Warren Buffett once referred to derivatives as “financial weapons of mass destruction“, and it was inevitable that they would begin to wreak havoc on our financial system at some point. While things may seem somewhat calm on Wall Street at the moment, the truth is that a great deal of trouble is bubbling just under the surface. As you will see below, something happened in mid-September that required an unprecedented 405 billion dollar surge of Treasury collateral into the repo market. I know – that sounds very complicated, so I will try to break it down more simply for you. It appears that some very large institutions have started to get into a significant amount of trouble because of all the reckless betting that they have been doing. This is something that I have warned would happen over and over again. In fact, I have written about it so much that my regular readers are probably sick of hearing about it. But this is what is going to cause the meltdown of our financial system.
Many out there get upset when I compare derivatives trading to gambling, and perhaps it would be more accurate to describe most derivatives as a form of insurance. The big financial institutions assure us that they have passed off most of the risk on these contracts to others and so there is no reason to worry according to them.
Well, personally I don’t buy their explanations, and a lot of others don’t either. On a very basic, primitive level, derivatives trading is gambling. This is a point that Jeff Nielson made very eloquently in a piece that he recently published…
No one “understands” derivatives. How many times have readers heard that thought expressed (please round-off to the nearest thousand)? Why does no one understand derivatives? For many; the answer to that question is that they have simply been thinking too hard. For others; the answer is that they don’t “think” at all.
Derivatives are bets. This is not a metaphor, or analogy, or generalization. Derivatives are bets. Period. That’s all they ever were. That’s all they ever can be.
One very large financial institution that appears to be in serious trouble with these financial weapons of mass destruction is Glencore. At one time Glencore was considered to be the 10th largest company on the entire planet, but now it appears to be coming apart at the seams, and a great deal of their trouble seems to be tied to derivatives. The following comes from Zero Hedge…
Of particular concern, they said, was Glencore’s use of financial instruments such as derivatives to hedge its trading of physical goods against price swings. The company had $9.8 billion in gross derivatives in June 2015, down from $19 billion in such positions at the end of 2014, causing investors to query the company about the swing.
Glencore told investors the number went down so drastically because of changes in market volatility this year, according to people briefed by Glencore. When prices vary significantly, it can increase the value of hedging positions.
Last year, there were extreme price moves, particularly in the crude-oil market, which slid from about $114 a barrel in June to less than $60 a barrel by the end of December.
That response wasn’t satisfying, said Michael Leithead, a bond fund portfolio manager at EFG Asset Management, which managed $12 billion as of the end of March and has invested in Glencore’s debt.
According to Bank of America, the global financial system has about 100 billion dollars of exposure overall to Glencore. So if Glencore goes bankrupt that is going to be a major event. At this point, Glencore is probably the most likely candidate to be “the next Lehman Brothers”.
And it isn’t just Glencore that is in trouble. Other financial giants such as Trafigura are in deep distress as well. Collectively, the global financial system has approximately half a trillion dollars of exposure to these firms…
Worse, since it is not just Glencore that the banks are exposed to but very likely the rest of the commodity trading space, their gross exposure blows up to a simply stunning number:
For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)
Call it half a trillion dollars in very highly levered exposure to commodities: an asset class that has been crushed in the past year.
The mainstream media is not talking much about any of this yet, and that is probably a good thing. But behind the scenes, unprecedented moves are already taking place.
When I came across the information that I am about to share with you, I was absolutely stunned. It comes from Investment Research Dynamics, and it shows very clearly that everything is not “okay” in the financial world…
Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market. Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate. However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008:
What in the world could possibly cause a spike of that magnitude?
Well, that same article that I just quoted links the troubles at Glencore with this unprecedented intervention…
What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period. You’ll note that this is around the same time that a crash in Glencore stock and bonds began. It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.
The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates. However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out sight in the general liquidity functions of the global banking system.
Back in 2008, Lehman Brothers was not “perfectly fine” one day and then suddenly collapsed the next. There were problems brewing under the surface well in advance.
Well, the same thing is happening now at banking giants such as Deutsche Bank, and at commodity trading firms such as Glencore, Trafigura and The Noble Group.
And of course a lot of smaller fish are starting to implode as well. I found this example posted on Business Insider earlier today…
On September 11, Spruce Alpha, a small hedge fund which is part of a bigger investment group, sent a short report to investors.
The letter said that the $80 million fund had lost 48% in a month, according the performance report seen by Business Insider.
There was no commentary included in the note. No explanation. Just cold hard numbers.
Wow – how do you possibly lose 48 percent in a single month?
It would be hard to do that even if you were actually trying to lose money on purpose.
Sadly, this kind of scenario is going to be repeated over and over as we get even deeper into this crisis.
Meanwhile, our “leaders” continue to tell us that there is nothing to worry about. For example, just consider what former Fed Chairman Ben Bernanke is saying…
Former Federal Reserve chairman Ben Bernanke doesn’t see any bubbles forming in global markets right right now.
But he doesn’t think you should take his word for it.
And even if you did, that isn’t the right question to ask anyway.
Speaking at a Wall Street Journal event on Wednesday morning, Bernanke said, “I don’t see any obvious major mispricings. Nothing that looks like the housing bubble before the crisis, for example. But you shouldn’t trust me.”
I certainly agree with that last sentence. Bernanke was the one telling us that there was not going to be a recession back in 2008 even after one had already started. He was clueless back then and he is clueless today.
Most of our “leaders” either don’t understand what is happening or they are not willing to tell us.
So that means that we have to try to figure things out for ourselves the best that we can. And right now there are signs all around us that another 2008-style crisis has begun.
Personally, I am hoping that there will be a lot more days like today when the markets were relatively quiet and not much major news happened around the world.
Unfortunately for all of us, these days of relative peace and tranquility are about to come to a very abrupt end.
What has been happening on Wall Street the past few days has been nothing short of stunning. On Thursday, the Dow Jones Industrial Average plummeted 358 points. It was the largest single day decline in a year and a half, and investors are starting to panic. Overall, the Dow is now down more than 1300 points from the peak of the market. Just yesterday, I wrote about all of the experts that are warning about a stock market crash in 2015, and after today I am sure that a lot more people will start jumping on the bandwagon. In particular, tech stocks are getting absolutely hammered lately. The Nasdaq has fallen close to 3.5% over the past two days alone, and it has dropped below its 200-day moving average. The Russell 2000 (a small-cap stock market index) is also now trading below its 200-day moving average. What all of this means is that the stock market crash of 2015 has already begun. The only question left to answer at this point is how bad it will ultimately turn out to be.
When stocks were booming, tech stocks were leading the way up.
But now that the market has turned, tech stocks are starting to lead the way down…
The Dow and the S&P 500 are negative for the year. The so-called “FANG” stocks – Facebook, Apple, Netflix, and Google – were some of the biggest losers, and helped send the Nasdaq more than 2% lower. Biotechs also suffered big losses; the iShares Nasdaq Biotechnology ETF fell 4% to a three-month low. The Vix, which gauges market expectations for near-term shifts in the S&P 500, surged more than 21%.
And Twitter is absolutely imploding. It has fallen below its IPO price, and at this point it is now down 65 percent from the peak.
Of course it was inevitable that Twitter and these tech stocks would start falling eventually. I specifically warned my readers about Twitter’s stock price nearly two years ago. I hope people listened to what I was saying and got out in time.
This current market crash is happening in the context of a full-blown global financial meltdown. Stock markets all over the planet are collapsing, and currencies are being devalued left and right. The following comes from a recent piece by Wolf Richter…
Hot money is already fleeing emerging markets. Higher rates in the US will drain more capital out of countries that need it the most. It will pressure emerging market currencies and further increase the likelihood of a debt crisis in countries whose governments, banks, and corporations borrow in a currency other than their own.
This scenario would be bad enough for the emerging economies. But now China has devalued the yuan to stimulate its exports and thus its economy at the expense of others. And one thing has become clear on Wednesday: these struggling economies that compete with China are going to protect their exports against Chinese encroachment.
Hence a currency war.
Two more major shots in the currency war were fired on Thursday by Kazakhstan and Vietnam…
Hit by sharp declines in crude prices, the oil-producing nation of Kazakhstan introduced a freely floating exchange rate for the tenge, which subsequently lost more than a quarter of its value.
The State Bank of Vietnam (SBV) devalued the dong (VND) by 1 percent against the dollar on Wednesday—its third adjustment so far this year—and simultaneously widened the trading band to 3 percent from 2 percent previously, the second increase in six days.
A quarter of its value?
Now that is a devaluation.
In the coming days, we are likely to see even more emerging markets devalue their currencies in a global “race to the bottom”. But this “race to the bottom” presents a great danger to financial markets. As I have written about previously, there are 74 trillion dollars in derivatives globally that are tied to the value of currencies. As foreign exchange rates start flying around all over the place, there are going to be financial institutions out there that are going to be losing obscene amounts of money.
I cannot say the “d word” enough. Derivatives are going to play a starring role during this financial collapse, and so that is a word that you will want to be listening for very carefully in the weeks and months to come.
The meltdown that has already been affecting much of the rest of the planet is now starting to affect us. And it was inevitable that it would. I like how Clive P. Maund put it recently…
Many lesser markets around the world are toppling, but somehow the big Western markets of Europe, Japan and the US are staying aloft. If you have ever made a sand castle on the beach and watched what happened when the tide comes in, you will recall that it is the weaker outer ramparts and smaller turrets that collapse first, and the big central towers that hold out the longest. The weaker outer ramparts and smaller turrets are the Emerging Markets which are already crumbling, and it won’t be long until the big central towers – the big Western Markets, go the same way – everything is pointing to it.
The funny thing is that even though all of the signs are pointing to a nightmarish global financial crisis, the mainstream media continues to insist that everything is going to be just fine.
In fact, CNBC says that the recent dip in stock prices is a “bull indicator” and they are encouraging everyone to pour lots more money into stocks.
But of course the truth is that what financial conditions are really telling us is that stocks have much, much farther to fall.
For instance, high yield credit is starting to crash just like it did prior to the stock market crash of 2008. Stocks and high yield credit usually tend to track one another quite closely, and so when there is a divergence that is a huge red flag. And as this chart from Zero Hedge demonstrates, a very large divergence has developed in recent months…
Sadly, the 358 point plunge for the Dow on Thursday was just the beginning.
Yes, there will be up days and down days, but we are now officially entering the “danger zone” as we roll into the months of September and October.
So will 2015 soon be mentioned along with the famous market crashes of 1929, 1987, 2001 and 2008?
Please feel free to share what you think by posting a comment below…
Yields on the riskiest junk bonds are absolutely soaring and the price of copper just hit a fresh six year low. To most people, those pieces of financial news are meaningless. But if you understand history, and you are aware of the patterns that immediately preceded previous stock market crashes, then you know how how huge both of those signs are. During the summer of 2008, junk bond prices absolutely cratered as junk bond yields skyrocketed. This was a very clear signal that financial markets were about to crash, and sure enough a couple of months later it happened. Now the exact same thing is happening again. The following comes from a Wall Street On Parade article that was posted on Tuesday entitled “Keep Your Eye on Junk Bonds: They’re Starting to Behave Like ‘08“…
According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets.
Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like U.S. Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.
And right now we are seeing the most volatility in the junkiest of the junk bonds.
The following comes from Wolf Richter, and my jaw just about dropped to the floor when I first saw this…
This chart of yields at the riskiest end of the junk bond market – bonds rated CCC and below – shows what happened. These bonds have been selling off over the past 12 months, with exception of the sucker rally earlier this year, and their yields more than doubled from less than 7.9% in June a year ago to 16.2% by Thursday evening. And Thursday was a massacre:
On Thursday, yields jumped 2.6 percentage points, from 13.58% to 16.18%, as these junk bonds plunged. Those kinds of single-day vertigo-inducing sell-offs are rare in normal times, and there haven’t been any since the Financial Crisis.
Amazingly, the Federal Reserve is actually thinking about raising interest rates in this environment.
If that sounds like a really bad idea to you, that is because it is a really bad idea.
Raising interest rates would just add fuel to the fire of this junk bond rout. DoubleLine Capital’s co-founder Jeffrey Gundlach agrees with me…
“To raise interest rates when junk bonds are nearly at a four-year low is a bad idea,” Gundlach said in a telephone interview.
Gundlach, widely followed for his prescient investment calls, said if the Fed begins raising interest rates in September, “it opens the lid on Pandora’s Box of a tightening cycle.”
Gundlach said the selling pressure in copper and commodity prices driven by worries over China’s growth outlook “should be a huge concern. It is the second-biggest economy in the world.”
Meanwhile, as Gundlach mentioned, the price of copper continues to plunge.
On Tuesday, it set a brand new six year low. It is now the lowest that it has been since the days of the last financial crisis.
And as you can see from this excerpt from a recent Investment Research Dynamics article, the price of copper started crashing before the stock market crash of 2008…
I wanted to keep this simple and just look at what is considered perhaps the best barometer of global economic activity:
You’ll note that the price of copper is headed lower and is back to the price level where it was in the middle of 2008, right before the great financial collapse. You’ll note that $3.6 trillion in Federal Reserve money printing – on top of trillions in Bank of Japan, ECB and People’s Bank of China money printing – has not been able to keep the price of copper from crashing again.
In case you haven’t figured it out by now, the global financial system is in real trouble.
Another sign that rough waters are ahead is the fact that global shipping has fallen into a dramatic slump. The following comes from the Telegraph…
World shipping has fallen into a deep slump over the late summer, dashing hopes of a quick recovery from the global trade recession earlier this year and heightening fears that the six-year economic expansion may be on its last legs.
Freight rates for container shipping from Asia to Europe fell by over 20pc in the second week of August, even though trade volumes should be picking up at this time of the year. The Shanghai Containerized Freight Index (SCFI) for routes to north European ports crashed by 23pc in five trading days.
Global economic activity is clearly slowing down, and there are 23 nations around the planet that are already experiencing stock market crashes.
The financial markets of the western world have not totally crashed just yet, but they are more leveraged and more vulnerable than ever. The following comes from Zero Hedge…
- The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.
- The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.
- Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.
- Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion… today they are $7 trillion: an amount equal to nearly 50% of US GDP.
- The Central Banks are now all leveraged at levels greater than or equal to where Lehman Brothers was when it imploded. The Fed is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at 30 to 1.
- The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 show Janet Yellen was worried about how to exit when the Fed’s balance sheet was $1.3 trillion (back in 2009). Today it’s over $4.5 trillion.
As I explained during a recent interview with Kate Dalley of Fox News radio, what is coming should be obvious to anyone that is willing to look at the numbers honestly.
The global financial system is going to crash.
Yes, this crisis is going to take years to fully play out, but by the time it is all said and done it is going to be much worse than what we experienced back in 2008 and 2009.
So buckle up tight and hold on for your life, because we are in for one wild ride.
Things continue to line up in textbook fashion for a major financial crisis by the end of 2015. This week, Wall Street has been buzzing about the first “death cross” that we have seen for the Dow since 2011. When the 50-day moving average moves below the 200-day moving average, that is a very important psychological moment for the market. And just like during the run up to the stock market crash of 2008, we are starting to witness lots of wild swings up and down. The Dow was up more than 200 points on Monday, the Dow was down more than 200 points on Tuesday, and it took a nearly 700 point roundtrip on Wednesday. This is exactly the type of behavior that we would expect to see during the weeks or months leading up to a crash. As any good sailor will tell you, when the waters start getting very choppy that is not a good sign. Of course what China is doing is certainly not helping matters. On Wednesday, the Chinese devalued the yuan for a second day in a row, and many believe that a new “currency war” has now begun.
So what does all of this mean?
Does this mean that the time of financial “shaking” has now arrived?
Let’s start with what is happening to the Dow. When the 50-day moving average crosses over the 200-day moving average, it is a very powerful signal. For example, as Business Insider has pointed out, if you would have got into stocks when the 50-day moving average moved above the 200-day moving average in December 2011, you would have experienced a gain of 43 percent by now…
The Dow Jones Industrial Average has been on an unrelenting upward trajectory since its October 2011 low.
The signal that convinced many traders that the market was now moving with a bullish bias was when the 50-day moving average of the index price rose above the 200-day moving average a couple of months later at the end of December.
Since then the market rallied 6,200 points to a high of 18,333 before pulling back to last night’s close of 17,404. That’s a gain of around 43% even though the market is 5% off its high.
But now a cross is happening in the other direction. That is why it is called a “death cross”. It is quite understandable why a lot of investors are freaking out about the fact that the 50-day moving average has moved below the 200-day moving average for the first time in four years. Every major stock market in history has been preceded by a death cross.
Of course no indicator is perfect. Sometimes these death crosses come just before market crashes, and other times nothing much seems to happen. The following comes from MarketWatch…
The 50-day moving average (or “MA”) crossed below a rising 200-day MA on July 7, 2010, when the Dow closed at 10,018.28. The Dow’s closing low for 2010 was actually hit two sessions earlier, at 9,686.48.
But the Dow fell another 5.9% over six weeks after the Aug. 24, 2011 death cross, and tumbled as much as 50% over 14 months after the one appearing on Jan. 3, 2008.
And keep in mind that when the January 2008 death cross appeared, the Dow had lost just 7.8% from its Oct. 9, 2007 peak. That means the bull market was still firmly in place, as the rule of thumb is a bear market is defined by a decline of at least 20% from a significant peak. In addition, the 200-day moving average didn’t turn lower until two weeks after the death cross appeared.
But this is not the only indicator pointing to trouble ahead. Even while we have many stocks hitting 52-week highs, we also have an extraordinary number hitting 52-week lows. This is called a “split market”, and this is a very ominous sign. In fact, according to Peter Boockvar 62 percent of all stocks on the New York Stock Exchange are already trading below their 200-day moving average…
Peter Boockvar, market strategist at Lindsey Group, said he believes the market is in a correction that began a few weeks ago, starting with commodities names getting hit. The small-cap Russell 2000 was also a leader of the declines. “The key is it’s infecting other areas of the market. You have every headwind and every reason to continue this correction,” he said.
“Going into today, 62 percent of the NYSE stocks were trading below the 200-day moving average,” said Boockvar. “More and more companies are dropping out of the bull market.”
At this point, we have already had more than 50 “split days” this year. King World News has just released an article which has pointed out this has only happened four times before, and a major stock market crash has followed each occurrence…
The only other times in history we’ve seen more than 50 split days during the past year were March 1968, August 1972, October 2000 and July 2006.
After all four of those, stocks lost more than a third of their value at some point during the next two years.
Are you starting to see?
A stock market crash is coming.
Another thing that has investors concerned is the fact that we have seen a large divergence between high yield credit and stocks. As Bloomberg has pointed out, when this happens a significant stock market decline follows more than 70 percent of the time…
While not without precedent, instances when anxiety in bonds didn’t seep into equities are rare. More than 70 percent of the time since 1996, as spreads widened as much as they have since April, the S&P 500 has fallen, with the average decline exceeding 10 percent, data compiled by Bloomberg show.
“This is something that sooner or later is going to impact the stock market,” said Russ Koesterich, global chief investment strategist at New York-based BlackRock Inc., which oversees $4.7 trillion. “Credit market conditions have not been benign and easy as where they were last summer.”
On top of everything else, it looks like a global currency war could be erupting.
According to USA Today, this desperate move by China to devalue the yuan may indicate that the Chinese economy is in far worse shape than most had thought…
One, China’s move suggests that its economy is in worst shape than believed. “It highlights the fragility of the global economy,” says Donald Luskin, chief investment officer at TrendMacro. Second, a weaker yuan means a stronger dollar, and a stronger dollar means U.S. products sold in China are more expensive, which means fewer sales of Apple iPhones, hotel rooms offered by Wynn Resorts and computer chips made by Micron Technology.
Lastly, there is a fear that other nations will respond to China by devaluing their own currencies to stay competitive.
“When people start talking about ‘currency wars,’ it’s never a good thing,” says Michael Farr, president of money-management firm Farr, Miller & Washington. “China’s move to devalue its currency could be the first shot across the bow towards a wider currency war.”
As I discussed yesterday, it seems like the phrase “currency war” has been thrown around a lot lately.
But what would that look like, and what would that mean for the global economy?
Well, former IMF economist Stephen Jen is suggesting that we could soon see major currencies all over the planet being devalued by up to 50 percent…
[The] devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil’s real to Indonesia’s rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen.
Volatility measures were already signaling rising distress in emerging markets even before China’s shock move. An index of anticipated price swings climbed above a rich-world gauge at the end of July, reversing the trend seen for most of the past six months.
The surging U.S. dollar combined with crashing prices for commodity exports has already created a state of crisis in South America. If emerging markets such as Brazil are forced to devalue their currencies to stay competitive with nations such as China, that is going to just exacerbate the problems.
For a long time, things in the financial world were pretty quiet.
But now events are beginning to accelerate.
A lot of people are extremely concerned about what is going to happen in September, and I think that there are very good reasons to be concerned.
Throughout our history, the majority of our stock market crashes have happened in the fall. Just remember what happened in 1929, 1987 and 2008.
Now we are approaching that time of the year once again, and things are lining up perfectly for a major financial crisis.
So what do you personally think will happen? Please feel free to join the discussion by posting a comment below…
Gerald Celente of the Trends Research Institute has just gone on the record with a prediction that there will be a stock market crash by the end of this calendar year. If you are not familiar with Gerald Celente, he is one of the most highly respected trends forecasters in the entire world. He has been featured on CNN, The Oprah Winfrey Show, The Today Show, Good Morning America, CBS Morning News, NBC Nightly News and Coast to Coast AM. Personally, I have a lot of respect for him. While it is true that not every single one of his forecasts about the future came to pass over the years, he does have a very solid track record that goes back for decades. He correctly predicted the 1987 stock market crash, the bursting of the dotcom bubble and the financial panic of 2008. Just a couple of days ago, he told Eric King the following: “I’m now predicting that we are going to see a global stock market crash before the end of the year.” Celente says that it won’t just be U.S. stocks either. He believes that crashes are also coming to “the DAX, the FTSE, the CAC, Shanghai, and the Nikkei”. It other words, it is going to be a truly global financial crisis and he says that there is “going to be panic on the streets from Wall Street to Shanghai and from the UK down to Brazil”.
When you go out on a limb like this, you are putting your credibility on the line. This is something that Celente has only done a few times in the past, and normally he has been spot on…
Rarely do I ever put a date on market crashes. I did it in 1987 when I forecast the 1987 stock market crash — that was in the Wall Street Journal. I also forecast the ‘Panic of 2008,’ and the ‘dot-com bust’ in October of 1999, when I said it (the dot-com mania) would fail in the second quarter of 2000…
Of course Celente is far from alone. Many others have also been warning that a new financial crisis is imminent.
For instance, just check out what David Stockman recently told CNBC…
David Stockman has long warned that the stock market is on the verge of a massive collapse, and the recent price action has him even more convinced than ever that the bottom is about to fall out.
“I think it’s pretty obvious that the top is in,” the Reagan administration’s OMB director said Thursday on CNBC’s “Futures Now.” The S&P 500 has traded in a historically narrow range for the better part of 2015, having moved just 1 percent higher year to date. “It’s just waiting for the knee-jerk bulls, robo traders and dip buyers to finally capitulate.”
Stockman, whose past claims have yet to come to fruition, still believes that the excessive monetary policy from central banks around the world has created a “debt supernova,” and all the signs point to “the end of the central bank enabled bubble,” which could cause a worldwide recession.
Just a few days ago, I authored an article entitled “8 Financial Experts That Are Warning That A Great Financial Crisis Is Imminent” which showed that a whole bunch of other financial experts are sounding the alarm about an implosion of the financial markets.
And before any of these warnings came out, I issued my “red alert” for the last six months of 2015 back on June 25th.
There is a growing consensus that something really, really bad is about to happen in the very near future.
You know that we are really late in the game when the mainstream media starts sounding exactly like The Economic Collapse Blog.
On July 22nd, I authored a piece entitled “Commodities Collapsed Just Before The Last Stock Market Crash – So Guess What Is Happening Right Now?”
Now compare that headline to this recent one from Bloomberg: “Commodities Are Crashing Like It’s 2008 All Over Again“.
The mainstream media is starting to get it. The exact same patterns that we witnessed just prior to the last financial crisis are playing out once again right before our very eyes. Here is an excerpt from that Bloomberg article…
Attention commodities investors: Welcome back to 2008!
The meltdown has pushed as many commodities into bear markets as there were in the month after the collapse of Lehman Brothers Holdings Inc., which spurred the worst financial crisis seven years ago since the Great Depression.
Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20 percent from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon.
This is the kind of stuff that I have been hammering on for weeks.
Another sign that we saw back in 2008 that is repeating once again is a substantial slowdown in global trade. Over the weekend, we got some more bad news on this front from China. The following comes from Zero Hedge…
Overnight we got another acute reminder of just who is lying hunched over, comatose in the driver’s seat of global commerce: the country whose July exports just crashed by 8.3% Y/Y (and down 3.6% from the month before) far greater than the consensus estimate of only a 1.5% drop, and the biggest drop in four months following the modest June rebound by 2.8%: China.
It wasn’t just exports, imports tumbled as well by 8.1%, fractionally worse than the -8.0% consensus, and down from the -6.1% in June as China’s commodity tolling operations are suddenly mothballed.
The crisis that so many have been waiting for is here.
As the coming weeks and months play out, there will be good days and there will be bad days. Remember, some of the biggest one day gains in U.S. stock market history happened right in the middle of the financial crisis of 2008. So don’t get fooled by what happens on any one particular day.
Also, please do not think that this crisis will be “over” by the end of 2015. What we are moving into is just the start of the crisis. Things will continue to unravel as we move into 2016 and beyond. The recession that we experienced back in 2008 and 2009 will seem like a Sunday picnic compared to what is coming by the time that everything is all said and done.
So that is why I work so hard to encourage people to get prepared.
What we are facing is not going to last for weeks or for months.
The coming crisis is going to last for years, and it is going to be painful beyond what most people would dare to imagine.
The debt crisis in Puerto Rico could potentially cost financial institutions in the United States tens of billions of dollars in losses. This week, Puerto Rico Governor Alejandro Garcia Padilla publicly announced that Puerto Rico’s 73 billion dollar debt is “not payable,” and a special adviser that was recently appointed to help straighten out the island’s finances said that it is “insolvent” and will totally run out of cash very shortly. At this point, Puerto Rico’s debt is approximately 15 times larger than the per capita median debt of the 50 U.S. states. Yes, the Greek debt crisis is larger, as Greece currently owes about $350 billion to the rest of the planet. But only about $14 billion of that total is owed to U.S. financial institutions. But with Puerto Rico, things are very different. Just about the entire 73 billion dollar debt is owed to U.S. financial institutions, and this could potentially cause massive problems for some extremely leveraged Wall Street firms.
There is a reason why Puerto Rico is called “America’s Greece”. In Puerto Rico today, more than 40 percent of the population is living in poverty, the unemployment rate is over 12 percent, and the economy of the small island nation has continually been in recession since 2006.
Yet all this time Puerto Rico has continued to pile up even more debt. Finally, it has gotten to the point where all of this debt is simply unpayable
Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit’s historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.
Puerto Rico “urgently needs our help,” Rhodes said. “It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer,” he added.
This is why I hammer on the danger of U.S. government debt so often. As we see with the examples of Greece and Puerto Rico, eventually a day of reckoning always arrives. And when the day of reckoning arrives, power shifts into the hands of those that you owe the money too.
It would be hard to understate just how severe the debt crisis in Puerto Rico has become. Former IMF economist Anne Krueger has gone so far as to say that it is “really dire”…
“The situation is dire, and I mean really dire,” said former IMF economist Anne Krueger, co-author of the report commissioned by the U.S. territory, which recommended debt restructuring, tax hikes and spending cuts. “The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico.”
So who is going to get left holding the bag?
As I mentioned at the top of this article, major U.S. financial institutions are very heavily exposed. Income from Puerto Rican bonds is exempt from state and federal taxation, and so that made them very attractive to many U.S. investors. According to USA Today, there are 180 mutual funds that have “at least 5% of their portfolios in Puerto Rican bonds”…
The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets and unsuspecting American investors. Morningstar, an investment research firm based in Chicago, estimated in 2013 that 180 mutual funds in the United States and elsewhere have at least 5% of their portfolios in Puerto Rican bonds.
It is important to keep in mind that many of these financial institutions are very highly leveraged. So just a “couple of percentage points” could mean the different between life and death for some of these firms.
And unlike what is happening with Greece, the private financial institutions that hold Puerto Rican bonds are not likely to be very eager to “negotiate”. In fact, the largest holder of Puerto Rican debt has already stated that it is very much against any kind of restructuring…
U.S. fund manager OppenheimerFunds, the largest holder of Puerto Rico debt among U.S. municipal bond funds, warned the island it stands ready to defend the terms of bonds it holds, a day after the governor said he wanted to restructure debt and postpone bond payments.
What Oppenheimer is essentially saying is that it does not plan to give Puerto Rico any slack at all. Here is more from the article that I just quoted above…
OppenheimerFunds, with about $4.5 billion exposure to Puerto Rico according to Morningstar, said it believed the island could repay bondholders while providing essential services to citizens and growing the economy. It said it stood ready “to defend the previously agreed to terms in each and every bond indenture.”
“We are disheartened that Governor Padilla, in a public forum, has called for negotiations with other creditors, representing and including the millions of individual Americans that hold Puerto Rico municipal bonds,” a spokesman for Oppenheimer said in a statement.
But Puerto Rico simply does not have the money to meet all of their debt obligations.
So somebody is not going to get paid at some point.
When that happens, those that insure Puerto Rican bonds are also going to take tremendous losses. The following comes from a recent piece by Stephen Flood…
Now, bondholders are at risk as are the funds which hold Puerto Rican bonds and, more importantly, those who insure them in the derivatives market.
Dave Kranzler, from Investment Research Dynamics has warned that there are signs that the Puerto Rico situation may not remain a local crisis for much longer.
He points out that share prices of MBIA, the bond insurers, have been plummeting. MBIA are valued at $3.9 billion whereas their exposure to Puerto Rican debt is around $4.5 billion. Kranzler reckons their exposure could even be multiples of that figure. A default could wipe them out.
He also points out that the firm’s largest shareholders are Warburg Pincus, the firm to which Timothy Geithner went after his stint as Treasury Secretary, when he helped paper over the chasms opening up in the financial system.
Did you notice the word “derivatives” in that quote?
Hmmm – who has been writing endless articles warning about the danger of derivatives for years?
Who has been warning that “this gigantic time bomb is going to go off and absolutely cripple the entire global financial system“?
When Puerto Rico defaults, bond insurers are going to be expected to step up and make huge debt service payments to investors.
But this just might bankrupt some of these big bond insurers. In fact, we have already started to see the stock prices of some of these bond insurers begin to plummet. The following comes from the Wall Street Journal…
Bond insurers MBIA Inc. and Ambac Financial Group Inc. are down again Tuesday as concerns over Puerto Rico’s ability to repay its debt multiply.
Investors fear that both firms face the potential for steep losses on their promises to backstop billions of Puerto Rico’s $72 billion of debt.
MBIA’s stock closed down 23% Monday, and fell more than 10% before rebounding Tuesday. By late afternoon, the stock was down 6%. Ambac’s stock fell 12% Monday and was off 14% Tuesday.
Of course Puerto Rico is just the tip of the iceberg of the coming debt crisis in the western hemisphere, just like Greece is just the tip of the iceberg of the coming debt crisis in Europe.
So stay tuned, because the second half of 2015 has now begun, and the remainder of this calendar year promises to be extremely “interesting”.
Well, the Nasdaq finally did it. It has climbed all the way back to where it was at the peak of the dotcom bubble. Back in March 2000, the Nasdaq set an all-time record high of 5,048.62. On Thursday, after all these years, that all-time record was finally eclipsed. The Nasdaq closed at 5056.06, and Wall Street greatly rejoiced. So if you invested in the Nasdaq at the peak of the dotcom bubble, you are just finally breaking even 15 years later. Unfortunately, the truth is that stocks have not been soaring because the U.S. economy is fundamentally strong. Just like the last two times, what we are witnessing is an irrational financial bubble. Sometimes these irrational bubbles can last for a surprisingly long time, but in the end they always burst. And even now there are signs of economic trouble bubbling to the surface all around us. The following are 11 signs that we are entering the next phase of the global economic crisis…
#1 It is being projected that half of all fracking companies in the United States will be “dead or sold” by the end of this year.
#2 The rig count just continues to fall as the U.S. oil industry implodes. Incredibly, the number of rigs in operation in the United States has fallen for 19 weeks in a row.
#3 McDonald’s has announced that it will be closing 700 “poor performing” restaurants in 2015. Why would McDonald’s be doing this if the economy was actually getting better?
#4 As I wrote about the other day, we could be right on the verge of a Greek debt default. In fact, we learned on Thursday that the Greek government has been “running on empty” for months…
Greece warned it will go bankrupt next week after failing to stump up enough cash to pay millions of public sector workers and its international debts.
Deputy finance minister Dimitras Mardas set alarm bells ringing yesterday when he declared the country had been ‘running on empty’ since February.
With a debt repayment deadline looming on May 1, Greece faces the deeply damaging prospect of having to snub its own employees to make a €200m payment to the International Monetary Fund.
#5 Coal accounts for approximately 40 percent of all electrical generation on the entire planet. When the price of coal starts to drop, that is a sign that economic activity is slowing down. Just prior to the last financial crisis in 2008, the price of coal shot up dramatically and then crashed really hard. Well, guess what? The price of coal has been crashing again, and it is already lower than it was at any point during the last recession.
#6 The price of iron ore has been crashing as well. It is down 35 percent in the last nine months, and David Stockman believes that this is because of a major deflationary crisis that is brewing in China…
There is no better measure of the true contraction underway in China than the price of iron ore. The Wall Street stock peddlers will tell you not to be troubled by the 70% plunge from the 2012 highs and the 35% drop just in the last nine months. According to them, its all the fault of the big global miners who went overboard opening up massive new iron ore pits and mining infrastructure.
#7 At this point, China accounts for more total global trade than anyone else in the world. That is why it is so alarming that Chinese imports and exports are both absolutely collapsing…
China’s monthly trade data shows exports fell in March from a year ago by 14.6% in yuan terms, compared to expectations for a rise of more than 8%.
Imports meanwhile fell 12.3% in yuan terms compared to forecasts for a fall of more than 11%.
#8 The number of publicly traded companies in the United States that filed for bankruptcy during the first quarter of 2015 was more than double the number that filed for bankruptcy during the first quarter of 2014.
#9 New home sales in the United States just declined at their fastest pace in almost two years.
#10 U.S. manufacturing data has been shockingly weak lately…
On the heels of weak PMIs from Europe and Asia, Markit’s US Manufacturing PMI plunged to 54.2 in April (from 55.7). Against expectations of a rise to 55.6, this is the biggest miss on record. Of course, this is ‘post-weather’ so talking-heads will need to find another excuse as New Orders declined for the first time since Nov 2014.
#11 When priced according to “the average blue-collar hourly wage“, U.S. stocks are the most expensive that they have ever been in history right now. To say that this financial bubble is overdue to burst is a massive understatement.
For a long time, I have been pointing to 2015 as a major “turning point” for the global financial system, and I still feel that way.
But for the first four months of this year, things have been surprisingly quiet – at least on the surface.
So what is going on?
Well, I believe that what we are experiencing right now is the proverbial “calm before the storm”. There is all sorts of turmoil brewing just beneath the surface, but for the moment things seem like they are running along just fine to most people. Unfortunately, this period of quiet is not going to last much longer.
And those that are “in the know” are already moving their money in anticipation of what is coming. For example, consider the words of Snapchat founder and CEO Evan Spiegel…
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets – at these values, however, all tech stocks are expensive – even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won’t be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks.
It may not happen next week, or even next month, but big financial trouble is coming.
And when it finally arrives, it is going to shock the world, even though anyone with any sense can see the coming crisis approaching from a mile away.