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Two More Harbingers Of Financial Doom That Mirror The Crisis Of 2008

Harbingers - Public DomainThe stock market continues to flirt with new record highs, but the signs that we could be on the precipice of the next major financial crisis continue to mount.  A couple of days ago, I discussed the fact that the U.S. dollar is experiencing a tremendous surge in value just like it did in the months prior to the financial crisis of 2008.  And previously, I have detailed how the price of oil has collapsed, prices for industrial commodities are tanking and market behavior is becoming extremely choppy.  All of these are things that we witnessed just before the last market crash as well.  It is also important to note that orders for durable goods are declining and the Baltic Dry Index has dropped to the lowest level on record.  So does all of this mean that the stock market is guaranteed to crash in 2015?  No, of course not.  But what we are looking for are probabilities.  We are looking for patterns.  There are multiple warning signs that have popped up repeatedly just prior to previous financial crashes, and many of those same warning signs are now appearing once again.

One of these warning signs that I have not discussed previously is the wholesale inventories to sales ratio.  When economic activity starts to slow down, inventory tends to get backed up.  And that is precisely what is happening right now.  In fact, as Wolf Richter recently wrote about, the wholesale inventories to sales ratio has now hit a level that we have not seen since the last recession…

In December, the wholesale inventory/sales ratio reached 1.22, after rising consistently since July last year, when it was 1.17. It is now at the highest – and worst – level since September 2009, as the financial crisis was winding down:

Wolf Richter

Rising sales gives merchants the optimism to stock more. But because sales are rising in that rosy scenario, the inventory/sales ratio, depicting rising inventories and rising sales, would not suddenly jump. But in the current scenario, sales are not keeping up with inventory growth.

Another sign that I find extremely interesting is the behavior of the yield on 10 year U.S. Treasury notes.  As Jeff Clark recently explained, we usually see a spike in the 10 year Treasury yield about the time the market is peaking before a crash…

The 10-year Treasury note yield bottomed on January 30 at 1.65%. Today, it’s at 2%. That’s a 35-basis-point spike – a jump of 21% – in less than two weeks.

And it’s the first sign of an impending stock market crash.

10 Year Yield - Stansberry

As I explained last September, the 10-year Treasury note yield has ALWAYS spiked higher prior to an important top in the stock market.

For example, the 10-year yield was just 4.5% in January 1999. One year later, it was 6.75% – a spike of 50%. The dot-com bubble popped two months later.

In 2007, rates bottomed in March at 4.5%. By July, they had risen to 5.5% – a 22% increase. The stock market peaked in September.

Let’s be clear… not every spike in Treasury rates leads to an important top in the stock market. But there has always been a sharp spike in rates a few months before the top.

Once again, just because something has happened in the past does not mean that it will happen in the future.

But the fact that so many red flags are appearing all at once has got to give any rational person reason for concern.

Yes, the Dow gained more than 100 points on Thursday.  But on Thursday we also learned that retail sales dropped again in January.  Overall, this has been the worst two month drop in retail sales since 2009

Following last month’s narrative-crushing drop in retail sales, despite all that low interest rate low gas price stimulus, January was more of the same as hopeful expectations for a modest rebound were denied. Falling 0.8% (against a 0.9% drop in Dec), missing expectations of -0.4%, this is the worst back-to-back drop in retail sales since Oct 2009. Retail sales declined in 6 of the 13 categories.

And economic activity is rapidly slowing down on the other side of the planet as well.

For example, Chinese imports and exports both fell dramatically in January…

Chinese imports collapsed 19.9% YoY in January, missing expectations of a modest 3.2% drop by the most since Lehman. This is the biggest YoY drop since May 2009 and worst January since the peak of the financial crisis. Exports tumbled 3.3% YoY (missing expectations of 5.9% surge) for the worst January since 2009. Combined this led to a $60.03 billion trade surplus in January – the largest ever. But apart from these massive imbalances, everything is awesome in the global economy (oh apart from The Baltic Dry at record lows, Iron Ore near record lows, oil prices crashed, and the other engine of the world economy – USA USA USA – imploding).

In light of so much bad economic data, it boggles my mind that stocks have been doing so well.

But this is typical bubble behavior.  Financial bubbles tend to be very irrational and they tend to go on a lot longer than most people think they will.  When they do finally burst, the consequences are often quite horrifying.

It may not seem like it to most people, but we are right on track for a major financial catastrophe.  It is playing out right in front of our eyes in textbook fashion.  But it is going to take a little while to unfold.

Unfortunately, most people these days do not have the patience to watch long-term trends develop.  Instead, we have been trained by the mainstream media to have the attention spans of toddlers.  We bounce from one 48-hour news cycle to the next, eagerly looking forward to the next “scandal” that is going to break.

And when the next financial crash does strike, the mainstream media is going to talk about what a “surprise” it is.  But for those that are watching the long-term trends, it is not going to be a surprise at all.  We will have seen it coming a mile away.

 

Why The Damage To The Economy Caused By The Oil Crash Is Going To Get Progressively Worse

Oil Price Crash - Public DomainWe are really starting to see the price of oil weigh very heavily on the economy and on the stock market.  On Tuesday, the Dow was down 291 points, and the primary reason for the decline was disappointing corporate sales numbers.  For example, heavy equipment manufacturer Caterpillar is blaming the “dramatic decline in the price of oil” for much lower than anticipated sales during the fourth quarter of 2014.  Even though Caterpillar is not an “energy company”, the price of oil is critical to their success.  And the same could be said about thousands of other companies.  That is why I have repeatedly stated that anyone who believes that collapsing oil prices are good for the U.S. economy is crazy.  The key to how much damage this oil collapse is going to do to our economy is not how low prices ultimately go.  Rather, the key is how long they stay at these low levels.  If the price of oil went back to $80 a barrel next week, the damage would be fairly minimal.  But if the price of oil stays at this current level for the remainder of 2015, the damage will be absolutely catastrophic.  Just think of the price of oil like a hot iron.  If you touch it for just a fraction of a second, it won’t do too much damage.  But if you press it against your skin for an hour, you will be severely damaged for the rest of your life at the very least.

So the damage that we are witnessing right now is just the very beginning unless the price of oil goes back up substantially.

When the price of oil first started crashing, most analysts focused on the impact that it would have on energy companies.  And without a doubt, quite a few of them are likely to be wiped out if things don’t change soon.

But of even greater importance is the ripple effects that the price of oil will have throughout our entire economy.  The oil price crash is not that many months old at this point, and yet big companies are already blaming it for causing significant problems.  The following is how Caterpillar explained their disappointing sales numbers on Tuesday

The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook.  Current oil prices are a significant headwind for Energy & Transportation and negative for our construction business in the oil producing regions of the world.  In addition, with lower prices for copper, coal and iron ore, we’ve reduced our expectations for sales of mining equipment.  We’ve also lowered our expectations for construction equipment sales in China.  While our market position in China has improved, 2015 expectations for the construction industry in China are lower”

We also learned on Tuesday that orders for durable goods were extremely disappointing.  Many analysts believe that this is another area where the oil price crash is having an impact

Orders for business equipment unexpectedly fell in December for a fourth month, signaling a global growth slowdown is weighing on American companies. Bookings for non-military capital goods excluding aircraft dropped 0.6 percent for a second month, data from the Commerce Department showed. Demand for all durable goods − items meant to last at least three years − declined 3.4 percent, the worst performance since August.

Let’s keep an eye on the durable goods numbers in coming months.  Usually, when the economy is heading into a recession durable goods numbers start declining.

Meanwhile, a bunch of other big companies reported disappointing sales numbers on Tuesday as well.  The following summary comes from the Crux

Microsoft lost 9.9 percent as software-license sales to businesses were below forecasts. Caterpillar plunged 7.3 percent after forecasting 2015 results that trailed estimates as plunging oil prices signal lower demand from energy companies. DuPont Co. dropped 2.8 percent as a stronger dollar cuts into the chemical maker’s profit. Procter & Gamble Co. and United Technologies Corp. declined at least 2 percent after saying the surging greenback will lower full-year earnings.

What the economy could really use right now is a huge rebound in the price of oil.

Unfortunately, as I wrote about the other day, that is not likely to happen any time soon.

In fact, a top executive for Goldman Sachs recently told CNBC that he believes that the price of oil could ultimately go as low as 30 dollars a barrel.

And hedge fund managers are backing up their belief that oil is heading even lower with big money

Hedge funds boosted bearish wagers on oil to a four-year high as US supplies grew the most since 2001.

Money managers increased short positions in West Texas Intermediate crude to the highest level since September 2010 in the week ended January 20, US Commodity Futures Trading Commission data show. Net-long positions slipped for the first time in three weeks.

US crude supplies rose by 10.1 million barrels to 397.9 million in the week ended January 16 and the country will pump the most oil since 1972 this year, the Energy Information Administration says. Saudi Arabia’s King Salman, the new ruler of the world’s biggest oil exporter, said he will maintain the production policy of his predecessor despite a 58 percent drop in prices since June.

Sadly, the truth is that anyone that thought that the stock market would go up forever and that the U.S. economy would be able to avoid a major downturn indefinitely was just being delusional.

Our economy goes through cycles, and every financial bubble eventually bursts.

For example, did you know that the S&P 500 has never had seven up years in a row?  The following comes from a CNBC article that was posted on Tuesday…

Doubleline Capital founder Jeff Gundlach, more known for his bond prowess than as an equity market expert, pointed out that the S&P 500 has never had seven consecutive up years.

Of course, records are made to be broken, and each year is supposed to stand on its own.

But in a market that faces an uncertain future regarding monetary policy, the specter of a global economic slowdown, and an oil price plunge that is dampening capital investment, Gundlach’s little factoid sparked a lot of chatter at ETF.com’s InsideETFs conference in Hollywood, Florida.

Hmm – that reminds me of the seven year cycles that I discussed in my article yesterday.

If the price of oil stays this low for the rest of 2015, there is no way that we are going to avoid a recession.

If the price of oil stays this low for the rest of 2015, there is no way that we are going to avoid a stock market crash.

So let’s hope that the price of oil starts going back up.

If it doesn’t, the damage that is inflicted on our economy is going to get progressively worse.

This Is Exactly How Markets Behave Right Before They Crash

Roller Coaster - Photo by NeukolnWhen the stock market starts to behave like a roller coaster, that is a sign that a major move to the downside is right around the corner.  As I have stated repeatedly, when the market is very calm it tends to go up.  But when the waters start getting really choppy, that is a clear indication that stocks are about to plummet.  In early 2015, volatility has returned to Wall Street in a big way.  At one point on Tuesday, the Dow was up more than 300 points.  But then the bottom dropped out.  From the peak on Tuesday, the Dow plunged nearly 700 points in less than 30 hours before recovering more than 100 points at the end of the day.  The Dow has now experienced the longest losing streak that we have seen in 3 months, but that is not that big of a deal.  Of much greater concern is the huge price swings that we have been seeing. Remember, the three largest single day stock market increases in history were right in the middle of the financial crisis of 2008.  So if stocks go up 400 points tomorrow that is NOT a good sign.  What we really need is a string of days when stocks move less than 100 points in either direction.  If stocks keep making dramatic moves up and dramatic moves down, history tells us that it is only a matter of time before they collapse.  Any student of stock market history knows that what we are witnessing right now is exactly how markets behave right before they crash.

Examine the chart below very carefully.  It is a chart of the CBOE Volatility Index from 2006 to 2008.  As you can see, volatility was very low as stocks soared during 2006.  Then things started to get a bit choppy in 2007, and investors should have recognized this as a warning sign.  Finally, you can see that the VIX absolutely skyrocketed during the financial crisis of 2008…

VIX 2006 to 2008

Looking back, it seems so obvious.

So why aren’t more people alarmed this time around?

As CNN is reporting, the VIX is up almost 20 percent so far in 2015…

Volatility has returned with a vengeance this January. The Dow has been moving up or down by at least 100 points nearly every day this year.

CNNMoney’s Fear & Greed Index is showing signs of Extreme Fear again. And a volatility gauge known as the VIX, which is one of the components in our index, is up nearly 20% so far this year.

Meanwhile, there are lots of other signs of trouble on the horizon as well.

For example, the price of copper got absolutely hammered on Wednesday.  As I write this, it has fallen more than 5 percent and it has not been this low in more than five years.

In financial circles, it is referred to as “Dr. Copper” because it is such a valuable indicator regarding where the global economy is heading next.

For example, in 2008 the price of copper was close to $4.00 before plummeting to below $1.50 by the end of that year as the global financial system fell apart.

Now the price of copper is plunging again, and many analysts are becoming extremely concerned

One growing global worry is the steep decline in copper, which is used in many products and is often viewed as good gauge on how China is doing. The price of copper hit its lowest price since 2009 on Wednesday at $2.46. Copper is down nearly 7% this week alone.

Meanwhile, the recession (some call it a depression) in Europe continues to get even worse, and the euro continues to plunge.

On Wednesday, the euro declined to the lowest level that we have seen in nine years, and Goldman Sachs is now saying that the euro and the U.S. dollar could be at parity by the end of next year.

That is amazing considering the fact that it took $1.60 to get one euro back in July 2008.

Personally, I am fully convinced that Goldman Sachs is right on this one.  I believe that the euro is going to all-time lows that we have never seen before, and this is going to create massive problems for the eurozone.

With all of these signs of trouble out there, the smart money is rapidly pulling their money out of stocks and putting it into government bonds.  This usually happens when a crisis is looming.  It is called a “flight to safety”, and it pushes government bond yields down.

On Wednesday, the yield on 10 year U.S. Treasuries fell beneath the important 1.8 percent barrier.  We will probably see it go even lower in the months ahead.

As the rest of the world economy crumbles, the remainder of the globe is looking to America to be the rock in the storm.  For example, the following quote that I found today comes from a British news source

The global economy is running on a single engine… the American one,’ the World Bank’s chief economist, Kaushik Basu, said. ‘This does not make for a rosy outlook for the world.’

Well, they may not want to rely on us too much, because there are plenty of signs that our economy is slowing down too.  For example, we learned today that December retail sales were down 0.9% from a year ago, and this is being called “an unmitigated disaster“.  Americans were supposed to be taking the money that they were saving on gasoline and spending it, but that apparently is not happening.

Back on October 29th, I wrote an article entitled “From This Day Forward, We Will Watch How The Stock Market Performs Without The Fed’s Monetary Heroin“.  In that article, I warned that the end of quantitative easing could have dire consequences for the financial system as bubbles created by the Fed began to burst.

And that is precisely what is happening.  In fact, many analysts are now pinpointing the end of QE as the exact moment when our current troubles began.  For instance, check out this excerpt from a CNBC article that was published on Wednesday

Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group. “It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended.”

Indeed, the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October.

We are moving into a time of great danger for Wall Street and for the global economy as a whole.

If we continue to see a tremendous amount of volatility, history tells us that it is only a matter of time before the markets implode.

Hopefully you will be ready when that happens.

Oil Falls Below 50 As Global Financial Markets Begin To Unravel

Crisis Silhouette - Public DomainOn Monday, the price of oil fell below $50 for the first time since April 2009, and the Dow dropped 331 points.  Meanwhile, the stock market declines over in Europe were even larger on a percentage basis, and the euro sank to a fresh nine year low on concerns that the anti-austerity Syriza party will be victorious in the upcoming election in Greece.  These are precisely the kinds of things that we would expect to see happen if a global financial crash was coming in 2015.  Just prior to the financial crisis of 2008, the price of oil collapsed, prices for industrial commodities got crushed and the U.S. dollar soared relative to other currencies.  All of those things are happening again.  And yet somehow many analysts are still convinced that things will be different this time.  And I agree that things will indeed be “different” this time.  When this crisis fully erupts, it will make 2008 look like a Sunday picnic.

Another thing that usually happens when financial markets begin to unravel is that they get really choppy.  There are big ups and big downs, and that is exactly what we have witnessed since October.

So don’t expect the markets just to go in one direction.  In fact, it would not be a surprise if the Dow went up by 300 or 400 points tomorrow.  During the initial stages of a financial crash, there are always certain days when the markets absolutely soar.

For example, did you know that the three largest single day stock market advances in history were right in the middle of the financial crash of 2008?  Here are the dates and the amount the Dow rose each of those days…

October 13th, 2008: +936 points

October 28th, 2008: +889 points

November 13th, 2008: +552 points

Just looking at those three days, you would assume that the fall of 2008 was the greatest time ever for stocks.  But instead, it was the worst financial crash that we have seen since the days of the Great Depression.

So don’t get fooled by the volatility.  Choppy markets are almost always a sign of big trouble ahead.  Calm waters usually mean that the markets are going up.

In order to avoid a major financial crisis in the near future, we desperately need the price of oil to rebound in a substantial way.

Unfortunately, it does not look like that is going to happen any time soon.  There is just way too much oil being produced right now.  The following is an excerpt from a recent CNBC article

The Morgan Stanley strategists say there are new reports of unsold West and North African cargoes, with much of the oil moving into storage. They also note that new supply has entered the global market with additional exports coming from Russia and Iraq, which is reportedly seeing production rising to new highs.

Since June, the price of oil has plummeted close to 55 percent.  If the price of oil stays where it is right now, we are going to see large numbers of small producers go out of business, the U.S. economy will lose millions of jobs, billions of dollars of junk bonds will go bad and trillions of dollars of derivatives will be in jeopardy.

And the lower the price of oil goes, the worse our problems are going to get.  That is why it is so alarming that some analysts are now predicting that the price of oil could hit $40 later this month

Some traders appeared certain that U.S. crude will hit the $40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build.

‘We’re headed for a four-handle,’ said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York. ‘Maybe not today, but I’m sure when you get the inventory numbers that come out this week, we definitely will.’

Open interest for $40-$50 strike puts in U.S. crude have risen several fold since the start of December, while $20-$30 puts for June 2015 have traded, said Stephen Schork, editor of Pennsylvania-based The Schork Report.

The only way that the price of oil has a chance to move back up significantly is if global production slows down.  But instead, production just continues to increase in the short-term thanks to projects that were already in the works.  As a result, analysts from Morgan Stanley say that the oil glut is only going to intensify

Morgan Stanley analysts said new production will continue to ramp up at a number of fields in Brazil, West Africa, Canada and in the U.S. Gulf of Mexico as well as U.S. shale production. Also, the potential framework agreement with Iran could mean more Iranian oil on the market.

Yes, lower oil prices mean that we get to pay less for gasoline when we fill up our vehicles.

But as I have written about previously, anyone that believes that lower oil prices are good for the U.S. economy or for the global economy as a whole is crazy.  And these sentiments were echoed recently by Jeff Gundlach

Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.

If the price of oil does not recover, we are going to see massive financial problems all over the planet and the geopolitical stress that this will create will be unbelievable.

To expand on this point, I want to share an excerpt from a recent Zero Hedge article.  As you can see, a rapid rise or fall in the price of oil almost always correlates with a major global crisis of some sort…

Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the ‘difference this time’ is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.

Oil Crisis Chart - Zero Hedge

So is the 45% YoY drop in oil prices about to ’cause’ contagion risk concerns for the world?

And without a doubt, we are overdue for another stock market crisis.

Between December 31st, 1996 and March 24th, 2000 the S&P 500 rose 106 percent.

Then the dotcom bubble burst and it fell by 49 percent.

Between October 9th, 2002 and October 9th, 2007 the S&P 500 rose 101 percent.

But then that bubble burst and it fell by 57 percent.

Between March 9th, 2009 and December 31st, 2014 the S&P 500 rose an astounding 204 percent.

When this bubble bursts, how far will it fall this time?

 

Most People Cannot Even Imagine That An Economic Collapse Is Coming

Thinking - Public DomainThe idea that the United States is on the brink of a horrifying economic crash is absolutely inconceivable to most Americans.  After all, the economy has been relatively stable for quite a few years and the stock market continues to surge to new heights.  On Friday, the Dow and the S&P 500 both closed at brand new all-time record highs.  For the year, the S&P 500 is now up 9 percent and the Nasdaq is now up close to 11 percent.  And American consumers are getting ready to spend more than 600 billion dollars this Christmas season.  That is an amount of money that is larger than the entire economy of Sweden.  So how in the world can anyone be talking about economic collapse?  Yes, many will concede, we had a few bumps in the road back in 2008 but things have pretty much gotten back to normal since then.  Why be concerned about economic collapse when there is so much stability all around us?

Unfortunately, this brief period of stability that we have been enjoying is just an illusion.

The fundamental problems that caused the financial crisis of 2008 have not been fixed.  In fact, most of our long-term economic problems have gotten even worse.

But most Americans have such short attention spans these days.  In a world where we are accustomed to getting everything instantly, news cycles only last for 48 hours and 2008 might as well be an eternity ago.

In the United States today, our entire economic system is based on debt.

Without debt, very little economic activity happens.  We need mortgages to buy our homes, we need auto loans to buy our vehicles and we need our credit cards to do our shopping during the holiday season.

So where does all of that debt come from?

It comes from the banks.

In particular, the “too big to fail banks” are the heart of this debt-based system.

Do you have a mortgage, an auto loan or a credit card from one of these “too big to fail” institutions?  A very large percentage of the people that will read this article do.

And a lot of people might not like to hear this, but without those banks we essentially do not have an economy.

When Lehman Brothers collapsed in 2008, it almost resulted in the meltdown of our entire system.  The stock market collapsed and we experienced an absolutely wicked credit crunch.

Unfortunately, that was just a small preview of what is coming.

Even though a few prominent “experts” such as New York Times columnist Paul Krugman have declared that the “too big to fail” problem is “over”, the truth is that it is now a bigger crisis than ever before.

Compared to five years ago, the four largest banks in the country are now almost 40 percent larger.  The following numbers come from a recent article in the Los Angeles Times

Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.

And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.

At the same time that those banks have been getting bigger, 1,400 smaller banks have completely disappeared from the banking industry.

That means that we are now more dependent on these gigantic banks than ever.

At this point, the five largest banks account for 42 percent of all loans in the United States, and the six largest banks account for 67 percent of all assets in our financial system.

If someone came along and zapped those banks out of existence, our economy would totally collapse overnight.

So the health of this handful of immensely powerful banking institutions is absolutely critical to our economy.

Unfortunately, these banks have become deeply addicted to gambling.

Have you ever known people that allowed their lives to be destroyed by addictions that they could never shake?

Well, that is what is happening to these banks.  They have transformed Wall Street into the largest casino in the history of the world.  Most of the time, their bets pay off and they make lots of money.

But as we saw back in 2008, when they miscalculate things can fall apart very rapidly.

The bets that I am most concerned about are known as “derivatives“.  In essence, they are bets about what will or will not happen in the future.  The big banks use very sophisticated algorithms that are supposed to help them be on the winning side of these bets the vast majority of the time, but these algorithms are not perfect.  The reason these algorithms are not perfect is because they are based on assumptions, and those assumptions come from people.  They might be really smart people, but they are still just people.

If things stay fairly stable like they have the past few years, the algorithms tend to work very well.

But if there is a “black swan event” such as a major stock market crash, a collapse of European or Asian banks, a historic shift in interest rates, an Ebola pandemic, a horrific natural disaster or a massive EMP blast is unleashed by the sun, everything can be suddenly thrown out of balance.

Acrobat Nik Wallenda has been making headlines all over the world for crossing vast distances on a high-wire without a safety net.  Well, that is essentially what our “too big to fail” banks are doing every single day.  With each passing year, these banks have become even more reckless, and so far there have not been any serious consequences.

But without a doubt, someday there will be.

What would you say about a bookie that took $200,000 in bets but that only had $10,000 to cover those bets?

You would certainly call that bookie a fool.

But that is what our big banks are doing.

Right now, JPMorgan Chase has more than 67 trillion dollars in exposure to derivatives but it only has 2.5 trillion dollars in assets.

Right now, Citibank has nearly 60 trillion dollars in exposure to derivatives but it only has 1.9 trillion dollars in assets.

Right now, Goldman Sachs has more than 54 trillion dollars in exposure to derivatives but it has less than a trillion dollars in assets.

Right now, Bank of America has more than 54 trillion dollars in exposure to derivatives but it only has 2.2 trillion dollars in assets.

Right now, Morgan Stanley has more than 44 trillion dollars in exposure to derivatives but it has less than a trillion dollars in assets.

Most people have absolutely no idea how incredibly vulnerable our financial system really is.

The truth is that these “too big to fail” banks could collapse at any time.

And when they fail, our economy will fail too.

So let us hope and pray that this brief period of false stability lasts for as long as possible.

Because when it ends, all hell is going to break loose.

From This Day Forward, We Will Watch How The Stock Market Performs Without The Fed’s Monetary Heroin

Money - Public DomainMark this day on your calendars.  The Dow is at 16974, the S&P 500 is at 1982 and the NASDAQ is at 4549.  From this day forward, we will be looking to see how the stock market performs without the monetary heroin that the Federal Reserve has been providing to it.  Since November 2008, the Fed has created about 3.5 trillion dollars and pumped it into the financial system.  An excellent chart illustrating this in graphic format can be found right here.  Pretty much everyone agrees that this has been a tremendous boon for the financial markets.  As you will see below, even former Fed chairman Alan Greenspan says that quantitative easing was “a terrific success” as far as boosting stock prices.  But he also says that QE has not been very helpful to the real economy at all.  In essence, the entire quantitative easing program was a massive 3.5 trillion dollar gift to Wall Street.  If that sounds unfair to you, that is because it is unfair.

So why is the Federal Reserve finally ending quantitative easing?

Well, officially the Fed says that it is because there has been so much improvement in the labor market

The Fed’s language, however, did suggest that they were getting more comfortable with the economy’s improvement. It cited “solid job gains,” citing a “substantial improvement in the outlook for the labor market,” as well as pointing out that “underutilization” of labor resources is “gradually diminishing.”

But that is not true at all.

The percentage of Americans that are working right now is about the same as it was during the depths of the last recession.  Just check out this chart…

Employment Population Ratio 2014

So there has been no “employment recovery” to speak of at all.

And as I wrote about yesterday, the percentage of Americans that are homeowners has been steadily falling throughout the quantitative easing era…

Homeownership Rate 2014

So let’s put the lie that quantitative easing helped the “real economy” to rest.  It did no such thing.

Instead, what QE did do was massively inflate stock prices.

The following is an excerpt from a Wall Street Journal report about a speech that former Fed chairman Alan Greenspan made to the Council on Foreign Relations on Wednesday

Mr. Greenspan’s comments to the Council on Foreign Relations came as Fed officials were meeting in Washington, D.C., and expected to announce within hours an end to the bond purchases.

He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”

Moving forward, what did Greenspan tell the members of the Council on Foreign Relations that they should do with their money?

This might surprise you…

Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.

Wow.

It almost sounds like Greenspan has been reading the Economic Collapse Blog.

Since November 2008, every time there has been an interruption in the Fed’s quantitative easing program, the stock market has gone down substantially.

Will that happen again this time?

Well, the market is certainly primed for it.  We are repeating so many of the very same patterns that we saw just prior to the last two financial crashes.

For example, there have been three dramatic peaks in margin debt in the last twenty years.

One of those peaks came early in the year 2000 just before the dotcom bubble burst.

The second of those peaks came in the middle of 2007 just before the subprime mortgage meltdown happened.

And the third of those peaks happened earlier this year.

You can view  a chart that shows these peaks very clearly right here.

The Federal Reserve appears to be confident that the stock market will be okay without the monetary heroin that it has been supplying.

We shall see.

But it should be deeply troubling to all Americans that this unelected, unaccountable body of central bankers has far more power over our economy than anyone else does.  During election season, our politicians get up and give speeches about what they will “do for the economy”, but the truth is that they are essentially powerless compared to the immense power that the Federal Reserve wields.  Just a few choice words from Janet Yellen can cause the financial markets to rise or fall dramatically.  The same cannot be said of any U.S. Senator.

We are told that monetary policy is “too important” to be exposed to politics.

We are told that the independence of the Federal Reserve is “sacred” and must never be interfered with.

I say that is a bunch of nonsense.

No organization should have the power to print up trillions of dollars out of thin air and give it to their friends.

The Federal Reserve is completely and totally out of control, and Congress needs to start exerting power over it.

The first step is to get in there and do a comprehensive audit of the Fed’s books.  This is something that U.S. Senator Ted Cruz called for in a recent editorial for USA Today

Americans are seeing near-zero interest rates on their savings accounts while median incomes are falling, and millions of people are facing higher gas prices, food prices, electricity prices, health insurance prices. Enough is enough, the Federal Reserve needs to open its books — Americans deserve a sound and stable dollar.

Whether you agree with Ted Cruz on other issues or not, this is one issue that all Americans should be able to agree on.

If you study any of our major economic problems, usually you will find that the Federal Reserve is at the heart of that problem.

So if we ever hope to solve the issues that are plaguing our economy, the Fed is going to need to be dealt with.

Hopefully the American people will start to send more representatives to Washington D.C. that understand this.

How Will The Stock Market React To The End Of Quantitative Easing?

Stock Market Crash - Public DomainIt 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

Chart By DayOnBay

And of course the chart above tells only part of the story.  Since April 2013, the S&P 500 has gone much higher…

S&P 500

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.

Low Inflation? The Price Of Ground Beef Has Risen 17 Percent Over The Past Year

Inflation Public DomainThanks to the Federal Reserve, the middle class is slowly being suffocated by rising food prices.  Every single dollar in your wallet is constantly becoming less valuable because of the inflation the Fed systematically creates.  And if you try to build wealth by saving money and earning interest on it, you still lose because thanks to the Federal Reserve’s near zero interest rate policies banks pay next to nothing on savings accounts.  The Federal Reserve wants you to either spend your money or to put it in the giant casino that we call the stock market.  But when Americans spend their paychecks they are finding that they don’t stretch as far as they once did.  The cost of living continues to rise at a much faster pace than wages are rising, and this is especially true when it comes to the price of food.

Someone that I know wrote to me today and let me know that she had to shut down the food pantry that she had been running for the poor for so many years.  It isn’t that she didn’t want to help the poor anymore.  It was that she just couldn’t deal with the rising food prices any longer.  Now she is just doing the best that she can to survive herself.

Perhaps you have also noticed that food prices have gotten pretty crazy lately.  In particular, meat prices have become absolutely obscene.  For example, the average price of ground beef has risen to a new record high of over $4.09 a pound.  Over the past twelve months, that works out to a whopping 17 percent increase…

The average price for a pound of ground beef climbed to another record high–$4.096 per pound–in the United States in September, according to data released today by the Bureau of Labor Statistics (BLS).

In August, according to BLS, the average price for a pound of all types of ground beef topped $4 for the first time–hitting $4.013. In September, the average price jumped .083 cents, an increase of 2.1 percent in one month.

A year ago, in September 2013, the average price for a pound of ground beef was $3.502 per pound. Since then, it has climbed 59.4 cents–or about 17 percent in one year.

The “intellectuals” over at the Federal Reserve insist that “a little bit of inflation” is good for an economy, but the truth is that inflation slowly robs us of our buying power.

In a previous article, I shared a chart that showed how food inflation has risen dramatically since the year 2000.  For this article, I wanted to show how food inflation has risen since the 1970s.  As you can see, the rise in food prices has been absolutely relentless for more than 40 years…

Food Inflation 2014

If our paychecks were going up at the same rate or even faster that would be okay.

But they aren’t.

In fact, CNN is reporting that our paychecks have fallen back to 1995 levels…

Americans also don’t feel any better off. While more people may have jobs, they aren’t bringing home fatter paychecks. Wages and income have remained stagnant for years, making it tough for folks even though inflation is low. Median household income, which stood at $51,939 last year, is back to 1995 levels.

Consumers expect a median income boost of 1.1% over the next year, Curtin said. But that won’t keep up with their inflation expectations of 2.8%.

“American households, on average, are still struggling with their living standards slowly eroding,” he said.

This is one of the primary reasons why the middle class is disappearing in America.

The purchasing power of our dollars is continually diminishing.

And this could be just the beginning.  Right now, severe drought is affecting some of the most important agricultural areas around the globe.  Most people are aware of the nightmarish drought in California, but did you know that things in Brazil are even worse?  Brazil is one of the most important food exporters in the world, and so they definitely need our prayers.

In addition, a “black swan event” such as a worldwide explosion of the Ebola pandemic could quickly drive food prices into the stratosphere.

Just this week, we learned that food prices in the Ebola-stricken regions of Liberia, Guinea and Sierra Leone have already risen by an average of 24 percent

Infection rates in the food-producing zones of Kenema and Kailahun in Sierra Leone, Lofa and Bong County in Liberia and GuDeckDedou in Guinea are among the highest in the region. Hundreds of farmers have died.

The three governments quarantined districts and restricted movements to contain the virus’ spread. But those measures also disrupted markets and led to food scarcity and panic buying, further pushing up prices, WFP and the Food and Agriculture Organization have said.

“Prices have risen by an average of 24 percent,” said WFP spokeswoman Elisabeth Byrs, adding an assessment of major markets showed the price of basic commodities was rising in Guinea, Liberia and Sierra Leone and in neighboring Senegal.

If you have been storing up food, I think that you will be very happy with your decision in the long run.

Without a doubt, food prices are only going to be going up from here.

But the Federal Reserve continues to insist that inflation is under control.

One of the ways that they make the “official numbers” look good is by playing accounting games.  They regularly change the way that inflation is calculated in order keep everyone calm.

You don’t have to take my word for it.  Posted below is an excerpt from an article by Mike Bryan, a vice president and senior economist in the Atlanta Fed’s research department…

The Economist retells a conversation with Stephen Roach, who in the 1970s worked for the Federal Reserve under Chairman Arthur Burns. Roach remembers that when oil prices surged around 1973, Burns asked Federal Reserve Board economists to strip those prices out of the CPI “to get a less distorted measure. When food prices then rose sharply, they stripped those out too—followed by used cars, children’s toys, jewellery, housing and so on, until around half of the CPI basket was excluded because it was supposedly ‘distorted'” by forces outside the control of the central bank. The story goes on to say that, at least in part because of these actions, the Fed failed to spot the breadth of the inflationary threat of the 1970s.

I have a similar story. I remember a morning in 1991 at a meeting of the Federal Reserve Bank of Cleveland’s board of directors. I was welcomed to the lectern with, “Now it’s time to see what Mike is going to throw out of the CPI this month.” It was an uncomfortable moment for me that had a lasting influence. It was my motivation for constructing the Cleveland Fed’s median CPI.

I am a reasonably skilled reader of a monthly CPI release. And since I approached each monthly report with a pretty clear idea of what the actual rate of inflation was, it was always pretty easy for me to look across the items in the CPI market basket and identify any offending—or “distorted”—price change. Stripping these items from the price statistic revealed the truth—and confirmed that I was right all along about the actual rate of inflation.

It is all a game to them.

It is all about getting to the “right number” to release to the public.

But anyone that goes to the grocery store knows what has been happening to food prices.

The next time you get to the checkout register and you feel tempted to ask the cashier what organ you should donate to pay for your groceries, please keep in mind that it is not the fault of the cashier.

Instead, there is one entity that you should blame.

Blame the Federal Reserve – their policies are slowly pushing the middle class into oblivion.

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