One thing that you have to appreciate about Donald Trump is that unlike most politicians, he actually says what is on his mind. On Tuesday, Trump told Fox Business that he had already gotten out of the stock market, and that he foresees “very scary scenarios” ahead for investors. And of course things have already started to get a bit ominous for those holding stocks over the last week and a half. The Dow Jones Industrial Average has now closed down for seven days in a row, and that is the longest losing streak that we have seen since the panic of last August. Over the past 12 months we have seen virtually every other major global stock market experience at least one major crash. Could the U.S. markets be next?
What Trump told Fox Business earlier today was actually right on the money. Our financial markets have been artificially inflated by the Federal Reserve, and all artificial bubbles of this nature eventually burst. The following comes from a Bloomberg article that was posted on Tuesday entitled “Trump Urges Exit From Market Boosted by ‘Artificially Low’ Rates“…
Donald Trump on Tuesday said interest rates set by the Federal Reserve are inflating the stock market and recommended 401(k)-holders to get out of equities, just like he did.
“I did invest and I got out, and it was actually very good timing,” the Republican presidential nominee said in a phone interview with Fox Business. “But I’ve never been a big investor in the stock market.”
“Interest rates are artificially low,” Trump said. “The only reason the stock market is where it is is because you get free money.”
Trump’s comments come at a time when we are getting a whole host of bad news about the U.S. economy. We just learned that U.S. GDP grew at a meager 1.2 percent annual rate during the second quarter, the rate of homeownership in the United States just hit an all-time record low, and corporate earnings have now been falling for five quarters in a row.
But perhaps most alarming of all is what is happening to the price of oil. As I discussed yesterday, the price of oil has plunged well over 20 percent since June 8th, and it was down again on Tuesday.
As I write this article, the price of U.S. oil is sitting at just $39.66. The psychologically-important 40 dollar barrier has been broken, but the price of oil doesn’t even have to go down another penny to do immense damage to the U.S. economy. If it just stays at this price, we are going to bleed more energy industry jobs, more energy companies are going to default on their debts, and more financial institutions that are exposed to the energy industry are going to get into serious trouble.
All the ingredients are there for a major financial crisis, and perhaps that explains why so many investors are flocking to precious metals such as gold and silver right now.
The price of gold has gone up for six trading days in a row, and silver is approaching 21 dollars an ounce.
If the goal of the EBA Stress Tests was to reassure investors and regain confidence that ‘all is well’ in Europe’s increasingly fragile and systemically interconnected banking system, then it has utterly failed. The broadest European bank stock index is now down 7% from the post-stress-test spike highs, Italian banks are at record lows and being halted (despite Renzi’s promises), Commerzbank is struggling with capital raise chatter, and Deutsche Bank and Credit Suisse are tumbling after being booted from the Stoxx 50.
It is funny – every time I write a major article about Deutsche Bank, their stock goes to a new record low.
Problems at Deutsche Bank and Credit Suisse are now becoming so obvious that even mainstream analysts are admitting that they are “causing some anxiety”…
“Deutsche Bank and Credit Suisse … are dropping to where they were after the Brexit vote,” said Bruce Bittles, chief investment strategist at Baird. “That’s causing some anxiety.”
Deutsche and Credit Suisse’s U.S.-listed shares closed down 3.75 percent and 4.67 percent, respectively.
In Europe nobody is waiting for financial stocks to crash, because they are already crashing.
A “too big to fail” crisis is rapidly unfolding across the entire continent, but most Americans are totally oblivious to what is going on over there. Instead, our major news outlets are feeding us an endless barrage of negative headlines about Donald Trump and a steady stream of positive headlines about Hillary Clinton.
I wonder who they want to win the election?
Of course I am being sarcastic. The days when the mainstream media at least pretended to be “independent” are long gone.
But as far as the stock market is concerned, I am quite confident that Donald Trump will be vindicated.
And if you don’t want to believe Donald Trump, I would encourage you to consider what Jeffrey Gundlach, the chief executive of DoubleLine Capital, has been saying. He has been right about the markets in recent years over and over again, and just a few days ago he publicly stated that “stocks should be down massively” and that now is the time to “sell everything“.
Unfortunately, very few people are likely to change course at this stage. Most of those that could see the warning signs have already gotten out of the market, and those that prefer to have blind faith in the system are not likely to listen to warnings from men like Trump and Gundlach.
So now it is just a waiting game.
We shall see if Trump and Gundlach are right, and those that end up on the correct side of the equation are probably going to make a boatload of money during the months ahead.
On the surface, things seem pretty quiet in mid-July 2016. The biggest news stories are about the speculation surrounding Donald Trump’s choice of running mate, the stock market in the U.S. keeps setting new all-time record highs, and the media seems completely obsessed with Taylor Swift’s love life. But underneath the surface, it is a very different story. As you will see below, the conditions for a “perfect storm” are coming together very rapidly, and the rest of 2016 promises to be much more chaotic than what we have seen so far.
Let’s start with China. On Tuesday, an international tribunal in the Hague ruled against China’s territorial claims in the South China Sea. The Chinese government announced ahead of time that they do not recognize the jurisdiction of the tribunal, and they have absolutely no intention of abiding by the ruling. In fact, China is becoming even more defiant in the aftermath of this ruling. We aren’t hearing much about it in the U.S. media, but according to international news reports Chinese president Xi Jinping has ordered the People’s Liberation Army “to prepare for combat” with the United States if the Obama administration presses China to abandon the islands that they are currently occupying in the South China Sea…
“Chinese president Xi Jinping has reportedly ordered the People’s Liberation Army to prepare for combat,” reports Arirang.com. “U.S.-based Boxun News said Tuesday that the instruction was given in case the United States takes provocative action in the waters once the ruling is made.”
A U.S. aircraft carrier and fighter jets were already sent to the region in anticipation of the ruling, with the Chinese Navy also carrying out exercises near the disputed Paracel islands.
Last October, China said it was “not frightened” to fight a war with the U.S. following an incident where the guided-missile destroyer USS Lassen violated the 12-nautical mile zone China claims around Subi and Mischief reefs in the Spratly archipelago.
Meanwhile, the relationship between the United States and Russia continues to go from bad to worse. The installation of a missile defense system in Romania is just the latest incident that has the Russians absolutely steaming, and during a public appearance on June 17th Russian President Vladimir Putin tried to get western reporters to understand that the world is being pulled toward war…
“We know year by year what’s going to happen, and they know that we know. It’s only you that they tell tall tales to, and you buy it, and spread it to the citizens of your countries. You people in turn do not feel a sense of the impending danger – this is what worries me. How do you not understand that the world is being pulled in an irreversible direction? While they pretend that nothing is going on. I don’t know how to get through to you anymore.”
And of course the Russians have been feverishly updating and modernizing their military in preparation for a potential future conflict with the United States. Just today we learned that the Russians are working to develop a hypersonic strategic bomber that is going to have the capability of striking targets with nuclear warheads from outer space.
Unfortunately, the Obama administration does not feel a similar sense of urgency. The size of our strategic nuclear arsenal has declined by about 95 percent since the peak of the Cold War, and many of our installations are still actually using rotary phones and the kind of 8 inch floppy disks for computers that were widely used back in the 1970s.
But I don’t expect war with China or Russia to erupt by the end of 2016. Of much more immediate concern is what is going on in the Middle East. The situation in Syria continues to deteriorate, but it is Israel that could soon be the center of attention.
Back in March, the Wall Street Journal reported that the Obama administration wanted to revive the peace process in the Middle East before Obama left office, and that a UN Security Council resolution that would divide the land of Israel and set the parameters for a Palestinian state was still definitely on the table…
The White House is working on plans for reviving long-stalled Middle East negotiations before President Barack Obama leaves office, including a possible United Nations Security Council resolution that would outline steps toward a deal between the Israelis and Palestinians, according to senior U.S. officials.
And just this week, the Washington Post reported that there were renewed “rumblings” about just such a resolution…
Israel is facing a restive European Union, which is backing a French initiative that seeks to outline a future peace deal by year’s end that would probably include a call for the withdrawal of Israeli troops and the creation of a Palestinian state. There are also rumblings that the U.N. Security Council might again hear resolutions about the conflict.
For years, Barack Obama has stressed the need for a Palestinian state, and now that his second term is drawing to a close he certainly realizes that this is his last chance to take action at the United Nations. If he is going to pull the trigger and support a UN resolution formally establishing a Palestinian state, it will almost certainly happen before the election in November. So over the coming months we will be watching these developments very carefully.
And it is interesting to note that there is an organization called “Americans For Peace Now” that is collecting signatures and strongly urging Obama to support a UN resolution of this nature. The following comes from their official website…
Now is the time for real leadership that can revive and re-accredit the two-state solution as President Obama enters his final months in office. And he can do this – he can lay the groundwork for a two-state agreement in the future by supporting an Israeli-Palestinian two-state resolution in the United Nations Security Council.
Such a resolution would restore U.S. leadership in the Israeli-Palestinian arena. It would preserve the now-foundering two-state outcome. And it would be a gift to the next president, leaving her or him constructive options for consequential actions in the Israeli-Palestinian arena, in place of the ever-worsening, politically stalemated status quo there is today.
Sadly, a UN resolution that divides the land of Israel and that formally establishes a Palestinian state would not bring lasting peace. Instead, it would be the biggest mistake of the Obama era, and it would set the stage for a major war between Israel and her neighbors. This is something that I discussed during a recent televised appearance down at Morningside that you can watch right here…
At the same time all of this is going on, the global economic crisis continues to escalate. Even though U.S. financial markets are in great shape at the moment, the same cannot be said for much of the rest of the world.
Just look at the country that is hosting the Olympics this summer. Brazil is mired in the worst economic downturn that it has seen since the Great Depression of the 1930s, and Rio de Janeiro’s governor has declared “a state of financial emergency“.
Elsewhere, China is experiencing the worst economic downturn that they have seen in decades, the Japanese are still trying to find the end of their “lost decade”, and the banking crisis in Europe is getting worse with each passing month.
In quite a few articles recently, I have discussed the ongoing implosion of the biggest and most important bank in Germany. But I am certainly not the only one warning about this. In one of his recent articles, Simon Black also commented on the turmoil at “the most dangerous bank in Europe”…
Well-capitalized banks are supposed to have double-digit capital levels while making low risk investments.
Deutsche Bank, on the other hand, has a capital level of less that 3% (just like Lehman), and an incredibly risky asset base that boasts notional derivatives exposure of more than $70 trillion, roughly the size of world GDP.
But of course Deutsche Bank isn’t getting a lot of attention from the mainstream media right now because of the stunning meltdown of banks in Italy, Spain and Greece. Here is more from Simon Black…
Italian banks are sitting on over 360 billion euros in bad loans right now and are in desperate need of a massive bailout.
IMF calculations show that Italian banks’ capital levels are among the lowest in the world, just ahead of Bangladesh.
And this doesn’t even scratch the surface of problems in other banking jurisdictions.
Spanish banks have been scrambling to raise billions in capital to cover persistent losses that still haven’t healed from the last crisis.
In Greece, over 35% of all loans in the banking system are classified as “non-performing”.
Even though U.S. stocks are doing well for the moment, the truth is that trillions of dollars of stock market wealth has been lost globally since this time last year. If you are not familiar with what has been going on around the rest of the planet, this may come as a surprise to you. During my recent appearance at Morningside, I shared some very startling charts which show how dramatically global markets have shifted over the past 12 months. You can view the segment in which I shared these charts right here…
I would really like it if the rest of 2016 was as quiet and peaceful as the past couple of days have been.
Unfortunately, I don’t believe that is going to be the case at all.
The storm clouds are rising and the conditions for a “perfect storm” are brewing. Sadly, most people are not going to understand what is happening until it is far too late.
The Dow closed above 18,000 on Monday for the first time since July. Isn’t that great news? I truly wish that it was. If the Dow actually reflected economic reality, I could stop writing about “economic collapse” and start blogging about cats or football. Unfortunately, the stock market and the economy are moving in two completely different directions right now. Even as stock prices soar, big corporations are defaulting on their debts at a level that we have not seen since the last financial crisis. In fact, this wave of debt defaults have become so dramatic that even USA Today is reporting on it…
Get ready to step over some landmines, investors. The number of companies defaulting on their debt is hitting levels not seen since the financial crisis, and it’s not just a problem for bondholders.
So far this year, 46 companies have defaulted on their debt, the highest level since 2009, according to S&P Ratings Services. Five companies defaulted this week, based on the latest data available from S&P Ratings Services. That includes New Jersey-based specialty chemical company Vertellus Specialties and Ohio-based iron ore producer Cliffs Natural. Of the world’s defaults this year, 37 are of companies based in the U.S.
Meanwhile, coal producer Peabody Energy (BTU) and surfwear seller Pacific Sunwear (PSUN) this week filed plans for bankruptcy protection. Shares of Peabody have dropped 97% over the past year to $2 a share and Pacific Sunwear stock is off 98% to 4 cents a share.
A lot of big companies in this country have fallen on hard times, and it looks like bankruptcy attorneys are going to be absolutely swamped with work for the foreseeable future.
So why are stock prices soaring right now? After all, it doesn’t seem to make any sense whatsoever.
And it isn’t just a few bad apples that we are talking about. All across the spectrum, corporate revenues and corporate earnings are down. At this point, earnings for companies on the S&P 500 have plunged a total of 18.5 percent from their peak in late 2014, and it is being projected that corporate earnings overall will be down 8.5 percent for the first quarter of 2016 compared to one year ago.
As earnings decline, a lot of big companies are getting into trouble with debt, and we have already seen a very large number of corporate debt downgrades. In recent interviews, I have been bringing up the fact that the average rating on U.S. corporate debt has now fallen to “BB”, which is already lower than it was at any point during the last financial crisis.
A lot of people don’t seem to believe me when I share that fact, but it is absolutely true.
One of the big reasons why corporate debt is being downgraded is because a lot of these big companies have been going into enormous amounts of debt in order to buy back their own stock. The following comes from Wolf Richter…
Downgrades ascribed to “shareholder compensation,” as Moody’s calls share buybacks and dividends, have been soaring, according to John Lonski, Chief Economist at Moody’s Capital Markets Research. The moving 12-month sum of Moody’s credit rating downgrades of US companies, jumped from 32 in March 2015, to 48 in December 2015, and to 61 in March 2016, nearly doubling within a year.
The last time the number of downgrades attributed to financial engineering reached 61 was in early 2007. It would hit its peak of 79 in mid- 2007, a few months before the beginning of the Great Recession in Q4 2007. At the time, stocks were on the verge of commencing their epic crash.
When corporations go into the market and buy back their own stock, they are slowly cannibalizing themselves. But we have seen these stock buybacks soar to record levels for a couple of reasons. Number one, big investors want to see stock prices go up, and so big investors tend to really like these stock buybacks and will generally support corporate executives that wish to engage in doing this. Number two, if you are a greedy corporate executive that is heavily compensated by stock options, you very much want to see the stock price go up as well.
So the name of the game is greed, and stock buybacks have been fueling much of the rise in U.S. stock prices that we have been seeing recently.
However, the truth is that nothing in the financial world lasts forever, and this irrational bubble will ultimately come to an end as well.
Back then, as could be the case today, a bull market & a US-led economic recovery was rudely interrupted by a crisis in Emerging Markets. The crisis threatened to hurt Main Street via Wall Street (the Nasdaq fell 33% between Jul-Oct 1998, when [Long-Term Capital Management] went under). Policy makers panicked and monetary policy was eased (with hindsight unnecessarily). Fresh liquidity combined with apocalyptic investor sentiment very quickly morphed into a violent but narrow equity bull market/bubble in 1998/99, one which ultimately took valuations & interest rates sharply higher to levels that eventually caused a “pop”.
Like Hartnett, I definitely believe that a major “pop” is on the way, although I would like for it to be delayed for as long as possible.
Someday we will look back on these times with utter amazement. It has been absolutely incredible how the financial markets have been able to defy economic reality for so long.
In a new CNNMoney/E*Trade survey of Americans who have at least $10,000 in an online trading account, over half (52%) gave the U.S. economy as a “C” grade. Another 15% rated the economy a “D” or “F.”
This gloom persists despite the fact that the stock market is on the upswing again. The Dow topped 18,000 Monday for the first time since July 2015.
If some Americans think that the U.S. economy deserves a “D” or an “F” grade right now, just wait until they see what is in our immediate future.
Personally, I give our economy an “A” for being able to maintain our unsustainable debt-fueled standard of living for as long as it has. Somehow we have managed to consume far more than we produce for decades, and the largest debt bubble in the history of the planet just keeps getting bigger and bigger and bigger.
Of course we are very much living on borrowed time at this point, but I truly hope that the bubble economy can keep going for at least a little while longer, because nobody should want to see what is coming afterwards.
*About the author: Michael Snyder is the founder and publisher of The Economic Collapse Blog. Michael’s controversial new book about Bible prophecy entitled “The Rapture Verdict” is available in paperback and for the Kindle on Amazon.com.*
Has the U.S. economy gotten better over the past six months or has it gotten worse? In this article, you will find solid proof that the U.S. economy has continued to get worse over the past six months. Unfortunately, most people seem to think that since the stock market has rebounded significantly in recent weeks that everything must be okay, but of course that is not true at all. If you look at a chart of the Dow, a very ominous head and shoulders pattern is forming, and all of the economic fundamentals are screaming that big trouble is ahead. When Donald Trump told the Washington Post that we are heading for a “very massive recession“, he wasn’t just making stuff up. We are already seeing lots of things happen that never take place outside of a recession, and the U.S. economy has already been sliding downhill fairly rapidly over the past several months. With all that being said, the following are 19 facts that prove things in America are worse than they were six months ago…
#1 U.S. factory orders have now declined on a year over year basis for 16 months in a row. As Zero Hedge has noted, in the post-World War II era this has never happened outside of a recession…
In 60 years, the US economy has not suffered a 16-month continuous YoY drop in Factory orders without being in recession. Moments ago the Department of Commerce confirmed that this is precisely what the US economy did, when factory orders not only dropped for the 16th consecutive month Y/Y, after declining 1.7% from last month
#3 It is being projected that corporate earnings will be down 8.5 percent for the first quarter of 2016 compared to one year ago. This will be the fourth quarter in a row that we have seen year over year declines, and the last time that happened was during the last recession.
#4 Total business sales have fallen 5 percent since the peak in mid-2014.
#5 S&P 500 earnings have now fallen a total of 18.5 percent from their peak in late 2014.
#6 Corporate debt defaults have soared to the highest level that we have seen since 2009.
#9 51 oil and gas drillers in North America have filed for bankruptcy since the beginning of last year, and according to CNN we could be on the verge of seeing the biggest one yet…
Shale oil driller SandRidge Energy (SD) warned there was “substantial doubt” it would survive the oil downturn. The Oklahoma City company said this week it is exploring a potential Chapter 11 bankruptcy filing.
Based on its $3.6 billion of debt, SandRidge would be the biggest North American oil-focused company to go bust during the current downturn, according to a CNNMoney analysis of stats compiled by law firm Haynes and Boone.
#10 According to Challenger, Gray & Christmas, job cut announcements by major firms in the United States were up 32 percent during the first quarter of 2016 compared to the first quarter of 2015.
#11 Consumers in the United States accumulated more new credit card debt during the 4th quarter of 2015 than they did during the entire years of 2009, 2010 and 2011 combined.
#12 Existing home sales in the U.S. were down 7.1 percent during the month of February, and this was the biggest decline that we have witnessed in six years.
#14 The Restaurant Performance Index in the U.S. recently dropped to the lowest level that we have seen since 2008.
#15 Major retailers all over the country are shutting down hundreds of stores as the “retail apocalypse” accelerates.
#16 If you take the number of working age Americans that are officially unemployed (8.1 million) and add that number to the number of working age Americans that are considered to be “not in the labor force” (93.9 million), that gives us a grand total of 102 million working age Americans that do not have a job right now
#17 Since peaking during the 3rd quarter of 2014, U.S. exports of goods and services have been steadily declining. This is something that we never see outside of a recession…
#18 The cost of everything related to medical care just continues to skyrocket even though our wages are stagnating. According to the Social Security Administration, 51 percent of all American workers make less than $30,000 a year, and yet the cost of medical care just hit a brand new all-time high…
#19 Our government debt continues to spiral out of control. At this point it is sitting at a staggering total of $19,218,516,838,306.52, but when Barack Obama first entered the White House it was only 10.6 trillion dollars. That means that our government has been stealing an average of more than 100 million dollars an hour from future generations of Americans every single hour of every single day since Barack Obama was inaugurated…
How in the world can anyone look at those numbers and suggest that everything is okay?
I simply do not understand how that could be possible.
Part of the problem is that Americans have been trained to be irrationally optimistic. It is fine to have an optimistic outlook on life, but when it causes you to throw logic and reason out the window that is not good.
For example, you can be “optimistic” about your ability to fly all you want, but if you step off a 10 story building you are going to take a very hard fall to the ground.
Similarly, you can ignore all of the facts and pretend that our economic prosperity is sustainable all you want, but it won’t change the fundamental laws of economics.
On a personal note, I would like to thank everyone that has helped make my new book the #1 new release in Christian eschatology on Amazon.com. I understand that a lot of my secular readers are not going to understand my fascination with Bible prophecy, and that is okay. I felt that I needed to write this book to address some very serious errors that are being taught in churches all over America today, and I also wanted to inspire believers to face the great hardships and persecution that are coming.
Just because very difficult times are approaching does not mean that it will be time to run and hide. My wife and I always live our lives with no fear, and when things get crazy we believe that it will be an opportunity to do even more good. We believe that the greatest chapters of our lives are still ahead of us, and we want people to understand why they can look forward to the future even though great darkness is rising all around us.
So yes, I definitely carry a message of warning.
But I also bring a message of hope.
As we look toward the future, there is much to be concerned about, but there are also things happening that are worth getting extremely excited about.
It is when times are the darkest that the light is needed the most, and very soon light will be greatly, greatly needed in the United States of America.
The stock market is in far worse shape than we are being told. As you will see in this article, the average U.S. stock is already down more than 20 percent from the peak of the market. But of course the major indexes are not down nearly that much. As the week begins, the S&P 500 is down 9.8 percent from its 2015 peak, the Dow Jones Industrial Average is down 10.7 percent from its 2015 peak, and the Nasdaq is down 11.0 percent from its 2015 peak. So if you only look at those indexes, you would think that we are only about halfway to bear market territory. Unfortunately, a few high flying stocks such as Facebook, Amazon, Netflix and Google have been masking a much deeper decline for the rest of the market. When the market closed on Friday, 229 of the stocks on the S&P 500 were down at least 20 percent from their 52 week highs, and when you look at indexes that are even broader things are even worse.
For example, let’s take a look at the Standard & Poor’s 1500 index. According to the Bespoke Investment Group, the average stock on that index is down a staggering 26.9 percent from the peak of the market…
Indeed, the Standard & Poor’s 1500 index – a broad basket of large, mid and small company stocks – shows that the average stock’s distance from its 52-week high is 26.9%, according to stats compiled by Bespoke Investment Group through Friday’s close.
“That’s bear market territory!” says Paul Hickey, co-founder of Bespoke Investment Group, the firm that provided USA TODAY with the gloomy price data.
So if the average stock has fallen 26.9 percent, what kind of market are we in?
To me, that is definitely bear market territory.
The rapid decline of the markets last week got the attention of the entire world, but of course this current financial crisis did not begin last week. These stocks have been falling since the middle part of last year. And what Bespoke Investment Group discovered is that small cap stocks have been hurt the most by this current downturn…
Here’s a statistical damage assessment, provided by Bespoke Investment Group, of the pain being felt by the average U.S. stock in the S&P 1500 index:
* Large-company stocks in the S&P 500 index are down 22.6%, on average, from peaks hit in the past 12 months.
* Mid-sized stocks in the S&P 400 index are sporting an average decline of 26.5% since hitting 52-week highs.
* Small stocks in the S&P 600 index are the farthest distance away from their recent peaks. The average small-cap name is 30.7% below its high in the past year.
After looking at those numbers, is there anyone out there that still wants to try to claim that “nothing is happening”?
Over the past six months or so, the sector that has been hit the hardest has been energy. According to CNN, the average energy stock has now fallen 52 percent…
And then there’s energy. The dramatic decline in crude oil prices rocked the energy space. The average energy stock is now down a whopping 52% from its 52-week high, according to Bespoke. The only thing worse than that is small-cap energy, which is down 61%.
If you go up to an energy executive and try to tell him that “nothing is happening”, you might just get punched in the face.
And it is very important to keep in mind that stocks still have a tremendous distance to fall. They are still massively overvalued by historical standards, and this is something that I have covered repeatedly on my website in recent months.
So how far could they ultimately fall?
Well, Dr. John Hussman is convinced that we could eventually see total losses in the 40 to 55 percent range…
I remain convinced that the U.S. financial markets, particularly equities and low-grade debt, are in a late-stage top formation of the third speculative bubble in 15 years.
On the basis of the valuation measures most strongly correlated with subsequent market returns (and that havefully retained that correlation even across recent market cycles), current extremes imply 40-55% market losses over the completion of the current market cycle, with zero nominal and negative real total returns for the S&P 500 on a 10-to-12-year horizon.
These are not worst-case scenarios, but run-of-the-mill expectations.
If the market does fall about 40 percent, that will just bring us into the range of what is considered to be historically “normal”. If some sort of major disaster or emergency were to strike, that could potentially push the market down much, much farther.
And with each passing day, we get even more numbers which seem to indicate that we are entering a very, very deep global recession.
For instance, global trade numbers are absolutely collapsing. This is a point that Raoul Pal hammered home during an interview with CNBC just the other day…
Looking at International Monetary Fund data, “the year-over-year change in global exports is at the second lowest level since 1958,” Raoul Pal, Publisher of the Global Macro Investor told CNBC’s”Fast Money”this week.
Basically, it means economies around the world are shipping their goods at near historically low levels. “Something massive is going on in the global economy and people are missing it,” Pal added.
The steep decline in 2015 exports is second only to 2009, when the global recession led to a 37 percent drop in export growth.
We have never seen global exports collapse this much outside of a recession.
Clearly we are witnessing a tremendous shift, and it boggles my mind that more people cannot see it.
As for this current wave of financial turmoil, it is hard to say how long it will last. As I write this article, markets all over the Middle East are imploding, stocks in Asia are going crazy, currencies are crashing, and carry trades are being unwound at a staggering pace. But at some point we should expect the level of panic to subside a bit.
If things do temporarily calm down, don’t let that fool you. Global financial markets have not been this fragile since 2008. Any sort of a trigger event is going to cause stocks all over the world to slide even more.
And let us not minimize the damage that has already been done one bit. As you just read, the average stock on the Standard & Poor’s 1500 index is already down 26.9 percent. The financial crisis that erupted during the second half of 2015 has already resulted in trillions of dollars of wealth being wiped out.
When people ask me when the “next financial crisis” is coming, I have a very simple answer for them.
The next financial crisis is not coming.
The next financial crisis is already here.
An angry bear has been released after nearly seven years in hibernation, and the entire world is going to be absolutely shocked by what happens next.
Did you see what just happened in China? For the second time in four days, a massive stock market crash has caused an emergency shutdown of the markets in China. On both Monday and Thursday, trading was suspended for 15 minutes when the CSI 300 fell 5 percent, and on both days the total decline very rapidly escalated to 7 percent once trading was reopened. Once a 7 percent drop happens, trading is automatically suspended for the rest of the day. I guess that is one way to keep the stock market from crashing – you just don’t let anyone trade. And of course the panic in China is causing other markets to go haywire as well. As I write this, the Nikkei is down 324 points and Hong Kong is down 572 points.
The amazing thing is that trading was only open in China for about 15 total minutes tonight. Here is how CNBC described what just happened…
China’s stocks were suspended from all trade on Thursday after the CSI300 tumbled more than 7 percent in early trade, triggering the market’s circuit breaker for a second time this week.
That drop-kicked stock markets across Asia, which were already wallowing after a weaker open amid concerns over China’s economic slowdown and its depreciating currency as well as falling oil prices.
On the mainland, the Shanghai Composite tumbled 7.32 percent by at the time of the halt, while the Shenzhen Composite plummeted 8.34 percent. The CSI300, the benchmark index against which China’s new circuit breakers are set, plunged 7.21 percent. If that index rises or falls 5 percent, the market halts all trade for 15 minutes. If it moves 7 percent, trading will be suspended for the rest of the day. In total Thursday, China shares only traded around 15 minutes.
How will European and U.S. markets respond to the chaos in Asia when they open?
That is a very good question. I think that everybody will be watching.
Already, the Dow Jones Industrial Average is down about 500 points for the year. The financial crisis that began in the second half of 2015 is now accelerating as we enter 2016, and nobody is quite sure what is going to happen next.
One key to watch is what happens with the S&P 500.
2000 is kind of like a giant line in the sand on the S&P 500. On Wednesday we saw the market hover around that psychologically-important number, and there is a whole lot of resistance right there. If we break solidly through 2000 and start plunging toward 1900, that is going to break things wide open.
The primary reason for the stock market crash in China on Thursday was another stunning devaluation of the yuan. This explanation from Zero Hedge is very helpful…
Following the collapse of offshore Yuan to 5 year lows and decompression to record spreads to onshore Yuan, The PBOC has stepped in and dramatically devalued the Yuan fix by 0.5% to 6.5646. This is the biggest devaluation since the August collapse. Offshore Yuan has erased what modest bounce gains it achieved intraday and is heading significantly lower once again. Dow futures are down 100 points on the news.
PBOC fixes Yuan at its weakest since March 2011… with the biggest devaluation since August
A massive devaluation of the yuan was also one of the primary reasons for the market turmoil that we saw back in August. The Chinese are playing games with their currency, and this is causing havoc in the global marketplace.
Meanwhile, we have received some other very troubling news about the global economy over the past few days…
-The price of oil continues to collapse. As I write this, the price of U.S. oil is down to $33.26 a barrel. Those that follow my writing regularly already know that this is a really bad sign for the global economy.
-The Baltic Dry Index just hit another brand new all-time record low. Global trade is absolutely imploding, and this is having a devastating impact on China and other major exporting nations.
-U.S. manufacturing is contracting at the fastest pace that we have seen since the last recession. This is precisely what we would expect to see during the early stages of a new crisis.
-U.S. manufacturing imports are also contracting at the fastest pace that we have seen since the last recession. It appears that “the almighty U.S. consumer” is not going to save the global economy after all.
In 2015, trillions of dollars of stock market wealth was wiped out globally. Now this new global financial crisis is picking up speed, and many of the “experts” seem absolutely stunned by what is happening.
But most of my readers are not surprised. That is because I have been breaking down the signs that have been warning us of this new crisis in excruciating detail for months. The financial carnage that we have witnessed around the globe this week is simply a logical progression of what has already been happening.
To be honest, though, even I have been stunned by what has happened in China this week. I can’t say that I expected an emergency shutdown of the Chinese markets two times within the first four trading days of the year.
Panic and fear are beginning to grip the global marketplace, and once that starts to happen events become very difficult to predict.
Let us hope that things settle down soon, but I wouldn’t count on it.
As I have said before, 2016 is the year when everything changes, and we are going to see things take place over the next 12 months that are going to shock the world.
It’s official – 2015 was a horrible year for stocks. On the last day of the year, the Dow Jones Industrial Average was down another 178 points, and overall it was the worst year for the Dow since 2008. But of course the Dow was far from alone. The S&P 500, the Russell 2000 and Dow Transports also all had their worst years since 2008. Isn’t it funny how these things seem to happen every seven years? But compared to other investments, stocks had a relatively “good” year. In 2015, junk bonds, oil and industrial commodities all crashed hard – just like they all did just prior to the great stock market crash of 2008. According to CNN, almost 70 percent of all investors lost money in 2015, and things are unfolding in textbook fashion for much more financial chaos in 2016.
Globally, over the past 12 months we have seen financial shaking unlike anything that we have experienced since the last great financial crisis. During the month of August markets all over the world started to go haywire, and at one point approximately 11 trillion dollars of financial wealth had been wiped out globally according to author Jonathan Cahn.
Since that time, U.S. stocks rebounded quite a bit, but they still ended red for the year. Other global markets were not nearly as fortunate. Some major indexes finished 2015 down 20 percent or more, and European stocks just had their second worst December ever.
I honestly don’t understand the “nothing is happening” crowd. The numbers clearly tell us that a global financial crisis began in 2015, and it threatens to accelerate greatly as we head into 2016.
Actually, there are a whole lot of people out there that would be truly thankful if “nothing” had happened over the past 12 months. For example, there are five very unfortunate corporate CEOs that collectively lost 20 billion dollars in 2015…
Five CEOs of companies in the Russell 1000 index, including Nicholas Woodman of camera maker GoPro (GPRO), Sheldon Adelson of casino operator Las Vegas Sands (LVS) and even the famed investor Warren Buffett of Berkshire Hathaway (BRKA), lost more money on their companies’ shares than any other CEOs this year, according to a USA TODAY analysis of data from S&P Capital IQ.
These five CEOs were handed a whopping collective $20 billion loss on their company stock in 2015. Each and every one of these CEOs lost $1 billion or more – based on the average number of shares they’ve owned this year.
The biggest loser of the group was Warren Buffett.
He lost an astounding 7.8 billion dollars in 2015.
Do you think that he believes that “nothing happened” this past year?
And if “nothing happened”, then why are hedge funds “dropping like flies” right now? The following comes from Zero Hedge…
Two days, ago we noted that hedge funds are now dropping like flies in a year in which generating alpha has become virtually impossible for the majority of the vastly overpaid 2 and 20 “smart money” out there (and where levered beta is no longer the “sure thing” it used to be when the Fed was pumping trillions into stocks) when we reported that Seneca Capital, the $500 million multi-strat hedge fund belonging to Doug Hirsh (of Sohn Investment Conference fame), is shutting down.
And just within the last 24 hours, another very prominent hedge fund has collapsed. SAB Capital, which once managed more than a billion dollars, is shutting down after huge losses this year. Here is more from Zero Hedge…
It turns out that despite our intention, the question was not rhetorical because just a few hours later Bloomberg answered when it reported that the latest hedge fund shutdown casualty was another iconic, long-term investor: Scott Bommer’s SAB Capital, which as of a year ago managed $1.1 billion, and which after 17 years of managing money and after dropping roughly 11% in the first eight month of 2015, has decided to return all outside client money, and converting the hedge fund into a family office (after all one has to preserve one’s offshore tax benefits).
Overall, 674 hedge funds shut down during the first nine months of this year, and the final number for 2015 will actually be far higher because the rate of closings has accelerated as we have approached the end of this calendar year. When the final numbers come in, I would not be surprised to hear that 1,000 hedge funds had closed up shop in 2015.
Meanwhile, underlying economic conditions continue to deteriorate.
The Chicago purchasing manager index unexpectedly plunged to 42.9 in December, its lowest reading since July 2009.
Any reading below 50 signals a contraction in business activity.
This was down from 48.7 in November and much worse than the 50.0 expected by economists.
When the final numbers for the fourth quarter are in a few months from now, I believe that they will show that the U.S. economy officially entered recession territory at this time.
And the truth is that deep recessions have already started for some of the other biggest economies on the planet. For example, I recently wrote about the deep troubles that Canada is now experiencing, and things have already gotten so bad in Brazil that Goldman Sachs is referring to that crisis as “an outright depression“.
Many people seem to assume that since I have a website called “The Economic Collapse Blog” that I must want everything to fall apart. But that is not true at all. I love my country, I enjoy my life, and I would be perfectly content to spend 2016 peacefully passing the time here in the mountains with my wonderful wife. The longer things can stay somewhat “normal”, the better it is for all of us.
Unfortunately, for decades we have been making incredibly foolish decisions as a society, and the consequences of those decisions are now catching up with us in a major way.
Jonathan Cahn likes to say that “a great shaking is coming”, and I very much agree with him.
In fact, I think that it is going to be here a lot sooner than most people think.
So buckle up, because I believe that 2016 is going to be quite a wild ride.
Are stocks overvalued? By just about any measure that you could possibly name, stocks are at historically high prices right now. From a technical standpoint, the stock market is more overvalued today than it was just prior to the last financial crisis. The only two moments in U.S. history that even compare to our current state of affairs are the run up to the stock market crash of 1929 and the peak of the hysteria just before the dotcom bubble burst. It is so obvious that stocks are in a bubble that even Janet Yellen has talked about it, but of course she will never admit that the Federal Reserve has played a key role in creating this bubble. They say that hindsight is 20/20, but what is happening right in front of our eyes in 2015 is so obvious that everyone should be able to see it. Just like with all other financial bubbles throughout our history, someday people will look back and talk about how stupid we all were.
Why can’t we ever learn from history? We just keep on making the same mistakes over and over again. And without a doubt, some of the smartest members of our society are trying to warn us about what is coming. For example, Yale economics professor Robert Shiller has repeatedly tried to warn us that stocks are overvalued…
I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.
But the CAPE ratio is not the only metric I watch. In my book Irrational Exuberance (3rd Ed., Princeton 2015) I discuss several metrics that help judge what’s going on in the market. These include my stock market confidence indices. One of the indicators in that series is based on a single question that I have asked individual and institutional investors over the years along the lines of, “Do you think the stock market is overvalued, undervalued, or about right?” Lately, what I call “valuation confidence” captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000.
Other analysts prefer to use different valuation indicators than Shiller does. But no matter which indicators you use, they all show that stocks are tremendously overvalued in mid-2015. For instance, just consider the following chart. It comes from Doug Short, and it shows the average of four of his favorite valuation indicators. As you can see, there is only one other time in all of our history when stocks have been more overvalued than they are today according to the average of these four indicators…
Another danger sign that many analysts are pointing to is the dramatic rise in margin debt that we have seen in recent years. Investors are borrowing tremendous amounts of money to fund purchases of stock. This is something that we witnessed during the dotcom bubble, it was something that we witnessed just prior to the financial collapse of 2008, and now it is happening again. In fact, margin debt just surged to a brand new all-time record high. Once again, the following chart comes from Doug Short…
All of this margin debt has helped drive stocks to ridiculous highs, but it can also serve to drive stock prices down very rapidly when the market turns. This was noted by Henry Blodget of Business Insider in a recent editorial…
What is “margin debt”?
It’s the amount of money stock investors have collectively borrowed via traditional margin accounts to fund stock purchases.
In a bull market, the growth of margin debt serves as a turbocharger that helps drive stock prices higher.
As with a home mortgage, the more investors borrow, the more house or stock they can buy. So as margin debt grows, collective buying power grows. The borrowed money gets used to fund new stock purchases, which helps drives the prices of those stocks higher. The higher prices, in turn, allow traders to borrow more money to fund additional purchases. And so on.
It’s a self-reinforcing cycle.
The trouble is that it’s a self-reinforcing cycle on the way down, too.
If the overall U.S. economy was absolutely booming, these ultra-high stock prices would not be as much of a concern. But the truth is that the financial markets have become completely divorced from economic reality. Right now, corporate profits are actually falling and our exports are way down. U.S. GDP shrunk during the first quarter, and there are a whole host of economic trouble signs on the horizon. I am calling this a “recession within a recession“, and I believe that we are heading into another major economic downturn.
Unfortunately, our “leaders” are absolutely clueless about what is coming. They assure us that everything is going to be just fine – just like they did back in 2008 before everything fell apart. But the truth is that things are already so bad that even the big banks are sounding the alarm. For instance, just consider the following words from Deutsche Bank…
At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood.
Ultimately, most people believe what they want to believe.
Our politicians want to believe that the economy is going to get better, and so do the bureaucrats over at the Federal Reserve. The mainstream media wants to put a happy face on things, and they want all of us to continue to have faith in the system.
Unfortunately for them, the system is failing. I truly do hope that this bubble can last for a few more months, but I don’t see it going on for much longer than that.
The greatest financial crisis in U.S. history is fast approaching, and it is going to be extraordinarily painful.
When it arrives, it is not just going to destroy faith in the system. In the end, it is going to destroy the system altogether.
Just a few days ago, the bull market for the S&P 500 turned six years old. This six year period of time has been great for investors, but what comes next? On March 9th, 2009 the S&P 500 hit a low of 676.53. Since that day, it has risen more than 200 percent. As you will see below, there are only two other times within the last 100 years when the S&P 500 performed this well over a six year time frame. In both instances, the end result was utter disaster. And as you take in this information, I want you to keep in mind what I said in my previous article entitled “7 Signs That A Stock Market Peak Is Happening Right Now“. What we are witnessing at this moment is classic “peaking behavior”, and there is a long way to go down from here. So if historical patterns hold up, those with lots of money in the stock market could soon be in for a whole lot of trouble.
According to Societe Generale analyst Andrew Lapthorne, there was an S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1929.
We all know what happened that year.
And there was another S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1999. In the end, all of those gains were wiped out when the dotcom bubble burst.
And now we are near the end of another great bull market for the S&P 500. The following is an excerpt from a recent Business Insider article…
“Such a strong six year run up in US equities has only been seen twice since 1900, i.e., back in 1929 and 1999, neither of which ended well,” Lapthorne wrote.
Needless to say, a lot of people are not very optimistic about that right now.
And there was another very interesting bull market that ended in 1987…
On Aug. 12, the S&P 500 dipped to 102.42, setting the stage for the third-biggest bull market in stocks since 1929. Inflation and unemployment fell. In 1984, President Reagan would cruise to reelection with an ad telling voters “It’s morning again in America.” By 1987, the stock market had tripled. Shareholders who were able to see beyond the gloom of the early 1980s reaped a huge return.
Of course a lot of those huge stock market returns were eliminated in a single day. On October 19th, 1987 the Dow declined by more than 22 percent during a single trading session. That day is still known as “Black Monday” up to this present time.
Markets tend to go down a lot faster than they go up. So if your stock portfolio has gone up substantially over the past few years, good for you. But keep in mind that all of your gains can be wiped out very rapidly. Millions of people experienced this during the last financial crisis, and millions more will experience this during the next one.
And as I keep reminding people, so many of the exact same patterns that we witnessed just prior to the last great stock market collapse are happening once again.
For example, just yesterday I explained that there has been only one other time over the past decade when we have seen the U.S. dollar surge in value in such a short period of time.
That was in 2008, just prior to the last financial crisis.
Another example is what has happened to the price of oil. Since the middle of last year, the price of oil has fallen by more than 50 dollars a barrel.
In all of history, that has happened only one other time.
That was in 2008, just prior to the last financial crisis.
But you know what? Despite all of the warning signs there are still people out there that are eagerly pouring money into the stock market.
Back in 2005 and 2006, I knew people that were hurrying to buy homes before they got “priced out of the market”. So they did everything that they could to scrape together down payments and they took on mortgages that were larger than they could really afford.
Mr Odey is best known for his big macroeconomic calls, including foreseeing the 2008 global credit crisis; piling into insurers in the wake of September 2001 attacks; and picking the recent oil price rout. He famously paid himself £28 million in 2008 after shorting credit crisis casualties, including British lender Bradford & Bingley. Mr Odey’s fund returned 54.8 per cent that year.
“The market’s reaction to all of this is leave it to the professionals, leave it to those great guys, the central bankers, because they saved the day in 2009,” he said. “These guys are kind of relying on central banks pulling a rabbit out of a hat.”
The risk is that this time, monetary policy may be ineffective: “We need the crisis to reformulate policy. Central banks are not all singing and all dancing, they cannot basically avoid the natural consequences of what we are doing.”
An inadequate supply-side response to the plunge in commodity prices as the resources industry declines to reduce production was in effect stimulating supply into falling demand.
“The trouble is today the players, whether they are the miners or the oil companies or the Saudis or anybody else, they are not doing the right things. This is the first time in my career where economics 101 doesn’t work at all.”
But it was also true that the world has not had a major recession for 25 years and thanks to frequent interventions, “there is a sensation we don’t have a business cycle”. Stocks are enjoying a six-year bull market but he also hinted at liquidity issues bubbling under the surface.
“I just think that you and I have got grandstand seats here [to an imminent market shock] and my point is having found myself in the second quarter of last year selling a lot of equities and starting to go short, I found out just how illiquid it all was. You never actually see it until people try and get out of these things.”
It was unclear to Mr Odey what central banks could do to prevent a crash.
The warning signs are clear.
Soon the time for warning will be over and the crisis will be here.