writes.
Even more troubling is what this could mean for the financial markets.
As I mentioned above, energy companies now account for close to 20 percent of the entire junk bond market. As those companies start to fail and those bonds start to go bad, that is going to hit our major banks really hard…
Everyone could suffer if the collapse triggers a wave of defaults through the high-yield debt market, and in turn, hits stocks. The first to fall: the banks that were last hit by the housing crisis.
Why could that happen?
Well, energy companies make up anywhere from 15 to 20 percent of all U.S. junk debt, according to various sources.
It would be hard to overstate the seriousness of what the markets could potentially be facing.
One analyst summed it up to CNBC this way…
“This is the one thing I’ve seen over and over again,” said Larry McDonald, head of U.S strategy at Newedge USA’s macro group. “When high yield underperforms equity, a major credit event occurs. It’s the canary in the coal mine.“
The last time junk bonds collapsed, a major stock market crash followed fairly rapidly.
And those that were hardest hit were the big Wall Street banks…
During the last high-yield collapse, which centered around debt tied to the housing sector, Citigroup lost 63 percent of its value in the following 60 days, Kensho shows. Bank of America was cut in half.
I understand that some of this information is too technical for a lot of people, but the bottom line is this…
Watch junk bonds. When they start crashing it is a sign that a major stock market collapse is right at the door.
At this point, even the mainstream media is warning about this. Just consider the following excerpt from a recent CNN article…
That swing away from junk bonds often happens shortly before stock market downturns.
“High yield does provide useful sell signals to equity investors,” Barclays analysts concluded in a recent report.
Barclays combed through the past dozen years of data. The warning signal they found is a 30% or greater increase in the spread between Treasuries and junk bonds before a dip.
If you have been waiting for the next major financial collapse, what you have just read in this article indicates that it is now closer than it has ever been.
Over the coming weeks, keep your eye on the price of oil, keep your eye on the junk bond market and keep your eye on the big banks.
Trouble is brewing, and nobody is quite sure exactly what comes next.
Americans are going to spend more than 600 billion dollars this Christmas season, and on Friday we got to see our fellow citizens fight each other like rabid animals over foreign-made flat screen televisions and Barbie dolls. As disgusting as this behavior is to many of us, there may soon come a time when we will all fondly remember these days. Most Americans are completely unaware of what is currently happening in the financial world, but right now there are deeply troubling signs that we could be on the verge of another major global financial collapse. If the next great economic downturn does strike in 2015, that could mean that we may have just witnessed the last great Black Friday celebration of American materialism. As you read this, stock prices are approximately double the value that they should be, margin debt is hovering near all-time record highs, and the “too big to fail” banks are being far more reckless than they were just prior to the last major stock market implosion. So many of the exact same patterns that we witnessed back in 2007 and 2008 are repeating right now, and as you will see below, this includes a horrifying crash in the price of oil. Anyone with half a brain should be able to see the slow-motion financial train wreck that is unfolding right before our eyes.
Every year, it has been my tradition to write an article about the mini-riots that erupt in retail stores all around the country on Black Friday. This year things were a bit calmer because so many stores opened up on Thanksgiving itself, but there was still plenty of chaos. For example, in the video posted below you can see women viciously fighting one another over discounted lingerie and underwear…
But instead of launching into another diatribe about how we are committing national economic suicide by buying hundreds of billions of dollars of foreign-made goods with money that we do not have, I want to focus on what is coming next.
You see, I believe that in the not too distant future many of us will be wishing for the days when the debt-fueled U.S. economy was healthy enough for people to be wrestling with one another on the floor over good deals in our retail establishments.
The next great financial crash (which many have been anticipating for years) is rapidly approaching. So many of the same things that happened last time are happening again. As I noted above, this includes a crash in the price of oil.
In the months prior to the last stock market collapse, the price of oil began plummeting dramatically in the summer of 2008. This was an “early warning signal” that something was deeply amiss in the financial world…
Many people assume that a lower price for oil is good for the economy, but the exact opposite is actually true. The oil industry has become absolutely critical to the U.S. and Canadian economies. And in recent years, the “shale oil boom” has been one of the only bright spots for the United States. If the shale oil industry starts to fail because of lower prices, a lot of the boom areas all over the nation are going to go bust really quickly and a lot of the financial institutions that were backing these projects are going to feel an immense amount of pain.
Unfortunately for us, the “shale oil revolution” simply does not work at 80 dollars a barrel.
And it certainly does not work at 70 dollars a barrel.
As I write this, U.S. crude is sitting at about 66 dollars a barrel due to OPEC’s recent decision to not cut output.
That is the lowest price for U.S. crude since September 2009.
So just like we saw during the summer of 2008, crude oil prices are collapsing once again. The chart below comes from the Federal Reserve, but it is a few days out of date. Now that the price of crude is down to about 66 dollars, you have to imagine the price actually going below the bottom of this chart…
Needless to say, this price collapse is having a huge impact on the stock prices of oil companies. The following information about what happened in the markets on Friday comes from Business Insider…
Here were some of the biggest losers on Friday:
- BP (BP), down 5%
- Royal Dutch Shell (RDS.A), down 6%
- Total (TOT), down 5%
- Statoil (STO), down 14%
- Exxon Mobil (XOM), down 5%
- ConocoPhillips (COP), down 9%
- Marathon Oil (MRO), down 13%
- Occidental Petroleum (OXY), down 7%
- Anadarko Petroleum (APC), down 14%
- Linn Energy (LINE), down 13%
- Whiting Petroleum (WLL), down 28%
- Oasis Petroleum (OAS), down 32%
- Kodiak Oil & Gas (KOG), down 28%
And this list goes on.
But this could just be the beginning of the oil price declines.
The most powerful oil official in Russia believes that the price of oil could fall below $60 next year…
Russia’s most powerful oil official Igor Sechin said in an interview with an Austrian newspaper that oil prices could fall below $60 by mid-way through next year.
Sechin, chief executive of Rosneft, Russia’s largest oil producer, also said U.S. oil production would fall after 2025 and that an oil market council should be created to monitor prices, the same day the OPEC cartel met in Vienna and left its output targets unchanged.
“We expect that a fall in the price to $60 and below is possible, but only during the first half, or rather by the end of the first half (of next year),” Sechin told the Die Presse newspaper.
And one oil industry analyst just told CNBC that he believes that the price of oil could ultimately plunge as low as $35 a barrel…
“When you look at the second half of 2015, that’s when you see oil beginning to dwarf demand by about a million, a million and a half barrels a day,” he said. “Thirty-five dollars is a possibility if they don’t get an agreement next spring because that’s when the oil really starts to build and you can have a billion barrels of oil with really no place to put it.”
This comes at a time when there are already a whole host of signs that the global economy is slowing down. Three of the ten largest economies on the planet have already slipped into recession, and the economic nightmare over in Europe just continues to get even worse. In fact, we just learned that the unemployment rate in Italy has shot above 13 percent for the first time ever recorded.
In addition, it is important to remember that the “real economy” in the United States is in far worse shape than it was just prior to the last financial crash. Just consider these numbers…
-In the United States today, the number of payday lending locations is greater than the number of McDonald’s and the number of Starbucks.
-One recent survey found that about 22 percent of all Americans have had to turn to a church food panty for assistance.
-This year, almost one out of every five households in the United States celebrated Thanksgiving on food stamps.
-The rate of government dependence in America is at an all-time high and approximately 60 percent of U.S. households get more in transfer payments from the government than they pay in taxes.
-According to a report that was just released by the National Center on Family Homelessness, the number of homeless children in the U.S. has soared to a new all-time record high of 2.5 million.
If things are this bad now, what are they going to look like after the next great financial crash?
And without a doubt, the next crash is coming. Hopefully we have at least a couple more months of relative stability, but many experts are now urgently warning that time is quickly running out.
By this time next year, Black Friday may look a whole lot different than it does today.
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.