What I am about to share with you is quite stunning. A well-respected financial expert that correctly predicted the last two stock market crashes is now warning that we are right on the verge of the next one. John Hussman is a former professor of economics and international finance at the University of Michigan, and the information in his latest weekly market comment is staggering. Since 1970, there have only been a handful of times when a combination of market signals that Hussman uses have indicated that a major market peak has been reached. In 1972, 2000 and 2007 each of those peaks was followed by a dramatic stock market crash. Now, for the first time since the last financial crisis, all four of those signals appeared once again during the week of July 17th. If Hussman’s analysis is correct, this could very well mean that the next great stock market crash in the United States is imminent.
It was an excellent article by Jim Quinn of the Burning Platform that first alerted me to Hussman’s latest warning. If you don’t follow Quinn’s work already, you should, because it is excellent.
When someone is repeatedly correct about the financial markets, we should all start paying attention. Back in late 2007, Hussman warned us about what was coming in 2008, but most people did not listen.
Now he is sounding the alarm again. According to Hussman, when there is a confluence of four key market indicators, that tells us that the market has peaked and is in danger of crashing. The following comes from Newsmax…
He cited the metric among the indicators that foreshadowed declines after peaks in 1972, 2000 and 2007:
*Less than 27 percent of investment advisers polled by Investors Intelligence who say they are bearish.
*Valuations measured by the Shiller price-to-earnings ratio are greater than 18 times.
*Less than 60 percent of S&P 500 stocks above their 200-day moving averages.
*Record high on a weekly closing basis.
“The most recent warning was the week ended July 17, 2015,” Hussman said. “It’s often said that they don’t ring a bell at the top, and that’s true in many cycles. But it’s interesting that the same ‘ding’ has been heard at the most extreme peaks among them.”
It is quite rare for the market to set a new record high on a weekly closing basis and have more than 40 percent of stocks below their 200-day moving averages at the same time. That is why a confluence of all these factors is fairly uncommon. Hussman elaborated on this in his recent report…
The remaining signals (record high on a weekly closing basis, fewer than 27% bears, Shiller P/E greater than 18, fewer than 60% of S&P 500 stocks above their 200-day average), are shown below. What’s interesting about these warnings is how closely they identified the precise market peak of each cycle. Internal divergences have to be fairly extensive for the S&P 500 to register a fresh overvalued, overbullish new high with more than 40% of its component stocks already falling – it’s evidently a rare indication of a last hurrah. The 1972 warning occurred on November 17, 1972, only 7 weeks and less than 4% from the final high before the market lost half its value. The 2000 warning occurred the week of March 24, 2000, marking the exact weekly high of that bull run. The 2007 instance spanned two consecutive weekly closing highs: October 5 and October 12. The final daily high of the S&P 500 was October 9 – right in between. The most recent warning was the week ended July 17, 2015.
The following is the chart that immediately followed the paragraph in his report that you just read…
When I first took a look at that chart I could hardly believe it.
It appears that Hussman’s signals are able to indicate major stock market crashes with stunning precision.
And considering the fact that we just hit a new “ding” for the first time since the last financial crisis, what Hussman is saying is more than just a little bit ominous.
According to Hussman this is not just a recent phenomenon either. Even though advisory sentiment figures were not available back in 1929, he believes that his indicators would have given a signal that a market crash was imminent in August of that year as well…
Though advisory sentiment figures aren’t available prior to the mid-1960’s, imputed data suggest that additional instances likely include the two consecutive weeks of August 19, 1929 and August 26, 1929. We can infer unfavorable market internals in that instance because we know that cumulative NYSE breadth was declining for months before the 1929 high. The week of the exact market peak would also be included except that stocks closed down that week after registering a final high on September 3, 1929. Another likely instance, based on imputed sentiment data, is the week of November 10, 1961, which was immediately followed by a market swoon into June 1962.
Of course the past is the past, and what has happened in the past will not necessarily happen in the future.
So is Hussman wrong this time? With all of the other things that are happening in the financial world right now, I certainly would not bet against him.
Other financial professionals are concerned that a market crash could be imminent as well. The following comes from a piece authored by Andrew Adams…
More than 13% of stocks on the New York Stock Exchange are at 52-week lows, which is about 6 standard deviations above the average over the last three years (1.62%) and an extreme only seen one other time during said period (last October when the S&P 500 was percentage points away from a 10% correction).
This dichotomy has created what I believe to be the biggest question about the stock market right now – have we already experienced a stealth correction in the majority of stocks that will soon come to an end or will the market leaders finally succumb to the weight of the laggards and join in on the sell-off? The answer to this could end up being worth at least $2.2 trillion, which is how much money would essentially be wiped out of the stock market if we finally get the much-discussed 10% correction in the overall market (the total U.S. stock market capitalization was $22.5 trillion as of June 30, according to the Center for Research in Security Prices).
Sometimes, a picture is worth more than a thousand words. I could share many more quotes from the “experts” about why they are concerned about a potential stock market collapse, but instead I want to share with you a “bonus chart” that Zero Hedge posted on Tuesday…
Do you understand what that is saying?
In 2007 and 2008, junk bonds started crashing well before stocks did.
Now, we are witnessing a similar divergence. If a similar pattern holds up this time, stocks have a long, long way to fall.
Like Hussman and so many others, I believe that a stock market crash and a new financial crisis are imminent.
The month of August is usually a slow month in the financial world, so hopefully we can get through it without too much chaos. But once we roll into the months of September and October we will officially be in “the danger zone”.
Keep an eye on China, keep an eye on Europe, and keep listening for serious trouble at “too big to fail” banks all over the planet.
The next several months are going to be extremely significant, and we all need to be getting ready while we still can.
Can you feel the panic in the air? CNN Money’s Fear & Greed Index measures the amount of fear in the financial world on a scale from 0 to 100. The closer it is to zero, the higher the level of fear. Last Monday, the index was sitting at a reading of 36. As I write this article, it has fallen to 7. The financial turmoil which began last week is threatening to turn into an avalanche. On Sunday night, we witnessed the second largest one day stock market collapse in China ever, and this pushed stocks all over the planet into the red. Meanwhile, the twin blades of an emerging market currency crisis and a commodity price crash are chewing up economies that are dependent on the export of natural resources all over the globe. For a long time, I have been warning about what would happen in the second half of 2015, and now it is here. The following is a summary of the financial carnage that we have seen over the past 24 hours…
-On Sunday night, the Shanghai Composite Index plunged 8.5 percent. It was the largest one day stock market crash in China since 2007, and it was the second largest in history. The Chinese government is promising to directly intervene in order to prevent Chinese stocks from going down even more.
-Over 1,500 stocks in China fell by their 10 percent daily maximum. This list includes giants such as China Unicom, Bank of Communications and PetroChina.
-Ever since peaking in June, the Shanghai Composite Index has dropped by a total of 28 percent.
-Even Chinese stocks that are listed on U.S. stock exchanges are being absolutely hammered. The following comes from USA Today…
The 144 China-based stocks with primary listings on major U.S. exchanges have erased nearly $40 billion in paper wealth since the Shanghai Composite index peaked on June 12. It’s an enormous destruction of wealth that in effects wipes out the market value of a company the size of cruise ship operator Carnival.
-The Chinese stock market crash pushed European stocks significantly lower on Monday…
The pan-European FTSEurofirst 300 provisionally closed 2.1 percent lower, while the Germany’s DAX and France’s CAC closed respectively 2.4 percent and 2.5 percent lower.
The U.K.’s benchmark FTSE outperformed its euro zone peers, but still closed unofficially down 1.0 percent.
-Overall, European stocks have been falling steadily since the beginning of last week. To get an idea of how much damage has been done already, just check out this chart.
-As I mentioned above, an emerging market currency crisis is causing havoc for economies all over the planet. The following comes from an article that was published by the Telegraph…
The currencies of Brazil, Mexico, South Africa and Turkey have all crashed to multi-year lows as investors flee emerging markets and commodity prices crumble.
The drastic moves came as fears of imminent monetary tightening by the US Federal Reserve combined with shockingly weak figures from China, which stoked fears that the country may be sliding into a deeper downturn and sent tremors through East Asia, Latin America and Africa.
-The government of Puerto Rico has announced that it does not have enough cash to make a scheduled debt payment of 169 million dollars on August 1st. The Obama administration says that there are no plans in the works to bail out Puerto Rico.
-On Monday, the Dow was down another 127 points. It was the fifth day in a row that the Dow and the S&P 500 have both declined.
-Overall, the Dow is now down more than 650 points since July 20th.
-480 stocks on the New York Stock Exchange have hit new 52-week lows. Many analysts consider this to be a very, very ominous sign.
-I have repeatedly written about the danger of the commodity collapse that we are currently witnessing, and the Bloomberg Commodity Index fell another 1.22 percent on Monday to a fresh low of 92.1493.
-On Monday, the price of U.S. oil hit a 52-week low of $46.92.
-So far, the price of U.S. oil has fallen about 20 percent this month.
-Back in June 2014, the price of a barrel of West Texas Intermediate crude was above 107 dollars. Since then, the price of U.S. oil has fallen an astounding 56 percent.
-Thanks in large part to the collapse in energy prices, junk bonds are cratering. This is something that happened just before the financial crisis of 2008, and now it is happening again. The following comes from Wolf Street…
Among the bonds: Cliffs Natural Resources down 27.6%, SandBridge down 30%, Murray Energy down 21.2%, and Linn Energy down 22.3%, according to Bloomberg.
For example, Linn Energy 6.25% notes due in 2019 were trading at 78 cents on the dollar at the beginning of July and at 58 on Friday, according to LCD. There was bloodshed beyond energy, such as AK Steel’s 7.625% notes due in 2021. They were trading at 62 cents on the dollar, down 22% from the beginning of July.
“The performance is a disappointment to investors who purchased about $40 billion of junk-rated bonds from energy companies this year, thinking that the worst of the slump was over,” Bloomberg noted.
This is exactly what we would expect to see during the early stages of a financial crisis.
Of course global financial markets may bounce back somewhat tomorrow. If you will remember, some of the largest one day gains in stock market history happened right in the middle of the stock market collapse of 2008. So don’t get fooled by what happens on any one particular day.
With so much fear in the air, literally anything could happen in the weeks and months ahead of us. One month ago, I issued a red alert for the last six months of this year. I warned that a major financial crisis was imminent and that people needed to start protecting themselves immediately.
As I write this article on Monday evening, financial markets are already opening up over in Asia. Japanese stocks are already down 251 points even though the market has only been open for about an hour over there.
We have entered a time when what is happening to global stock markets will once again be headline news. We are right on the precipice of another great financial crisis, only this one is going to ultimately end up being much worse than the last one.
Now is the time.
Please get prepared while you still can.
Was last week a preview of things to come? There are quite a few people out there that believe that the stock market would begin to decline in July, and that appears to be precisely what is happening. Last week, the Dow Jones Industrial Average fell by more than 530 points. It was the biggest one week decline that we have seen so far in 2015, and some are suggesting that this could only be just the beginning. By just about any measurement that you might want to use, the stock market is overvalued. But we have been in this bubble for so long that many people have come to believe that this is “the new normal”. In fact, earlier today someone that I know dropped me a line and suggested that our financial overlords may be able to use the tools at their disposal to get this current bubble to persist indefinitely. Unfortunately, the truth is that no financial bubble ever lasts forever, and right now some very alarming things are starting to happen behind the scenes. Over the past couple of weeks, the smart money has been dumping stocks like crazy, and the lack of liquidity in the bond markets is beginning to become acute. Could it be possible that another great financial crisis is just around the corner?
Last week took a lot of investors by surprise. The following is how Zero Hedge summarized the carnage…
-Russell 2000 -3.1% – worst week since Oct 2014 (Bullard)
-Dow -2.8% – worst week since Dec 2014
-S&P -2.1% – worst week since Jan 2015
-Trannies -2.8% – worst week since Mar 2015
-Nasdaq -2.2% – worst week since Mar 2015
The talking heads on television were not quite sure what to make of this sudden downturn. On CNBC, analysts mainly blamed the usual suspects…
“I think the market’s very much concerned about the commodity (decline),” said John Lonski, chief economist at Moody’s. “The contraction in China manufacturing activity is gaining momentum and the credit market has yet to signal that rates are not about to go higher.”
He also noted a surprising decline in new home sales and continued lack of revenue growth in earnings. Nearly all the commodities are in a bear market and gold and crude settled at lows Friday.
“You’ve got some major growth concerns and that is what’s weighing on investors minds,” said Peter Boockvar, chief market strategist at The Lindsey Group.
And without a doubt, there are some new numbers that are deeply troubling for Wall Street. For example, it is being projected that S&P 500 companies will collectively report a 2.2 percent decline in earnings for the second quarter of 2015. If this comes to pass, it will be the first drop that we have seen since the third quarter of 2012.
The biggest reason for this decline in earnings is the implosion of U.S. energy companies due to the crash in oil prices. The following comes from CNBC…
Thanks to a collapse in the price of oil, the energy sector is slated to report a monster 54 percent drop in earnings and 28 percent swoon in revenue, compared to the second quarter in the year prior.
Hmm – unlike what so many others were saying initially, it turns out that the oil crash is bad for the U.S. economy after all.
But just like at this time of the year in 2008, most people fully expect that everything is going to be just fine. So many of the exact same patterns that we witnessed the last time around are playing out once again, and yet most of the “experts” refuse to see what is happening right in front of their eyes.
When things crash this time, it won’t just be stocks that collapse. As I have been writing about so frequently, we are also headed for an implosion of the bond markets as well. The following comes from Dr. David Eifrig…
In the U.S. Treasury securities market, financial-services giant JPMorgan Chase estimates that five years ago, you could move about $280 million worth of Treasury securities before your trades moved the market’s price. Now, that’s down to $80 million… a decline of more than 70%.
When a panic sets in, reduced liquidity can cause big swings in market prices.
There is that word “liquidity” again. This is something that I have repeatedly been taking about. Just check out this article from a little over a month ago. A bond is only worth what someone else is willing to pay for it, and if the market runs out of buyers that can cause seismic shifts in price very rapidly. Here is more from Eifrig…
In a run-of-the-mill bear market, you just have a downward trend… When enough investors are selling bonds, it drives down prices. Falling prices lead more investors to start selling. We see that all the time.
A liquidity crisis goes even further. It’s like a classic run on a bank… Without sufficient liquidity, the sellers don’t just see lower prices… they see no prices. Since no one wants to buy bonds at this particular time, the price for them effectively becomes zero.
There has been a lot of speculation about what will happen in the second half of 2015.
We only have a little over five months to go in the year, so it won’t be too long before we see who was right and who was wrong.
Our perceptions of the future are very much shaped by our worldviews. All the time, I get “Obamabots” that come to my website and leave comments on my articles telling me how Barack Obama has “turned the economy around” and has set the stage for a new era of prosperity in America.
Despite all the evidence to the contrary, they choose to believe that things are in great shape because that is what they want to believe. Just check out the results from one recent survey…
While 55 percent of Democrats reported feeling positive about the economy, for example, just 25 percent of Republicans felt the same from March 25 to May 27.
When asked if they thought the economy would improve over the next 12 months, 53 percent of Democrats said yes. Only 23 percent of the Republicans in the survey agreed.
The same perception gap extends to the far future, with 41 percent of Democrats believing that the next generation will be better off than their parents, and just 24 percent of Republicans saying the same.
To me, those numbers are quite striking.
Many Democrats very much want to believe that things are getting better because Barack Obama is in the White House.
Many Republicans very much want to believe that things are totally falling apart because Barack Obama is in the White House.
So who is right and who is wrong?
Please feel free to share what you think by posting a comment below…
Do you believe that the New York Stock Exchange shut down because of a “technical glitch” on Wednesday? At 11:32 AM on Wednesday morning, trading on the New York Stock Exchange was halted due to “internal technical issues”, and it did not resume until 3:10 PM. Officials insist that there is no evidence that a cyberattack caused the technical problems even though hactivists had hinted that something may happen the night before. Adding to the suspicion is the fact that United Airlines and the Wall Street Journal also experienced very serious “technical glitches” on Wednesday. Others found it very curious that trading on the NYSE was halted just after Chinese stocks had absolutely plummeted the night before. In fact, Hong Kong’s Hang Seng Index experienced the largest one day decline that we have witnessed since November 2008. So is there more going on here than meets the eye?
Overall, the Dow was down 261 points on Wednesday, and the Dow and the S&P 500 both closed below their 200 day moving averages. Iron ore had its biggest daily price drop ever, and the price of oil continued to decline. But it was the stunning shut down of the New York Stock Exchange that made headlines all over the world…
The New York Stock Exchange, United Airlines and the Wall Street Journal have all fallen victim to a series of massive technical glitches within hours of each other.
NYSE halted all trading for ‘technical reasons’ at 11:32am and only reopened at 3:10pm – but says the problem is an internal one and not the result of a cyberattack.
It comes as tens of thousands of United Airlines passengers were stranded at U.S. airports on Wednesday morning after all of the carrier’s flights were grounded nationwide due to a computer system glitch.
The Wall Street Journal was also left unable to publish after its systems came under attack and has been forced to switch to an alternative site design.
In response to the shut down, the following photo began circulating on Twitter…
But was it really just a “technical glitch”?
Of course they probably would never admit it publicly if it was a cyberattack. We live at a time when the authorities are much more concerned with keeping everyone calm than they are about telling us the truth. So in the end all we can really do is speculate about what really happened.
But what we do know is that the stock market crash in China got even worse the night before this shutdown. The Shanghai Composite Index and the Hang Seng Index both declined by almost six percent overnight. Overall, the Shanghai Composite Index is now down by more than 30 percent in less than a month, and the Chinese version of the NASDAQ is down by more than 40 percent…
In just three weeks, stocks listed on mainland China’s most prominent exchange have fallen by more than 30% from their seven-year highs. The even more speculative ChiNext Index has lost 42% of its value over the 21 days.
Government regulators have now banned, for six months, Chinese executives from selling stock in their own companies. This is only one of a number moves made by panicked officials.
At this point, trading for approximately 45 percent of all stocks on the Shanghai and Shenzhen exchanges has been suspended. So as a result the selling has bled over to the Hang Seng Index in Hong Kong, and this has caused tremendous chaos…
Hong Kong’s benchmark stock gauge plunged the most since the global financial crisis as an equity rout in mainland China rippled across Asia.
The Hang Seng Index fell 5.8 percent to 23,516.56 at the close today, the biggest drop since November 2008, after slumping as much as 8.6 percent.
Even though the Chinese have been trying all sorts of crazy things to stop the crash, nothing has worked. Instead, the selling restrictions have only seemed to fuel the panic even more…
“Investors are disappointed and afraid that the Chinese policy makers lost control of the market,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. “With no end in sight to the plunge, sentiment has turned cold. With liquidity drying up in the mainland, the Hong Kong market is being sold instead –- the only thing it can do is just quietly take the storm.”
Meanwhile, things over in Europe have become more ominous as well. As I wrote about yesterday, EU officials have declared this week to be “the final deadline” for making a deal with Greece. On Wednesday, Greece applied for a new three year emergency loan, and European officials have said that they will consider it…
A race to save Greece from bankruptcy and keep it in the euro gathered pace on Wednesday when Athens formally applied for a three-year loan and European authorities launched an accelerated review of the request.
Greek Prime Minister Alexis Tsipras called in a speech to the European Parliament for a fair deal, acknowledging Greece’s historic responsibility for its plight, after EU leaders gave him five days to come up with convincing reforms.
The government submitted a request to the European Stability Mechanism bailout fund to lend an unspecified amount “to meet Greece’s debt obligations and to ensure stability of the financial system”. It promised to begin implementing tax and pension measures sought by creditors as early as Monday.
But there is still a tremendous amount of skepticism about whether a deal can be reached. The Greeks want debt relief, but the Germans have completely ruled out any sort of a debt haircut. Most of the rest of the EU nations are siding with the Germans, and unless the Greek government caves in at the last moment it appears that a “Grexit” is quite likely.
For most people, the events of 2008 have long since faded from their memories. After years of soaring stock prices, many in the financial world have become extremely comfortable. But as we are seeing in China, what goes up must eventually come down.
And the shut down of the New York Stock Exchange today should be a huge wake up call for all of us. We have become extraordinarily dependent on computers and technology, and this makes us exceedingly vulnerable. Someday, we might just experience a cyberattack that causes a tremendous amount of permanent damage that cannot be undone.
What will we do then?
Our world is becoming increasingly unstable, and events are beginning to accelerate as we enter the second half of 2015.
So what comes next? Please feel free to share what you think by posting a comment below…
A global stock market crash has begun. European stocks are crashing, Chinese stocks are crashing, and commodities are crashing. And guess what? All of those things happened before U.S. stocks crashed in the fall of 2008 too. In so many ways, it seems like we are watching a replay of the financial crisis of 2008, but this time around the world is in far worse shape financially. Global debt levels are at an all-time high, the 75 trillion dollar global shadow banking system could implode at any time, and there are hundreds of trillions of dollars in derivatives that threaten to wipe out major banks all over the planet. The last major worldwide financial crash was almost seven years ago, and very little has been done since that time to prepare for the next one. If global markets do not calm down, we could see carnage in the months ahead that is absolutely unprecedented.
For months, European authorities have been promising us that a “Grexit” is already “priced in” to the markets and that any “contagion” from the Greek crisis will be “contained”. Of course everyone knew that was just a smokescreen. Just in the past couple of days since the Greek “no” vote, European stocks have already been crashing. The following comes from Zero Hedge…
Does this look contained to you?
Portugal, Spain, and Italy all collapsing…
As I mentioned at the top of this article, European stocks started crashing well before U.S. stocks started crashing during the last financial crisis. If you doubt this, just look at this chart, and this chart and this chart.
Will the same thing happen again this time?
And just like I have warned repeatedly, European bond yields have started to soar. When bond yields go up, bond prices go down, so many bond investors are losing a tremendous amount of money right now. Here is more from Zero Hedge…
European bond risk is anything but “contained” as GGB 10Y Yields top 18%…
If there is not a last minute deal between Greece and her creditors, what we have witnessed so far in the bond markets will just be the tip of the iceberg. In the months ahead, we could witness a bond crash unlike anything that we have ever seen in all of history. Just consider what Egon von Greyerz recently told Eric King…
There is no liquidity in this market and this is where we will soon see a problem. We will see the bond market totally seizing up in the next few months. Eric, people simply don’t understand that this is a much bigger problem than Greece.
So we are talking about a worldwide problem, not just a Greek problem. The majority of the $100 trillion bond market is worthless, and of course a ticking time-bomb of over $1 quadrillion worth of derivatives is linked to that. This means that, sadly, we are heading into a major contagion that will lead to financial catastrophe for the world. This will also lead to an implosion of all bubble assets across the globe.
Hmm – there is that word “derivatives” again.
It is funny how that keeps popping up.
As things unravel over in Europe, a lot of desperate Europeans are feverishly purchasing physical gold. The following comes from Bloomberg…
European investors are increasing purchases of gold as Greece’s turmoil boosts the appeal for an alternative to the euro.
Demand from Greek customers for Sovereign gold coins was double the five-month average in June, the U.K. Royal Mint said in an e-mailed statement. CoinInvest.com, an online retailer, said sales on Saturday and Sunday were the highest since Cyprus limited cash withdrawals in 2013, driven by a jump in German, French and Greek buyers.
Investors are searching for a safe haven after Greece imposed capital controls, closed banks and stopped selling gold coins to the public until at least July 6.
Meanwhile, Chinese stocks have continued to fall. Overall, Chinese stocks have fallen 27 percent since the peak, and a whopping 3.2 trillion dollars of “paper wealth” has been wiped out in China in just the last three weeks.
At this point things are so bad that about one-fourth of all stocks in China have already suspended trading according to CNN…
The turmoil in China’s stock market is so bad that some companies are calling it quits.
Over 700 Chinese companies have halted trading to “self preserve,” according to the state media. That means about a quarter of the companies listed on China’s two big exchanges — the Shanghai and Shenzhen — are no longer trading.
Desperate measures are being employed to try to stop the stock market crash in China. For example, over the weekend an alliance of securities brokerages pledged to invest “at least 120 billion yuan” in order to stabilize stock prices…
China’s top 21 securities brokerages said on Saturday they would collectively invest at least 120 billion yuan ($19.3 billion) to help stabilize the country’s stock markets after a slump of nearly 30 percent since mid-June. In addition, 57 Chinese mutual funds are reportedly investing 2.2 billion yuan in stock funds.
The Chinese central bank has gotten involved as well. In fact, the People’s Bank of China has taken the dramatic step of actually directly loaning money to brokerages…
In an extraordinary move, the People’s Bank of China has begun lending money to investors to buy shares in the flailing market. The Wall Street Journal reports this “liquidity assistance” will be provided to the regulator-owned China Securities Finance Corp, which will lend the money to brokerages, which will in turn lend to investors.
The dramatic intervention marks the first time funds from the central bank have been directed anywhere other than the banks, signalling serious concern from authorities about the crisis.
In addition, the Chinese government has taken the following steps to intervene…
-All short selling of stocks has been banned.
-China’s national social security fund has been banned from selling stocks, but they can continue to buy stocks.
-Local media has been banned from using the terms “equity disaster” and “rescue the market” in their news reports.
But despite everything that you just read, Chinese stocks have still been falling.
Meanwhile, global commodity prices are crashing. Just check out this chart. This is also something that happened before U.S. stocks crashed back in 2008.
Thankfully, U.S. stocks have not started crashing yet. But it should be noted that the “smart money” in the United States has been selling stocks like crazy since the “no” vote in the Greek referendum. And if the patterns that we witnessed seven years ago hold up, it is just a matter of time before we experience a stock market crash too.
Incredibly, there are a lot of people out there that very strongly believe that everything is going to be just fine. They have tremendous faith in the central bankers and in our political leaders, and they are assuring all the rest of us that there is no possible way that the global financial system could be brought down again.
I truly wish that they were right. If everything was going to be just fine, instead of writing about the coming economic collapse I could write about sports or do a blog dedicated to LOLcats. But of course the truth is that the “hopetimists” are dead wrong.
A great shaking is coming to our world, and life as we know it is about to change in a major way.
The result of the referendum in Greece is a great victory for freedom, but it is also threatens to unleash unprecedented economic chaos all across Europe. With almost all of the votes counted, it is being reported that approximately 61 percent of Greeks have voted “no” and only about 39 percent of Greeks have voted “yes”. This is a much larger margin of victory for the “no” side than almost everyone was anticipating, and it represents a stunning rejection of European austerity. Massive celebrations have erupted on the streets of Athens and other major Greek cities, but the euphoria may not last long. Greek Prime Minister Alexis Tsipras is promising that Greece will be able to stay in the euro, but that gives EU bureaucrats and the IMF a tremendous amount of power, because at this point the Greek government is flat broke. Without more money from the EU and the IMF, the Greek government will not be able to pay its bills and virtually all Greek banks will inevitably collapse. Meanwhile, the rest of Europe is about to experience a tremendous amount of pain as financial markets respond to the results of this referendum. The euro is already plummeting, and most analysts expect European bond yields to soar and European stocks to drop substantially when trading opens on Monday morning.
Personally, I love the fact that the Greek people decided not to buckle under the pressure being imposed on them by the EU and the IMF. But amidst all of the celebration, the cold, hard reality of the matter is that your options are extremely limited when you are out of money.
How is the Greek government going to pay its bills without any money?
How are the insolvent Greek banks going to operate without any money?
How is the Greek economy going to function without any money?
Now that the Greek people have overwhelmingly rejected the demands of the creditors, it will be very interesting to see what the EU and the IMF do. Prior to the referendum, European leaders were insisting that a “no” vote would put an end to negotiations and would force Greece to leave the euro.
Now that the results are in, are they going to change their tune? Because the ball is definitely in their court…
“This does two things: it legitimises the stance of the Greek government and it leaves the ball in Europe’s court,” ANZ Bank analysts said in a note.
“Europe either folds or Greece goes bankrupt; over to you Merkel.”
So would they actually let Greece go bankrupt?
It is going to be fascinating to watch what happens over the next few days. Right now, Greek banks are on life support. If the European Central Bank decides to pull the plug, they would essentially destroy the entire Greek banking system. The only thing that can keep Greek banks alive and kicking is more intervention from the ECB. The following comes from the New York Times…
Now that Greek voters have said no to the economic demands of its international creditors, the fate of the country’s struggling banks is in the hands of the European Central Bank.
Greece’s banks, closed since last Monday because they are perilously low on cash, have been kept alive in recent weeks by emergency loans from the European Central Bank. On Monday, the central bank’s policy makers plan to convene to determine how much longer they are willing to prop up the Greek banks, now that the country has essentially said no to the unpopular dictates of the other eurozone countries.
Of much greater concern to the rest of the world is how financial markets are going to respond to all of this. As I write this article, things already appear to be unraveling. The following comes from CNBC…
Germany’s Dax is indicated sharply lower from Friday’s close at around 4 percent, while the euro was down 2 percent against the yen as the news emerged. U.S. stocks are expected to open around 1 percent lower Monday, according to recent stock futures data.
What could be most important for those worried about contagion from the Greek crisis is how Portuguese, Spanish and Italian government bonds perform in Monday morning trade.
If these peripheral euro zone countries, often lumped in with Greece, suffer a sharp spike in yields, this could cause alarm about whether Greece leaving the currency might cause further contagion to other weaker euro zone economies.
This could potentially become a “trigger event” that unleashes a wave of financial panic all over Europe. And once financial panic begins, it is very difficult to end.
If the EU and the IMF want to avoid a crisis, they could just give in to the new Greek government. But that would be politically risky for certain high profile European leaders. For instance, Angela Merkel would face a huge backlash back home if she conceded to the new Greek government now. And other German leaders are already calling the referendum result a “disaster”…
German politicians branded the result a ‘disaster’, with the country’s economy minister Sigmar Gabriel Sigmar accusing Tsipras of ‘tearing down the last bridges on which Greece and Europe could have moved towards a compromise’.
He added: ‘Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness.’
And the president of the European Parliament, a German, told a German radio station over the weekend that a “no” vote would almost certainly mean that the Greeks will be forced out of the euro…
“If after the referendum, the majority is a ‘no,’ they will have to introduce another currency because the euro will no longer be available for a means of payment,” Martin Schulz, European Parliament president, said on German radio.
That is pretty strong language, eh?
Here is yet another quote from Schulz…
“Without new money, salaries won’t be paid, the health system will stop functioning, the power network and public transport will break down, and they won’t be able to import vital goods because nobody can pay,” he said.
So at this point it is all up to the EU and the IMF, and in particular the focus will be on the Germans.
What will they decide to do?
Will they give in, or will they force the Greeks to leave the euro?
If the Greeks do transition from the euro to a new currency, it will be a process that takes months (if not longer). You just can’t change ATMs, computer systems, cash registers, etc. overnight. So a move to the drachma would not be as simple as many are suggesting…
British firms like De La Rue, which prints 150 currencies worldwide, are believed to have been contacted with a view to providing such services.
It’s done in great secrecy to prevent currency speculation. The other big problem is the logistical challenges of switching a currency. All ATMs, computers and other machinery of commerce that bears the euro symbol will have to be adjusted. It could, and would, take months.
And if Greece does leave, it will be a massive shock for global financial markets. Faith in the European project will be shattered, the euro will drop like a rock, bond yields all over the continent will rise to unsustainable levels and major banks all over Europe will fail.
I think that the following quote from Romano Prodi sums things up quite well…
Romano Prodi, former chief of the European Commission and Italy’s ex-premier, said it is the EU’s own survival that is now at stake as the botched handling of the Greek crisis escalates into a catastrophe. “If the EU cannot resolve a small problem the size of Greece, what is the point of Europe?“
Meanwhile, we should all keep in mind that a financial crisis has already erupted over in Asia as well. Chinese stocks have lost 30 percent of their value in just the last three weeks. In fact, the amount of “paper wealth” wiped out in China over the past three weeks is approximately equivalent to “10 times Greece’s gross domestic product”…
A dizzying three-week plunge in Chinese equities has wiped out $2.36 trillion in market value — equivalent to about 10 times Greece’s gross domestic product last year.
The great financial collapse of 2015 is well underway, and it should be a very interesting week for global markets.
But no matter what happens this week, we all need to keep in mind that this is just the tip of the iceberg.
A “perfect storm” is on the way, and we all need to get prepared for it while we still can.
The second largest stock market in the entire world is collapsing right in front of our eyes. Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out. Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States. From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value. It was the greatest stock market surge in Chinese history. But after hitting a peak, it began to fall dramatically. From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed. In the end, more than two-thirds of all wealth in the market was completely wiped out. You can see all of this on a chart that you can find right here. What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again. Is this yet another sign that a U.S. stock market crash is imminent?
Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008. Today, I want to share with you an excerpt from a New York Times article that was published in April 2008. At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…
The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.
Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.
This sounds almost exactly like what is happening in China right now. First we witnessed a ridiculous Chinese stock market bubble form, and now we are watching a nightmarish sell off take place. This next excerpt is from a Reuters article that was just published…
Shanghai’s benchmark share index crashed below 4,000 points for the first time since April – a key support level that analysts said had been seen as a line in the sand that Beijing had to defend, below which more conservative investors would start ejecting from their leveraged positions, widening the rout.
Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed at an incredibly rapid pace in since June 12, losing more than 20 percent in jaw-dropping volatility as money surges in and out of the market.
That drop has wiped out nearly $3 trillion in market capitalization, more than the GDP of Brazil.
Did you catch that last part?
The amount of wealth that has been wiped out during this Chinese stock market crash is already greater than the entire yearly GDP of Brazil.
To me, that is absolutely incredible.
And now that the global financial system is more interconnected than ever, what goes on over in China has a greater impact on the rest of the globe than ever before. Today, China has the largest economy on the planet on a purchasing power basis, and the Chinese stock market “is the second largest in the world in terms of market capitalization”…
Just as in 1929, flighty retail investors make up the bulk of China’s stock market and, just as in 1929 in the U.S., they have heavily margined their accounts. The Financial Times puts the number of retail investors in the Chinese stock market at 80 to 90 percent of the total market. Retail investors, unlike sophisticated institutional investors, are prone to panic selling, which explains the wild intraday swings in the Shanghai Composite over the past week.
Last night, the Shanghai Composite broke a key technical support level, closing below 4,000 at 3,912.77. The index is now down 24 percent since it peaked earlier this month and has wiped out more than $2.4 trillion in value. China’s stock market is the second largest in the world in terms of market capitalization, with the U.S. ranking number one.
Making world markets even more worried about the situation in China, its regulators are showing a similar brand of leadership as Mario Draghi. After previously pledging to trim back risky margin lending, they have now done a complete flip flop and are permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed.
I know that a lot of Americans don’t really care about what happens over in Asia, but when the second largest stock market in the entire world crashes, it is a very big deal.
The great financial crisis of 2015 has now begun, and it is just going to get much, much worse. On Thursday, Ron Paul declared that “the day of reckoning is at hand“, and I agree with him.
So what comes next?
The following is what Phoenix Capital Research is anticipating…
By the time it’s all over, I expect:
1) Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.
2) The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).
3) Japan to have defaulted and very likely enter hyperinflation.
4) US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.
5) Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.
I tend to agree with most of that. I don’t agree that the euro is going to go away, but I do agree that the eurozone is going to break up and be reconstituted in a new form eventually. And yes, we are going to see tremendous inflation all over the world down the road, but I wouldn’t say that it is imminent in Japan or anywhere else. But overall, I think that is a pretty good list.
So what do you think is coming? Please feel free to join the discussion by posting a comment below…