Stock Market Collapse

We Have Already Witnessed The First 1300 Points Of The Stock Market Crash Of 2015

August 20, 2015August 20, 2015 by Michael

What has been happening on Wall Street the past few days has been nothing short of stunning. On Thursday, the Dow Jones Industrial Average plummeted 358 points. It was the largest single day decline in a year and a half, and investors are starting to panic. Overall, the Dow is now down more than 1300 points from the peak of the market. Just yesterday, I wrote about all of the experts that are warning about a stock market crash in 2015, and after today I am sure that a lot more people will start jumping on the bandwagon. In particular, tech stocks are getting absolutely hammered lately. The Nasdaq has fallen close to 3.5% over the past two days alone, and it has dropped below its 200-day moving average. The Russell 2000 (a small-cap stock market index) is also now trading below its 200-day moving average. What all of this means is that the stock market crash of 2015 has already begun. The only question left to answer at this point is how bad it will ultimately turn out to be.

When stocks were booming, tech stocks were leading the way up.

But now that the market has turned, tech stocks are starting to lead the way down…

The Dow and the S&P 500 are negative for the year. The so-called “FANG” stocks – Facebook, Apple, Netflix, and Google – were some of the biggest losers, and helped send the Nasdaq more than 2% lower. Biotechs also suffered big losses; the iShares Nasdaq Biotechnology ETF fell 4% to a three-month low. The Vix, which gauges market expectations for near-term shifts in the S&P 500, surged more than 21%.

And Twitter is absolutely imploding. It has fallen below its IPO price, and at this point it is now down 65 percent from the peak.

Of course it was inevitable that Twitter and these tech stocks would start falling eventually. I specifically warned my readers about Twitter’s stock price nearly two years ago. I hope people listened to what I was saying and got out in time.

This current market crash is happening in the context of a full-blown global financial meltdown. Stock markets all over the planet are collapsing, and currencies are being devalued left and right. The following comes from a recent piece by Wolf Richter…

Hot money is already fleeing emerging markets. Higher rates in the US will drain more capital out of countries that need it the most. It will pressure emerging market currencies and further increase the likelihood of a debt crisis in countries whose governments, banks, and corporations borrow in a currency other than their own.

This scenario would be bad enough for the emerging economies. But now China has devalued the yuan to stimulate its exports and thus its economy at the expense of others. And one thing has become clear on Wednesday: these struggling economies that compete with China are going to protect their exports against Chinese encroachment.

Hence a currency war.

Two more major shots in the currency war were fired on Thursday by Kazakhstan and Vietnam…

Hit by sharp declines in crude prices, the oil-producing nation of Kazakhstan introduced a freely floating exchange rate for the tenge, which subsequently lost more than a quarter of its value.

The State Bank of Vietnam (SBV) devalued the dong (VND) by 1 percent against the dollar on Wednesday—its third adjustment so far this year—and simultaneously widened the trading band to 3 percent from 2 percent previously, the second increase in six days.

A quarter of its value?

Now that is a devaluation.

In the coming days, we are likely to see even more emerging markets devalue their currencies in a global “race to the bottom”. But this “race to the bottom” presents a great danger to financial markets. As I have written about previously, there are 74 trillion dollars in derivatives globally that are tied to the value of currencies. As foreign exchange rates start flying around all over the place, there are going to be financial institutions out there that are going to be losing obscene amounts of money.

I cannot say the “d word” enough. Derivatives are going to play a starring role during this financial collapse, and so that is a word that you will want to be listening for very carefully in the weeks and months to come.

The meltdown that has already been affecting much of the rest of the planet is now starting to affect us. And it was inevitable that it would. I like how Clive P. Maund put it recently…

Many lesser markets around the world are toppling, but somehow the big Western markets of Europe, Japan and the US are staying aloft. If you have ever made a sand castle on the beach and watched what happened when the tide comes in, you will recall that it is the weaker outer ramparts and smaller turrets that collapse first, and the big central towers that hold out the longest. The weaker outer ramparts and smaller turrets are the Emerging Markets which are already crumbling, and it won’t be long until the big central towers – the big Western Markets, go the same way – everything is pointing to it.

The funny thing is that even though all of the signs are pointing to a nightmarish global financial crisis, the mainstream media continues to insist that everything is going to be just fine.

In fact, CNBC says that the recent dip in stock prices is a “bull indicator” and they are encouraging everyone to pour lots more money into stocks.

But of course the truth is that what financial conditions are really telling us is that stocks have much, much farther to fall.

For instance, high yield credit is starting to crash just like it did prior to the stock market crash of 2008. Stocks and high yield credit usually tend to track one another quite closely, and so when there is a divergence that is a huge red flag. And as this chart from Zero Hedge demonstrates, a very large divergence has developed in recent months…

Sadly, the 358 point plunge for the Dow on Thursday was just the beginning.

Yes, there will be up days and down days, but we are now officially entering the “danger zone” as we roll into the months of September and October.

So will 2015 soon be mentioned along with the famous market crashes of 1929, 1987, 2001 and 2008?

Please feel free to share what you think by posting a comment below…

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.

Guess What Happened The Last Two Times The S&P 500 Was Up More Than 200% In Six Years?

March 11, 2015March 11, 2015 by Michael

Just a few days ago, the bull market for the S&P 500 turned six years old. This six year period of time has been great for investors, but what comes next? On March 9th, 2009 the S&P 500 hit a low of 676.53. Since that day, it has risen more than 200 percent. As you will see below, there are only two other times within the last 100 years when the S&P 500 performed this well over a six year time frame. In both instances, the end result was utter disaster. And as you take in this information, I want you to keep in mind what I said in my previous article entitled “7 Signs That A Stock Market Peak Is Happening Right Now“. What we are witnessing at this moment is classic “peaking behavior”, and there is a long way to go down from here. So if historical patterns hold up, those with lots of money in the stock market could soon be in for a whole lot of trouble.

According to Societe Generale analyst Andrew Lapthorne, there was an S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1929.

We all know what happened that year.

And there was another S&P 500 bull market run of more than 200 percent over a six year time period that ended in 1999. In the end, all of those gains were wiped out when the dotcom bubble burst.

And now we are near the end of another great bull market for the S&P 500. The following is an excerpt from a recent Business Insider article…

“Such a strong six year run up in US equities has only been seen twice since 1900, i.e., back in 1929 and 1999, neither of which ended well,” Lapthorne wrote.

It’s anyone’s guess what happens next. But Lapthorne and his colleagues have slanted bearish.

So how will this current bull market end?

Needless to say, a lot of people are not very optimistic about that right now.

And there was another very interesting bull market that ended in 1987…

On Aug. 12, the S&P 500 dipped to 102.42, setting the stage for the third-biggest bull market in stocks since 1929. Inflation and unemployment fell. In 1984, President Reagan would cruise to reelection with an ad telling voters “It’s morning again in America.” By 1987, the stock market had tripled. Shareholders who were able to see beyond the gloom of the early 1980s reaped a huge return.

Of course a lot of those huge stock market returns were eliminated in a single day. On October 19th, 1987 the Dow declined by more than 22 percent during a single trading session. That day is still known as “Black Monday” up to this present time.

Markets tend to go down a lot faster than they go up. So if your stock portfolio has gone up substantially over the past few years, good for you. But keep in mind that all of your gains can be wiped out very rapidly. Millions of people experienced this during the last financial crisis, and millions more will experience this during the next one.

And as I keep reminding people, so many of the exact same patterns that we witnessed just prior to the last great stock market collapse are happening once again.

For example, just yesterday I explained that there has been only one other time over the past decade when we have seen the U.S. dollar surge in value in such a short period of time.

That was in 2008, just prior to the last financial crisis.

Another example is what has happened to the price of oil. Since the middle of last year, the price of oil has fallen by more than 50 dollars a barrel.

In all of history, that has happened only one other time.

That was in 2008, just prior to the last financial crisis.

I could go on and on. I could talk about margin debt, price/earnings ratios, industrial commodities, etc.

But you know what? Despite all of the warning signs there are still people out there that are eagerly pouring money into the stock market.

Back in 2005 and 2006, I knew people that were hurrying to buy homes before they got “priced out of the market”. So they did everything that they could to scrape together down payments and they took on mortgages that were larger than they could really afford.

And in the end they got burned.

Today, people are doing similar things. For instance, my friend Bob recently sent me an article that I could hardly believe. It turns out that an “expert” on CNBC is encouraging people “to take out a 7 year loan with a rapidly amortizing asset as collateral in order to buy stocks.”

Yikes!

Let me be clear. The really, really, really dumb money is jumping into the stock market right now. Those that are pouring money into stocks today are really going to get hit hard when the crash comes.

And it isn’t just me saying this.

Just consider the words of billionaire hedge fund manager Crispin Odey…

Mr Odey is best known for his big macroeconomic calls, including foreseeing the 2008 global credit crisis; piling into insurers in the wake of September 2001 attacks; and picking the recent oil price rout. He famously paid himself £28 million in 2008 after shorting credit crisis casualties, including British lender Bradford & Bingley. Mr Odey’s fund returned 54.8 per cent that year.

“The market’s reaction to all of this is leave it to the professionals, leave it to those great guys, the central bankers, because they saved the day in 2009,” he said. “These guys are kind of relying on central banks pulling a rabbit out of a hat.”

The risk is that this time, monetary policy may be ineffective: “We need the crisis to reformulate policy. Central banks are not all singing and all dancing, they cannot basically avoid the natural consequences of what we are doing.”

An inadequate supply-side response to the plunge in commodity prices as the resources industry declines to reduce production was in effect stimulating supply into falling demand.

“The trouble is today the players, whether they are the miners or the oil companies or the Saudis or anybody else, they are not doing the right things. This is the first time in my career where economics 101 doesn’t work at all.”

But it was also true that the world has not had a major recession for 25 years and thanks to frequent interventions, “there is a sensation we don’t have a business cycle”. Stocks are enjoying a six-year bull market but he also hinted at liquidity issues bubbling under the surface.

“I just think that you and I have got grandstand seats here [to an imminent market shock] and my point is having found myself in the second quarter of last year selling a lot of equities and starting to go short, I found out just how illiquid it all was. You never actually see it until people try and get out of these things.”

It was unclear to Mr Odey what central banks could do to prevent a crash.

The warning signs are clear.

Soon the time for warning will be over and the crisis will be here.

I hope that you are getting ready.

7 Signs That A Stock Market Peak Is Happening Right Now

March 9, 2015March 9, 2015 by Michael

Is this the end of the last great run for the U.S. stock market? Are we witnessing classic “peaking behavior” that is similar to what occurred just before other major stock market crashes? Throughout 2014 and for the early stages of 2015, stocks have been on quite a tear. Even though the overall U.S. economy continues to be deeply troubled, we have seen the Dow, the S&P 500 and the Nasdaq set record after record. But no bull market lasts forever – particularly one that has no relation to economic reality whatsoever. This false bubble of financial prosperity has been enjoyable, and even I wish that it could last much longer. But there comes a time when we all must face reality, and the cold, hard facts are telling us that this party is about to end. The following are 7 signs that a stock market peak is happening right now…

#1 Just before a stock market crash, price/earnings ratios tend to spike, and that is precisely what we are witnessing. The following commentary and chart come from Lance Roberts…

The chart below shows Dr. Robert Shiller’s cyclically adjusted P/E ratio. The problem is that current valuations only appear cheap when compared to the peak in 2000. In order to put valuations into perspective, I have capped P/E’s at 30x trailing earnings. The dashed orange line measures 23x earnings which has been the level where secular bull markets have previously ended. I have noted the peak valuations in periods that have exceeded that 30x earnings.

At 27.85x current earning the markets are currently at valuation levels where previous bull markets have ended rather than continued. Furthermore, the markets have exceeded the pre-financial crisis peak of 27.65x earnings. If earnings continue to deteriorate, market valuations could rise rapidly even if prices remain stagnant.

#2 The average bull market lasts for approximately 3.8 years. The current bull market has already lasted for six years.

#3 The median total gain during a bull market is 101.5 percent. For this bull market, it has been 213 percent.

#4 Usually before a stock market crash we see a divergence between the relative strength index and the stock market itself. This happened prior to the bursting of the dotcom bubble, it happened prior to the crash of 2008, and it is happening again right now…

The first technical warning sign that we should heed is marked by a significant divergence between the relative strength index (RSI) and the market itself. This is noted by a declining pattern of lower highs in the RSI as stocks continue to make higher highs, a sign that the market is “topping out”. In the late ‘90s this divergence persisted for many years as the tech bubble reached epic valuation levels. In 2007 this divergence lasted over a much shorter period (6 months) before the market finally peaked and succumbed to massive selling. With last month’s strong rally to new records, we now have a confirmed divergence between the long-term relative strength index and the market’s price action.

#5 In the past, peaks in margin debt have been very closely associated with stock market peaks. The following chart comes from Doug Short, and I included it in a previous article…

#6 As I have discussed previously, we usually witness a spike in 10 year Treasury yields just about the time that the stock market is peaking right before a crash.

Well, according to Business Insider, we just saw the largest 5 week rate rally in two decades…

Lots of guys and gals went home this past weekend thinking about the implications of the recent rise in the 10-year Treasury bond’s yield.

Chris Kimble notes it was the biggest 5-week rate rally in twenty years!

#7 A lot of momentum indicators seem to be telling us that we are rapidly approaching a turning point for stocks. For example, James Stack, the editor of InvesTech Research, says that the Coppock Guide is warning us of “an impending bear market on the not-too-distant horizon”…

A momentum indicator dubbed the Coppock Guide, which serves as “a barometer of the market’s emotional state,” has also peaked, Stack says. The indicator, which, “tracks the ebb and flow of equity markets from one psychological extreme to another,” is also flashing a warning flag.

The Coppock Guide’s chart pattern is flashing a “double top,” which suggests that “psychological excesses are present” and that “secondary momentum has peaked” in this bull market, according to Stack.

“All of this is just another reason for concern about an impending bear market on the not-too-distant horizon,” Stack writes.

So if we are to see a stock market crash soon, when will it happen?

Well, the truth is that nobody knows for certain.

It could happen this week, or it could be six months from now.

In fact, a whole lot of people are starting to point to the second half of 2015 as a danger zone. For example, just consider the words of David Morgan…

“Momentum is one indicator and the money supply. Also, when I made my forecast, there is a big seasonality, and part of it is strict analytical detail and part of it is being in this market for 40 years. I got a pretty good idea of what is going on out there and the feedback I get. . . . I’m in Europe, I’m in Asia, I’m in South America, I’m in Mexico, I’m in Canada; and so, I get a global feel, if you will, for what people are really thinking and really dealing with. It’s like a barometer reading, and I feel there are more and more tensions all the time and less and less solutions. It’s a fundamental take on how fed up people are on a global basis. Based on that, it seems to me as I said in the January issue of the Morgan Report, September is going to be the point where people have had it.”

Time will tell if Morgan was right.

But without a doubt, lots of economic warning signs are starting to pop up.

One that is particularly troubling is the decline in new orders for consumer goods. This is something that Charles Hugh-Smith pointed out in one of his recent articles…

The financial news is astonishingly rosy: record trade surpluses in China, positive surprises in Europe, the best run of new jobs added to the U.S. economy since the go-go 1990s, and the gift that keeps on giving to consumers everywhere, low oil prices.

So if everything is so fantastic, why are new orders cratering? New orders are a snapshot of future demand, as opposed to current retail sales or orders that have been delivered.

Posted below is a chart that he included with his recent article. As you can see, the only time things have been worse in recent decades was during the depths of the last financial crisis…

To me, it very much appears that time is running out for this bubble of false prosperity that we have been living in.

But what do you think? Please feel free to contribute to the discussion by posting a comment below…

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

January 6, 2015January 6, 2015 by Michael

If you do not believe that we are heading directly toward another major financial crisis, you need to read this article. So many of the exact same patterns that preceded the great financial collapse of 2008 are happening again right before our very eyes. History literally appears to be repeating, but most Americans seem absolutely oblivious to what is going on. The mainstream media and our politicians are promising them that everything is going to be okay somehow, and that seems to be good enough for most people. But the signs that another massive financial crisis is on the horizon are everywhere. All you have to do is open up your eyes and look at them.

Bill Gross, considered by many to be the number one authority on government bonds on the entire planet, made headlines all over the world on Tuesday when he released his January Investment Outlook. I don’t know if we have ever seen Gross be more negative about a new year than he is about 2015. For example, just consider this statement…

“When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.”

And this is how he ended the letter…

And so that is why – at some future date – at some future Ides of March or May or November 2015, asset returns in many categories may turn negative. What to consider in such a strange new world? High-quality assets with stable cash flows. Those would include Treasury and high-quality corporate bonds, as well as equities of lightly levered corporations with attractive dividends and diversified revenues both operationally and geographically. With moments of liquidity having already been experienced in recent months, 2015 may see a continuing round of musical chairs as riskier asset categories become less and less desirable.

Debt supercycles in the process of reversal are not favorable events for future investment returns. Father Time in 2015 is not the babe with a top hat in our opening cartoon. He is the grumpy old codger looking forward to his almost inevitable “Ides” sometime during the next 12 months. Be cautious and content with low positive returns in 2015. The time for risk taking has passed.

So why are Gross and so many other financial experts being so “negative” right now?

It is because they can see what is happening.

They can see the same patterns that we saw in early 2008 unfolding again right in front of us. I wanted to put these patterns in a single article so that they will be easy to share with people. The following are 10 key events that preceded the last financial crisis that are happening again right now…

#1 A really bad start to the year for the stock market. During the first three trading days of 2015, the S&P 500 was down a total of 2.73 percent. There are only two times in history when it has declined by more than three percent during the first three trading days of a year. Those years were 2000 and 2008, and in both years we witnessed enormous stock market declines.

#2 Very choppy financial market behavior. This is something that I discussed yesterday. In general, calm markets tend to go up. When markets get choppy, they tend to go down. For example, the chart that I have posted below shows how the Dow Jones Industrial Average behaved from the beginning of 2006 to the end of 2008. As you can see, the Dow was very calm as it rose throughout 2006 and most of 2007, but it got very choppy as 2008 played out…

As I also mentioned yesterday, it is important not to get fooled if stocks soar on a particular day. The three largest single day stock market gains in history were right in the middle of the financial crisis of 2008. When you start to see big ups and big downs in the market, that is a sign of big trouble ahead. That is why it is so alarming that global financial markets have begun to become quite choppy in recent weeks.

#3 A substantial decline for 10 year bond yields. When investors get scared, there tends to be a “flight to safety” as investors move their money to safer investments. We saw this happen in 2008, and that is happening again right now.

In fact, according to Bloomberg, global 10 year bond yields have already dropped to low levels that are absolutely unprecedented…

Taken together, the average 10-year bond yield of the U.S., Japan and Germany has dropped below 1 percent for the first time ever, according to Steven Englander, global head of G-10 foreign-exchange strategy at Citigroup Inc.

That’s not good news. The rock-bottom rates, which fall below zero when inflation is taken into account, show “that investors think we are going nowhere for a long time,” Englander wrote in a report yesterday.

#4 The price of oil crashes. As I write this, the price of U.S. oil has dipped below $48 a barrel. But back in June, it was sitting at $106 at one point. As the chart below demonstrates, there is only one other time in history when the price of oil has declined by more than $50 in less than a year…

The only other time there has been an oil price collapse of this magnitude we experienced the greatest financial crisis since the Great Depression shortly thereafter. Are we about to see history repeat? For much more on this, please see my previous article entitled “Guess What Happened The Last Time The Price Of Oil Crashed Like This?”

#5 A dramatic drop in the number of oil and gas rigs in operation. Right now, oil and gas rigs are going out of operation at a frightening pace. During the fourth quarter of 2014, 93 oil and gas rigs were idled, and it is being projected that another 200 will shut down this quarter. As this Business Insider article demonstrates, this is also something that happened during the financial crisis of 2008 and it continued well into 2009.

#6 The price of gasoline takes a huge tumble. Millions of Americans are celebrating that the price of gasoline has plummeted in recent weeks. But they were also celebrating when it happened back in 2008 as well. But of course it turned out that there was really nothing to celebrate in 2008. In short order, millions of Americans lost their jobs and their homes. So the chart that I have posted below is definitely not “good news”…

#7 A broad range of industrial commodities begin to decline in price. When industrial commodities go down in price, that is a sign that economic activity is slowing down. And just like in 2008, that is what we are watching unfold on the global stage right now. The following is an excerpt from a recent CNBC article…

From nickel to soybean oil, plywood to sugar, global commodity prices have been on a steady decline as the world’s economy has lost momentum.

For an extended discussion on this, please see my recent article entitled “Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?”

#8 A junk bond crash. Just like in 2008, we are witnessing the beginnings of a junk bond collapse. High yield debt related to the energy industry is on the bleeding edge of this crash, but in recent weeks we have seen investors start to bail out of a broad range of junk bonds. Check out this chart and this chart in addition to the chart that I have posted below…

#9 Global inflation slows down significantly. When economic activity slows down, so does inflation. This is something that we witnessed in 2008, this is also something that is happening once again. In fact, it is being projected that global inflation is about to fall to the lowest level that we have seen since World War II…

Increases in the prices of goods and services in the world’s largest economies are slowing dramatically. Analysts are predicting that inflation will fall below 2pc in all of the countries that make up the G7 group of advanced nations this year – the first time that has happened since before the Second World War.

Indeed, Japan was the only G7 country whose inflation rate was above 2pc last year. And economists believe that was because its government increased sales tax which had the effect of artificially boosting prices.

#10 A crisis in investor confidence. Just prior to the last financial crisis, the confidence that investors had that we would be able to avoid a stock market collapse in the next six months began to decline significantly. And guess what? That is something else that is happening once again…

Investor confidence that the US will avoid a stock-market crash in the next six months has dropped dramatically since last spring.

The Yale School of Management publishes a monthly Crash Confidence Index. The index shows the proportion of investors who believe we will avoid a stock-market crash in the next six months.

Yale points out that “crash confidence reached its all-time low, both for individual and institutional investors, in early 2009, just months after the Lehman crisis, reflecting the turmoil in the credit markets and the strong depression fears generated by that event, and is plausibly related to the very low stock market valuations then.”

Are you starting to get the picture?

And of course I am not the only one warning about these things. As I wrote about earlier in the week, there are a whole host of prominent voices that are now warning of imminent financial danger.

Today, I would like to add one more name to the list. He is respected author James Howard Kunstler, and what he predicts is coming in 2015 is absolutely chilling…

*****

Here are my financial forecast particulars for 2015:

Early in 2015 the ECB proposes a lame QE program and is laughed out of the room. European markets tank.

Greek elections in January produce a government that stands up to the EU and ECB and causes a fatal slippage of faith in the ability of that project to continue.

Second half of 2015, the rest of the world gangs up and counter-attacks the US dollar.

Bond markets in Europe implode in first half and the contagion spreads to the US as fear and distrust rises about viability of US safe haven status.

Derivatives associated with currencies, interest rates, and junk bonds trigger a bloodbath in credit default swaps (CDS) and the appearance of countless black holes through which debt and “wealth” disappear forever.

US stock markets continue to bid upward in the first half of 2015, crater in Q3 as faith in paper and pixels erodes. DJA and S & P fall 30 to 40 percent in the initial crash, then further into 2016.

Gold and silver slide in the first half, then take off as debt and equity markets craters, faith in abstract instruments evaporates, faith in central bank omnipotence dissolves, and citizens all over the world desperately seek safety from currency war.

Goldman Sachs, Citicorp, Morgan Stanley, Bank of America, DeutscheBank, SocGen, all succumb to insolvency. American government and Federal Reserve officials don’t dare attempt to rescue them again.

By the end of 2015, central banks everywhere stand in general discredit. In the US, the Federal Reserve’s mandate is publically debated and revised back to its original mission as lender of last resort. It is forbidden to engage in further interventions and a new less-secretive mechanism is drawn up for regulating basic interest rates.

Oil prices creep back into the $65 – $70 range by May 2015. It is not enough to halt the destruction in the shale, tar sand, and deepwater sectors. As contraction in the failing global economy accelerates, oil sinks back to the $40 range in October…

…unless mischief in the Middle East (in particular, the Islamic State messing with Saudi Arabia) leads to gross and perhaps fatally permanent disruption in world oil markets — and then all bets are off for both the continuity of advanced economies and for peace between nations.

*****

Personally, I don’t agree with Kunstler on all of the particulars and the timing of certain events, but overall I think that we are going to look back when the year is done and say that he was a lot more right than he was wrong.

We are moving into a time of extreme danger for the global economy. There has never been a time when I have been more concerned about a new year since I began The Economic Collapse Blog back in 2009.

Over the past couple of years, we have been very blessed to be able to enjoy a bubble of relative stability. But this period of stability also fooled many people into thinking that our economic problems had been fixed, when in reality they have only gotten worse.

We consume far more wealth than we produce, our debt levels are at record highs and we are at the tail end of the largest Wall Street financial bubble in all of history.

It is inevitable that we are heading for a tragic conclusion to all of this. It is just a matter of time.

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.

We Just Witnessed The Worst Week For Global Financial Markets In 3 Years

December 14, 2014December 14, 2014 by Michael

Is this the start of the next major financial crisis? The nightmarish collapse of the price of oil is creating panic in financial markets all over the planet. On June 16th, U.S. oil was trading at a price of $107.52. Since then, it has fallen by almost 50 dollars in less than 6 months. This has only happened one other time in our history. In the summer of 2008, the price of oil utterly collapsed and we all remember what happened after that. Well, the same patterns that we witnessed back in 2008 are happening again. As the price of oil crashed in 2008, so did prices for a whole host of other commodities. That is happening again. Once commodities started crashing, the market for junk bonds started to implode. That is also happening again. Finally, toward the end of 2008, we witnessed a horrifying stock market crash. Could we be on the verge of another major one? Last week was the worst week for the Dow in more than three years, and stock markets all over the world are crashing right now. Bad financial news continues to roll in from the four corners of the globe on an almost hourly basis. Have we finally reached the “tipping point” that so many have been warning about?

What we witnessed last week is being described as “a bloodbath” that was truly global in scope. The following is how Zero Hedge summarized the carnage…

WTI’s 2nd worst week in over 3 years (down 10 of last 11 weeks)
Dow’s worst worst week in 3 years
Financials worst week in 2 months
Materials worst week since Sept 2011
VIX’s Biggest week since Sept 2011
Gold’s best week in 6 months
Silver’s last 2 weeks are best in 6 months
HY Credit’s worst 2 weeks since May 2012
IG Credit’s worst week in 2 months
10Y Yield’s best week since June 2012
US Oil Rig Count worst week in 2 years
The USDollar’s worst week since July 2013
USDJPY’s worst week since June 2013
Portugal Bonds worst week since July 2011
Greek stocks worst week since 1987

The stock market meltdown in Greece is particularly noteworthy. After peaking in March, the Greek stock market is down 40 percent since then. That includes a 20 percent implosion in just the past three trading days.

And it isn’t just Greece. Financial markets all over Europe are in turmoil right now. In addition to crashing oil prices, there is also renewed concern about the fundamental stability of the eurozone. Many believe that it is inevitable that it is headed for a break up. As a result of all of this fear, European stocks also had their worst week in over three years…

European stock markets closed sharply lower on Friday, posting their biggest weekly loss since August 2011, as commodity prices continued to fall and and shares in oil-related firms came under renewed pressure from the weak price for crude.

The pan-European FTSEurofirst 300 unofficially ended 2.6 percent lower, down 5.9 percent on the week as the energy sector once again weighed heavily on wider benchmarks, falling over 3 percent.

But despite all of the carnage that we witnessed in the U.S. and in Europe last week, things are actually far worse for financial markets in the Middle East.

Just check out what happened on the other side of the planet on Sunday…

Stock markets in the Persian Gulf got drilled Sunday as worries about further price declines grew. The Dubai stock index fell 7.6% Sunday, the equivalent of a 1,313-point plunge in the Dow Jones industrial average. The Saudi Arabian market fell 3.3%.

Overall, Dubai stocks are down a whopping 23 percent over the last two weeks, and full-blown stock market crashes are happening in Qatar and Kuwait too.

Like I said, this is turning out to be a truly global financial panic.

Another region to keep an eye on is South America. Argentina is a financial basket case, the Brazilian stock market is tanking big time, and the implied probability of default on Venezuelan debt is now up to 93 percent…

Swaps traders are almost certain that Venezuela will default as the rout in oil prices pressures government finances and sends bond prices to a 16-year low.

Benchmark notes due 2027 dropped to 43.75 cents on the dollar as of 11:35 a.m. in New York, the lowest since September 1998, as crude extended a bear market decline. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years is at 59 percent, bringing the implied probability of default to 93 percent, the highest in the world.

So what does all of this mean for the future?

Are we experiencing a repeat of 2008?

Could what is ahead be even worse than that?

Or could this just be a temporary setback?

Recently, Howard Hill shared a few things that he looks for to determine whether a major financial crisis is upon us or not…

The first condition is a serious market sector correction.

According to some participants in the market for energy company bonds and loans, such a correction is already underway and heading toward a meltdown (the second condition). Others are more sanguine, and expect a recovery soon.

That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18% ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.

If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.

The third condition, which we can’t determine directly, would be pressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.

I think that he makes some really good points.

In particular, I think that watching how junk bonds perform over the next few weeks will be extremely telling.

Last week was truly a bloodbath for high yield debt.

But perhaps things will stabilize this week.

Let’s hope so, because this is the closest that we have been to another major financial crisis since 2008.

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

November 30, 2014November 30, 2014 by Michael

There has only been one other time in history when the price of oil has crashed by more than 40 dollars in less than 6 months. The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months. Well, now it is happening again, but this time the stakes are even higher. When the price of oil falls dramatically, that is a sign that economic activity is slowing down. It can also have a tremendously destabilizing affect on financial markets. As you will read about below, energy companies now account for approximately 20 percent of the junk bond market. And a junk bond implosion is usually a signal that a major stock market crash is on the way. So if you are looking for a “canary in the coal mine”, keep your eye on the performance of energy junk bonds. If they begin to collapse, that is a sign that all hell is about to break loose on Wall Street.

It would be difficult to overstate the importance of the shale oil boom to the U.S. economy. Thanks to this boom, the United States has become the largest oil producer on the entire planet.

Yes, the U.S. now actually produces more oil than either Saudi Arabia or Russia. This “revolution” has resulted in the creation of millions of jobs since the last recession, and it has been one of the key factors that has kept the percentage of Americans that are employed fairly stable.

Unfortunately, the shale oil boom is coming to an abrupt end. As a recent Vox article discussed, OPEC has essentially declared a price war on U.S. shale oil producers…

For all intents and purposes, OPEC is now engaged in a “price war” with the United States. What that means is that it’s very cheap to pump oil out of places like Saudi Arabia and Kuwait. But it’s more expensive to extract oil from shale formations in places like Texas and North Dakota. So as the price of oil keeps falling, some US producers may become unprofitable and go out of business. The result? Oil prices will stabilize and OPEC maintains its market share.

If the price of oil stays at this level or continues falling, we will see a significant number of U.S. shale oil companies go out of business and large numbers of jobs will be lost. The Saudis know how to play hardball, and they are absolutely ruthless. In fact, we have seen this kind of scenario happen before…

Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the US shale oil sector.” Even legendary oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.” This has happened once before. By the mid-1980’s, as oil output from Alaska’s North Slope and the North Sea came on line (combined production of around 5-6 million barrels a day), OPEC set off a price war to compete for market share. As a result, the price of oil sank from around $40 to just under $10 a barrel by 1986.

But the energy sector has been one of the only bright spots for the U.S. economy in recent years. If this sector starts collapsing, it is going to have a dramatic negative impact on our economic outlook. For example, just consider the following numbers from a recent Business Insider article…

Specifically, if prices get too low, then energy companies won’t be able to cover the cost of production in the US. This spending by energy companies, also known as capital expenditures, is responsible for a lot of jobs.

“The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending,” Goldman Sachs’ Amanda Sneider writes.

Even more troubling is what this could mean for the financial markets.

As I mentioned above, energy companies now account for close to 20 percent of the entire junk bond market. As those companies start to fail and those bonds start to go bad, that is going to hit our major banks really hard…

Everyone could suffer if the collapse triggers a wave of defaults through the high-yield debt market, and in turn, hits stocks. The first to fall: the banks that were last hit by the housing crisis.

Why could that happen?

Well, energy companies make up anywhere from 15 to 20 percent of all U.S. junk debt, according to various sources.

It would be hard to overstate the seriousness of what the markets could potentially be facing.

One analyst summed it up to CNBC this way…

“This is the one thing I’ve seen over and over again,” said Larry McDonald, head of U.S strategy at Newedge USA’s macro group. “When high yield underperforms equity, a major credit event occurs. It’s the canary in the coal mine.“

The last time junk bonds collapsed, a major stock market crash followed fairly rapidly.

And those that were hardest hit were the big Wall Street banks…

During the last high-yield collapse, which centered around debt tied to the housing sector, Citigroup lost 63 percent of its value in the following 60 days, Kensho shows. Bank of America was cut in half.

I understand that some of this information is too technical for a lot of people, but the bottom line is this…

Watch junk bonds. When they start crashing it is a sign that a major stock market collapse is right at the door.

At this point, even the mainstream media is warning about this. Just consider the following excerpt from a recent CNN article…

That swing away from junk bonds often happens shortly before stock market downturns.

“High yield does provide useful sell signals to equity investors,” Barclays analysts concluded in a recent report.

Barclays combed through the past dozen years of data. The warning signal they found is a 30% or greater increase in the spread between Treasuries and junk bonds before a dip.

If you have been waiting for the next major financial collapse, what you have just read in this article indicates that it is now closer than it has ever been.

Over the coming weeks, keep your eye on the price of oil, keep your eye on the junk bond market and keep your eye on the big banks.

Trouble is brewing, and nobody is quite sure exactly what comes next.

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