The Beginning Of The End Ad
Gold Buying Guide: Golden Eagle Coins
Lear Capital: The Best Source for Buying Gold & Precious Metal Investing

Recent Posts

The Preppers Blueprint Economic Collapse Blog Get Prepared Now Ad

Enter your email to subscribe to The Economic Collapse Blog:

Delivered by FeedBurner

We Are Getting Very Close To An Inverted Yield Curve – And If That Happens A Recession Is Essentially Guaranteed

If something happens seven times in a row, do you think that there is a pretty good chance that it will happen the eighth time too?  Immediately prior to the last seven recessions, we have seen an inverted yield curve, and it looks like it is about to happen again for the very first time since the last financial crisis.  For those of you that are not familiar with this terminology, when we are talking about a yield curve we are typically talking about the spread between two-year and ten-year U.S. Treasury bond yields.  Normally, long-term rates are higher than short-term rates, but when investors get spooked about the economy this can reverse.  Just before every single recession since 1960 the yield curve has “inverted”, and now we are getting dangerously close to it happening again for the first time in a decade.

On Thursday, the spread between two-year and ten-year Treasuries dropped to just 79 basis points.  According to Business Insider, this is almost the tightest that the yield curve has been since 2007…

The spread between the yields on two-year and 10-year Treasurys fell to 79 basis points, or 0.79%, after Wednesday’s disappointing consumer-price and retail-sales data. The spread is currently within a few hundredths of a percentage point of being the tightest it has been since 2007.

Perhaps more notably, it is on a path to “inverting” — meaning it would cost more to borrow for the short term than the long term — for the first time since the months leading up to the financial crisis.

So why is an inverted yield curve such a big event?  Here is how CNBC recently explained it…

An inverted yield curve, which has correctly predicted the last seven recessions going back to the late 1960’s, occurs when short-term interest rates yield more than longer-term rates. Why is an inverted yield curve so crucial in determining the direction of markets and the economy? Because when bank assets (longer-duration loans) generate less income than bank liabilities (short-term deposits), the incentive to make new loans dries up along with the money supply. And when asset bubbles are starved of that monetary fuel they burst. The severity of the recession depends on the intensity of the asset bubbles in existence prior to the inversion.

What is truly alarming is that the Federal Reserve can see what is happening to the yield curve, and they can see all of the other indications that the economy is slowing down, but they decided to raise rates anyway.

Raising rates in a slowing economy is a recipe for disaster, but the Fed has gone beyond that and has declared that it intends to start unwinding the 4.5 trillion dollars of assets that have accumulated on the Fed’s balance sheet.

Janet Yellen is trying to tell us that this will be a smooth process, but many analysts are far from convinced.  For instance, just consider what Peter Boockvar recently told CNBC

“They desperately want this to be an easy, smooth, paint-drying type of process, but there’s no chance,” said Peter Boockvar, chief market analyst at The Lindsey Group. “The whole purpose of quantitative easing was to inflame the markets higher. Why shouldn’t the reverse happen when we do quantitative tightening?”

I hope that there are no political motivations behind the Fed’s moves.  During the Obama era, interest rates were pushed all the way to the floor and the financial system was flooded with new money by the Fed.  But now the Fed is completely reversing the process now that Donald Trump is in office.

When the inevitable stock market crash comes, Trump will get most of the blame, but it will actually be the Federal Reserve’s fault.  If the Fed had not injected trillions of dollars into the system, stocks would not have ever gotten this high.  And now that they are reversing the process that created the bubble, a whole lot of innocent people out there are going to get really hurt as stock prices come crashing down.

And if you thought that the last recession was bad for average American families, wait until you see what happens this time around.  As Kevin Muir has noted, it is utter madness for the Fed to hit the breaks in a rapidly slowing economy…

There are a million other little signs the US economy is rolling over, but that’s not important. What is important is the realization that until financial conditions back up, the Fed will not ease off the brake.

To top it all off, the Fed is not only braking, but they are also preparing the market for a balance sheet unwind. This is like QE in reverse.

It’s a perfect storm of negativity. An overly tight Fed that is determined to withdraw monetary stimulus even in the face of a declining economy.

Even if the Fed ultimately decides not to unwind their balance sheet very rapidly, rising rates will still significantly slow down economic activity.

Rising mortgage rates are going to hit the housing market hard, rising rates on auto loans are horrible news for an auto industry that is already having a horrendous year, and rising rates on credit cards will mean higher credit card payments for millions of American families.

And this comes at a time when indicator after indicator is already screaming that the next recession is dead ahead.

Today, an unelected, unaccountable central banking cartel has far more power over our economy than anyone else, and that includes President Trump and Congress.  The more manipulating they do, the bigger our economic booms and busts become, and this next bust is going to be a doozy.

There have been 18 distinct recessions or depressions since the Federal Reserve was created in 1913, and if we finally want to get off of this economic roller coaster for good we need to abolish the Federal Reserve.

As many of you may have heard, I am very strongly leaning toward running for Congress here in Idaho, and one of the key things that is going to set me apart from any other candidate is that I am very passionate about shutting down the Federal Reserve.  I recently detailed why it is imperative that we do this in an article entitled “The Federal Reserve Must Go”.  Central banks are designed to create government debt spirals, and the size of the U.S. national debt has gotten more than 5000 times larger since the Fed was initially established.

If we ever want to do something about our national debt, and if we ever want to get our economy back on track on a permanent basis, we have got to do something about the Federal Reserve.

Anyone that would suggest otherwise is just wasting your time.

A Financial Nightmare For Italy: The Yield Curve For Italian Bonds Is Turning Upside Down

What we are all watching unfold right now is a complete and total financial nightmare for Italy.  Italian bond yields are soaring to incredibly dangerous levels, and now the yield curve for Italian bonds is turning upside down.  So what does that mean?  Normally, government debt securities that have a longer maturity pay a higher interest rate.  There is typically more risk when you hold a bond for an extended period of time, so investors normally demand a higher return for holding debt over longer time periods.  But when investors feel as though a major economic downturn or a substantial financial crisis is coming, the yield on short-term bonds will often rise above the yield for long-term bonds.  This happened to Greece, to Ireland and to Portugal and all three of them ended up needing bailouts.  Now it is happening to Italy and Spain may follow shortly, but the EU cannot afford to bail out either of them.  An inverted yield curve is a major red flag.  Unfortunately, there does not seem to be much hope that there is going to be a solution to this European debt crisis any time soon.

We are witnessing a crisis of confidence in the European financial system.  All over Europe bond yields went soaring today.  When I finished my article about the financial crisis in Italy on Tuesday night, the yield on 10 year Italian bonds was at 6.7 percent.  I awoke today to learn that it had risen to 7.2 percent.

But even more importantly, the yield on 5 year Italian bonds is now sitting at about 7.5 percent, and the yield on 2 year Italian bonds is about 7.2 percent.

The yield curve for Italian bonds is in the process of turning upside down.

If you want to see a frightening chart, just look at this chart that shows what has happened to 2 year Italian bonds recently.

Do phrases like “heading straight up” and “going through the roof” come to mind?

This comes despite rampant Italian bond buying by the European Central Bank.  CNBC is reporting that the European Central Bank was aggressively buying up 2 year Italian bonds and 10 year Italian bonds on Wednesday.

So what does it say when even open market manipulation by the European Central Bank is not working?

Of course some in the financial community are saying that the European Central Bank is not going far enough.  Some prominent financial professionals are even calling on the European Central Bank to buy up a trillion euros worth of European bonds in order to soothe the markets.

Part of the reason why Italian bond yields rose so much on Wednesday was that London clearing house LCH Clearnet raised margin requirements on Italian government bonds.

But that doesn’t explain why bond yields all over Europe were soaring.

The reality is that bond yields for Spain, Belgium, Austria and France also skyrocketed on Wednesday.

This is a crisis that is rapidly engulfing all of Europe.

But at this point, bond yields in Europe are still way too low.  European leaders shattered confidence when they announced that they were going to ask private Greek bondholders to take a 50% haircut.  So now rational investors have got to be asking themselves why they would want to hold any sovereign European debt at all.

There is no way in the world that any rational investor should invest in European bonds at these levels.

Are you kidding me?

If there is a very good chance that private bondholders will be forced to take huge haircuts on these bonds at some point in the future then they should be demanding much, much higher returns than this.

But if bond yields continue to go up in Europe, we are going to quickly come to a moment of very great crisis.

The following is what Rod Smyth of Riverfront Investment Group recently told his clients about the situation that is unfolding in Italy….

“In our view, 7% is a ‘tipping point’ for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance”

Other analysts are speaking of a “point of no return”.  For example, check out what a report that was just released by Barclays Capital had to say….

“At this point, Italy may be beyond the point of no return. While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.”

But unlike Greece, Ireland and Portugal, the EU simply cannot afford to bail out Italy.

Italy’s national debt is approximately 2.7 times larger than the national debts of Greece, Ireland and Portugal put together.

Plus, as I noted earlier, Spain is heading down the exact same road as Italy.

Europe has simply piled up way, way too much debt and now they are going to pay the price.

Global financial markets are very nervous right now.  You can almost smell the panic in the air.  As a CNBC article posted on Wednesday noted, one prominent think tank actually believes that there is a 65 percent chance that we will see a “banking crisis” by the end of November….

“There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks.”

Personally, I believe that particular think tank is being way too pessimistic, but this just shows how much fear is out there right now.

It seems more likely to me that the European debt crisis will really unravel once we get into 2012.  And when it does, it just won’t be a few countries that feel the pain.

For example, when Italy goes down many of their neighbors will be in a massive amount of trouble as well.  As you can see from this chart, France has massive exposure to Italian debt.

Just like we saw a few years ago, a financial crisis can be very much like a game of dominoes.  Once the financial dominoes start tumbling, it will be hard to predict where the damage will end.

Some believe that what is coming is going to be even worse than the financial nightmare of a few years ago.  For example, the following is what renowned investor Jim Rogers recently told CNBC….

“In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful”

Rogers says that the reason the next crisis is going to be so bad is because debt levels are so much higher than they were back then….

“Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse”

So what is the “endgame” for this crisis?

German Chancellor Angela Merkel is saying that fundamental changes are needed….

“It is time for a breakthrough to a new Europe”

So what kind of a “breakthrough” is she talking about?  Well, Merkel says that the ultimate solution to this crisis is going to require even tighter integration for Europe….

“That will mean more Europe, not less Europe”

As I have written about previously, the political and financial elite of Europe are not going to give up on the EU because of a few bumps in the road.  In fact, at some point they are likely to propose a “United States of Europe” as the ultimate solution to this crisis.

But being more like the United States is not necessarily a solution to anything.

The U.S. is 15 trillion dollars in debt and extreme poverty is spreading like wildfire in this nation.

No, the real problem is government debt and the central banks of the western world which act as perpetual debt machines.

By not objecting to central banks and demanding change, those of us living in the western world have allowed ourselves to become enslaved to gigantic mountains of debt.  Unless something dramatically changes, our children and our grandchildren will suffer under the weight of this debt for as long as they live.

Don’t we owe future generations something better than this?

Ready Made Resources 2015
Finca Bayano
Panama Relocation Tours
The 1 Must Own Gold Stock
180x350




 

Credible Warning

ProphecyHour

Facebook Twitter More...