December 14th To 18th: A Week Of Reckoning For Global Stocks If The Fed Hikes Interest Rates?

Time Of Reckoning - Public DomainAre we about to witness widespread panic in the global financial marketplace?  This week is shaping up to be an absolutely critical week for global stocks.  Coming into December, more than half of the 93 largest stock market indexes in the world were down more than 10 percent year to date, and last week stocks really started to slide all over the world.  Here in the United States, the Dow Jones Industrial Average is down about 600 points over the past week or so, and at this point it is down more than 1000 points from the peak of the market.  That brings us to this week, during which the Federal Reserve is expected to raise interest rates for the very first time since the last financial crisis.  If that happens, that could potentially be enough to accelerate this “slide” into a full-blown crash.

And just look at what is already happening.  Trading for stocks in the Middle East has opened for the week, and we are already witnessing tremendous carnage

Following Friday’s further freefall in crude oil prices, The Middle East is opening down notably. Abu Dhabi, Saudi, and Kuwait are lower; Israel is weak and UAE and Qatar are tumbling, but Dubai is worst for now.  Dubai is down for the 6th day in a row (dropping over 3% – the most in a month) extending the opening losses to 2-year lows. The 11% drop in the last 6 days is the largest since the post-China-devaluation global stock collapse. Leading the losses are financial and property firms.

Things in Asia look very troubling as well.  As I write this, the Japanese market has just opened, and the Nikkei is already down 508 points.

In recent days I have been explaining to my readers how everything is lining up in textbook fashion for another major market crash.  In particular, the implosion of junk bonds is a major red flag.  Late last week, Third Avenue Management shocked Wall Street by freezing withdrawals from a 788 million dollar credit mutual fund.  The following comes from Bloomberg

A day after a prominent Wall Street firm shocked investors by freezing withdrawals from a credit mutual fund, things only got nastier in the junk-bond market. Prices on the high-risk securities sank to levels not seen in six years and, to add to the growing sense of alarm, billionaire investor Carl Icahn said the selloff is only starting.

The meltdown in High Yield is just beginning,” Icahn, who’s been betting against the high-yield market, wrote on his verified Twitter account Friday.

Icahn’s comments come as junk-bond investors, already stung by the worst losses since 2008, are the most nervous they’ve been in three years after Third Avenue Management took the rare step of freezing withdrawals from a $788 million credit mutual fund.

What Third Avenue Management just did was absolutely huge.  Now investors that have money in any similar funds are going to be racing to get it out.  We could be on the verge of a run on bond funds that is absolutely unprecedented.  This is so obvious that even CNBC’s Jim Cramer is sounding the alarm…

Friday was a day where Cramer’s ears were burning with concern because of the troubles discovered with a high yield bond fund run by Third Avenue Management. It decided to bar investors from getting their money out of its Focused Credit Fund, because it could not meet demands to get cash back to them in an orderly way.

This was significant because when it tries to sell the bonds needed to satisfy these orders for redemptions, it could destroy the high yield bond market because there are no buyers anywhere near the amount that they want to sell.

I cannot emphasize enough just how disconcerting this move is,” Cramer said.

I know that for the ordinary person on the street, all of this sounds very complicated.

But it basically comes down to this – anyone that has a lot of money invested in these bond funds is in danger of getting totally wiped out.

In a situation like this, it is those that are “first out the door” that come out as the winners.  I like how Wolf Richter explained what we are currently facing…

It works like this: When an “open-end” bond fund starts losing money, investors begin to sell it. Fund managers first use all available cash to pay investors. When the cash is gone, they sell the most liquid securities that haven’t lost much money yet, such as Treasuries. When they’re gone, they sell the most liquid corporate paper. As they go down the line, they sell bonds that have already lost a lot of value. By now the smart money is betting against the fund, having figured out what’s happening. They’re shorting the very bonds these folks are trying to sell.

The longer this goes on, the more money investors lose and the more spooked they get. It turns into a run. And people who still have that fund in their retirement account are getting cleaned out.

Bond funds can be treacherous – especially if they hold dubious paper, which is never dubious until it suddenly is. And when they get in trouble, you want to be among the first out the door.

I would anticipate that we will see more junk bond carnage this week – especially if the Fed raises rates.

And as I have discussed previously, a stock crash almost always follows a junk bond crash.  If the Fed does raise rates this week and stocks do start falling significantly, one key day to watch will be Friday.  JPM’s head quant Marko Kolanovic has warned that “the largest option expiry in many years” will happen on that day…

This important event falls at a peculiar time—less than 48 hours before the largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050. Clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.

A perfect storm for stocks is brewing, and this week could potentially be one of the most chaotic that we have seen in a very long time.

But of course the Federal Reserve could decide to surprise us all by not raising rates, and that would change things substantially.

So what do you think will happen this week?

Please feel free to share your thoughts by posting a comment below…

Stocks Began Falling Right At This Time Of The Year Just Prior To The Last Financial Crisis

Stock Market Crash Bear - Public DomainHave you heard of the saying “sell in May and go away”?  Traditionally, the period from May through October has been a time of weakness for stocks.  In fact, on average stocks hit their lowest point of the year on October 27th.  And most people don’t remember this, but the Dow Jones Industrial Average actually began plunging right at this time of the year just prior to the financial crisis of 2008.  Most people do remember the huge stock crash that happened in the fall of that year, but the market actually started to slide in May.  Throughout the first four and a half months of 2008, stocks moved up and down in a fairly narrow range, and the Dow closed at a short-term peak of 13,028.16 on May 19th.  From there it was all downhill for the rest of the year.  So will a similar thing happen in 2015 as we approach the next great financial crisis?  Since March 20th, the Dow Jones Transportation Average has already fallen by almost 800 points.  So will the Dow Jones Industrial Average soon follow?  Well, only time will tell, but the Dow was down 190 points on Tuesday.  Signs of trouble are popping up all over the place, and the “smart money” is getting out while the getting is good.

The chart that I have posted below shows how the Dow Jones Industrial Average performed during 2008.  As you can see, stocks began plummeting long before the financial crisis in the fall.  From May 19th through early July, the Dow fell by about 2,000 points.  Should we expect to see a similar pattern this summer?…

Dow Jones Industrial Average 2008

Like I stated earlier in this article, red flags and warning signs are starting to pop up all over the place.  The following are just a few of the trouble signs that we have seen this week…

-On Tuesday, the VIX (a closely watched measure of market volatility) jumped by the highest percentage that we have seen so far in 2015.  As I have explained so often before, markets tend to go up in calm markets and they tend to go down in volatile markets.  So the fact that volatility is on the rise is not a good sign.

-The U.S. dollar index is surging again.  In fact, we just witnessed the largest seven day rise in the U.S. dollar index since the collapse of Lehman Brothers.  This is another indication that big trouble is ahead.  For much more on this, please see my previous article entitled “Guess What Happened The Last Time The U.S. Dollar Skyrocketed In Value Like This?…

-Thanks to the ongoing Greek crisis, the euro is falling again.  It just hit a fresh one-month low, and if I am right it is going to go quite a bit lower as the European financial crisis intensifies.

-In the U.S., orders for durable goods have fallen year over year for four months in a row.  When orders for durable goods start going negative for a few months, it is usually a signal that we are entering a recession.

-After rebounding a little bit, the price of crude oil is falling again.  It just hit a new one-month low, and the number of oil rigs in operation has declined for 24 weeks in a row.  Once again, this is highly reminiscent of what happened back in 2008.

-Unfortunately, it isn’t just oil that is declining.  A whole host of other commodity prices are going down right now as well.  This happened just prior to the financial crisis of 2008, and it is a sign that we are heading into a deflationary economic slowdown.

The reason why I talk so much about what happened the last time around is that we should be able to learn from it.

Looking back, there were so many warning signs leading up to the financial crisis of 2008 but most people totally missed them.  Now, so many of those exact same signs are appearing once again, but they are being ignored.

Only this time the global financial system is in far worse shape than it was back in 2008.  Debt levels all over the planet have absolutely exploded over the past seven years, and the debt to GDP ratio for the entire world is now up to a mind blowing 286 percent.  In the United States, our national debt has approximately doubled since just prior to the last recession, and at this point it is mathematically impossible to pay it off.  We are in the midst of the greatest stock market bubble of all time, the greatest bond bubble of all time (76 trillion dollars) and the greatest derivatives bubble of all time.  Anyone that cannot see the trouble that is approaching is willingly blind.

In the western world, we have extremely short attention spans and we suffer deeply from something called “normalcy bias”.  The following is how “normalcy bias” is defined by Wikipedia

The normalcy bias, or normality bias, is a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster and its possible effects. This may result in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to include the populace in its disaster preparations.

The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred then it never will occur. It can result in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

That is such a perfect description of what is happening in the western world today.  But just because things have always been a certain way in our past does not mean that they will continue to be that way in the future.  A great economic storm is rapidly approaching, and the signs of the times are all around us.

Hopefully more people will start listening to the warnings, because we have almost run out of time to prepare.

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