Are we watching a replay of the last financial crisis? Over the past six months, the price of oil has collapsed, the U.S. dollar has soared, and a whole bunch of other patterns that we witnessed just before the stock market crash of 2008 are repeating once again. But what we have not seen yet is the actual stock market crash. So will there be one this year? In this article, I am going to compare the performance of the Dow Jones Industrial Average during the first three months of 2008 to the performance of the Dow Jones Industrial Average during the first three months of 2015. As you will see, there are some striking similarities. And without a doubt, we are overdue for a major market downturn. The S&P 500 has risen for six years in a row, but it has never had seven up years consecutively. In addition, there has not even been a 10 percent stock market “correction” is almost three and a half years. So will stocks be able to continue to defy both gravity and the forces of economic reality? Only time will tell.
Below is a chart that shows how the Dow Jones Industrial Average performed during the first three months of 2008. It was a time of increased volatility, but the market pretty much went nowhere. This is typical of what we see in the months leading up to a market crash. The markets start getting really choppy with large ups and large downs…
This next chart shows how the Dow Jones Industrial Average has performed during the first three months of 2015. Once again, we are witnessing a time of increased volatility, but the market is not really going anywhere. In fact, after falling about 200 points on Tuesday (not shown on this chart) it is just barely below where it started the year…
When the market becomes quite restless but it doesn’t really move anywhere, that is a sign that we have reached a turning point. The following is what a recent CNN article had to say about the rising volatility that we have been witnessing…
The Dow fell nearly 3.7% in January, surged 5.6% in February and is down about 2% this month. The S&P 500 and Nasdaq have gone through similar sentiment swings. The Dow ended the quarter slightly in the red while the S&P 500 and Nasdaq were up a little bit.
Charles Schwab chief investment officer Liz Ann Sonders summed up this volatility the best — with a nod to U2. “Running to Stand Still: Wild Swings Taking Market Nowhere” is the title of her most recent market commentary.
What can investors expect for the rest of 2015? Probably a lot more of the same.
Now let’s look at a chart for the entire year of 2008. After peaking for the year in early May, the Dow started to slide. Things started to get really crazy in September, and by the end of the year the U.S. economy was plunged into the greatest crisis since the Great Depression…
Will the rest of 2015 follow a similar pattern?
A lot of investors are actually betting that this will be the case.
Right now, hundreds of millions of dollars are flowing into VXX – an ETF that makes money when the Chicago Board Options Exchange Volatility Index goes up. In other words, these investors are betting that we are going to see a lot more stock market volatility in the weeks and months to come.
And as I have said so many times before, stocks tend to rise in calm markets and they tend to fall when the markets become volatile.
So essentially these investors are betting that we are headed for a stock market crash.
The following is more on the massive inflow of money into VXX that we have been seeing from the Crux…
Ways to speculate on how noisy the stock market will be have exploded in the last decade with the advent of products tied to the Chicago Board Options Exchange Volatility Index. Strategies include relatively simple hedges against equity losses, such as owning a security that aims to mimic the VIX.
VXX, one of the most popular ways to bet on bigger market swings, has absorbed $715 million in seven consecutive weeks of inflows, its longest streak of inflows since one ending in July 2012. The infusion of fresh cash has continued this week, swelling its market value to $1.5 billion, the highest since September 2013.
At the same time, short-sellers in VXX — people effectively betting the bull market will persist — have dropped out. Short interest has slid 35 percent since October, falling to the lowest in more than seven months last week, data compiled by Markit Ltd. show.
And many of the exact same people that warned us about the financial crisis of 2008 in advance are warning that another crisis is rapidly approaching. For example, check out the following quote from Ann Pettifor that recently appeared in an article in the Guardian…
As Janet Yellen’s Federal Reserve prepares to raise interest rates, boosting the value of the dollar, while the plunging price of crude puts intense pressure on the finances of oil-exporting countries, there are growing fears of a new debt crisis in the making.
Ann Pettifor of Prime Economics, who foreshadowed the credit crunch in her 2003 book The Coming First World Debt Crisis, says: “We’re going to have another financial crisis. Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa; then there’s Malaysia. We’re back to where we were, and that for me is really frightening.”
Pettifor is right on two counts – another major financial crisis is approaching, and it is going to be global in scope.
Before I end this article, there are two more items that I would like to share with you.
Firstly, it is being reported that the IPO market has really cooled off in 2015. When the number of companies going public starts to decline, that is a clear sign that a stock market bubble is on borrowed time. The following comes from Business Insider…
The number of US companies going public has really dropped off lately.
“After a record year in 2014, the IPO market slowed dramatically in the first quarter of 2015,” Renaissance Capital analysts said.
The first quarter of 2015, which ended Tuesday, was the slowest quarter for IPOs since the first quarter of 2013. While stock prices have been near all-time highs, market volatility has been escalating, turning companies off from trying to unload shares onto the public markets.
Secondly, the San Francisco housing market has been a pretty reliable indicator of previous economic booms and busts. The San Francisco housing market started to cool off before the dotcom bubble burst, it started to cool off before the stock market crash of 2008, and now it is cooling off once again. The following chart comes from Zero Hedge…
The warning signs are there.
But as with so many other things in life, most people are going to end up believing precisely what they want to believe.
So what do you believe about what the rest of the year will bring? Please feel free to share your thoughts by posting a comment below…
When an economic crisis is coming, there are usually certain indicators that appear in advance. For example, commodity prices usually start to plunge before a recession begins. And as you can see from the Bloomberg Commodity Index which you can find right here, this has already been happening. In addition, I have previously written about how the U.S. dollar went on a great run just before the financial collapse of 2008. This is something that has also been happening over the past few months. Some people would have you believe that nobody can anticipate the next great economic downturn and that to try to do so is just an exercise in “guesswork”. But that is not the case at all. We can look back over history and see patterns that keep repeating. And a lot of the exact same patterns that happened just before previous stock market crashes are happening again right now.
For example, let’s talk about the price of oil. There are only two times in history when the price of oil has fallen by more than 50 dollars in a six month time period. One was just before the financial crisis in 2008, and the other has just happened…
As a result of crashing oil prices, we are witnessing oil rigs shut down in the United States at a blistering pace. In fact, almost half of all oil rigs in the U.S. have already shut down. The following commentary and chart come from Wolf Richter…
In the latest week, drillers idled another 41 oil rigs, according to Baker Hughes. Only 825 rigs were still active, down 48.7% from October. In the 23 weeks since, drillers have idled 784 oil rigs, the steepest, deepest cliff-dive in the history of the data:
We are looking at a full-blown fracking bust, and this bust is already having a dramatic impact on the economies of states that are heavily dependent on the energy industry.
The crash in oil prices is hammering the Texas economy.
The latest manufacturing outlook index from the Dallas Fed plunged again in March, to -17.4 from -11.2 in February, indicating deteriorating business conditions in the state.
But this pain is going to be felt far beyond Texas. In recent years, Wall Street banks have made a massive amount of money packaging up energy industry loans, bonds, etc. and selling them off to investors.
If that sounds similar to the kind of behavior that preceded the subprime mortgage meltdown, that is because it is.
Now those loans, bonds, etc. are going bad as the fracking bust intensifies, and whoever is left holding all of this worthless paper at the end of the day is going to lose an extraordinary amount of money. Here is more from Wolf Richter…
It suited Wall Street just fine: according to Dealogic, banks extracted $31 billion in fees from the US oil and gas industry and its investors over the past five years by handling IPOs, spin-offs, “leveraged-loan” transactions, the sale of bonds and junk bonds, and M&A.
That’s $6 billion in fees per year! Over the last four years, these banks made over $4 billion in fees on just “leveraged loans.” These loans to over-indebted, junk-rated companies soared from about $40 billion in 2009 to $210 billion in 2014 before it came to a screeching halt.
For Wall Street it doesn’t matter what happens to these junk bonds and leveraged loans after they’ve been moved on to mutual funds where they can decompose sight-unseen. And it doesn’t matter to Wall Street what happens to leverage loans after they’ve been repackaged into highly rated Collateralized Loan Obligations that are then sold to others.
At the same time, we are also witnessing a slowdown in global trade. This usually happens when economic conditions are about to turn sour, and that is why it is so alarming that the total volume of global trade in January was down 1.4 percent from December. According to Tyler Durden of Zero Hedge, that was the largest drop since 2011…
Presenting the latest data from the CPB Netherlands Bureau for Economic Policy Analysis, according to which in January world trade by volume dropped by a whopping 1.4% from December: the biggest drop since 2011!
We are seeing some troubling signs in the U.S. as well.
I shared the following chart in a previous article, but it bears repeating. It comes from Charles Hugh Smith, and it shows that new orders for consumer goods are falling at a rate not seen since the last recession…
Well, what about the stock market? It was up more than 200 points on Monday. Isn’t that good news?
Yes, but the euphoria on Wall Street will not last for long.
When corporate earnings per share either start flattening out or start to decline, that is a huge red flag. We saw this just prior to the stock market crash of 2008, and it is happening again right now. The following commentary and chart come from Phoenix Capital Research…
Take a look at the below chart showing current stock levels and changes in forward Earnings Per Share (EPS). Note, in particular how divergences between EPS and stocks tend to play out (hint look at 2007-2008).
We all know what came next.
And guess what?
According to CNBC, a lot of the “smart money” is pulling their money out of the stock market right now while the getting is good…
Recent market volatility has sent stock market investors rushing for the exits and into cash.
Outflows from equity-based funds in 2015 have reached their highest level since 2009, thanks to a seesaw market that has come under pressure from weak economic data, a stronger dollar and the the prospect of monetary tightening.
Funds that invest in stocks have seen $44 billion in outflows, or redemptions, year to date, according to Bank of America Merrill Lynch. Equity funds have seen outflows in five of the last six weeks, including $6.1 billion in just the last week.
It doesn’t matter if you are a millionaire “on paper” today.
What matters is if the money is going to be there when you really need it.
At the moment, a whole lot of people have been lulled into a false sense of complacency by the soaring stock market and by the bubble of false economic stability that we have been enjoying.
But under the surface, there is a whole lot of turmoil going on.
Those that are looking for the signs are going to see the next crisis approaching well in advance.
Those that are not are going to get absolutely blindsided by what is coming.
Are we on the verge of an unprecedented global currency crisis? On Tuesday, the euro briefly fell below $1.07 for the first time in almost a dozen years. And the U.S. dollar continues to surge against almost every other major global currency. The U.S. dollar index has now risen an astounding 23 percent in just the last eight months. That is the fastest pace that the U.S. dollar has risen since 1981. You might be tempted to think that a stronger U.S. dollar is good news, but it isn’t. A strong U.S. dollar hurts U.S. exports, thus harming our economy. In addition, a weak U.S. dollar has fueled tremendous expansion in emerging markets around the planet over the past decade or so. When the dollar becomes a lot stronger, it becomes much more difficult for those countries to borrow more money and repay old debts. In other words, the emerging market “boom” is about to become a bust. Not only that, it is important to keep in mind that global financial institutions bet a tremendous amount of money on currency movements. According to the Bank for International Settlements, 74 trillion dollars in derivatives are tied to the value of the U.S. dollar, the value of the euro and the value of other global currencies. When currency rates start flying around all over the place, you can rest assured that someone out there is losing an enormous amount of money. If this derivatives bubble ends up imploding, there won’t be enough money in the entire world to bail everyone out.
Do you remember what happened the last time the U.S. dollar went on a great run like this?
As you can see from the chart below, it was in mid-2008, and what followed was the worst financial crisis since the Great Depression…
A rapidly rising U.S. dollar is extremely deflationary for the overall global economy.
This is a huge red flag, and yet hardly anyone is talking about it.
Meanwhile, the euro continues to spiral into oblivion…
How many times have I said it? The euro is heading to all-time lows. It is going to go to parity with the U.S. dollar, and then it is eventually going to go below parity.
This is going to cause massive headaches in the financial world.
The Europeans are attempting to cure their economic problems by creating tremendous amounts of new money. It is the European version of quantitative easing, but it is having some very nasty side effects.
The markets are starting to realize that if the value of the U.S. dollar continues to surge, it is ultimately going to be very bad for stocks. In fact, the strength of the U.S. dollar is being cited as the primary reason for the Dow’s 332 point decline on Tuesday…
The Dow Jones industrial average fell more than 300 points to below the index’s 50-day moving average, wiping out gains for the year. The S&P 500 also closed in the red for the year and breached its 50-day moving average, which is an indicator of the market trend. Only the Nasdaq held onto gains of 2.61 percent for the year.
There’s “concern that energy and the strength in the dollar will somehow be negative for the equities,” said Art Hogan, chief market strategist at Wunderlich Securities. He noted that the speed of the dollar’s surge was the greatest market driver, amid mixed economic data and concerns about the Federal Reserve raising interest rates.
And as I noted above, when the U.S. dollar rises the things that we export to other nations become more expensive and that hurts our businesses.
Despite reassurance from The Fed that a strengthening dollar is positive for US jobs, The White House has now issued a statement that a “strengthening USD is a headwind for US growth.”
But even more important, a surging U.S. dollar makes it more difficult for emerging markets all over the world to borrow new money and to repay old debts. This is especially true for nations that heavily rely on exporting commodities…
It becomes especially ugly for emerging market economies that produce commodities. Many emerging market countries rely on their natural resources for growth and haven’t yet developed more advanced industries. As the products of their principal industries decline in value, foreign investors remove available credit while their currency is declining against the U.S. dollar. They don’t just find it difficult to pay their debt – it is impossible.
But now the process that created the emerging markets “boom” is starting to go into reverse.
The global economy is fueled by cheap dollars. So if the U.S. dollar continues to rise, that is not going to be good news for anyone.
And of course the biggest potential threat of all is the 74 trillion dollar currency derivatives bubble which could end up bursting at any time.
The sophisticated computer algorithms that financial institutions use to trade currency derivatives are ultimately based on human assumptions. When currencies move very little and the waters are calm in global financial markets, those algorithms tend to work really, really well.
But when the unexpected happens, some of the largest financial firms in the world can implode seemingly overnight.
Just remember what happened to Lehman Brothers back in 2008. Unexpected events can cripple financial giants in just a matter of hours.
Today, there are five U.S. banks that each have more than 40 trillion dollars of total exposure to derivatives of all types. Those five banks are JPMorgan Chase, Bank of America, Goldman Sachs, Citibank and Morgan Stanley.
By transforming Wall Street into a gigantic casino, those banks have been able to make enormous amounts of money.
But they are constantly performing a high wire act. One of these days, their reckless gambling is going to come back to haunt them, and the entire global financial system is going to be severely harmed as a result.
As I have said so many times before, derivatives are going to be at the heart of the next great global financial crisis.
And thanks to the wild movement of global currencies in recent months, there are now more than 74 trillion dollars in currency derivatives at risk.
Anyone that cannot see trouble on the horizon at this point is being willingly blind.
The Chinese do not plan to live in a world dominated by the U.S. dollar for much longer. Chinese leaders have been calling for the U.S. dollar to be replaced as the primary global reserve currency for a long time, but up until now they have never been very specific about what they would put in place of it. Many have assumed that the Chinese simply wanted some new international currency to be created. But what if that is not what the Chinese had in mind? What if they have always wanted their own currency to become the single most dominant currency on the entire planet? What you are about to see is rather startling, but it shouldn’t be a surprise. When it comes to economics and finance, the Chinese have always been playing chess while the western world has been playing checkers. Sadly, we have gotten to the point where checkmate is on the horizon.
On Wednesday, I came across an excellent article by Simon Black. What he had to say in that article just about floored me…
When I arrived to Bangkok the other day, coming down the motorway from the airport I saw a huge billboard—and it floored me.
The billboard was from the Bank of China. It said: “RMB: New Choice; The World Currency”
Given that the Bank of China is more than 70% owned by the government of the People’s Republic of China, I find this very significant.
It means that China is literally advertising its currency overseas, and it’s making sure that everyone landing at one of the world’s busiest airports sees it. They know that the future belongs to them and they’re flaunting it.
This is the photograph of that billboard that he posted with his article…
Everyone knows that China is rising.
And most everyone has assumed that Chinese currency would soon play a larger role in international trade.
But things have moved so rapidly in recent years that now a very large chunk of the financial world actually expects the renminbi to replace the dollar as the primary reserve currency of the planet someday. The following comes from CNBC…
The tightly controlled Chinese yuan will eventually supersede the dollar as the top international reserve currency, according to a new poll of institutional investors.
The survey of 200 institutional investors – 100 headquartered in mainland China and 100 outside of it – published by State Street and the Economist Intelligence Unit on Thursday found 53 percent of investors think the renminbi will surpass the U.S. dollar as the world’s major reserve currency.
Optimism was higher within China, where 62 percent said they saw a redback world on the horizon, compared with 43 percent outside China.
And without a doubt we are starting to see the beginnings of a significant shift.
China’s yuan broke into the top five as a world payment currency in November, overtaking the Canadian dollar and the Australian dollar, global transaction services organization SWIFT said on Wednesday.
The U.S. dollar won’t be replaced overnight, but things are changing.
Of course the truth is that the Chinese have been preparing for this for a very long time. The Chinese refuse to tell the rest of the world exactly how much gold they have, but everyone knows that they have been accumulating enormous amounts of it. And even if they don’t explicitly back the renminbi with gold, the massive gold reserves that China is accumulating will still give the rest of the planet a great deal of confidence in Chinese currency.
But don’t just take my word for it. Consider what Alan Greenspan has had to say on the matter…
Alan Greenspan, who served at the helm of the Federal Reserve for nearly two decades, recently penned an op-ed for the Council on Foreign Relations discussing gold and its possible role in China, the world’s second-largest economy. He notes that if China converted only a “relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system.”
Meanwhile, the Chinese have also been accumulating a tremendous amount of U.S. debt. At this point, the Chinese own approximately 1.3 trillion dollars worth of our debt, and that gives them a lot of power over our currency and over our financial system.
Someday if the Chinese wanted to undermine confidence in the U.S. dollar and in the U.S. financial system, they have a lot of ammunition at their disposal.
And it isn’t just all of that debt that gives China leverage. In recent years, the Chinese have been buying up real estate, businesses and energy assets all over the United States at a staggering pace. For a small taste of what has been taking place, check out the YouTube video posted below…
For much, much more on this trend, please see the following articles…
On a purchasing power basis, the size of the Chinese economy has already surpassed the size of the U.S. economy.
And there are lots of signs of trouble ahead for the U.S. economy at this point. I like how Brandon Smith put it in one recent article…
We are only two months into 2015, and it has already proven to be the most volatile year for the economic environment since 2008-2009. We have seen oil markets collapsing by about 50 percent in the span of a few months (just as the Federal Reserve announced the end of QE3, indicating fiat money was used to hide falling demand), the Baltic Dry Index losing 30 percent since the beginning of the year, the Swiss currency surprise, the Greeks threatening EU exit (and now Greek citizens threatening violent protests with the new four-month can-kicking deal), and the effects of the nine-month-long West Coast port strike not yet quantified. This is not just a fleeting expression of a negative first quarter; it is a sign of things to come.
In addition, things continue to look quite bleak for Europe. Once upon a time, many expected the euro to overtake the U.S. dollar as the primary global reserve currency, but that didn’t happen. And in recent months the euro has been absolutely crashing. On Wednesday, it hit the lowest point that we have seen against the dollar in more than a decade…
The euro last stood at $1.1072, off 0.90 percent for the day and below a key support level, Sutton said. It fell to as little as $1.1066, which was the lowest level for the euro against the dollar since September 2003, according to Thomson Reuters data.
The euro also declined to one-month lows against the Japanese yen, which was flat against the dollar at 119.72 yen to the dollar.
As the U.S. and Europe continue to struggle, China is going to want a significantly larger role on the global stage.
And as the billboard in Thailand suggests, they are more than willing to step up to the plate.
So will the road to the future be paved with Chinese currency? Please feel free to share what you think by posting a comment below…
The stock market continues to flirt with new record highs, but the signs that we could be on the precipice of the next major financial crisis continue to mount. A couple of days ago, I discussed the fact that the U.S. dollar is experiencing a tremendous surge in value just like it did in the months prior to the financial crisis of 2008. And previously, I have detailed how the price of oil has collapsed, prices for industrial commodities are tanking and market behavior is becoming extremely choppy. All of these are things that we witnessed just before the last market crash as well. It is also important to note that orders for durable goods are declining and the Baltic Dry Index has dropped to the lowest level on record. So does all of this mean that the stock market is guaranteed to crash in 2015? No, of course not. But what we are looking for are probabilities. We are looking for patterns. There are multiple warning signs that have popped up repeatedly just prior to previous financial crashes, and many of those same warning signs are now appearing once again.
One of these warning signs that I have not discussed previously is the wholesale inventories to sales ratio. When economic activity starts to slow down, inventory tends to get backed up. And that is precisely what is happening right now. In fact, as Wolf Richter recently wrote about, the wholesale inventories to sales ratio has now hit a level that we have not seen since the last recession…
In December, the wholesale inventory/sales ratio reached 1.22, after rising consistently since July last year, when it was 1.17. It is now at the highest – and worst – level since September 2009, as the financial crisis was winding down:
Rising sales gives merchants the optimism to stock more. But because sales are rising in that rosy scenario, the inventory/sales ratio, depicting rising inventories and rising sales, would not suddenly jump. But in the current scenario, sales are not keeping up with inventory growth.
Another sign that I find extremely interesting is the behavior of the yield on 10 year U.S. Treasury notes. As Jeff Clark recently explained, we usually see a spike in the 10 year Treasury yield about the time the market is peaking before a crash…
The 10-year Treasury note yield bottomed on January 30 at 1.65%. Today, it’s at 2%. That’s a 35-basis-point spike – a jump of 21% – in less than two weeks.
And it’s the first sign of an impending stock market crash.
For example, the 10-year yield was just 4.5% in January 1999. One year later, it was 6.75% – a spike of 50%. The dot-com bubble popped two months later.
In 2007, rates bottomed in March at 4.5%. By July, they had risen to 5.5% – a 22% increase. The stock market peaked in September.
Let’s be clear… not every spike in Treasury rates leads to an important top in the stock market. But there has always been a sharp spike in rates a few months before the top.
Once again, just because something has happened in the past does not mean that it will happen in the future.
But the fact that so many red flags are appearing all at once has got to give any rational person reason for concern.
Yes, the Dow gained more than 100 points on Thursday. But on Thursday we also learned that retail sales dropped again in January. Overall, this has been the worst two month drop in retail sales since 2009…
Following last month’s narrative-crushing drop in retail sales, despite all that low interest rate low gas price stimulus, January was more of the same as hopeful expectations for a modest rebound were denied. Falling 0.8% (against a 0.9% drop in Dec), missing expectations of -0.4%, this is the worst back-to-back drop in retail sales since Oct 2009. Retail sales declined in 6 of the 13 categories.
And economic activity is rapidly slowing down on the other side of the planet as well.
Chinese imports collapsed 19.9% YoY in January, missing expectations of a modest 3.2% drop by the most since Lehman. This is the biggest YoY drop since May 2009 and worst January since the peak of the financial crisis. Exports tumbled 3.3% YoY (missing expectations of 5.9% surge) for the worst January since 2009. Combined this led to a $60.03 billion trade surplus in January – the largest ever. But apart from these massive imbalances, everything is awesome in the global economy (oh apart from The Baltic Dry at record lows, Iron Ore near record lows, oil prices crashed, and the other engine of the world economy – USA USA USA – imploding).
In light of so much bad economic data, it boggles my mind that stocks have been doing so well.
But this is typical bubble behavior. Financial bubbles tend to be very irrational and they tend to go on a lot longer than most people think they will. When they do finally burst, the consequences are often quite horrifying.
It may not seem like it to most people, but we are right on track for a major financial catastrophe. It is playing out right in front of our eyes in textbook fashion. But it is going to take a little while to unfold.
Unfortunately, most people these days do not have the patience to watch long-term trends develop. Instead, we have been trained by the mainstream media to have the attention spans of toddlers. We bounce from one 48-hour news cycle to the next, eagerly looking forward to the next “scandal” that is going to break.
And when the next financial crash does strike, the mainstream media is going to talk about what a “surprise” it is. But for those that are watching the long-term trends, it is not going to be a surprise at all. We will have seen it coming a mile away.
Over the past decade, there has been only one other time when the value of the U.S. dollar has increased by so much in such a short period of time. That was in mid-2008 – just before the greatest financial crash since the Great Depression. A surging U.S. dollar also greatly contributed to the Latin American debt crisis of the early 1980s and the Asian financial crisis of 1997. Today, the globe is more interconnected than ever. Most global trade is conducted in U.S. dollars, and much of the borrowing done by emerging markets all over the planet is denominated in U.S. dollars. When the U.S. dollar goes up dramatically, this can put a tremendous amount of financial stress on economies all around the world. It also has the potential to greatly threaten the stability of the 65 trillion dollars in derivatives that are directly tied to the value of the U.S. dollar. The global financial system is more vulnerable to currency movements than ever before, and history tells us that when the U.S. dollar soars the global economy tends to experience a contraction. So the fact that the U.S. dollar has been skyrocketing lately is a very, very bad sign.
Most of the people that write about the coming economic collapse love to talk about the coming collapse of the U.S. dollar as well.
But in the initial deflationary stage of the coming financial crisis, we are likely to see the U.S. dollar actually strengthen considerably.
As I have discussed so many times before, we are going to experience deflation first, and after that deflationary phase the desperate responses by the Federal Reserve and the U.S. government to that deflation will cause the inflationary panic that so many have written about.
Yes, someday the U.S. dollar will essentially be toilet paper. But that is not in our immediate future. What is in our immediate future is a “flight to safety” that will push the surging U.S. dollar even higher.
This is what we witnessed in 2008, and this is happening once again right now.
Just look at the chart that I have posted below. You can see the the U.S. dollar moved upward dramatically relative to other currencies starting in mid-2008. And toward the end of the chart you can see that the U.S. dollar is now experiencing a similar spike…
At the moment, almost every major currency in the world is falling relative to the U.S. dollar.
For example, this next chart shows what the euro is doing relative to the dollar. As you can see, the euro is in the midst of a stunning decline…
Instead of focusing on the U.S. dollar, those that are looking for a harbinger of the coming financial crisis should be watching the euro. As I discussed yesterday, analysts are telling us that if Greece leaves the eurozone the EUR/USD could fall all the way down to 0.90. If that happens, the chart above will soon resemble a waterfall.
And of course it isn’t just the euro that is plummeting. The yen has been crashing as well. The following chart was recently posted on the Crux…
Unfortunately, most Americans have absolutely no idea how important all of this is. In recent years, growing economies all over the world have borrowed gigantic piles of very cheap U.S. dollars. But now they are faced with the prospect of repaying those debts and making interest payments using much more expensive U.S. dollars.
Investors are starting to get nervous. At one time, investors couldn’t wait to pour money into emerging markets, but now this process is beginning to reverse. If this turns into a panic, we are going to have one giant financial mess on our hands.
The truth is that the value of the U.S. dollar is of great importance to every nation on the face of the Earth. The following comes from U.S. News & World Report…
In the early ’80s, a bullish U.S. dollar contributed to the Latin American debt crisis, and also impacted the Asian Tiger crisis in the late ’90s. Emerging markets typically have higher growth, but carry much higher risk to investors. When the economies are doing well, foreign investors will lend money to emerging market countries by purchasing their bonds.
They also deposit money in foreign banks, which facilitates higher lending. The reason for this is simple: Bond payments and interest rates in emerging markets are much higher than in the U.S. Why deposit cash in the U.S. and earn 0.25 percent, when you could earn 6 percent in Indonesia? With the dollar strengthening, the interest payments on any bond denominated in U.S. dollars becomes more expensive.
Additionally, the deposit in the Indonesian bank may still be earning 6 percent, but that is on Indonesian rupiahs. After converting the rupiahs to U.S. dollars, the extra interest doesn’t offset the loss from the exchange. As investors get nervous, the higher interest on emerging market debt and deposits becomes less alluring, and they flee to safety. It may start slowly, but history tells us it can quickly spiral out of control.
Over the past few months, I have been repeatedly stressing that so many of the signs that we witnessed just prior to previous financial crashes are happening again.
Now you can add the skyrocketing U.S. dollar to that list.
If you have not seen my previous articles where I have discussed these things, here are some places to get started…
The long-anticipated collapse of the euro is here. When European Central Bank president Mario Draghi unveiled an open-ended quantitative easing program worth at least 60 billion euros a month on Thursday, stocks soared but the euro plummeted like a rock. It hit an 11 year low of $1.13, and many analysts believe that it is going much, much lower than this. The speed at which the euro has been falling in recent months has been absolutely stunning. Less than a year ago it was hovering near $1.40. But since that time the crippling economic problems in southern Europe have gone from bad to worse, and no amount of money printing is going to avert the financial nightmare that is slowly unfolding right before our eyes. Yes, there may be some temporary euphoria for a few days, but it is important to remember that reckless money printing worked for the Weimar Republic for a little while too before it turned into an utter disaster. Now that the ECB has decided to go this route, it is essentially out of ammunition. The only thing that it could potentially do beyond this is to print even larger quantities of money. As the global financial crisis begins to unfold over the next couple of years, the ECB is pretty much going to be powerless to do anything about it. Over the next couple of months, we can expect the euro to continue to head toward parity with the U.S. dollar, and eventually it is going to go to all-time lows. Meanwhile, the future of the eurozone itself is very much in doubt. If it does break up, the elite of Europe will probably try to put it back together in some sort of new configuration, but the damage will already have been done.
Over the next 18 months, the European Central bank will create more than a trillion euros out of thin air and will use that money to buy debt. The following is how this new QE program for Europe was described by the Telegraph…
“The combined monthly purchases of public and private sector securities will amount to €60bn euros,” said Mr Draghi at a press conference following a meeting of the ECB’s governing council.
“They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation,” he added, meaning the package will amount to at least €1.1 trillion.
Mr Draghi’s package of asset purchases, including bonds issued by national governments and EU institutions such as the European Commission, is intended to boost the eurozone’s flagging economy and to ward off the spectre of deflation.
When you print more money, you drive down the value of your currency. And the euro has already been crashing for months as you can see from the chart below…
As I write this, the euro is down to $1.13. And most analysts seem to agree that it is likely heading even lower.
How low could it ultimately go?
One prominent currency strategist recently told CNBC that he believes that it is actually heading beneath parity with the U.S. dollar…
The euro plunged to an 11-year low on Thursday, after the European Central Bank announced that it would begin a 60-euro monthly asset purchasing program. But it could still have a ways to fall.
Brown Brothers Harriman global head of currency strategy Marc Chandler predicts that the euro, which fell as low as 1.1362 on Thursday after trading near 1.4000 in May, is heading below 1.0. That widely watched level is the point at which it will just take a single U.S. dollar to purchase a euro, a condition known in the currency markets as “parity.”
I totally agree with Chandler.
In fact, I believe that the euro is ultimately going to break the all-time record low against the dollar.
I also believe that the current configuration of the eurozone is eventually going to fall to pieces. The euro may survive as a currency, but Europe is ultimately going to look a whole lot different than it does right now.
In fact, we could see things start to come apart for the eurozone as soon as Sunday. If Syriza wins a decisive victory in the upcoming Greek elections, it could create all sorts of chaos…
The polls put Alexis Tsipras and Syriza ahead of the ruling New Democracy party of Greek Prime Minister Antonis Samaras.
Tsipras has vowed to convince the ECB and euro zone to write down the value of their Greek debt holdings to allow him to increase public spending and stimulate job growth.
“There is a good chance they could win, and if they begin moving away from fiscal austerity, other members of the EU are going to say: ‘No more lending, no more life support.’ On Monday morning you’ll know,” De Clue said.
But of course Europe is far from alone. Financial problems are erupting all over the planet, and central banks are getting desperate.
Over the past week, seven major central banks have made moves to fight deflation. But the more that they cut interest rates and print money, the less effect that it has. And eventually, the people of the world are going to seriously lose confidence in these central banks as they realize what a sham the system really is.
“My belief is that the big surprise this year is that investor confidence in central banks collapses. And when that happens — I can’t short central banks, although I’d really like to, and the only way to short them is to go long gold, silver and platinum,” he said. “That’s the only way. That’s something I will do.”
So what do you think?
Do you agree with Marc Faber?
And what do you think is next for the euro?
Do you agree with me that it is going to record lows?
Please feel free to share what you think by posting a comment below…
On Monday, the price of oil fell below $50 for the first time since April 2009, and the Dow dropped 331 points. Meanwhile, the stock market declines over in Europe were even larger on a percentage basis, and the euro sank to a fresh nine year low on concerns that the anti-austerity Syriza party will be victorious in the upcoming election in Greece. These are precisely the kinds of things that we would expect to see happen if a global financial crash was coming in 2015. Just prior to the financial crisis of 2008, the price of oil collapsed, prices for industrial commodities got crushed and the U.S. dollar soared relative to other currencies. All of those things are happening again. And yet somehow many analysts are still convinced that things will be different this time. And I agree that things will indeed be “different” this time. When this crisis fully erupts, it will make 2008 look like a Sunday picnic.
Another thing that usually happens when financial markets begin to unravel is that they get really choppy. There are big ups and big downs, and that is exactly what we have witnessed since October.
So don’t expect the markets just to go in one direction. In fact, it would not be a surprise if the Dow went up by 300 or 400 points tomorrow. During the initial stages of a financial crash, there are always certain days when the markets absolutely soar.
For example, did you know that the three largest single day stock market advances in history were right in the middle of the financial crash of 2008? Here are the dates and the amount the Dow rose each of those days…
October 13th, 2008: +936 points
October 28th, 2008: +889 points
November 13th, 2008: +552 points
Just looking at those three days, you would assume that the fall of 2008 was the greatest time ever for stocks. But instead, it was the worst financial crash that we have seen since the days of the Great Depression.
So don’t get fooled by the volatility. Choppy markets are almost always a sign of big trouble ahead. Calm waters usually mean that the markets are going up.
In order to avoid a major financial crisis in the near future, we desperately need the price of oil to rebound in a substantial way.
Unfortunately, it does not look like that is going to happen any time soon. There is just way too much oil being produced right now. The following is an excerpt from a recent CNBC article…
The Morgan Stanley strategists say there are new reports of unsold West and North African cargoes, with much of the oil moving into storage. They also note that new supply has entered the global market with additional exports coming from Russia and Iraq, which is reportedly seeing production rising to new highs.
Since June, the price of oil has plummeted close to 55 percent. If the price of oil stays where it is right now, we are going to see large numbers of small producers go out of business, the U.S. economy will lose millions of jobs, billions of dollars of junk bonds will go bad and trillions of dollars of derivatives will be in jeopardy.
And the lower the price of oil goes, the worse our problems are going to get. That is why it is so alarming that some analysts are now predicting that the price of oil could hit $40 later this month…
Some traders appeared certain that U.S. crude will hit the $40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build.
‘We’re headed for a four-handle,’ said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York. ‘Maybe not today, but I’m sure when you get the inventory numbers that come out this week, we definitely will.’
Open interest for $40-$50 strike puts in U.S. crude have risen several fold since the start of December, while $20-$30 puts for June 2015 have traded, said Stephen Schork, editor of Pennsylvania-based The Schork Report.
The only way that the price of oil has a chance to move back up significantly is if global production slows down. But instead, production just continues to increase in the short-term thanks to projects that were already in the works. As a result, analysts from Morgan Stanley say that the oil glut is only going to intensify…
Morgan Stanley analysts said new production will continue to ramp up at a number of fields in Brazil, West Africa, Canada and in the U.S. Gulf of Mexico as well as U.S. shale production. Also, the potential framework agreement with Iran could mean more Iranian oil on the market.
Yes, lower oil prices mean that we get to pay less for gasoline when we fill up our vehicles.
But as I have written about previously, anyone that believes that lower oil prices are good for the U.S. economy or for the global economy as a whole is crazy. And these sentiments were echoed recently by Jeff Gundlach…
“Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.“
If the price of oil does not recover, we are going to see massive financial problems all over the planet and the geopolitical stress that this will create will be unbelievable.
To expand on this point, I want to share an excerpt from a recent Zero Hedge article. As you can see, a rapid rise or fall in the price of oil almost always correlates with a major global crisis of some sort…
Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the ‘difference this time’ is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.
So is the 45% YoY drop in oil prices about to ’cause’ contagion risk concerns for the world?
And without a doubt, we are overdue for another stock market crisis.
Between December 31st, 1996 and March 24th, 2000 the S&P 500 rose 106 percent.
Then the dotcom bubble burst and it fell by 49 percent.
Between October 9th, 2002 and October 9th, 2007 the S&P 500 rose 101 percent.
But then that bubble burst and it fell by 57 percent.
Between March 9th, 2009 and December 31st, 2014 the S&P 500 rose an astounding 204 percent.
When this bubble bursts, how far will it fall this time?
This is the big problem with fiat currency – eventually the temptation to print more of it when you are in a jam becomes too powerful to resist. In a surprise move on Friday, the Bank of Japan dramatically increased the size of the quantitative easing program that it has been conducting. This sent Japanese stocks soaring and the Japanese yen plunging. The yen had already fallen by about 11 percent against the dollar over the last year before this announcement, and news of the BOJ’s surprise move caused the yen to collapse to a seven year low. Essentially what the Bank of Japan has done is declare a currency war. And as you will see below, in every currency war there are winners and there are losers. Let’s just hope that global financial markets do not get shredded in the crossfire.
Without a doubt, the Japanese are desperate. Their economic decline has lasted for decades, and their debt levels are off the charts. In such a situation, printing more money seems like such an easy solution. But as history has shown us, wild money printing always ends badly. Just remember what happened in the Weimar Republic and in Zimbabwe.
At this point, the Bank of Japan is already behaving so recklessly that it is making the Federal Reserve look somewhat responsible in comparison. The following is how David Stockman summarized what just happened…
This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.
Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.
The Japanese are absolutely destroying the credibility of their currency in a last ditch effort to boost short-term economic growth.
So why would they want to devalue their currency?
Well, there are too main reasons why nations do this.
One reason is that it makes it easier to pay off debt. The government debt to GDP ratio in Japan is approximately 250 percent at the moment, and the total debt to GDP ratio is approximately 600 percent. When you have lots more money floating around, servicing crippling levels of debt becomes more feasible.
Secondly, nations like to devalue their currencies because it makes their products less expensive on the world stage.
In other words, it helps them sell more stuff to other people.
But in the process, this hurts other exporters. For example, what the Bank of Japan just did is already having serious consequences for South Korean automakers…
In Seoul, shares of auto makers Hyundai Motor and Kia Motors fell 5.9% and 5.6%, respectively, on Monday.
South Korean and Japanese companies often compete head-to-head in the same product groups in global markets, notably cars and electronics goods.
From the Bank of Japan’s standpoint, “you’re giving your industry a head start relative to someone else’s,” said Markus Rosgen, regional head of equity strategy at Citi in Hong Kong. “The perception in the equity market will be that they [South Korea] will have to take a hit from the lack of competitiveness versus the Japanese.”
This is why I said that there are winners and there are losers in every currency war.
If you boost your exports by devaluing your currency, you take away business from someone else. And ultimately other nations start devaluing their currencies in an attempt to stay competitive. That is why they call it a currency war.
For now, the Japanese are celebrating. On Friday, Japanese stocks surged almost five percent for the day and reached a seven year high. Investors tend to love quantitative easing, and they were very pleasantly surprised by what the Bank of Japan decided to do.
But of course rising stock prices are not always a good thing. As Kyle Bass recently explained, wild money printing caused Zimbabwe’s stock market to skyrocket to unprecedented heights as well and that turned out very, very badly…
Amid the euphoria… Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC’s Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected).
However, he caveats that nominally bullish statement with a critical point, “Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs” as purchasing power is crushed. Investors, he says, are “too focused on nominal prices” as the rate of growth of the monetary base is destroying true wealth. Bass is convinced that cost-push inflation is coming (as the velocity of money will move once psychology shifts) and investors must not take their eye off the insidious nature of underlying inflation – no matter what we are told by the government (as they will always lie when its critical). Own ‘productive assets’, finance them at low fixed rates (thank you Ben)…
And just like we have experienced with quantitative easing in the United States, Japan’s money printing has done very little to help the real economy. Here is more from David Stockman…
Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south.
So up to this point Japan’s experiment in crazy money printing has been a dismal failure.
Will printing even more money turn things around?
We shall see, but I wouldn’t hold your breath.
Meanwhile, there are reports that the European Central Bank is getting ready for more quantitative easing. Central banks all over the planet are becoming increasingly desperate for answers, and the temptation to print, print and print some more is extremely strong.
Nobody is quite sure how this currency war will play out, but I have a feeling that it isn’t going to be pretty.