Currency Crisis

Now Is The Time – Fear Rises As Financial Markets All Over The Planet Start To Crash

July 27, 2015July 27, 2015 by Michael

Can you feel the panic in the air? CNN Money’s Fear & Greed Index measures the amount of fear in the financial world on a scale from 0 to 100. The closer it is to zero, the higher the level of fear. Last Monday, the index was sitting at a reading of 36. As I write this article, it has fallen to 7. The financial turmoil which began last week is threatening to turn into an avalanche. On Sunday night, we witnessed the second largest one day stock market collapse in China ever, and this pushed stocks all over the planet into the red. Meanwhile, the twin blades of an emerging market currency crisis and a commodity price crash are chewing up economies that are dependent on the export of natural resources all over the globe. For a long time, I have been warning about what would happen in the second half of 2015, and now it is here. The following is a summary of the financial carnage that we have seen over the past 24 hours…

-On Sunday night, the Shanghai Composite Index plunged 8.5 percent. It was the largest one day stock market crash in China since 2007, and it was the second largest in history. The Chinese government is promising to directly intervene in order to prevent Chinese stocks from going down even more.

-Over 1,500 stocks in China fell by their 10 percent daily maximum. This list includes giants such as China Unicom, Bank of Communications and PetroChina.

-Ever since peaking in June, the Shanghai Composite Index has dropped by a total of 28 percent.

-Even Chinese stocks that are listed on U.S. stock exchanges are being absolutely hammered. The following comes from USA Today…

The 144 China-based stocks with primary listings on major U.S. exchanges have erased nearly $40 billion in paper wealth since the Shanghai Composite index peaked on June 12. It’s an enormous destruction of wealth that in effects wipes out the market value of a company the size of cruise ship operator Carnival.

-The Chinese stock market crash pushed European stocks significantly lower on Monday…

The pan-European FTSEurofirst 300 provisionally closed 2.1 percent lower, while the Germany’s DAX and France’s CAC closed respectively 2.4 percent and 2.5 percent lower.

The U.K.’s benchmark FTSE outperformed its euro zone peers, but still closed unofficially down 1.0 percent.

-Overall, European stocks have been falling steadily since the beginning of last week. To get an idea of how much damage has been done already, just check out this chart.

-As I mentioned above, an emerging market currency crisis is causing havoc for economies all over the planet. The following comes from an article that was published by the Telegraph…

The currencies of Brazil, Mexico, South Africa and Turkey have all crashed to multi-year lows as investors flee emerging markets and commodity prices crumble.

The drastic moves came as fears of imminent monetary tightening by the US Federal Reserve combined with shockingly weak figures from China, which stoked fears that the country may be sliding into a deeper downturn and sent tremors through East Asia, Latin America and Africa.

-The government of Puerto Rico has announced that it does not have enough cash to make a scheduled debt payment of 169 million dollars on August 1st. The Obama administration says that there are no plans in the works to bail out Puerto Rico.

-On Monday, the Dow was down another 127 points. It was the fifth day in a row that the Dow and the S&P 500 have both declined.

-Overall, the Dow is now down more than 650 points since July 20th.

-480 stocks on the New York Stock Exchange have hit new 52-week lows. Many analysts consider this to be a very, very ominous sign.

-I have repeatedly written about the danger of the commodity collapse that we are currently witnessing, and the Bloomberg Commodity Index fell another 1.22 percent on Monday to a fresh low of 92.1493.

-On Monday, the price of U.S. oil hit a 52-week low of $46.92.

-So far, the price of U.S. oil has fallen about 20 percent this month.

-Back in June 2014, the price of a barrel of West Texas Intermediate crude was above 107 dollars. Since then, the price of U.S. oil has fallen an astounding 56 percent.

-Thanks in large part to the collapse in energy prices, junk bonds are cratering. This is something that happened just before the financial crisis of 2008, and now it is happening again. The following comes from Wolf Street…

Among the bonds: Cliffs Natural Resources down 27.6%, SandBridge down 30%, Murray Energy down 21.2%, and Linn Energy down 22.3%, according to Bloomberg.

For example, Linn Energy 6.25% notes due in 2019 were trading at 78 cents on the dollar at the beginning of July and at 58 on Friday, according to LCD. There was bloodshed beyond energy, such as AK Steel’s 7.625% notes due in 2021. They were trading at 62 cents on the dollar, down 22% from the beginning of July.

“The performance is a disappointment to investors who purchased about $40 billion of junk-rated bonds from energy companies this year, thinking that the worst of the slump was over,” Bloomberg noted.

This is exactly what we would expect to see during the early stages of a financial crisis.

Of course global financial markets may bounce back somewhat tomorrow. If you will remember, some of the largest one day gains in stock market history happened right in the middle of the stock market collapse of 2008. So don’t get fooled by what happens on any one particular day.

With so much fear in the air, literally anything could happen in the weeks and months ahead of us. One month ago, I issued a red alert for the last six months of this year. I warned that a major financial crisis was imminent and that people needed to start protecting themselves immediately.

As I write this article on Monday evening, financial markets are already opening up over in Asia. Japanese stocks are already down 251 points even though the market has only been open for about an hour over there.

We have entered a time when what is happening to global stock markets will once again be headline news. We are right on the precipice of another great financial crisis, only this one is going to ultimately end up being much worse than the last one.

Now is the time.

Please get prepared while you still can.

The Last, Great Run For The U.S. Dollar, The Death Of The Euro And 74 Trillion In Currency Derivatives At Risk

March 10, 2015March 10, 2015 by Michael

Are we on the verge of an unprecedented global currency crisis? On Tuesday, the euro briefly fell below $1.07 for the first time in almost a dozen years. And the U.S. dollar continues to surge against almost every other major global currency. The U.S. dollar index has now risen an astounding 23 percent in just the last eight months. That is the fastest pace that the U.S. dollar has risen since 1981. You might be tempted to think that a stronger U.S. dollar is good news, but it isn’t. A strong U.S. dollar hurts U.S. exports, thus harming our economy. In addition, a weak U.S. dollar has fueled tremendous expansion in emerging markets around the planet over the past decade or so. When the dollar becomes a lot stronger, it becomes much more difficult for those countries to borrow more money and repay old debts. In other words, the emerging market “boom” is about to become a bust. Not only that, it is important to keep in mind that global financial institutions bet a tremendous amount of money on currency movements. According to the Bank for International Settlements, 74 trillion dollars in derivatives are tied to the value of the U.S. dollar, the value of the euro and the value of other global currencies. When currency rates start flying around all over the place, you can rest assured that someone out there is losing an enormous amount of money. If this derivatives bubble ends up imploding, there won’t be enough money in the entire world to bail everyone out.

Do you remember what happened the last time the U.S. dollar went on a great run like this?

As you can see from the chart below, it was in mid-2008, and what followed was the worst financial crisis since the Great Depression…

A rapidly rising U.S. dollar is extremely deflationary for the overall global economy.

This is a huge red flag, and yet hardly anyone is talking about it.

Meanwhile, the euro continues to spiral into oblivion…

How many times have I said it? The euro is heading to all-time lows. It is going to go to parity with the U.S. dollar, and then it is eventually going to go below parity.

This is going to cause massive headaches in the financial world.

The Europeans are attempting to cure their economic problems by creating tremendous amounts of new money. It is the European version of quantitative easing, but it is having some very nasty side effects.

The markets are starting to realize that if the value of the U.S. dollar continues to surge, it is ultimately going to be very bad for stocks. In fact, the strength of the U.S. dollar is being cited as the primary reason for the Dow’s 332 point decline on Tuesday…

The Dow Jones industrial average fell more than 300 points to below the index’s 50-day moving average, wiping out gains for the year. The S&P 500 also closed in the red for the year and breached its 50-day moving average, which is an indicator of the market trend. Only the Nasdaq held onto gains of 2.61 percent for the year.

There’s “concern that energy and the strength in the dollar will somehow be negative for the equities,” said Art Hogan, chief market strategist at Wunderlich Securities. He noted that the speed of the dollar’s surge was the greatest market driver, amid mixed economic data and concerns about the Federal Reserve raising interest rates.

And as I noted above, when the U.S. dollar rises the things that we export to other nations become more expensive and that hurts our businesses.

This is so basic that even the White House understands it…

Despite reassurance from The Fed that a strengthening dollar is positive for US jobs, The White House has now issued a statement that a “strengthening USD is a headwind for US growth.”

But even more important, a surging U.S. dollar makes it more difficult for emerging markets all over the world to borrow new money and to repay old debts. This is especially true for nations that heavily rely on exporting commodities…

It becomes especially ugly for emerging market economies that produce commodities. Many emerging market countries rely on their natural resources for growth and haven’t yet developed more advanced industries. As the products of their principal industries decline in value, foreign investors remove available credit while their currency is declining against the U.S. dollar. They don’t just find it difficult to pay their debt – it is impossible.

It has been estimated that emerging markets have borrowed more than 3 trillion dollars since the last financial crisis.

But now the process that created the emerging markets “boom” is starting to go into reverse.

The global economy is fueled by cheap dollars. So if the U.S. dollar continues to rise, that is not going to be good news for anyone.

And of course the biggest potential threat of all is the 74 trillion dollar currency derivatives bubble which could end up bursting at any time.

The sophisticated computer algorithms that financial institutions use to trade currency derivatives are ultimately based on human assumptions. When currencies move very little and the waters are calm in global financial markets, those algorithms tend to work really, really well.

But when the unexpected happens, some of the largest financial firms in the world can implode seemingly overnight.

Just remember what happened to Lehman Brothers back in 2008. Unexpected events can cripple financial giants in just a matter of hours.

Today, there are five U.S. banks that each have more than 40 trillion dollars of total exposure to derivatives of all types. Those five banks are JPMorgan Chase, Bank of America, Goldman Sachs, Citibank and Morgan Stanley.

By transforming Wall Street into a gigantic casino, those banks have been able to make enormous amounts of money.

But they are constantly performing a high wire act. One of these days, their reckless gambling is going to come back to haunt them, and the entire global financial system is going to be severely harmed as a result.

As I have said so many times before, derivatives are going to be at the heart of the next great global financial crisis.

And thanks to the wild movement of global currencies in recent months, there are now more than 74 trillion dollars in currency derivatives at risk.

Anyone that cannot see trouble on the horizon at this point is being willingly blind.

Guess What Happened The Last Time The U.S. Dollar Skyrocketed In Value Like This?…

February 10, 2015February 10, 2015 by Michael

Over the past decade, there has been only one other time when the value of the U.S. dollar has increased by so much in such a short period of time. That was in mid-2008 – just before the greatest financial crash since the Great Depression. A surging U.S. dollar also greatly contributed to the Latin American debt crisis of the early 1980s and the Asian financial crisis of 1997. Today, the globe is more interconnected than ever. Most global trade is conducted in U.S. dollars, and much of the borrowing done by emerging markets all over the planet is denominated in U.S. dollars. When the U.S. dollar goes up dramatically, this can put a tremendous amount of financial stress on economies all around the world. It also has the potential to greatly threaten the stability of the 65 trillion dollars in derivatives that are directly tied to the value of the U.S. dollar. The global financial system is more vulnerable to currency movements than ever before, and history tells us that when the U.S. dollar soars the global economy tends to experience a contraction. So the fact that the U.S. dollar has been skyrocketing lately is a very, very bad sign.

Most of the people that write about the coming economic collapse love to talk about the coming collapse of the U.S. dollar as well.

But in the initial deflationary stage of the coming financial crisis, we are likely to see the U.S. dollar actually strengthen considerably.

As I have discussed so many times before, we are going to experience deflation first, and after that deflationary phase the desperate responses by the Federal Reserve and the U.S. government to that deflation will cause the inflationary panic that so many have written about.

Yes, someday the U.S. dollar will essentially be toilet paper. But that is not in our immediate future. What is in our immediate future is a “flight to safety” that will push the surging U.S. dollar even higher.

This is what we witnessed in 2008, and this is happening once again right now.

Just look at the chart that I have posted below. You can see the the U.S. dollar moved upward dramatically relative to other currencies starting in mid-2008. And toward the end of the chart you can see that the U.S. dollar is now experiencing a similar spike…

At the moment, almost every major currency in the world is falling relative to the U.S. dollar.

For example, this next chart shows what the euro is doing relative to the dollar. As you can see, the euro is in the midst of a stunning decline…

Instead of focusing on the U.S. dollar, those that are looking for a harbinger of the coming financial crisis should be watching the euro. As I discussed yesterday, analysts are telling us that if Greece leaves the eurozone the EUR/USD could fall all the way down to 0.90. If that happens, the chart above will soon resemble a waterfall.

And of course it isn’t just the euro that is plummeting. The yen has been crashing as well. The following chart was recently posted on the Crux…

Unfortunately, most Americans have absolutely no idea how important all of this is. In recent years, growing economies all over the world have borrowed gigantic piles of very cheap U.S. dollars. But now they are faced with the prospect of repaying those debts and making interest payments using much more expensive U.S. dollars.

Investors are starting to get nervous. At one time, investors couldn’t wait to pour money into emerging markets, but now this process is beginning to reverse. If this turns into a panic, we are going to have one giant financial mess on our hands.

The truth is that the value of the U.S. dollar is of great importance to every nation on the face of the Earth. The following comes from U.S. News & World Report…

In the early ’80s, a bullish U.S. dollar contributed to the Latin American debt crisis, and also impacted the Asian Tiger crisis in the late ’90s. Emerging markets typically have higher growth, but carry much higher risk to investors. When the economies are doing well, foreign investors will lend money to emerging market countries by purchasing their bonds.

They also deposit money in foreign banks, which facilitates higher lending. The reason for this is simple: Bond payments and interest rates in emerging markets are much higher than in the U.S. Why deposit cash in the U.S. and earn 0.25 percent, when you could earn 6 percent in Indonesia? With the dollar strengthening, the interest payments on any bond denominated in U.S. dollars becomes more expensive.

Additionally, the deposit in the Indonesian bank may still be earning 6 percent, but that is on Indonesian rupiahs. After converting the rupiahs to U.S. dollars, the extra interest doesn’t offset the loss from the exchange. As investors get nervous, the higher interest on emerging market debt and deposits becomes less alluring, and they flee to safety. It may start slowly, but history tells us it can quickly spiral out of control.

Over the past few months, I have been repeatedly stressing that so many of the signs that we witnessed just prior to previous financial crashes are happening again.

Now you can add the skyrocketing U.S. dollar to that list.

If you have not seen my previous articles where I have discussed these things, here are some places to get started…

“Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”

“Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?…”

“10 Key Events That Preceded The Last Financial Crisis That Are Happening Again RIGHT NOW”

The warnings signs are really starting to pile up.

When we look back at past financial crashes, there are recognizable patterns that can be identified.

Anyone with half a brain should be able to see that a large number of those patterns are unfolding once again right before our eyes.

Unfortunately, most people in this world end up believing exactly what they want to believe.

No matter how much evidence you show them, they will not accept the truth until it is too late.

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?

January 26, 2014January 26, 2014 by Michael

This time, the Federal Reserve has created a truly global problem. A big chunk of the trillions of dollars that it pumped into the financial system over the past several years has flowed into emerging markets. But now that the Fed has decided to begin “the taper”, investors see it as a sign to pull the “hot money” out of emerging markets as rapidly as possible. This is causing currencies to collapse and interest rates to soar all over the planet. Argentina, Turkey, South Africa, Ukraine, Chile, Indonesia, Venezuela, India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far. In fact, last week emerging market currencies experienced the biggest decline that we have seen since the financial crisis of 2008. And all of this chaos in emerging markets is seriously spooking Wall Street as well. The Dow has fallen nearly 500 points over the last two trading sessions alone. If the Federal Reserve opts to taper even more in the coming days, this currency crisis could rapidly turn into a complete and total currency collapse.

A lot of Americans have always assumed that the U.S. dollar would be the first currency to collapse when the next great financial crisis happens. But actually, right now just the opposite is happening and it is causing chaos all over the planet.

For instance, just check out what is happening in Turkey according to a recent report in the New York Times…

Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.

On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”

“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”

As inflation escalates and interest rates soar in these countries, ordinary citizens are going to feel the squeeze. Just having enough money to purchase the basics is going to become more difficult.

And this is not just limited to a few countries. What we are watching right now is truly a global phenomenon…

“You’ve had a massive selloff in these emerging-market currencies,” Nick Xanders, a London-based equity strategist at BTIG Ltd., said by telephone. “Ruble, rupee, real, rand: they’ve all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way.”

So why is this happening? Well, there are a number of factors involved of course. However, as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis. A recent USA Today article described how the Fed helped create this massive bubble in the emerging markets…

Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.

But now that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock.

“Emerging markets need the hot money but capital is exiting now,” says Koesterich. “What you have is people saying, ‘I don’t want to own emerging markets.'”

What we are potentially facing is the bursting of a financial bubble on a global scale. Just check out what Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say…

If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years. In South Africa, the rand is at the weakest since 2008. The currencies are also weak in Brazil and Mexico. But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela.

I’m mentioning these countries individually just to stress that this situation is extremely serious. It is also on a massive scale. In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.

And many smaller nations are being deeply affected already as well.

For example, most Americans cannot even find Liberia on a map, but right now the actions of our Federal Reserve have pushed the currency of that small nation to the verge of collapse…

Liberia’s finance minister warned against panic today after being summoned to parliament to explain a crash in the value of Liberia’s currency against the US dollar.

“Let’s be careful about what we say about the economy. Inflation, ladies and gentlemen, is not out of control,” Amara Konneh told lawmakers, while adding that the government was “concerned” about the trend.

Closer to home, the Mexican peso tumbled quite a bit last week and is now beginning to show significant weakness. If Mexico experiences a currency collapse, that would be a huge blow to the U.S. economy.

Like I said, this is something that is happening on a global scale.

If this continues, we will eventually see looting, violence, blackouts, shortages of basic supplies, and runs on the banks in emerging markets all over the planet just like we are already witnessing in Argentina and Venezuela.

Hopefully something can be done to stop this from happening. But once a bubble starts to burst, it is really difficult to try to hold it together.

Meanwhile, I find it to be very “interesting” that last week we witnessed the largest withdrawal from JPMorgan’s gold vault ever recorded.

Was someone anticipating something?

Once again, hopefully this crisis will be contained shortly. But if the Fed announces that it has decided to taper some more, that is going to be a signal to investors that they should race for the exits and the crisis in the emerging markets will get a whole lot worse.

And if you listen carefully, global officials are telling us that is precisely what we should expect. For example, consider the following statement from the finance minister of Mexico…

“We expected this year to be a volatile year for EM as the Fed tapers,” Mexican Finance Minister Luis Videgaray said, adding that volatility “will happen throughout the year as tapering goes on”.

Yes indeed – it is looking like this is going to be a very volatile year.

I hope that you are ready for what is coming next.