Bonds

Who Is Behind The Oil War, And How Low Will The Price Of Crude Go In 2015?

December 31, 2014December 31, 2014 by Michael

Who is to blame for the staggering collapse of the price of oil? Is it the Saudis? Is it the United States? Are Saudi Arabia and the U.S. government working together to hurt Russia? And if this oil war continues, how far will the price of oil end up falling in 2015? As you will see below, some analysts believe that it could ultimately go below 20 dollars a barrel. If we see anything even close to that, the U.S. economy could lose millions of good paying jobs, billions of dollars of energy bonds could default and we could see trillions of dollars of derivatives related to the energy industry implode. The global financial system is already extremely vulnerable, and purposely causing the price of oil to crash is one of the most deflationary things that you could possibly do. Whoever is behind this oil war is playing with fire, and by the end of this coming year the entire planet could be dealing with the consequences.

Ever since the price of oil started falling, people have been pointing fingers at the Saudis. And without a doubt, the Saudis have manipulated the price of oil before in order to achieve geopolitical goals. The following is an excerpt from a recent article by Andrew Topf…

We don’t have to look too far back in history to see Saudi Arabia, the world’s largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices.

It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.

The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel.

Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC’s refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.

If the Saudis wanted to stabilize the price of oil, they could do that immediately by announcing a production cutback.

The fact that they have chosen not to do this says volumes.

In addition to wanting to harm U.S. shale producers, some believe that the Saudis are determined to crush Iran. This next excerpt comes from a recent Daily Mail article…

Above all, Saudi Arabia and its Gulf allies see Iran — a bitter religious and political opponent — as their main regional adversary.

They know that Iran, dominated by the Shia Muslim sect, supports a resentful underclass of more than a million under-privileged and angry Shia people living in the gulf peninsula — a potential uprising waiting to happen against the Saudi regime.

The Saudis, who are overwhelmingly Sunni Muslims, also loathe the way Iran supports President Assad’s regime in Syria — with which the Iranians have a religious affiliation. They also know that Iran, its economy plagued by corruption and crippled by Western sanctions, desperately needs the oil price to rise. And they have no intention of helping out.

The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices.

There are others out there that are fully convinced that the Saudis and the U.S. are actually colluding to drive down the price of oil, and that their real goal is to destroy Russia.

In fact, Venezuela’s President Nicolas Maduro openly promoted this theory during a recent speech on Venezuelan national television…

“Did you know there’s an oil war? And the war has an objective: to destroy Russia,” he said in a speech to state businessmen carried live on state TV.

“It’s a strategically planned war … also aimed at Venezuela, to try and destroy our revolution and cause an economic collapse,” he added, accusing the United States of trying to flood the market with shale oil.

Venezuela and Russia, which both have fractious ties with Washington, are widely considered the nations hardest hit by the global oil price fall.

And as I discussed just the other day, Russian President Vladimir Putin seems to agree with this theory…

“We all see the lowering of oil prices. There’s lots of talk about what’s causing it. Could it be an agreement between the U.S. and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.”

Without a doubt, Obama wants to “punish” Russia for what has been going on in Ukraine. Going after oil is one of the best ways to do that. And if the U.S. shale industry gets hurt in the process, that is a bonus for the radical environmentalists in Obama’s administration.

There are yet others that see this oil war as being even more complicated.

Marin Katusa believes that this is actually a three-way war between OPEC, Russia and the United States…

“It’s a three-way oil war between OPEC, Russia and North American shale,” says Marin Katusa, author of “The Colder War,” and chief energy investment strategist at Casey Research.

Katusa doesn’t see production slowing in 2015: “We know that OPEC will not be cutting back production. They’re going to increase it. Russia has increased production to all-time highs.” With Russia and OPEC refusing to give up market share how will the shale industry compete?

Katusa thinks the longevity and staying power of the shale industry will keep it viable and profitable. “The versatility and the survivability of a lot of these shale producers will surprise people. I don’t see that the shale sector is going to collapse over night,” he says. Shale sweet spots like North Dakota’s Bakken region and Texas’ Eagle Ford area will help keep production levels up and output steady.

Whatever the true motivation for this oil war is, it does not appear that it is going to end any time soon.

And so that means that the price of oil is going to go lower.

How much lower?

One analyst recently told CNN that we could see the price of oil dip into the $30s next year…

Few saw the energy meltdown coming. Now that it’s here, industry analysts warn another move lower is possible as the momentum remains firmly to the downside.

“If this doesn’t hold, we could go back to price levels in late 2008 and early 2009 — down in the $30s. There’s no reason why it couldn’t happen,” said Darin Newsom, senior analyst at Telvent DTN.

Others are even more pessimistic. For instance, Jeremy Warner of the Sydney Morning Herald, who correctly predicted that the price of oil would fall below $80 this year, is now forecasting that the price of oil could fall all the way down to $20 next year…

Revisiting the past year’s predictions is, for most columnists a frequently humbling experience. The howlers tend to far outweigh the successes. Yet, for a change, I can genuinely claim to have got my main call for markets – that oil would sink to $US80 a barrel or less – spot on, and for the right reasons, too.

Just in case you think I’m making it up, this is what I said 12 months ago: “My big prediction is for $US80 oil, from which much of the rest of my outlook for the coming year flows. It’s hard to overstate the significance of a much lower oil price – Brent at, say, $US80 a barrel, or perhaps lower still – yet this is a surprisingly likely prospect, the implications of which have been largely missed by mainstream economic forecasters.”

If on to a good thing, you might as well stick with it; so for the coming year, I’m doubling up on this forecast. Far from bouncing back to the post crisis “normal” of something over $US100 a barrel, as many oil traders seem to expect, my view is that the oil price will remain low for a long time, sinking to perhaps as little as $US20 a barrel over the coming year before recovering a little.

But even Warner’s chilling prediction is not the most bearish.

A technical analyst named Abigail Doolittle recently told CNBC that under a worst case scenario the price of oil could fall as low as $14 a barrel…

No one really saw 2014’s dramatic plunge in oil price coming, so it’s probably fair to say that any predictions about where it’s going from here fall somewhere between educated guesses and picking a number out of a hat.

In that light, it’s less than shocking to see one analyst making a case—albeit in a pure outlier sense—for a drop all the way below $14 a barrel.

Abigail Doolittle, who does business under the name Peak Theories Research, posits that current chart trends point to the possibility that crude has three downside target areas where it could find support—$44, $35 and the nightmare scenario of, yes, $13.65.

But the truth is that none of those scenarios need to happen in order for this oil war to absolutely devastate the U.S. economy and the U.S. financial system.

There is a very strong correlation between the price of oil and the performance of energy stocks and energy bonds. But over the past couple of weeks this correlation has been broken. The following chart comes from Zero Hedge…

It is inevitable that at some point we will see energy stocks and energy bonds come back into line with the price of crude oil.

And it isn’t just energy stocks and bonds that we need to be concerned about. There is only one other time in all of history when the price of oil has crashed by more than 50 dollars in less than a year. That was in 2008 – just before the great financial crisis that erupted in the fall of that year. For much, much more on this, please see my previous article entitled “Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”

Whether the price of oil crashed or not, we were already on the verge of massive financial troubles.

But the fact that the price of oil has collapsed makes all of our potential problems much, much worse.

As we enter 2015, keep an eye on energy stocks, energy bonds and listen for any mention of problems with derivatives. The next great financial crisis is right around the corner, but most people will never see it coming until they are blindsided by it.

Junk Bonds Are Going To Tell Us Where The Stock Market Is Heading In 2015

December 18, 2014December 18, 2014 by Michael

Do you want to know if the stock market is going to crash next year? Just keep an eye on junk bonds. Prior to the horrific collapse of stocks in 2008, high yield debt collapsed first. And as you will see below, high yield debt is starting to crash again. The primary reason for this is the price of oil. The energy sector accounts for approximately 15 to 20 percent of the entire junk bond market, and those energy bonds are taking a tremendous beating right now. This panic in energy bonds is infecting the broader high yield debt market, and investors have been pulling money out at a frightening pace. And as I have written about previously, almost every single time junk bonds decline substantially, stocks end up following suit. So don’t be fooled by the fact that some comforting words from Janet Yellen caused stock prices to jump over the past couple of days. If you really want to know where the stock market is heading in 2015, keep a close eye on the market for high yield debt.

If you are not familiar with junk bonds, the concept is actually very simple. Corporations that do not have high credit ratings typically have to pay higher interest rates to borrow money. The following is how USA Today describes these bonds…

High-yield bonds are long-term IOUs issued by companies with shaky credit ratings. Just like credit card users, companies with poor credit must pay higher interest rates on loans than those with gold-plated credit histories.

But in recent years, interest rates on junk bonds have gone down to ridiculously low levels. This is another bubble that was created by Federal Reserve policies, and it is a colossal disaster waiting to happen. And unfortunately, there are already signs that this bubble is now beginning to burst…

Back in June, the average junk bond yield was 3.90 percentage points higher than Treasury securities. The average energy junk bond yielded 3.91 percentage points higher than Treasuries, Lonski says.

That spread has widened to 5.08 percentage points for junk bonds vs. 7.86 percentage points for energy bonds — an indication of how worried investors are about default, particularly for small, highly indebted companies in the fracking business.

The reason why so many analysts are becoming extremely concerned about this shift in junk bonds is because we also saw this happen just before the great stock market crash of 2008. In the chart below, you can see how yields on junk bonds started to absolutely skyrocket in September of that year…

Of course we have not seen a move of that magnitude quite yet this year, but without a doubt yields have been spiking. The next chart that I want to share is of this year. As you can see, the movement over the past month or so has been quite substantial…

And of course I am far from the only one that is watching this. In fact, there are some sharks on Wall Street that plan to make an absolute boatload of cash as high yield bonds crash.

One of them is Josh Birnbaum. He correctly made a giant bet against subprime mortgages in 2007, and now he is making a giant bet against junk bonds…

When Josh Birnbaum was at Goldman Sachs in 2007, he made a huge bet against subprime mortgages.

Now he’s betting against something else: high-yield bonds.

From The Wall Street Journal:

Joshua Birnbaum, the ex-Goldman Sachs Group Inc. trader who made bets against subprime mortgages during the financial crisis, now has more than $2 billion in wagers against high-yield bonds at his Tilden Park Capital Management LP hedge-fund firm, according to investor documents.

Could you imagine betting 2 billion dollars on anything?

If he is right, he is going to make an incredible amount of money.

And I have a feeling that he will be. As a recent New American article detailed, there is already panic in the air…

It’s a mania, said Tim Gramatovich of Peritus Asset Management who oversees a bond portfolio of $800 million: “Anything that becomes a mania — ends badly. And this is a mania.”

Bill Gross, who used to run PIMCO’s gigantic bond portfolio and now advises the Janus Capital Group, explained that “there’s very little liquidity” in junk bonds. This is the language a bond fund manager uses to tell people that no one is buying, everyone is selling. Gross added: “Everyone is trying to squeeze through a very small door.”

Bonds issued by individual energy developers have gotten hammered. For instance, Energy XXI, an oil and gas producer, issued more than $2 billion in bonds just in the last four years and, up until a couple of weeks ago, they were selling at 100 cents on the dollar. On Friday buyers were offering just 64 cents. Midstates Petroleum’s $700 million in bonds — rated “junk” by both Moody’s and Standard and Poor’s — are selling at 54 cents on the dollar, if buyers can be found.

So is there anything that could stop junk bonds from crashing?

Yes, if the price of oil goes back up to 80 dollars or more a barrel that would go a long way to settling things back down.

Unfortunately, many analysts are convinced that the price of oil is going to head even lower instead…

“We’re continuing to search for a bottom, and might even see another significant drop before the year-end,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

As I write this, the price of U.S. oil has fallen $1.69 today to $54.78.

If the price of oil stays this low, junk bonds are going to keep crashing.

If junk bonds keep crashing, the stock market is almost certainly going to follow.

For additional reading on this, please see my previous article entitled “‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal“.

But just like in the years leading up to the crash of 2008, there are all kinds of naysayers proclaiming that a collapse will never happen.

Even though our financial problems and our underlying economic fundamentals have gotten much worse since the last crisis, they are absolutely convinced that things are somehow going to be different this time.

In the end, a lot of those skeptics are going to lose an enormous amount of money when the dominoes start falling.

‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal

December 4, 2014December 4, 2014 by Michael

Are we about to see U.S. stocks take a significant tumble? If you are looking for a “canary in the coal mine” for the U.S. stock market, just look at high yield bonds. In recent years, almost every single time junk bonds have declined substantially there has been a notable stock market correction as well. And right now high yield bonds are steadily moving lower. The biggest reason for this is falling oil prices. As I wrote about the other day, energy companies now account for about 20 percent of the high yield bond market. As the price of oil falls, investors are understandably becoming concerned about the future prospects of those companies and are dumping their bonds. What is happening cannot be described as a “crash” just yet, but there has been a pretty sizable decline for junk bonds over the past month. And as I noted above, junk bonds and stocks usually move in tandem. In fact, junk bonds usually start falling before stocks do. So does the decline in high yield bonds that we are witnessing at the moment indicate that we are on the verge of a significant stock market correction?

That is a question that CNBC asked in a recent article entitled “Near perfect sell signal says stocks should drop“…

The S&P 500 and the iShares iBoxx High Yield Corporate Bond ETF are a mirror image since the start of the year, but since the end of October, high yield has diverged to the lower right, and yet the S&P 500 has continued to record highs. Since separating in October, the S&P 500 is up 3 percent, while the high-yield ETF is down 4 percent.

On 10 occasions since 2007, the high-yield ETF dropped 5 percent in 30 trading days. During nine of those instances, the S&P 500 fell as well, with an average return of negative 9 percent, according to CNBC analysis using Kensho.

Only once did high yield give a false sell signal. That was last year, when the market was already entranced by the Federal Reserve’s quantitative easing program, which has seemed to elevate stocks with an abnormal consistency. And even then, the S&P 500 managed just a 0.4 percent climb amid the junk debt rout.

Personally, I am convinced that this correlation between junk bonds and stocks is very significant.

Let’s just go back and look at what happened during the financial crash of 2008 for a moment.

In the chart posted below, you can see that high yield bonds began crashing in the middle of September that year…

But U.S. stocks did not crash at the same time. In fact, the chart below shows that they did not really begin crashing until early October…

That is why analysts often refer to junk bonds as a “leading indicator”. What happens to high yield debt is often a really good indicator of what is about to happen to stocks.

Now let’s take a look at what is happening today.

Since the beginning of November, junk bonds have been falling steadily…

Meanwhile, the Dow has continued to reach new heights…

This is not a state of affairs that can persist indefinitely. Either junk bonds will rebound or U.S. stocks will start falling.

If the U.S. economy was on solid footing, you could perhaps argue that it could go either way.

Unfortunately, that is not the case. At this point, the stock market has become completely divorced from economic fundamentals. Price to earnings ratios are at absurd levels, margin debt is hovering near record highs, and the “real economy” continues to fall apart. We are enjoying a massively inflated standard of living which is being propped up by the largest mountain of debt in world history, and it is only a matter of time before reality starts catching up with us.

And the signs of our long-term economic decline are all around us if you are willing to look at them. For example, the lead headline on the Drudge Report today was about how China has now overtaken us and has become the largest economy on the planet…

Hang on to your hats, America.

And throw away that big, fat styrofoam finger while you’re about it.

There’s no easy way to say this, so I’ll just say it: We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world. For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.

It just happened — and almost nobody noticed.

The International Monetary Fund recently released the latest numbers for the world economy. And when you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A.

Meanwhile, some of the most iconic companies in the United States continue to struggle deeply. For instance, Sears has just announced that the number of store closings for this year is going to reach a total of 235 and that the company lost more than half a billion dollars during the third quarter of 2014 alone…

Sears Holdings Corp., posted a disappointing third quarter Thursday that saw revenue, earnings, and sales at stores open at least a year all fall as the retailer tries to salvage its business.

Sears, which owns Kmart, lost $548 million, or $5.15 a share, for the period ended Nov. 1. That’s up from a loss of $534 million, or $5.03 a share, in the year-ago period.

Even though Sears is losing more than 500 million dollars a quarter, banks and investors continue to inject new money into the corporation. That is a crying shame, because Sears is a company that is going to zero. Anyone that is investing in Sears at this point is just pouring their money into a black hole. As Kevin O’Leary would say, they are guilty of murdering money.

And of course what is happening to Sears is just part of the broader “retail apocalypse” that I keep writing about. In order for retailers to thrive they need healthy consumers, and consumers are not financially healthy because the real economy is a disaster zone.

But these days so many people are in denial. The stock market has been soaring for so long that many skeptics are now proclaiming that another 2008-style crash will never happen. Even though the fact that we are in the midst of an absolutely insane financial bubble should be glaringly obvious to anyone with half a brain, these skeptics have convinced themselves that the current state of affairs can persist indefinitely.

Sadly, it looks like what is about to hit us in 2015 is going to serve as a very rude wake up call for them and for the millions of other Americans that currently have their heads in the sand.

5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives

September 24, 2014 by Michael

When is the U.S. banking system going to crash? I can sum it up in three words. Watch the derivatives. It used to be only four, but now there are five “too big to fail” banks in the United States that each have more than 40 trillion dollars in exposure to derivatives. Today, the U.S. national debt is sitting at a grand total of about 17.7 trillion dollars, so when we are talking about 40 trillion dollars we are talking about an amount of money that is almost unimaginable. And unlike stocks and bonds, these derivatives do not represent “investments” in anything. They can be incredibly complex, but essentially they are just paper wagers about what will happen in the future. The truth is that derivatives trading is not too different from betting on baseball or football games. Trading in derivatives is basically just a form of legalized gambling, and the “too big to fail” banks have transformed Wall Street into the largest casino in the history of the planet. When this derivatives bubble bursts (and as surely as I am writing this it will), the pain that it will cause the global economy will be greater than words can describe.

If derivatives trading is so risky, then why do our big banks do it?

The answer to that question comes down to just one thing.

Greed.

The “too big to fail” banks run up enormous profits from their derivatives trading. According to the New York Times, U.S. banks “have nearly $280 trillion of derivatives on their books” even though the financial crisis of 2008 demonstrated how dangerous they could be…

American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them. But the 2008 crisis revealed how flaws in the market had allowed for dangerous buildups of risk at large Wall Street firms and worsened the run on the banking system.

The big banks have sophisticated computer models which are supposed to keep the system stable and help them manage these risks.

But all computer models are based on assumptions.

And all of those assumptions were originally made by flesh and blood people.

When a “black swan event” comes along such as a war, a major pandemic, an apocalyptic natural disaster or a collapse of a very large financial institution, these models can often break down very rapidly.

For example, the following is a brief excerpt from a Forbes article that describes what happened to the derivatives market when Lehman Brothers collapsed back in 2008…

Fast forward to the financial meltdown of 2008 and what do we see? America again was celebrating. The economy was booming. Everyone seemed to be getting wealthier, even though the warning signs were everywhere: too much borrowing, foolish investments, greedy banks, regulators asleep at the wheel, politicians eager to promote home-ownership for those who couldn’t afford it, and distinguished analysts openly predicting this could only end badly. And then, when Lehman Bros fell, the financial system froze and world economy almost collapsed. Why?

The root cause wasn’t just the reckless lending and the excessive risk taking. The problem at the core was a lack of transparency. After Lehman’s collapse, no one could understand any particular bank’s risks from derivative trading and so no bank wanted to lend to or trade with any other bank. Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode.

After the last financial crisis, we were promised that this would be fixed.

But instead the problem has become much larger.

When the housing bubble burst back in 2007, the total notional value of derivatives contracts around the world had risen to about 500 trillion dollars.

According to the Bank for International Settlements, today the total notional value of derivatives contracts around the world has ballooned to a staggering 710 trillion dollars ($710,000,000,000,000).

And of course the heart of this derivatives bubble can be found on Wall Street.

What I am about to share with you is very troubling information.

I have shared similar numbers in the past, but for this article I went and got the very latest numbers from the OCC’s most recent quarterly report. As I mentioned above, there are now five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives…

JPMorgan Chase

Total Assets: $2,476,986,000,000 (about 2.5 trillion dollars)

Total Exposure To Derivatives: $67,951,190,000,000 (more than 67 trillion dollars)

Citibank

Total Assets: $1,894,736,000,000 (almost 1.9 trillion dollars)

Total Exposure To Derivatives: $59,944,502,000,000 (nearly 60 trillion dollars)

Goldman Sachs

Total Assets: $915,705,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $54,564,516,000,000 (more than 54 trillion dollars)

Bank Of America

Total Assets: $2,152,533,000,000 (a bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,457,605,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $831,381,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $44,946,153,000,000 (more than 44 trillion dollars)

And it isn’t just U.S. banks that are engaged in this type of behavior.

As Zero Hedge recently detailed, German banking giant Deutsche Bank has more exposure to derivatives than any of the American banks listed above…

Deutsche has a total derivative exposure that amounts to €55 trillion or just about $75 trillion. That’s a trillion with a T, and is about 100 times greater than the €522 billion in deposits the bank has. It is also 5x greater than the GDP of Europe and more or less the same as the GDP of… the world.

For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.

At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.

It is like a patient with an extremely advanced case of cancer.

Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process.

The same thing could be said about our relationship with the “too big to fail” banks. If they fail, so do the rest of us.

We were told that something would be done about the “too big to fail” problem after the last crisis, but it never happened.

In fact, as I have written about previously, the “too big to fail” banks have collectively gotten 37 percent larger since the last recession.

At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.

If those banks were to disappear tomorrow, we would not have much of an economy left.

But as you have just read about in this article, they are being more reckless than ever before.

We are steamrolling toward the greatest financial disaster in world history, and nobody is doing much of anything to stop it.

Things could have turned out very differently, but now we will reap the consequences for the very foolish decisions that we have made.

14 Reasons Why The U.S. Economy’s Bubble Of False Prosperity May Be About To Burst

August 13, 2014 by Michael

Did you know that a major event just happened in the financial markets that we have not seen since the financial crisis of 2008? If you rely on the mainstream media for your news, you probably didn’t even hear about it. Just prior to the last stock market crash, a massive amount of money was pulled out of junk bonds. Now it is happening again. In fact, as you will read about below, the market for high yield bonds just experienced “a 6-sigma event”. But this is not the only indication that the U.S. economy could be on the verge of very hard times. Retail sales are extremely disappointing, mortgage applications are at a 14 year low and growing geopolitical storms around the world have investors spooked. For a long time now, we have been enjoying a period of relative economic stability even though our underlying economic fundamentals continue to get even worse. Unfortunately, there are now a bunch of signs that this period of relative stability is about to end. The following are 14 reasons why the U.S. economy’s bubble of false prosperity may be about to burst…

#1 The U.S. junk bond market just experienced “a 6-sigma event” earlier this month. In other words, it is an event that is only supposed to have a chance of 1 in 500 million of happening. Billions of dollars are being pulled out of junk bonds right now, and that has some analysts wondering if a financial crash is right around the corner.

#2 The last time that we saw a junk bond rout of this magnitude was back during the financial crash of 2008. In fact, as the Telegraph recently explained, bonds usually crash before stocks do…

The credit market usually leads the equity market during turning points, as happened when credit markets cracked first in 2008.

Will the same thing happen this time around?

#3 Retail sales have missed expectations for three months in a row and we just had the worst reading since January.

#4 Things have gotten so bad that even Wal-Mart is really struggling. Same-store sales at Wal-Mart have declined for five quarters in a row and the outlook for the future is not particularly promising.

#5 The four week moving average for mortgage applications just hit a 14 year low. It is now even lower than it was during the worst moments of the financial crisis of 2008.

#6 The tech industry is supposed to be booming, but mass layoffs in the tech industry are actually 68 percent ahead of last year’s pace.

#7 According to the Federal Reserve, 40 percent of all households in the United States are currently showing signs of financial stress.

#8 The U.S. homeownership rate has fallen to the lowest level since 1995.

#9 According to one survey, 76 percent of Americans do not have enough money saved to cover six months of expenses.

#10 Rumblings of a stock market correction have become so loud that even the mainstream media is reporting on it. For example, just check out this CNN headline from earlier this month: “Is a correction near? Wall Street on edge“.

#11 The civil war in Iraq is spiraling out of control, and Barack Obama has just announced that he is going to send 130 troops to the country in a “humanitarian” capacity. Iraq is the 7th largest oil producing nation on the entire planet, and if the flow of oil is disrupted that could have serious consequences.

#12 As a result of the conflict in Ukraine, the United States, Canada and the European Union have slapped sanctions on Russia. In return, Russia has slapped sanctions on them. Will this slowdown in global trade significantly harm the U.S. economy?

#13 The three day cease-fire between Hamas and Israel is about to end, and Hamas officials are saying that they are preparing for a “long battle“. If a resolution is not found soon, we could potentially see a full-blown regional war erupt in the Middle East.

#14 The number of Ebola deaths continues to grow at an exponential rate, and if the virus starts spreading inside the United States it has the potential to pretty much shut down our entire economy.

Meanwhile, things look even more dire in much of the rest of the globe.

For example, the economic slowdown has gotten so bad in some nations over in Europe that they are actually experiencing deflation…

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral.

The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS.

And in Japan, GDP just contracted at a 6.8 percent annual rate during the second quarter…

Japan’s economy suffered its worst contraction since 2011 in the second quarter as consumer spending on big items slumped in the wake of a sales tax rise.

Gross domestic product shrunk by an annualized 6.8% in the three months ended June, Japan’s Cabinet Office said Wednesday. The result was actually better than the 7% contraction expected by economists.

On a quarterly basis, Japan’s GDP dropped by 1.7% as business and housing investment declined. Japan’s economy last suffered a hit of this magnitude after the 2011 tsunami and nuclear disaster.

There is no way that this bubble of false prosperity was going to last forever. It was never real to begin with. It was just based on a pyramid of debt and false promises. In fact, the condition of the global financial system is now far worse than it was just prior to the financial crisis of 2008.

Sadly, most people do not understand these things. Most people just assume that our leaders have fixed whatever caused the problems last time. And when the next crisis arrives, they will be totally blindsided by it.

The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?

January 20, 2014January 20, 2014 by Michael

Did you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st? We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“. In other words, it could be a “Lehman Brothers moment” for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that “hot money” has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money. But the truth is that what has been happening in China surpasses all of their efforts combined. You can see an incredible chart which graphically illustrates this point right here. As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article…

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.

Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well. In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk. Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both. The result? The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding. Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth. Optimists say China is getting its credit addiction under control, but that’s not correct. In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Overall, M2 in China is up by about 1000 percent since 1999. That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting. Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”…

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a “bond headache” as well. At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years. Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.

But I am not the only one talking about it.

In fact, the World Economic Forum is warning about the exact same thing…

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.

Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?

In the end, it doesn’t really matter. The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

It is just a matter of time.

The Taper Is On – 8 Ways That This Is Going To Affect You And Your Family

December 18, 2013December 18, 2013 by Michael

The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing. On Wednesday, the Fed announced that monthly purchases of U.S. Treasury bonds will be reduced from $45 billion to $40 billion, and monthly purchases of mortgage-backed securities will be reduced from $35 billion to $30 billion. When this news came out, it sent shockwaves through financial markets all over the planet. But the truth is that not that much has really changed. The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace. It will just be slightly less than before. However, this very well could represent a very important psychological turning point for investors. It is a signal that “the party is starting to end” and that the great bull market of the past four years is drawing to a close. So what is all of this going to mean for average Americans? The following are 8 ways that “the taper” is going to affect you and your family…

1. Interest Rates Are Going To Go Up

Following the announcement on Wednesday, the yield on 10 year U.S. Treasuries went up to 2.89% and even CNBC admitted that the taper is a “bad omen for bonds“. Thousands of other interest rates in our economy are directly affected by the 10 year rate, and so if that number climbs above 3 percent and stays there, that is going to be a sign that a significant slowdown of economic activity is ahead.

2. Home Sales Are Likely Going To Go Down

Mortgage rates are heavily influenced by the yield on 10 year U.S. Treasuries. Because the yield on 10 year U.S. Treasuries is now substantially higher than it was earlier this year, mortgage rates have also gone up. That is one of the reasons why the number of mortgage applications just hit a new 13 year low. And now if rates go even higher that is going to tighten things up even more. If your job is related to the housing industry in any way, you should be extremely concerned about what is coming in 2014.

3. Your Stocks Are Going To Go Down

Yes, I know that stocks skyrocketed today. The Dow closed at a new all-time record high, and I can’t really provide any rational explanation for why that happened. When the announcement was originally made, stocks initially sold off. But then they rebounded in a huge way and the Dow ended up close to 300 points.

A few months ago, when Fed Chairman Ben Bernanke just hinted that a taper might be coming soon, stocks fell like a rock. I have a feeling that the Fed orchestrated things this time around to make sure that the stock market would have a positive reaction to their news. But of course I absolutely cannot prove this at all. I hope someday we learn the truth about what actually happened on Wednesday afternoon. I have a feeling that there was some direct intervention in the markets shortly after the announcement was made and then the momentum algorithms took over from there.

In any event, what we do know is that when QE1 ended stocks fell dramatically and the same thing happened when QE2 ended. If you doubt this, just check out this chart.

Of course QE3 is not being ended, but this tapering sends a signal to investors that the days of “easy money” are over and that we have reached the peak of the market.

And if you are at the peak of the market, what is the logical thing to do?

Sell, sell, sell.

But in order to sell, you are going to need to have buyers.

And who is going to want to buy stocks when there is no upside left?

4. The Money In Your Bank Account Is Constantly Being Devalued

When a new dollar is created, the value of each existing dollar that you hold goes down. And thanks to the Federal Reserve, the pace of money creation in this country has gone exponential in recent years. Just check out what has been happening to M1. It has nearly doubled since the financial crisis of 2008…

The Federal Reserve has been behaving like the Weimar Republic, and this tapering does not change that very much. Even with this tapering, the Fed is still going to be creating money out of thin air at an absolutely insane rate.

And for those that insist that what the Federal Reserve is doing is “working”, it is important to remember that the crazy money printing that the Weimar Republic did worked for them for a little while too before ending in complete and utter disaster.

5. Quantitative Easing Has Been Causing The Cost Of Living To Rise

The Federal Reserve insists that we are in a time of “low inflation”, but anyone that goes to the grocery store or that pays bills on a regular basis knows what a lie that is. The truth is that if the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.

Most of the new money created by quantitative easing has ended up in the hands of the very wealthy, and it is in the things that the very wealthy buy that we are seeing the most inflation. As one CNBC article recently stated, we are seeing absolutely rampant inflation in “stocks and bonds and art and Ferraris and farmland“.

6. Quantitative Easing Did Not Reduce Unemployment And Tapering Won’t Either

The Federal Reserve actually first began engaging in quantitative easing back in late 2008. As you can see from the chart below, the percentage of Americans that are actually working is lower today than it was back then…

The mainstream media continues to insist that quantitative easing was all about “stimulating the economy” and that it is now okay to cut back on quantitative easing because “unemployment has gone down”. Hopefully you can see that what the mainstream media has been telling you has been a massive lie. According to the government’s own numbers, the percentage of Americans with a job has stayed at a remarkably depressed level since the end of 2010. Anyone that tries to tell you that we have had an “employment recovery” is either very ignorant or is flat out lying to you.

7. The Rest Of The World Is Going To Continue To Lose Faith In Our Financial System

Everyone else around the world has been watching the Federal Reserve recklessly create hundreds of billions of dollars out of thin air and use it to monetize staggering amounts of government debt. They have been warning us to stop doing this, but the Fed has been slow to listen.

The greatest damage that quantitative easing has been causing to our economy does not involve the short-term effects that most people focus on. Rather, the greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.

Right now, far more U.S. dollars are used outside the country than inside the country. The rest of the world uses U.S. dollars to trade with one another, and major exporting nations stockpile massive amounts of our dollars and our debt.

We desperately need the rest of the world to keep playing our game, because we have become very dependent on getting super cheap exports from them and we have become very dependent on them lending us trillions of our own dollars back to us.

If the rest of the world decides to move away from the U.S. dollar and U.S. debt because of the incredibly reckless behavior of the Federal Reserve, we are going to be in a massive amount of trouble. Our current economic prosperity greatly depends upon everyone else using our dollars as the reserve currency of the world and lending trillions of dollars back to us at ultra-low interest rates.

And there are signs that this is already starting to happen. In fact, China recently announced that they are going to quit stockpiling more U.S. dollars. This is one of the reasons why the Fed felt forced to do something on Wednesday.

But what the Fed did was not nearly enough. It is still going to be creating $75 billion out of thin air every single month, and the rest of the world is going to continue to lose more faith in our system the longer this continues.

8. The Economy As A Whole Is Going To Continue To Get Even Worse

Despite more than four years of unprecedented money printing by the Federal Reserve, the overall U.S. economy has continued to decline. If you doubt this, please see my previous article entitled “37 Reasons Why ‘The Economic Recovery Of 2013’ Is A Giant Lie“.

And no matter what the Fed does now, our decline will continue. The tragic downfall of small cities such as Salisbury, North Carolina are perfect examples of what is happening to our country as a whole…

During the three-year period ending in 2009, Salisbury’s poverty rate of 16% was about 3% higher than the national rate. In the following three-year period between 2010 and 2012, the city’s poverty rate was approaching 30%. Salisbury has traditionally relied heavily on the manufacturing sector, particularly textiles and fabrics. In recent decades, however, manufacturing activity has declined significantly and continues to do so. Between 2010 and 2012, manufacturing jobs in Salisbury — as a percent of the workforce — shrank from 15.5% to 8.3%.

But the truth is that you don’t have to travel far to see evidence of our economic demise for yourself. All you have to do is to go down to the local shopping mall. Sears has experienced sales declines for 27 quarters in a row, and at this point Sears is a dead man walking. The following is from a recent article by Wolf Richter…

The market share of Sears – including K-Mart – has dropped to 2% in 2013 from 2.9% in 2005. Sales have declined for years. The company lost money in fiscal 2012 and 2013. Unless a miracle happens, and they don’t happen very often in retail, it will lose a ton in fiscal 2014, ending in January: for the first three quarters, it’s $1 billion in the hole.

Despite that glorious track record, and no discernible turnaround, the junk-rated company has had no trouble hoodwinking lenders into handing it a $1 billion loan that matures in 2018, to pay off an older loan that would have matured two years earlier.

And J.C. Penney is suffering a similar fate. According to Richter, the company has lost a staggering 1.6 billion dollars over the course of the last year…

Then there’s J.C. Penney. Sales plunged 27% over the last three years. It lost over $1.6 billion over the last four quarters. It installed a revolving door for CEOs. It desperately needed to raise capital; it was bleeding cash, and its suppliers and landlords had already bitten their fingernails to the quick. So the latest new CEO, namely its former old CEO Myron Ullman, set out to extract more money from the system, borrowing $1.75 billion and raising $785 million in a stock sale at the end of September that became infamous the day he pulled it off.

So don’t believe the hype.

The economy is getting worse, not better.

Quantitative easing did not “rescue the economy”, but it sure has made our long-term problems a whole lot worse.

And this “tapering” is not a sign of better things to come. Rather, it is a sign that the bubble of false prosperity that we have been enjoying for the past few years is beginning to end.

12 Very Ominous Warnings About What A U.S. Debt Default Would Mean For The Global Economy

October 7, 2013October 7, 2013 by Michael

A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash unlike anything that the world has ever seen before. If the U.S. government purposely wanted to damage the global financial system, the best way that they could do that would be to default on U.S. debt obligations. A U.S. debt default would cause stocks to crash, would cause bonds to crash, would cause interest rates to soar wildly out of control, would cause a massive credit crunch, and would cause a derivatives panic that would be absolutely unprecedented. And that would just be for starters. But don’t just take my word for it. These are the things that top financial experts all over the planet are saying will happen if there is an extended U.S. debt default.

Because they are so close together, the “government shutdown” and the “debt ceiling deadline” are being confused by many Americans.

As I wrote about the other day, the “partial government shutdown” that we are experiencing right now is pretty much a non-event. Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world. In fact, only about 17 percent of the federal government is actually shut down at the moment. This “shutdown” could continue for many more weeks and it would not affect the global economy too much.

On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous.

And if the U.S. government is eventually forced to start delaying interest payments on U.S. debt (which could potentially happen as soon as November), that would be absolutely catastrophic.

Once again, just don’t take my word for it. The following are 12 very ominous warnings about what a U.S. debt default would mean for the global economy…

#1 Gerald Epstein, a professor of economics at the University of Massachusetts Amherst: “If the US does default, that will make the Lehman Brothers bankruptcy look like a cakewalk”

#2 Tim Bitsberger, a former Treasury official under President George W. Bush: “If we miss an interest payment, that would blow Lehman out of the water”

#3 Peter Tchir, founder of New York-based TF Market Advisors: “Once the system starts to break down related to settlement and payments, then liquidity disappears, as we saw after Lehman”

#4 Bill Isaac, chairman of Cincinnati-based Fifth Third Bancorp: “We can’t even imagine all the things that might happen, just like Henry Paulson couldn’t imagine all the bad things that might happen if he let Lehman go down”

#5 Jim Grant, founder of Grant’s Interest Rate Observer: “Financial markets are all confidence-based. If that confidence is shaken, you have disaster.”

#6 Richard Bove, VP of research at Rafferty Capital Markets: “If they seriously default on the debt, what we’re really talking about is a depression”

#7 Chinese vice finance minister Zhu Guangyao: “The U.S. is clearly aware of China’s concerns about the financial stalemate [in Washington] and China’s request for the US to ensure the safety of Chinese investments.”

#8 The U.S. Treasury Department: “A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse”

#9 Goldman Sachs: “We estimate that the fiscal pull-back would amount to 9pc of GDP. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly”

#10 Simon Johnson, former chief economist for the IMF: “It would be insane to default, but it’s no longer a zero-percent probability”

#11 Warren Buffett about the potential of a debt default: “It should be like nuclear bombs, basically too horrible to use”

#12 Bloomberg: “Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.”

A U.S. debt default could be the trigger for the “nightmare scenario” that so many people have been writing about in recent years. In fact, it could greatly accelerate the timetable for the inevitable economic collapse that is coming. A recent Yahoo article described some of the things that we would likely see in the event of an extended U.S. debt default…

A default would upend money markets, destroy bond funds, slam the brakes on lending, cause interest rates to spiral, make our banks insolvent, and deal a blow to our foreign trading partners and creditors around the globe; all of which would throw the U.S. and the world into economic disarray.

And of course stocks would crash big time. Deutsche Bank’s David Bianco believes that if the U.S. government starts missing interest payments on U.S. Treasury bonds, we could see the S&P 500 go down to 850 by the end of the year.

There would be almost immediate panic among ordinary Americans as well. In fact, it is being reported that some banks are already stuffing their ATM machines will extra cash just in case…

With just 10 days left to raise the debt ceiling and congressional Republicans threatening to force the government to default on its obligations, banks are taking some dramatic steps to prepare for the economic chaos that would result should the brinkmanship continue.

The Financial Times reports that one major U.S. bank has started stuffing its automatic teller machines with extra cash in preparation for a possible bank run from panicked depositors. The New York Times reports that another bank is weighing a plan to advance funds to customers who rely on Social Security and other government payments that could stop in the event of a default.

Let’s hope that cooler heads will prevail and that a U.S. debt default will be avoided.

Unfortunately, it appears that the Democrats are absolutely determined not to be moved from their current position a single inch. They have decided to refuse to negotiate and demand that the Republicans give them every single thing that they want.

And who can really blame them for adopting that strategy? After all, it has certainly worked in the past. Whenever Democrats have stood united and have refused to give a single inch, the Republicans have always freaked out and caved in eventually.

Will this time be any different?

The funny thing is that once upon a time, Barack Obama was adamantly against any increase in the debt limit. The following comes courtesy of Zero Hedge…

But now Obama says that it is so unreasonable to be opposed to a debt limit increase that any negotiations are out of the question.

So which Obama is right?

If the Democrats will not negotiate, a debt default could still be avoided if the Republicans give in.

And that is what they always do, right?

Perhaps not this time. Just check out what John Boehner had to say on Sunday…

“I, working with my members, decided to do this in a unified way,” the speaker said — with demands to defund, delay or otherwise alter the Affordable Care Act.

Boehner had expected that the Obamacare fight would come during the next vote to raise the debt ceiling, “but, you know, working with my members, they decided, let’s do it now,” he said. “And the fact is, this fight was going to come, one way or another. We’re in the fight. We don’t want to shut the government down. We’ve passed bills to pay the troops. We passed bills to make sure the federal employees know that they’re going to be paid throughout this.”

“You’ve never seen a more dedicated group of people who are thoroughly concerned about the future of our country,” he said of House Republicans. “It is time for us to stand and fight.”

But will the Republicans really stand and fight?

In the past, betting on the intestinal fortitude of the Republican Party has been a loser every single time.

So we’ll see. Boehner insists that this time is different. Boehner insists that he is not going to fold like a 20 dollar suit this time. In fact, when he was asked if the U.S. government was headed toward a debt default if Obama continued to refuse to negotiate, Boehner made the following statement…

“That’s the path we’re on.”

The mainstream media has certainly been placing most of the blame at the feet of the Republicans, but at least the U.S. House of Representatives has been trying to get an agreement reached. The House has voted 26 times since the Senate last voted. Harry Reid has essentially shut the Senate down until the Republicans fold and give the Democrats exactly what they want.

The funny thing is that this could probably be solved very easily. If the Democrats agreed to a one year delay to the individual mandate, the Republicans would probably jump at it. And because of epic technical failures, hardly anyone has been able to get signed up for Obamacare anyway. So a one year delay would give the Obama administration time to get their act together.

Unfortunately, the Democrats seem absolutely obsessed with the idea that they will not give the Republicans one single inch. They seem to believe that this will be to their political benefit.

But this is a very dangerous game that they are playing. The U.S. government must roll over 441 billion dollars of short-term debt between October 18th and November 15th.

If a debt ceiling increase is not in place by that time, it will send interest rates soaring. Borrowing costs for state and local governments, corporations, and ordinary Americans will go through the roof and economic activity will be hit really hard.

And as detailed above, we could potentially be looking at a financial crash that would make 2008 look like a Sunday picnic.

So let us hope for a political solution soon. That will at least kick the can down the road for a little bit longer.

If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.

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