Stock Markets

12 Signs That An Imminent Global Financial Crash Has Become Even More Likely

Time Spinning Skyline - Public DomainDid you see what just happened?  The devaluation of the yuan by China triggered the largest one day drop for that currency in the modern era.  This caused other global currencies to crash relative to the U.S. dollar, the price of oil hit a six year low, and stock markets all over the world were rattled.  The Dow fell 212 points on Tuesday, and Apple stock plummeted another 5 percent.  As we hurtle toward the absolutely critical months of September and October, the unraveling of the global financial system is beginning to accelerate.  At this point, it is not going to take very much to push us into a full-blown worldwide financial crisis.  The following are 12 signs that indicate that a global financial crash has become even more likely after the events of the past few days…

#1 The devaluation of the yuan on Tuesday took virtually the entire planet by surprise (and not in a good way).  The following comes from Reuters…

China’s 2 percent devaluation of the yuan on Tuesday pushed the U.S. dollar higher and hit Wall Street and other global equity markets as it raised fears of a new round of currency wars and fed worries about slowing Chinese economic growth.

#2 One of the big reasons why China devalued the yuan was to try to boost exports.  China’s exports declined 8.3 percent in July, and global trade overall is falling at a pace that we haven’t seen since the last recession.

#3 Now that the Chinese have devalued their currency, other nations that rely on exports are indicating that they might do the same thing.  If you scan the big financial news sites, it seems like the term “currency war” is now being bandied about quite a bit.

#4 This is the very first time that the 50 day moving average for the Dow has moved below the 200 day moving average in the last four years. This is known as a “death cross”, and it is a very troubling sign.  We are just about at the point where all of the most common technical signals that investors typically use to make investment decisions will be screaming “sell”.

#5 The price of oil just closed at a brand new six year low.  When the price of oil started to decline back in late 2014, a whole lot of people were proclaiming that this would be a good thing for the U.S. economy.  Now we can see just how wrong they were.

At this point, the price of oil has already fallen to a level that is going to be absolutely nightmarish for the global economy if it stays here.  Just consider what Jeff Gundlach had to say about this in December…

And back in December 2014, “Bond King” Jeff Gundlach had a serious warning for the world if oil prices got to $40 a barrel.

“I hope it does not go to $40,” Gundlach said in a presentation, “because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.”

#6 This week we learned that OPEC has been pumping more oil than we thought, and it is being projected that this could cause the price of oil to plunge into the 30s…

Increased pumping by OPEC as Chinese demand appears to be slackening could drive oil to the lowest prices since the peak of the financial crisis.

West Texas Intermediate crude futures skidded through the year’s lows and looked set to break into the $30s-per-barrel range after the Organization of the Petroleum Exporting Countries admitted to more pumping and China devalued its currency, sending ripples through global markets.

#7 In a recent article, I explained that the collapse in commodity prices that we are witnessing right now is eerily similar to what we witnessed just before the stock market crash of 2008.  On Tuesday, things got even worse for commodities as the price of copper closed at a brand new six year low.

#8 The South American debt crisis of 2015 continues to intensify.  Brazil’s government bonds have been downgraded to just one level above junk status, and the approval rating of Brazil’s president has fallen into the single digits.

#9 Just before the financial crisis of 2008, a surging U.S. dollar put an extraordinary amount of stress on emerging markets.  Now that is happening again.  Emerging market stocks just hit a brand new four year low on Tuesday thanks to the stunt that China just pulled.

#10 Things are not so great in the United States either.  The ratio of wholesale inventories to sales in the United States just hit the highest level since the last recession.  What that means is that there is a whole lot of stuff sitting in warehouses out there that is waiting to be sold in an economy that is rapidly slowing down.

#11 Speaking of slowing down, the growth of consumer spending in the United States has just plummeted to multi-year lows.

#12 Deep inside, most of us can feel what is coming.  According to Gallup, the number of Americans that believe that the economy is getting worse is almost 50 percent higher than the number of Americans that believe that the economy is getting better.

Things are lining up perfectly for a global financial crisis and a major recession beginning in the fall and winter of 2015.

But just because things look like they will happen a certain way does not necessarily mean that they will.  All it takes is a single “event” of some sort to change everything.

So what do you believe will happen in the months ahead?

Please feel free to join the discussion by posting a comment below…

It Is About To Get Ugly: Oil Is Crashing And So Is Greece

Hindenburg Disaster - Public DomainThe price of oil collapsed by more than 8 percent on Wednesday, and a decision by the European Central Bank has Greece at the precipice of a complete and total financial meltdown.  What a difference 24 hours can make.  On Tuesday, things really seemed like they were actually starting to get better.  The price of oil had rallied by more than 20 percent since last Thursday, things in Europe seemed like they were settling down, and there appeared to be a good deal of optimism about how global financial markets would perform this month.  But now fear is back in a big way.  Of course nobody should get too caught up in how the markets behave on any single day.  The key is to take a longer term point of view.  And the fact that the markets have been on such a roller coaster ride over the past few months is a really, really bad sign.  When things are calm, markets tend to steadily go up.  But when the waters start really getting choppy, that is usually a sign that a big move down in on the horizon.  So the huge ups and the huge downs that we have witnessed in recent days are likely an indicator that rough seas are ahead.

A stunning decision that the European Central Bank has just made has set the stage for a major showdown in Europe.  The ECB has decided that it will no longer accept Greek government bonds as collateral from Greek banks.  This gives the European Union a tremendous amount of leverage in negotiations with the new Greek government.  But in the short-term, this could mean some significant pain for the Greek financial system.  The following is how a CNBC article described what just happened…

“The European Central Bank is telling the Greek banking system that it will no longer accept Greek bonds as collateral for any repurchase agreement the Greek banks want to conduct,” said Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.

“This is because the ECB only accepts investment grade paper and up until today gave Greece a waiver to this clause. That waiver has now been taken away and Greek banks now have to go to the Greek Central Bank and tap their Emergency Liquidity Assistance facility for funding,” he said.

And it certainly didn’t take long for global financial markets to respond to this news…

The Greek stock market closed hours ago, but the exchange-traded fund that tracks Greek stocks, GREK, crashed during the final minutes of trading in the US markets.

The euro is also getting walloped, falling 1.3% against the US dollar.

The EUR/USD, which had recovered to almost 1.15, fell to nearly 1.13 on news of the action taken by the ECB.

But this is just the beginning.

In coming months, I fully expect the euro to head toward parity with the U.S. dollar.

And if the new Greek government will not submit to the demands of the EU, and Greece ultimately ends up leaving the common currency, it could potentially mean the end of the eurozone in the configuration that we see it today.

Meanwhile, the oil crash has taken a dangerous new turn.

Over the past week, we have seen the price of oil go from $43.58 to $54.24 to less than 48 dollars before rebounding just a bit at the end of the day on Wednesday.

This kind of erratic behavior is the exact opposite of what a healthy market would look like.

What we really need is a slow, steady climb which would take the price of oil back to at least the $80 level.  In the current range in which it has been fluctuating, the price of oil is going to be absolutely catastrophic for the global economy, and the longer it stays in this current range the more damage that it is going to do.

But of course the problems that we are facing are not just limited to the oil price crash and the crisis in Greece.  The truth is that there are birth pangs of the next great financial collapse all over the place.  We just have to be honest with ourselves and realize what all of these signs are telling us.

And it isn’t just in the western world where people are sounding the alarm.  All over the world, highly educated professionals are warning that a great storm is on the horizon.  The other day, I had an economist in Germany write to me with his concerns.  And in China, the head of the Dagong Rating Agency is declaring that we are going to have to face “a new world financial crisis in the next few years”…

The world economy may slip into a new global financial crisis in the next few years, China’s Dagong Rating Agency Head Guan Jianzhong said in an interview with TASS news agency on Wednesday.

“I believe we’ll have to face a new world financial crisis in the next few years. It is difficult to give the exact time but all the signs are present, such as the growing volume of debts and the unsteady development of the economies of the US, the EU, China and some other developing countries,” he said, adding the situation is even worse than ahead of 2008.

For a long time, I have been pointing at the year 2015.  But this year is not going to be the end of anything.  Rather, it is just going to be the beginning of the end.

During the past few years, we have experienced a temporary bubble of false stability fueled by reckless money printing and an unprecedented accumulation of debt.  But instead of fixing anything, those measures have just made the eventual crash even worse.

Now a day of reckoning is fast approaching.

Life as we know it is about to change dramatically, and most people are completely and totally unprepared for it.

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

Global Financial Markets Crash - Public DomainIs 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.

Have Central Bankers Lost Control? Could The Bond Bubble Implode Even If There Is No Tapering?

Panic - Photo by Wes WashingtonAre the central banks of the world starting to lose control of the financial markets?  Could we be facing a situation where the bond bubble is going to inevitably implode no matter what the central bankers do?  For the past several years, the central bankers of the planet have been able to get markets to do exactly what they want them to do.  Stock markets have soared to record highs, bond yields have plunged to record lows and investors have literally hung on every word uttered by Federal Reserve Chairman Ben Bernanke and other prominent central bankers.  In the United States, it has been remarkable what Bernanke has been able to accomplish.  The U.S. government has been indulging in an unprecedented debt binge, the Fed has been wildly printing money, and the real rate of inflation has been hovering around 8 to 10 percent, and yet Bernanke has somehow convinced investors to lend gigantic piles of money to the U.S. government for next to nothing.  But this irrational state of affairs is not going to last indefinitely.  At some point, investors are going to wake up and start demanding higher returns.  And we are already starting to see this happen in Japan.  Wild money printing has actually caused bond yields to go up.  What a concept!  And that is what should happen – when central banks recklessly print money it should cause investors to demand a higher return.  But if bond investors all over the globe start acting rationally, that is going to cause the largest bond bubble in the history of the planet to burst, and that will create utter devastation in the financial markets.

Central banks can manipulate the financial system in the short-term, but there is usually a tremendous price to pay for the distortions that are caused in the long-term.

In Bernanke’s case, all of this quantitative easing seemed to work well for a while.  The first round gave the financial system a nice boost, and so the Fed decided to do another.  The second round had less effect, but it still boosted stocks and caused bond yields to go down.  The third round was supposed to be the biggest of all, but it had even less of an effect than the second round.  If you doubt this, just check out the charts in this article.

Our financial system has become addicted to this financial “smack”.  But like any addict, the amount needed to get the same “buzz” just keeps increasing.  Unfortunately, the more money that the Fed prints, the more distorted our financial system becomes.

The only way that this is going to end is with a tremendous amount of pain.  There is no free lunch, and there are already signs that investors are starting to wake up to this fact.

As investors wake up, they are going to realize that this bond bubble is irrational and entirely unsustainable.  Once the race to the exits begins, it is not going to be pretty.  In fact, the are indications that the race to the exits has already begun…

During the month of June, fixed income allocations fell to a four-year low, according to the American Association of Individual Investors, as major bond fund managers like Pimco experienced record withdrawals for the second quarter. That pullback sent places like emerging markets and high-yield bonds reeling—just as the Federal Reserve signaled plans to taper its easy-money policies within the coming years. Benchmark bond yields ticked up on that news, and in an unexpected twist, the stock market nosedived as well.

A lot of people out there have been floating the theory that the Fed will decide not to taper at all and that quantitative easing will continue at the same pace and therefore the markets will settle back down.

But what if they don’t settle back down?

Could the bond bubble implode even if there is no tapering?

That is what some are now suggesting.  For example, Detlev Schlichter is pointing to what has been happening in Japan as an indication that the paradigm has changed…

My conclusion is this: if market weakness is the result of concerns over an end to policy accommodation, then I don’t think markets have that much to fear. However, the largest sell-offs occurred in Japan, and in Japan there is not only no risk of policy tightening, there policy-makers are just at the beginning of the largest, most loudly advertised money-printing operation in history. Japanese government bonds and Japanese stocks are hardly nose-diving because they fear an end to QE. Have those who deal in these assets finally realized that they are sitting on gigantic bubbles and are they trying to exit before everybody else does? Have central bankers there lost control over markets?

After all, money printing must lead to higher inflation at some point. The combination in Japan of a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation (indeed, that is the official goal of Abenomics!) are a toxic mix for the bond market. It is absurd to assume that you can destroy your currency and dispossess your bond investors and at the same time expect them to reward you with low market yields. Rising yields, however, will derail Abenomics and the whole economy, for that matter.

The financial situation in Japan is actually very similar to the financial situation in the United States.  We both have “a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation”.  In both cases, rational investors should demand higher returns when the central bank fires up the printing presses.

And if interest rates on U.S. Treasury bonds start to rise to rational levels, the U.S. government is going to have to pay more to borrow money, state and local governments are going to have to pay more to borrow money, junk bonds will crash, the market for home mortgages will shrivel up and economic activity in this country will slow down substantially.

Plus, as I am fond of reminding everyone, there is a 441 trillion dollar interest rate derivatives time bomb sitting out there that rapidly rising interest rates could set off.

So needless to say, the Federal Reserve is scared to death of what higher interest rates would mean.

But at this point, they may have lost control of the situation.

If A Global Recession Is Not Looming, Then Why Are Bailouts Flying Around As If The End Of The World Is Coming?

I have learned that watching what people do is much more important than listening to what they say.  Back in 2008, financial authorities in the United States insisted that everything was gone to be okay.  But we all know now that was a lie.  Well, right now financial authorities in the U.S. and Europe are once again trying to assure us that everything is under control and that we are not headed for a global recession.  Unfortunately, their actions are telling a very different story.  All over the world, bailouts are flying around as if the end of the world is coming.  Governments and central banks are stepping in with gigantic mountains of money to prop up bond yields, major banks and even stock markets.  What we have seen over the past few months has been absolutely unprecedented.  So why are such desperate measures being taken if everything is going to be just fine?  Unfortunately, debt problems are never solved with more debt, so these bailouts really aren’t solving anything.  We are still headed for a massive amount of financial pain.  It would just be nice if the authorities would quit lying to us and would actually admit how bad things really are.

Today it was announced that the European Central Bank has agreed to make $638 billion in 3 year loans to 523 different banks.  Never before (not even during the last financial crisis) has the ECB loaned so much cheap money to European banks at one time.

This move by the ECB made headlines all over the globe.  CNBC is calling them “ultra-long and ultra-cheap loans“.

European authorities are hoping that European banks will use this money to make loans to businesses and to buy up the debt of troubled European governments.

But as we have seen in the United States, bailout money does not always get spent the way that the authorities intend for it to be spent.

The truth is that the banks could end up just sitting on the money.  That is what happened with a lot of bailout money in the United States during the last financial crisis.

European authorities hope, however, that European banks will take this super cheap money and lend it to European governments at much higher interest rates.

Unfortunately, global financial markets were not terribly impressed with this move by the ECB.  European bond yields actually rose and the euro just kept on falling.

Every few days another major “solution” to the European debt crisis is put out there, but so far nothing has worked.

For example, the European Central Bank has already spent over 274 billion dollars directly buying up European government bonds, and yet bond yields continue to hover in very dangerous territory.

But without ECB intervention, we probably would have already seen a major financial collapse in Europe.

The financial system of Europe is a total mess right now, and everyone is becoming incredibly dependent on the ECB.  The following comes from a recent Reuters article….

One of the key factors certain to have boosted demand is that banks are now more reliant than ever on central bank funds. The ECB said on Monday, in its semi-annual Financial Stability Review, that this dependency could be difficult to cure.

French banks have almost quadrupled their intake of ECB money since June to 150 billion euros, while banks in Italy and Spain are each taking more than 100 billion euros.

At this point, the ECB has the weight of the entire world on its shoulders.  One false move and we could see a huge wave of bank failures and we could be plunged into a major global recession.

But even with all of this unprecedented assistance, we have already seen some big time European banks fail.

Back in Obtober, Dexia was the first major European bank to be bailed out, and the cost of that bailout is going to exceed 100 billion dollars.

The funny thing is that Dexia actually passed the banking stress test that was conducted earlier this year with flying colors.

So what does that say about all of the other major European banks that did not do so well on the stress test?

In addition, it was recently announced that Germany’s second largest bank is going to need a bailout.

The following comes from a Sky News report….

Germany’s second largest bank, Commerzbank, is reportedly in discussions with the German government about a bailout after regulators said it needed to raise more money to cope with a potential default on its loans to governments.

“Intense talks” have been going on for several days, according to sources who spoke to the news agency Reuters.

Even with unprecedented intervention by the ECB, the truth is that the European banking system is rapidly failing.

In Greece, a full-blown run on the banks is happening.  According to a recent Der Spiegel article, funds are being pulled out of Greek banks at a pace that is astounding….

He means that the outflow of funds from Greek bank accounts has been accelerating rapidly. At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion — by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October — the biggest monthly outflow of funds since the start of the debt crisis in late 2009.

In all, approximately 20 percent of all deposits in Greek banks have been withdrawn since the start of 2011.

Other European nations are implementing draconian measures in an attempt to protect their banks.  For example, in Italy all cash transactions over 1000 euros have been permanently banned.  People will either have to use checks, debit cards or credit cards for large transactions.  This will “encourage” people to keep more money in the banks, and this will also make it much easier for the Italian government to track transactions and to collect taxes.

But it is not just in the EU where we find unusual steps being taken.

In the UK, the Bank of England is acting like the end of the world is about to happen.  The following comes from a recent article on the This Is Money website….

The deputy governor of the Bank of England today warned the situation surrounding the single currency was ‘worrying’ and that the Bank was making preparations to support British banks, should the eurozone collapse.

A temporary loan facility has been introduced as a precaution, for use in the event of contagion from the eurozone crisis endangering UK institutions, Charlie Bean said in an interview on BBC Radio 4’s World at One.

An article posted on Business Insider a while back says that Switzerland is also preparing for “a euro collapse”….

The Swiss government is preparing for a collapse of the euro, according to Swiss Finance Minister Eveline Widmer-Schlumpf.

She told parliament that a work group was studying the imposition of capital controls and negative interest rates to protect Switzerland from the capital flight that a euro collapse would engender

Frightening stuff.

On the other side of the world, the government of China is also taking action.  In fact, China is actually injecting money into the stock market in order to prop up stock prices.

The following comes from an article in the China Post….

In a movement considered “long overdue” by some analysts, the injection of government money into the tanking stock market to prop up stock prices has been given the green light, government officials announced yesterday.

Vice Premier Chen, the topmost government official charged with the country’s financial stability, however, insisted the fundamentals of the economy and the stock market are sound, expressing his hope for continued optimism among the people.

Of course the Federal Reserve is not going to stand on the sideline while all of this is going on.  In a recent article, I described how the Federal Reserve is helping to bail out European banks….

The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank have announced a coordinated plan to provide liquidity support to the global financial system.  According to the plan, the Federal Reserve is going to substantially reduce the interest rate that it charges the European Central Bank to borrow dollars.  In turn, that will enable the ECB to lend dollars to European banks at a much cheaper rate.  The hope is that this will alleviate the credit crunch which has gripped the European financial system by the throat.  So where is the Federal Reserve going to get all of these dollars that it will be loaning out at very low interest rates?  You guessed it – the Fed is just going to create them out of thin air.  Our currency is being debased so that Europe can be helped out.

If the global financial system was in good shape, all of these bailouts would not be happening.

These desperate measures are a clear sign that something is up.

The financial authorities of the world are doing their best to keep the system together, but in the end they are not going to be able to prevent the collapse that is coming.

The world is heading for incredibly hard economic times.

So is the end of the world coming?

No.

But to many in the financial world it may feel like it.  The coming global recession is not going to be fun.

We have now reached a point where it has become “normal” for governments and central banks to throw money at one financial crisis after another.

At one time, bailouts were so unusual that they provoked a great deal of outrage.

Today, bailouts have become standard operating procedure.

The bailouts will continue to get larger and larger, and authorities all over the globe will do their very best to keep the house of cards from coming crashing down.

Unfortunately, they will not be successful.

Europe Tries To Kick The Can Down The Road But It Will Only Lead To Financial Disaster

Have you heard the good news?  Financial armageddon has been averted.  The economic collapse in Europe has been cancelled.  Everything is going to be okay.  Well, actually none of those statements is true, but news of the “debt deal” in Europe has set off a frenzy of irrational exuberance throughout the financial world anyway.  Newspapers all over the globe are declaring that the financial crisis in Europe is over.  Stock markets all over the world are soaring.  The Dow was up nearly 3 percent today, and this recent surge is helping the S&P 500 to have its best month since 1974.  Global financial markets are experiencing an explosion of optimism right now.  Yes, European leaders have been able to kick the can down the road for a few months and a total Greek default is not going to happen right now.  However, as you will see below, the core elements of this “debt deal” actually make a financial disaster in Europe even more likely in the future.

The two most important parts of the plan are a 50% “haircut” on Greek debt held by private investors and highly leveraging the European Financial Stability Facility (EFSF) to give it much more “firepower”.

Both of these elements are likely to cause significant problems down the road.  But most investors do not seem to have figured this out yet.  In fact, most investors seem to be buying into the hype that Europe’s problems have been solved.

There is a tremendous lack of critical thinking in the financial community today.  Just because politicians in Europe say that the crisis has been solved does not mean that the crisis has been solved.  But all over the world there are bold declarations that a great “breakthrough” has been achieved.  An article posted on USA Today is an example of this irrational exuberance….

Investors — at least for now — don’t have to worry about a financial collapse like the one in 2008, after Wall Street investment bank Lehman Bros. filed for bankruptcy, sparking a global financial crisis.

“Financial Armageddon seems to have been taken off the table,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott.

Wow, doesn’t that sound great?

But now let’s look at the facts.

You can’t solve a debt problem with even more debt.  But that is what this debt deal is trying to do.

The politicians in Europe did not want to raise more money for the EFSF the “hard way”.  Voters in Germany (and other European nations) are overwhelmingly against contributing even more cash to a fund that many see as a financial black hole.

So what do you do when more money is needed but nobody wants to contribute?

You borrow it.

Essentially, this debt deal calls for the EFSF to become four or five times larger by “leveraging” the existing funds in the EFSF.

But isn’t that risky?

Of course it is.

There are some leaders in Europe that recognize this.  For example, an article in The Telegraph notes the reservations that the president of the Bundesbank has about this plan….

Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.

He warned that the scheme could be hit by market turbulence with taxpayers left holding the bill for risky investments in Italian and Spanish bonds.

So who is going to fund all of this new debt?

Well, it turns out that the Europeans are counting on the same folks that the U.S. government is constantly borrowing money from.

The Chinese.

French President Nicolas Sarkozy has already spoken directly with Chinese President Hu Jintao about funding this new bailout effort.

So is borrowing money from the Chinese to fund bailouts for Greece and other weak sisters in Europe sound policy?

Of course not.

And the sad thing is that this expanded EFSF is still not going to be enough to solve the financial problems in Europe.

According to an article in The Telegraph, a recent survey of economists found that most of them do not believe that this new plan is going to raise enough money….

The plan to increase the European Financial and Stability Facility to €1  trillion on paper was attacked by economists as not enough to “stave off” worsening debt problems in Italy and Spain.

In a survey of economists, 26 of 48 thought the firepower was not enough.

But the worst part of this new plan is the 50 percent “haircut” that private investors are being forced to take.

This is essentially a partial default by the Greek government.  A lot of folks are going to get hit really hard by losses from this.  Instead of making financial institutions in Europe stronger, these losses are going to make a lot of them even weaker.

Normally, in the event of a default, credit default swap contracts would be triggered.  But apparently because this was considered to be a “voluntary” haircut, that is not going to happen in this instance.

A Bloomberg article explained this in greater detail.  The following is a brief excerpt….

The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules.

That means that investors and financial institutions all over the world are just going to have to eat these losses.

Greek Prime Minister George Papandreou is already acknowledging that a number of Greek banks will have to be nationalized because of the severity of this “haircut”.  A recent CNBC article detailed this….

The haircut is expected to impose big losses on the country’s banks and state-run pension funds, which are up their necks in toxic Greek government bonds of about 100 billion euros.

The government will replenish pension funds’ capital, but banks may face temporary nationalisation, Papandreou said.

“It is very likely that a large part of the banks’ shares will pass into state ownership,” Papandreou said. He pledged, however, that these stakes will be sold back to private investors after the banks’ restructuring.

So where will the Greek government get the funds to “replenish” the capital of those banks?

That is a very good question.

But we haven’t even discussed the worst part of this “debt deal” yet.

If you don’t remember any other part of this article, please remember this.

The debt deal in Europe sends a very frightening message to the market.

The truth is that Europe could have totally bailed out Greece without any sort of a “haircut” taking place.

But they didn’t.

So now investors all over the globe have got to be thinking that if they are holding Portuguese bonds, Italian bonds or Spanish bonds there is a really good chance that they will be forced to take a massive “haircut” at some point as well.

At this time last year, the yield on two year Italian bonds was about 2.5 percent.  Now it is about 4.5 percent.  As investors begin to price in the probability of having to take a future “haircut” on Italian debt, those bond yields are going to go much, much higher.

That means that it is going to become much more expensive for the Italian government to borrow money and that also means that it is going to become much more difficult for the Italians to get their financial house in order.

In essence, the haircut on Greek debt is a signal to investors that they should require a much higher rate of return on the debt of all of the PIIGS.  This is going to make the financial collapse of all of the PIIGS much more likely.

Remember, about this time last year the yield on two year Greek bonds was about 10 percent.  Today, it is over 70 percent.

As I wrote about in a previous article, the western world is in debt up to its eyeballs right now and trying to kick the can down the road is not going to solve anything.

Our leaders may succeed in delaying the pain for a while, but it most definitely is coming.

Greece, Portugal, Ireland and Italy all have debt to GDP ratios that are well over 100% right now.  Spain is in a huge amount of trouble as well.

When you add up all the debt, Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

If Italy or Spain goes down, the rest of Europe is going to be helpless to stop it.  There simply is not going to be enough money to bail either one of them out.

That is why this “debt deal” is so alarming.  All investors in Italian or Spanish debt will now have to factor in the probability that they will be required to accept a 50 percent haircut at some point in the future.

If the markets behave rationally (and if the ECB does not manipulate them too much), it appears inevitable that bond yields over in Europe are going to rise substantially, and that will put tremendous additional financial strain on governments all over Europe.

Basically, we have got a huge mess on our hands, and this debt deal just made it a lot worse.

Yes, a financial collapse has been averted in Greece for the moment, but the truth is that there is no real reason to be celebrating this deal.

A massive financial storm is coming to Europe, and this “debt deal” has made that all the more certain.

Once again, politicians in Europe have tried to kick the can down the road, but in the end their efforts are only going to lead to complete and total financial disaster.

The G-7 Forex Intervention Is A Perfect Example Of How Manipulated The Global Currency Market Really Is

What do governments and central banks do when they don’t like what is happening in the financial markets?  They directly intervene and they manipulate the financial markets of course.  On Friday, the central banks of the G-7 acted in concert to drive down the value of the surging yen.  So why did they do this?  Well, the fear was that a rising yen would hurt Japanese exports at a time when the economy of Japan needs all of the help that it can get.  So, as central banks have been doing with increasing frequency, they directly intervened in the Forex market in order to bring about the result that they desired.  Unfortunately, this is not an isolated incident.  The truth is that foreign governments, central banks and large financial institutions are constantly manipulating the Forex, precious metals and stock markets all over the globe.  You see, in today’s global economy the “stakes are so high” that the free market cannot be trusted.

The reality of the matter is that none of the financial markets are really “free markets” anymore.  Not that they are completely rigged, but to say that they are very highly manipulated would not be a stretch.

At least this time the manipulation was made public.  Of course it would have been really hard to hide the fact that all G-7 central banks intervened in the Forex on the same day.

The last time there was such a coordinated intervention in the global currency market was back in 2000 when central banks intervened to boost the struggling euro.

But the truth is that individual central banks attempt to manipulate the Forex all the time.

Some of these interventions become public.  In September 2010, a bold 12 billion dollar move by the Bank of Japan to push down the value of the yen made headlines around the globe but had only limited success.

Another example of this from last year was when the Swiss National Bank experienced losses equivalent to about 15 billion dollars trying to stop the rapid rise of the Swiss franc.

Many nations around the world have become extremely sensitive to currency movements.

In particular, there are several Asian nations that are known to be constant currency manipulators.  For example, Singapore is very well known for intervening in the foreign exchange market in order to benefit exporters.

And that is what this most recent intervention on behalf of the yen was all about.  It was about making Japanese exports cheaper.

But who is going to say no to Japan right now?  It is believed that Japan asked the G-7 to do this, and so they did.

Japanese Finance Minister Yoshihiko Noda told the media the following about this massive intervention in the marketplace by the G-7….

“Given yen moves after the tragic events that hit Japan, the United States, Britain, Canada and the European Central Bank have agreed with Japan to jointly intervene in the currency market.”

So isn’t the Forex supposed to be a free market?

If you still believe that, I have a bridge to sell you.

According to Kathleen Brooks, the research director at a major Forex trading firm, it looks like there is a certain level that global authorities simply will not allow the yen to rise to….

“It looks as though global authorities are willing to pull out all of the stops to defend the 80.00 level in dollar/yen.”

The following is the full statement released by the G-7 defending their currency intervention….

Statement of G-7 Finance Ministers and Central Bank Governors

March 18, 2011

We, the G-7 Finance Ministers and Central Bank Governors, discussed the recent dramatic events in Japan and were briefed by our Japanese colleagues on the current situation and the economic and financial response put in place by the authorities.

We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation and our confidence in the resilience of the Japanese economy and financial sector.

In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate.

But it is not just foreign governments and central banks that manipulate financial markets.

If you want to try to make money on the Forex, you had really better know what you are doing, because most “little fish” get swallowed up and spit out.

A number of years ago I actually invested in the Forex and I rapidly learned that it is not a “clean game”.  I discovered that there are industry insiders that openly confess that several of the “big fish” in the industry brazenly “stop hunt” and regularly trade against the positions of their clients.

Not that stock markets around the globe are much better.  It would take thousands of pages just to document the well known cases of stock manipulation and insider trading.

And don’t get me started on the precious metals markets.  As I have written about previously, very compelling evidence of manipulation in those markets has been handed to the U.S. government and they have essentially done next to nothing with that evidence.

Not that people don’t make money in the financial markets.  Some people make a ton of money.  But those people are experts and they know how to survive in a “dirty game”.

If you are an amateur, you really need to think twice before diving too deeply into the financial markets.  If you think that you can jump into the Forex or the U.S. stock market and “get rich quick” you are in for a rude awakening.

The financial markets have become a game that is designed to funnel money to the “sharks” and to the “big boys”.  Once you put your money into the game, the odds are that “the house” is going to win.

For those that still do believe that the financial markets are a good way to build wealth, at least be prudent enough to get some sound financial advice.  There is no shame in having a financial professional invest your money for you.

But it is no guarantee of success either.  The truth is that millions of Americans have experienced a lot of pain in the financial markets over the last few years.

As the global economy becomes even more unstable, the manipulation of the financial markets by governments and by central banks is going to become even more dramatic.

As financial markets around the world crash and rise and crash again a whole lot of people are going to be wiped out financially.

You don’t have to be one of them.

Global Financial Markets Plunge As The World Watches Japan Descend Into A Nuclear Nightmare

Global financial markets are in turmoil as the situation in Japan continues to deteriorate.  Stock markets are plunging all over the world as investors flock to investments that are considered to be safer.  The 9.0 earthquake and the unprecedented tsunami in Japan would have been more than enough to spook investors and unleash chaos on world financial markets, but now the unfolding nightmare at the Fukushima Dai-ichi nuclear facility is really starting to cause panic.  Right now there is a mass exodus out of the city of Tokyo.  But not everyone can leave the city.  There are over 30 million people living in and around Tokyo.  So where in the world could you possibly put 30 million refugees?  Sadly, the truth is that millions of Japanese are going to stay in Tokyo no matter how high the radiation gets.  Let us hope that Japanese authorities can get the situation at the Fukushima Dai-ichi nuclear facility under control, but the fact that they have resorted to dropping water from helicopters and shooting water cannons at these nuclear reactors is not comforting.

World financial markets are certainly not expressing a lot of confidence right now.  This week alone, $300 billion in U.S. stock values have been wiped out.  The Dow Jones industrial average lost about 2 percent of its total value on Wednesday.  The Nikkei 225 stock index has lost about 10 percent of its total value since the beginning of this crisis.  At one point it was down more than 16 percent, but a gigantic monetary injection from the Bank of Japan has helped to stabilize things at least for now.  There are also some that believe that the Japanese government is now directly buying up stocks to keep them from falling even further.

Stock markets across Europe have been plunging as well.  An article posted on the USA Today website described some of the carnage on Wednesday….

In Europe, the FTSE 100 index of leading British shares closed down 97.05 points, or 1.7% at 5,598.23 while France’s CAC-40 fell 84.29 points, or 2.2%, to 3,696.56. Germany’s DAX ended 133.82 points, or 2%, lower at 6,513.84.

The financial ripples from this crisis are going to be felt for a long, long time.

In order to rebuild Japan, the Japanese government is somehow going to have to borrow massive amounts of money.  But the Japanese national debt was already projected to reach 228 percent of GDP this year.

The Japanese government has become an incredibly bad credit risk, but lowering their credit rating right now would seem to be in very bad taste.  So far, all three major credit rating agencies are taking a “wait and see” approach when it comes to Japan.

Unfortunately, the crisis in Japan is far from over.

The situation at the Fukushima Dai-ichi nuclear facility just seems to grow more dire with each passing day.  Right now, the primary concern is the 40 years of spent fuel rods that are stored throughout the complex.

Ed Lyman, a physicist at the Union of Concerned Scientists, recently explained why the pools that store the spent fuel rods are the biggest problem at this point….

“For the time being, the greatest concern is the spent fuel pools because there is a clear pathway for release of radioactivity from the pools into the environment.”

The phrase “spent fuel rods” may make it sound like they should no longer be a threat, but the truth is that these fuel rods remain extremely hot and extremely radioactive for years after they are done being used.  For some reason, someone thought that it would be a good idea to store these spent fuel rods in huge pools of water near the top of each of the nuclear reactor buildings at the Fukushima Dai-ichi complex.

These spent fuel rod pools are not housed in the same kind of containment vessels that the nuclear reactors are.  Therefore there is a much greater danger that radiation from these spent fuel rods could be released into the surrounding environment.

A recent article by Paul Joseph Watson did a great job of explaining just how big of a problem these spent fuel rods represent….

The Fukushima Daiichi plant has seven pools dedicated to spent fuel rods. These are located at the top of six reactor buildings – or were until explosions and fires ravaged the plant. On the ground level there is a common pool in a separate building that was critically damaged by the tsunami. Each reactor building pool holds 3,450 fuel rod assemblies and the common pool holds 6,291 fuel rod assemblies. Each assembly holds sixty-three fuel rods. In short, the Fukushima Daiichi plant contains over 600,000 spent fuel rods – a massive amount of radiation that will soon be released into the atmosphere.

Each of these 600,000 spent fuel rods is a potential “dirty bomb”.

Are you starting to grasp just how serious this all is?

It is absolutely critical that all of these spent fuel rods remain submerged in water.

If the water drops in the spent fuel pools there will be nothing to keep the spent fuel rods cool and they will start to degrade very, very quickly.

Unfortunately, things don’t look good right now.  U.S. authorities today expressed their belief that the spent fuel rods in unit 4 are now exposed and that a great deal of radiation is being released.  In fact, Gregory Jaczko, the chairman of the Nuclear Regulatory Commission, stated during Congressional testimony today that he believes that an extremely high level of radiation is being released by exposed spent fuel rods at the Fukushima Dai-ichi nuclear facility at this point….

We believe that radiation levels are extremely high, which could possibly impact the ability to take corrective measures.

It would be hard to understate the courage of those that are working inside the Fukushima Dai-ichi nuclear facility right now. They all likely realize that they are all going to die very quickly. They are laying down their lives in an effort to save their countrymen. According to a recent report from CBS News these workers say that they are not afraid to die….

Although communication with the workers inside the nuclear plant is nearly impossible, a CBS News consultant spoke to a Japanese official who made contact with one of the workers inside the control center.

The official said that his friend told him that he was not afraid to die, that that was his job.

Would all of us respond the same way?

Even the media that are reporting on this disaster in Japan are starting to be affected by this radiation.  Lester Holt revealed this morning that his entire crew had tested positive for radiation after returning from an assignment.

Meanwhile, Barack Obama is acting as if all of this stuff going on in Japan is no big deal. In fact, as Keith Koffler recently observed, Obama seems to be really enjoying himself in the midst of this crisis….

This morning, as Japan’s nuclear crisis enters a potentially catastrophic phase, we are told that Obama is videotaping his NCAA tournament picks and that we’ll be able to tune into ESPN Wednesday to find out who he likes.

Saturday, he made his 61st outing to the golf course as president, and got back to the White House with just enough time for a quick shower before heading out to party with Washington’s elite journalists at the annual Gridiron Dinner.

If you are curious about Obama’s picks for the NCAA tourney, they are posted on the official White House website.

This weekend, the Obamas are headed down to Brazil. According to an article in Forbes, the Obama plan to do a good bit of sightseeing while they are there….

The Obama family will also take in the sights in Rio. A trip to Corcovado mountain, where the Christ the Redeemer statue stands (France gave us Lady Liberty, gave Brazil Jesus) is supposedly on the itinerary. What trip to Rio would be complete without it?

Isn’t it great to see Obama acting like a true leader in the midst of one of the greatest moments of crisis that the world has seen since World War 2?

What in the world is Obama possibly thinking?

One thing about a major crisis is that it reveals the true character of those affected by it.  Many are responding to this crisis in Japan with great acts of courage and heroism.

Others are not rising to the occasion.

Let us just hope and pray that the Japanese figure out a way to get the situation at the Fukushima Dai-ichi nuclear complex under control.  If a “worst case scenario” happens we could soon be facing an unprecedented nuclear nightmare.

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