The 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.
Mark this day on your calendars. The Dow is at 16974, the S&P 500 is at 1982 and the NASDAQ is at 4549. From this day forward, we will be looking to see how the stock market performs without the monetary heroin that the Federal Reserve has been providing to it. Since November 2008, the Fed has created about 3.5 trillion dollars and pumped it into the financial system. An excellent chart illustrating this in graphic format can be found right here. Pretty much everyone agrees that this has been a tremendous boon for the financial markets. As you will see below, even former Fed chairman Alan Greenspan says that quantitative easing was “a terrific success” as far as boosting stock prices. But he also says that QE has not been very helpful to the real economy at all. In essence, the entire quantitative easing program was a massive 3.5 trillion dollar gift to Wall Street. If that sounds unfair to you, that is because it is unfair.
So why is the Federal Reserve finally ending quantitative easing?
Well, officially the Fed says that it is because there has been so much improvement in the labor market…
The Fed’s language, however, did suggest that they were getting more comfortable with the economy’s improvement. It cited “solid job gains,” citing a “substantial improvement in the outlook for the labor market,” as well as pointing out that “underutilization” of labor resources is “gradually diminishing.”
But that is not true at all.
The percentage of Americans that are working right now is about the same as it was during the depths of the last recession. Just check out this chart…
So there has been no “employment recovery” to speak of at all.
And as I wrote about yesterday, the percentage of Americans that are homeowners has been steadily falling throughout the quantitative easing era…
So let’s put the lie that quantitative easing helped the “real economy” to rest. It did no such thing.
Instead, what QE did do was massively inflate stock prices.
The following is an excerpt from a Wall Street Journal report about a speech that former Fed chairman Alan Greenspan made to the Council on Foreign Relations on Wednesday…
Mr. Greenspan’s comments to the Council on Foreign Relations came as Fed officials were meeting in Washington, D.C., and expected to announce within hours an end to the bond purchases.
He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.
“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”
Moving forward, what did Greenspan tell the members of the Council on Foreign Relations that they should do with their money?
This might surprise you…
Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.
It almost sounds like Greenspan has been reading the Economic Collapse Blog.
Since November 2008, every time there has been an interruption in the Fed’s quantitative easing program, the stock market has gone down substantially.
Will that happen again this time?
Well, the market is certainly primed for it. We are repeating so many of the very same patterns that we saw just prior to the last two financial crashes.
For example, there have been three dramatic peaks in margin debt in the last twenty years.
One of those peaks came early in the year 2000 just before the dotcom bubble burst.
The second of those peaks came in the middle of 2007 just before the subprime mortgage meltdown happened.
And the third of those peaks happened earlier this year.
You can view a chart that shows these peaks very clearly right here.
The Federal Reserve appears to be confident that the stock market will be okay without the monetary heroin that it has been supplying.
We shall see.
But it should be deeply troubling to all Americans that this unelected, unaccountable body of central bankers has far more power over our economy than anyone else does. During election season, our politicians get up and give speeches about what they will “do for the economy”, but the truth is that they are essentially powerless compared to the immense power that the Federal Reserve wields. Just a few choice words from Janet Yellen can cause the financial markets to rise or fall dramatically. The same cannot be said of any U.S. Senator.
We are told that monetary policy is “too important” to be exposed to politics.
We are told that the independence of the Federal Reserve is “sacred” and must never be interfered with.
I say that is a bunch of nonsense.
No organization should have the power to print up trillions of dollars out of thin air and give it to their friends.
The Federal Reserve is completely and totally out of control, and Congress needs to start exerting power over it.
The first step is to get in there and do a comprehensive audit of the Fed’s books. This is something that U.S. Senator Ted Cruz called for in a recent editorial for USA Today…
Americans are seeing near-zero interest rates on their savings accounts while median incomes are falling, and millions of people are facing higher gas prices, food prices, electricity prices, health insurance prices. Enough is enough, the Federal Reserve needs to open its books — Americans deserve a sound and stable dollar.
Whether you agree with Ted Cruz on other issues or not, this is one issue that all Americans should be able to agree on.
If you study any of our major economic problems, usually you will find that the Federal Reserve is at the heart of that problem.
So if we ever hope to solve the issues that are plaguing our economy, the Fed is going to need to be dealt with.
Hopefully the American people will start to send more representatives to Washington D.C. that understand this.
It is widely expected that the Federal Reserve is going to announce the end of quantitative easing this week. Will this represent a major turning point for the stock market? As you will see below, since 2008 stocks have risen dramatically throughout every stage of quantitative easing. But when the various phases of quantitative easing have ended, stocks have always responded by declining substantially. The only thing that caused stocks to eventually start rising again was a new round of quantitative easing. So what will happen this time? That is a very good question. What we do know is that the the performance of the stock market has become completely divorced from economic reality, and in recent weeks there have been signs of market turmoil that we have not seen in years. Could the end of quantitative easing be the thing that finally pushes the financial markets over the edge?
After all this time, many Americans still don’t understand what quantitative easing actually is. Since the end of 2008, the Federal Reserve has injected approximately 3.5 trillion dollars into the financial system. Of course the Federal Reserve didn’t actually have 3.5 trillion dollars. The Fed created all of this money out of thin air and used it to buy government bonds and mortgage-backed securities.
If that sounds like “cheating” to you, that is because it is cheating. If you or I tried to print money, we would be put in prison. When the Federal Reserve does it, it is called “economic stimulus”.
But the overall economy has not been helped much at all. If you doubt this, just look at these charts.
Instead, what all of this “easy money” has done is fuel the greatest stock market bubble in history.
As you can see from the chart below, every round of quantitative easing has driven the S&P 500 much higher. And when each round of quantitative easing has finally ended, stocks have declined substantially…
And of course the chart above tells only part of the story. Since April 2013, the S&P 500 has gone much higher…
If someone from another planet looked at that chart, they would be tempted to think that the U.S. economy must be expanding like crazy.
But of course that is not happening.
This market binge has been solely fueled by reckless money printing by the Federal Reserve. It is not backed up by economic fundamentals in any way, shape or form.
And now that quantitative easing is ending, many are wondering if the party is over.
For example, just check out what CNN is saying about the matter…
Even in this bull market, all good things must come to an end.
The Federal Reserve is expected to close a chapter in history this week and announce the conclusion of its massive stimulus program. Known as quantitative easing, the program is widely credited with driving investors back into stocks in the aftermath of the financial crisis.
“I think to some extent quantitative easing has provided an assurance to investors that (has) kept them optimistic,” said Bruce McCain, Chief Investment Strategist of Key Private Bank in Cleveland, Ohio. “Now we’re going to have to see whether investors can ride without training wheels.”
Everyone knows that quantitative easing was a massive gift to those that own stocks.
So how will the stock market respond now that the monetary heroin is ending?
We shall see.
Meanwhile, deflationary pressures are already starting to take hold around the rest of the globe. The following is an excerpt from a recent Reuters report…
After months of focus on slack in U.S. labor markets, the Federal Reserve faces a new challenge: the possibility that weak inflation may be so firmly entrenched it upends the return to normal monetary policy.
The soft global inflation backdrop, from sliding oil prices to stagnant wages in advanced economies, has triggered debate over whether the Fed and its peers merely need to wait for a slow-motion business cycle to improve, or face a shift in the underlying nature of inflation after the global recession.
That uncertainty has become the Fed’s chief concern in recent weeks, likely to shape upcoming policy statements and delay even further the moment when interest rates, pinned near zero for nearly six years, will start rising again.
If the Federal Reserve and other global central banks were not printing money like mad, the global economy would have almost certainly entered a deflationary depression by now.
But all the Federal Reserve and other global central banks have done is put off the inevitable and make our long-term problems even worse.
Instead of fixing the fundamental problems that caused the great financial crash of 2008, the central bankers decided to try to paper over our problems instead. They flooded the global financial system with easy money, but today our financial system is shakier than ever.
In fact, we just learned that 10 percent of the biggest banks in Europe have failed their stress tests and must raise more capital…
The European Central Bank says 13 of Europe’s 130 biggest banks have flunked an in-depth review of their finances and must increase their capital buffers against losses by 10 billion euros ($12.5 billion).
The ECB said 25 banks in all were found to need stronger buffers — but that 12 have already made up their shortfall during the months in which the ECB was carrying out its review. The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers.
Most people do not realize how vulnerable our financial system truly is. It is essentially a pyramid of debt and credit that could fall apart at any time.
Right now, the “too big to fail” banks account for 42 percent of all loans and 67 percent of all banking assets in the United States.
Without those banks, we essentially do not have an economy.
But instead of being careful, those banks have taken recklessness to unprecedented heights.
At this moment, five of the “too big to fail” banks each have more than 40 trillion dollars of exposure to derivatives.
Most Americans don’t even understand what derivatives are, but when the next great financial crisis strikes we are going to be hearing a whole lot about them.
The big banks have transformed Wall Street into the biggest casino in the history of the planet, and there is no way that this is going to end well.
A great collapse is coming.
It is just a matter of time.
Thanks 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…
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.
As the Obama administration continues to alienate almost everyone else around the entire planet, an increasing number of prominent international voices are starting to question why the U.S. dollar should be so overwhelmingly dominant in global trade. In previous articles, I have discussed Russia’s “de-dollarization strategy” and the fact that Gazprom is now asking their large customers to start paying in currencies other than the dollar. But this is not just a story about Russia any longer. As you will read about below, China and South Korea have just signed a major agreement to facilitate trade with one another using their own national currencies, and even prominent French officials are now talking about the need to use the dollar less and the euro more. John Williams of shadowstats.com recently said that things have never “been more negative” for the U.S. dollar, and he was right on the mark. The power of the almighty dollar has allowed all of us living in the United States to enjoy an extremely high standard of living for decades, but as that power now fades it is going to have profound implications for the U.S. economy. In future years the value of the dollar will go down substantially, all of the imported goods filling our stores will become much more expensive, and it is going to cost the federal government a lot more to borrow money. Unfortunately, with the stock market hitting all-time record highs and with the mainstream media endlessly touting an “economic recovery”, most Americans are not paying any attention to these things.
French oil giant Total is one of the largest energy companies in the entire world. On Saturday, Total’s CEO made an absolutely stunning statement. According to Reuters, he told reporters that there “is no reason to pay for oil in dollars”…
“Doing without the (U.S.) dollar, that wouldn’t be realistic, but it would be good if the euro was used more,” he told reporters.
“There is no reason to pay for oil in dollars,” he said. He said the fact that oil prices are quoted in dollars per barrel did not mean that payments actually had to be made in that currency.
If Gazprom’s CEO had made such a statement, it would not have really surprised anyone. But this came from a high profile French CEO. A decade ago, it would have been unthinkable for him to say such a thing. Wars have been started over less. Virtually all oil and natural gas around the planet has been bought and sold for U.S. dollars since the 1970s, and this is an arrangement that the U.S. government has traditionally guarded very zealously. But now that Russia has broken the petrodollar monopoly, the fear of questioning the almighty dollar appears to be dissipating.
And at this point even French government officials are not afraid to publicly discuss moving away from the U.S. dollar. Just check out what French finance minister Michel Sapin said to the press this weekend…
French finance minister Michel Sapin says “now is the right time to bolster the use of the euro” adding, more ominously for the dollar, “we sell ourselves aircraft in dollars. Is that really necessary? I don’t think so.” Careful to avoid upsetting his ‘allies’ across the pond, Sapin followed up with the slam-dunk diplomacy, “This is not a fight against dollar imperialism,” except, of course – that’s exactly what it is… just as it was over 40 years ago when the French challenged Nixon.
So why are the French suddenly so upset?
Could it be the fact that we just slapped the largest bank in France with a nearly 9 billion dollar fine?…
The remarks come a week after Paris-based bank BNP Paribas (BNP) SA was slapped with a $8.97 billion fine by U.S. authorities for transactions carried out in dollars in countries facing American sanctions. The fine spurred debate in France about the right of the U.S. in extending its regulatory reach beyond its borders.
This is yet another example of how the Obama administration is alienating friends all over the globe.
In fact, there doesn’t seem to be anyone that the Obama administration is afraid of crossing. Just a couple of days ago, the German press exploded in outrage when Germany arrested a U.S. spy. Why we feel the need to spy on our friends is something that I will never figure out.
And of course our relations with Russia are probably the worst that they have been since the end of the Cold War at this point. And as the Russians now rapidly move away from the U.S. dollar, they seem intent on bringing the rest of “the BRICS” with them. The following is a short excerpt from a recent Voice of Russia article entitled “BRICS morphing into anti-dollar alliance“…
However, in her discussion with Vladimir Putin, the head of the Russian central bank unveiled an elegant technical solution for this problem and left a clear hint regarding the members of the anti-dollar alliance that is being created by the efforts of Moscow and Beijing:
“We’ve done a lot of work on the ruble-yuan swap deal in order to facilitate trade financing. I have a meeting next week in Beijing,” she said casually and then dropped the bomb: “We are discussing with China and our BRICS parters the establishment of a system of multilateral swaps that will allow to transfer resources to one or another country, if needed. A part of the currency reserves can be directed to [the new system].” (source of the quote: Prime news agency)
It seems that the Kremlin chose the all-in-one approach for establishing its anti-dollar alliance. Currency swaps between the BRICS central banks will facilitate trade financing while completely bypassing the dollar. At the same time, the new system will also act as a de facto replacement of the IMF, because it will allow the members of the alliance to direct resources to finance the weaker countries. As an important bonus, derived from this “quasi-IMF” system, the BRICS will use a part (most likely the “dollar part”) of their currency reserves to support it, thus drastically reducing the amount of dollar-based instruments bought by some of the biggest foreign creditors of the US.
Of course the key economic player in the BRICS alliance is China.
So will China actually go along with a “de-dollarization” strategy?
Well, the truth is that China has been making moves to become more independent of the dollar for a long time, and it has just been announced that China and South Korea have signed an agreement which will mean more direct trade between the two nations using their own national currencies…
China’s central bank has authorized the Bank of Communications, the country’s fifth largest lender, to undertake yuan clearing business in the South Korean capital, the People’s Bank of China (PBoC) said in a statement.
The announcement came as Chinese President Xi Jinping wrapped up a state visit to South Korea on Friday. China is seeking to make the yuan – also known as the renminbi – used more internationally in keeping with the country’s status as the world’s second biggest economy behind the United States.
Unfortunately, most Americans don’t care about any of this at all.
They don’t understand that more U.S. dollars are actually used outside the United States than are used inside the United States. Because most of the rest of the world uses U.S. dollars to trade with one another, this has created a tremendous amount of artificial demand for our currency. In other words, the value of the U.S. dollar is much higher than it otherwise would be, and this has enabled us to import trillions of dollars of products at ridiculously low prices. The standard of living that we enjoy today is highly dependent on this arrangement continuing.
And our ability to fund the federal government and our state and local governments is heavily dependent on the rest of the planet loaning our dollars back to us for next to nothing. If we actually had to pay realistic market rates to borrow money, the finances of the federal government would have already collapsed long ago.
So it is absolutely imperative for our own economic well-being that this “de-dollarization” trend not accelerate any further. The rest of the world could actually severely hurt us by deciding to stop using the almighty dollar, and the more that the Obama administration antagonizes both our friends and our foes around the globe the more likely that is to happen.
We live in very perilous times, and the almighty dollar is more vulnerable now than it has been in decades.
If it starts collapsing, it will take down the entire U.S. financial system with it.
Let us hope that we still have a bit more time before that happens, because once the U.S. dollar collapses it will be exceedingly painful for all of us.
Why has Goldman Sachs chosen this moment to publicly declare that stocks are overpriced? Why has Goldman Sachs suddenly decided to warn all of us that the stock market could decline by 10 percent or more in the coming months? Goldman Sachs has to know that when they release a report like this that it will move the market. And that is precisely what happened on Monday. U.S. stocks dropped precipitously. So is Goldman Sachs just honestly trying to warn their clients that stocks may have become overvalued at this point, or is another agenda at work here? To be fair, the truth is that all of the big banks should be warning their clients about the stock market bubble. Personally, I have stated that the stock market has officially entered “crazytown territory“. So it would be hard to blame Goldman Sachs for trying to tell the truth. But Goldman Sachs also had to know that a warning that the stock market could potentially fall by more than 10 percent would rattle nerves on Wall Street.
This report that has just been released by Goldman Sachs has gotten a lot of attention. In fact, an article about this report was featured at the top of the CNBC website for quite a while on Monday. Needless to say, news of this report spread on Wall Street like wildfire. The following is a short excerpt from the CNBC article…
A stock market correction is approaching the level of near certainty as Wall Street faces a major paradigm shift in how to achieve price gains, according to a Goldman Sachs analysis.
In a market outlook that garnered significant attention from traders Monday, the firm’s strategists called the S&P 500 valuation “lofty by almost any measure” and attached a 67 percent probability to the chance that the market would fall by 10 percent or more, which is the technical yardstick for a correction.
Of course Goldman Sachs is quite correct to be warning about an imminent stock market correction. Right now stocks are overvalued according to just about any measure that you could imagine…
The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.
There is a lot of technical jargon in the paragraph above, but essentially what it is saying is that stock prices are unusually high right now according to a whole host of key indicators.
And in case you were wondering, stocks did fall dramatically on Monday. The Dow fell by 179 points, which was the biggest decline of the year by far.
So is Goldman Sachs correct about what could be coming?
Well, the truth is that there are many other analysts that are far more pessimistic than Goldman Sachs is. For example, David Stockman, the Director of the Office of Management and Budget under President Reagan, believes that the U.S. stock market is heading for “a pretty rude day of awakening”…
“This (2014) is the year of the end game. The party is over. We are now just at the point where they are rounding up the Wall Street drunks who are swilling on the fifth consecutive seasonally maladjusted phony recovery. That will become evident in the weeks and months ahead. Then I think the markets are going to have a pretty rude day of awakening.”
For many more forecasts that are similar to this, please see my previous article entitled “Dent, Faber, Celente, Maloney, Rogers – What Do They Say Is Coming In 2014?”
There are also some other signs that we are rapidly heading toward a major “turning point” in the financial world in 2014. One of those signs is the continual decline of Comex gold inventories. Someone out there (China?) is voraciously gobbling up physical gold. The following is a short excerpt from a recent article by Steve St. Angelo…
After a brief pause in the decline of Comex Gold inventories, it looks like it has continued once again as there were several big withdrawals over the past few days. Not only was there a large removal of gold from the Comex today, the Registered (Dealer) inventories are now at a new record low.
And of course the overall economy continues to get even weaker. The Baltic Dry Index (a very important indicator of global economic activity) has fallen by more than 40 percent over the past couple of weeks…
We noted Friday that the much-heralded Baltic Dry Index has seen the worst start to the year in over 30 years. Today it got worse. At 1,395, the the Baltic Dry index, which reflects the daily charter rate for vessels carrying cargoes such as iron ore, coal and grain, is now down 18% in the last 2 days alone (biggest drop in 6 years), back at 4-month lows. The shipping index has utterly collapsed over 40% in the last 2 weeks.
So does this mean that tough times are just around the corner?
Or perhaps things will stabilize again and this little bubble of false prosperity that we have been enjoying will be extended for a little while longer.
The important thing is to not get too caught up in the short-term numbers.
If you look at our long-term national “balance sheet numbers” and the long-term trends that are systematically destroying our economy, it becomes abundantly clear that a massive economic collapse is on the way. Our national debt is on pace to more than double during the Obama years, our “too big to fail” banks are now much bigger and much more reckless than they were before the financial crash of 2008, and the middle class in America is steadily shrinking. In other words, our long-term national “balance sheet numbers” are worse than ever.
We consume far more wealth than we produce, and our entire nation is drowning in a massive ocean of red ink that stretches from sea to shining sea.
This is not sustainable, and it is inevitable that the stock market will catch up with economic reality at some point.
It is just a matter of time.
The mainstream media would have us believe that the U.S. economy must be in great shape since the stock market has been setting new all-time record highs this month. But is that really true? Yes, surging stock prices have enabled sales of beach homes in the Hamptons to hit a brand new record high. However, the reality is that stock prices have not risen dramatically in recent years because corporations are doing so much better than before. In fact, the growth in stock prices has been far, far greater than the growth of corporate revenues. The only reason that stock prices have been climbing so much is because the Federal Reserve has been flooding the financial system with hundreds of billions of dollars that it has created out of thin air. The Fed has created an artificial stock market bubble that is completely and totally divorced from economic reality.
Meanwhile, everything is not so fine for the rest of the U.S. economy. Economic growth projections have been steadily declining over the past two years, and the growth rate of personal income in the United States has been on a huge downward trend since 2008. The U.S. economy actually lost 240,000 full-time jobs last month, and the middle class continues to shrink.
So welcome to the “new normal” where most Americans struggle at least part of the time. According to one recent survey, “four out of 5 U.S. adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives”. Things are tough out there, and they are steadily getting tougher.
Yes, the boys and girls up on Wall Street are doing great (for the moment), but most of the rest of the country is really struggling. We have never even come close to recovering from the last major economic crisis, and now another one is rapidly approaching.
The other day, Chartist Friend from Pittsburgh sent me an email and told me that he had some charts that he wanted to share with me and asked if I wanted to see them. I said sure, send them over right away. These charts show very clearly that the stock market has become completely divorced from reality.
In a normal market, stock prices would only rise dramatically if the overall economy was healthy and growing. Unfortunately, our economy is far from healthy and has been declining for a very long time. If the financial markets were not being pumped up by so much money printing and so much debt, there is no way that stock prices would be this high.
If we truly did have a free market financial system, stock prices should be a reflection of the overall economy. Instead, we have a very sick economy and financial markets that have been very highly manipulated.
For example, just check out the first chart that I have posted below. If the economy was actually getting better, the percentage of working age Americans with a job should be increasing. Sadly, that is not happening…
This next chart shows how the average duration of unemployment has absolutely skyrocketed in recent years. Yes, the duration of unemployment has improved slightly in recent months, but we are still very far from where we used to be. Meanwhile, the stock market has been soaring to new all-time record highs…
Traditionally, there has been a high degree of correlation between stock prices and real disposable personal income. From the chart below, you can see that this relationship held up quite well through the end of the last recession, and then it started breaking down. This is especially true at the very end of the chart. Real Disposable income has started to decline sharply but stock prices just continue to soar…
When an economy is healthy, money tends to circulate through that economy at a healthy pace. That is why the chart below is so alarming. The velocity of money is the lowest that it has been in modern times, and this indicates that economic activity should be slowing down. But the Federal Reserve has enabled the bankers to thrive by pumping massive amounts of money into the financial system…
When an economy goes into recession, freight shipments tend to go down. In the chart below, you can see that this happened during the past two recessions. Unfortunately, we have never even come close to returning to the level that we were at before the last recession, and yet the stock market has been able to soar to unprecedented heights…
When an economy is growing and people are able to get good jobs, they tend to go out and buy new homes. Yes, we have seen a bit of an increase in the number of new homes sold recently, but we are still a vast distance away from the level we were at before the last recession. And now mortgage rates are starting to rise steadily, and this is likely going to cause the number of new homes sold to start going back down. The chart below clearly shows us that the real estate market is far from healthy at this point…
For most middle class Americans, their homes are their primary financial assets. So the fact that home prices have declined so much is absolutely devastating for many families. But stocks are primarily held by the top 5 percent of all Americans, and as the chart below shows, they have benefited greatly from the antics of the Federal Reserve in recent years…
There is no way in the world that the stock market should be this high. The economic fundamentals simply do not justify it. As a society, we consume far more than we produce, our debt is growing at an exponential pace, our economic infrastructure is being absolutely gutted and our financial system is a giant Ponzi scheme that could collapse at any time.
And no market can stay divorced from reality forever. At some point this bubble is going to burst, and when financial bubbles burst they tend to do so very rapidly.
As Marc Faber recently said, “one day, this financial bubble will have to adjust on the downside.”
When it does “adjust”, we are likely going to see a financial panic even worse than we witnessed back in 2008. Credit will freeze up, economic activity will grind to a standstill and millions of Americans will lose their jobs.
Don’t assume that the bubble of false prosperity that we are enjoying right now will last forever.
Use the time that you have right now to prepare for what is ahead.
A great storm is rapidly approaching, and I don’t see any way that it is going to be averted.
What do 1929, 2000 and 2007 all have in common? Those were all years in which we saw a dramatic spike in margin debt. In all three instances, investors became highly leveraged in order to “take advantage” of a soaring stock market. But of course we all know what happened each time. The spike in margin debt was rapidly followed by a horrifying stock market crash. Well guess what? It is happening again. In April (the last month we have a number for), margin debt rose to an all-time high of more than 384 billion dollars. The previous high was 381 billion dollars which occurred back in July 2007. Margin debt is about 29 percent higher than it was a year ago, and the S&P 500 has risen by more than 20 percent since last fall. The stock market just continues to rise even though the underlying economic fundamentals continue to get worse. So should we be alarmed? Is the stock market bubble going to burst at some point? Well, if history is any indication we are in big trouble. In the past, whenever margin debt has gone over 2.25% of GDP the stock market has crashed. That certainly does not mean that the market is going to crash this week, but it is a major red flag.
The funny thing is that the fact that investors are so highly leveraged is being seen as a positive thing by many in the financial world. Some believe that a high level of margin debt is a sign that “investor confidence” is high and that the rally will continue. The following is from a recent article in the Wall Street Journal…
The rising level of debt is seen as a measure of investor confidence, as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against. The latest rise has been fueled by low interest rates and a 15% year-to-date stock-market rally.
Others, however, consider the spike in margin debt to be a very ominous sign. Margin debt has now risen to about 2.4 percent of GDP, and as the New York Times recently pointed out, whenever we have gotten this high before a market crash has always followed…
The first time in recent decades that total margin debt exceeded 2.25 percent of G.D.P. came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom — when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes. That boom in margin loans also ended badly.
Posted below is a chart of the performance of the S&P 500 over the last several decades. After looking at this chart, compare it to the margin debt charts that the New York Times recently published that you can find right here. There is a very strong correlation between these charts. You can find some more charts that directly compare the level of margin debt and the performance of the S&P 500 right here. Every time margin debt has soared to a dramatic new high in the past, a stock market crash and a recession have always followed. Will we escape a similar fate this time?
What makes all of this even more alarming is the fact that a number of things that we have not seen happen in the U.S. economy since 2009 are starting to happen again. For much more on this, please see my previous article entitled “12 Clear Signals That The U.S. Economy Is About To Really Slow Down“.
At some point the stock market will catch up with the economy. When that happens, it will probably happen very rapidly and a lot of people will lose a lot of money.
And there are certainly a lot of prominent voices out there that are warning about what is coming. For example, the following is what renowned investor Alan M. Newman had to say about the current state of the market earlier this year…
“If anything has changed yet in 2013, we certainly do not see it. Despite the early post-fiscal cliff rally, this is the same beast we rode to the 2007 highs for the Dow Industrials. The U.S. stock market is over leveraged, overpriced and has been commandeered by mechanical forces to such an extent that all holding periods are now affected by more risk than at any time in history.”
Unfortunately, most Americans never get to hear such voices. Instead, most Americans rely on the mainstream media to do much of their thinking for them. And right now the mainstream media is insisting that we are not in a stock market bubble…
Forbes: “Why Stocks Are On Solid Footing And This Is No Bubble”
ABC News: “AP Survey: Economists See No Stock Market Bubble”
Businessweek: “Prognostications: It’s Not a Stock Bubble”
Yahoo: “This Is NOT a Stock Bubble! Says Ben Stein”
MarketWatch: “Is a stock bubble coming? No, say economists”
So what do you think?
Do you believe that we are in a stock market bubble that is about to burst, or do you believe that everything is going to be just fine?
Please feel free to express your opinion by posting a comment below…