The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

Most people have no idea that Wall Street has become a gigantic financial casino.  The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end.  The word “derivatives” sounds complicated and technical, but understanding them is really not that hard.  A derivative is essentially a fancy way of saying that a bet has been made.  Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before.  Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.  Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion.  The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them “financial weapons of mass destruction”.  For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down.  When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.

Most people don’t talk much about derivatives because they simply do not understand them.

Perhaps a couple of definitions would be helpful.

The following is how a recent Bloomberg article defined derivatives….

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

The key word there is “speculation”.  Today the folks down on Wall Street are speculating on just about anything that you can imagine.

The following is how Investopedia defines derivatives….

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

A derivative has no underlying value of its own.  A derivative is essentially a side bet.  Usually these side bets are highly leveraged.

At this point, making side bets has totally gotten out of control in the financial world.  Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it.  This system is almost entirely unregulated and it is totally dominated by the big international banks.

Over the past couple of decades, the derivatives market has multiplied in size.  Everything is going to be fine as long as the system stays in balance.  But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.

The amount of money that we are talking about is absolutely staggering.  Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective….

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.

The notional value of the derivative market is roughly $1.4 QUADRILLION.

I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.

$1.4 Quadrillion is roughly:

-40 TIMES THE WORLD’S STOCK MARKET.

-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.

-23 TIMES WORLD GDP.

It is hard to fathom how much money a quadrillion is.

If you started counting right now at one dollar per second, it would take 32 million years to count to one quadrillion dollars.

Yes, the boys and girls down on Wall Street have gotten completely and totally out of control.

In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system….

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.

They will almost certainly be at the center of the next financial crisis as well.

For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.

So what does that mean?

An article posted on The Daily Bail the other day explained that it means that U.S. taxpayers could end up holding the bag….

This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.

So did you hear about this on the news?

Probably not.

Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.

JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.

It is hard to even conceive of such figures.

Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.

Morgan Stanley also has tremendous exposure to derivatives.

You may have noticed that these are some of the “too big to fail” banks.

The biggest U.S. banks continue to grow and they continue to get even more power.

Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.

These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.

You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the “too big to bail” banks to become bigger than ever.

And they pretty much do whatever they want.

A while back, the New York Times published an article entitled “A Secretive Banking Elite Rules Trading in Derivatives“.  That article exposed the steel-fisted control that the “too big to fail” banks exert over the trading of derivatives.  Just consider the following excerpt from the article….

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

So what institutions are represented at these meetings?

Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Why do those same five names seem to keep popping up time after time?

Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.

Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.

But that is a faulty assumption.  Just look at AIG back in 2008.  When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone “bust” without gigantic bailouts from the federal government.  If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.

It is inevitable that the same thing is going to happen again.  Except next time it may be on a much grander scale.

When “the house” goes “bust”, everybody loses.  The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won’t be any government on earth with enough money to put it back together again.

A horrible derivatives crisis is coming.

It is only a matter of time.

Stay alert for any mention of the word “derivatives” or the term “derivatives crisis” in the news.  When the derivatives crisis arrives, things will start falling apart very rapidly.

 

LOL – This Stock Market Rally Is For Suckers

Hey, have you heard?  The stock market is absolutely soaring right now.  The Dow was up 330 points on Monday, and overall the Dow has risen by more than 10 percent since October 3rd.  So should we all be throwing our money into the stock market in order to take advantage of this tremendous rally?  Well, if you actually believe that the sovereign debt crisis has passed and that we are no longer on the verge of a massive worldwide financial crisis then I have a bridge that I would like to sell you.  The stock market may be soaring, but absolutely nothing has been solved.  The truth is that this stock market rally is for suckers.  The primary reason why stocks rose today was because German Chancellor Angela Merkel and French President Nicolas Sarkozy promised that they would reveal a “comprehensive response” to the European debt crisis by the end of this month.  When pressed for specifics, Sarkozy stated that “now is not the moment to go into the details.”  So do global financial markets really have a legitimate reason to be giddy about the super secret plan cooked up by Angela Merkel and Nicolas Sarkozy, or are Merkel and Sarkozy just blowing a bunch of smoke?

Merkel and Sarkozy have made bold promises in the past, but nothing ever got fixed.

So why should we believe them this time?

If they have real solutions, why don’t they just reveal them now?

Why keep us in suspense?

By making these vague promises, Merkel and Sarkozy certainly did give a boost to global financial markets, but they also seriously raised expectations.

Now many in the financial world are expecting something truly significant from Merkel and Sarkozy.  For example, CNN has quoted economist Scott Brown as saying the following about the announcement by Merkel and Sarkozy….

“The Europe debt crisis cloud has been hanging over the market for a year-and-a-half now,” said Scott Brown, chief economist at Raymond James. “The risks and worries have been intensifying over the last couple of weeks, but after this weekend, the market is expecting something big and concrete that will put the crisis behind us.”

So can Merkel and Sarkozy deliver something big?

Of course not.

Merkel has already gotten all of the bailout money that she is going to get out of the Germans.  The political will for more bailouts is totally gone in Germany, and many of Germany’s top leaders have expressed this in no uncertain terms.

For example, German Finance Minister Wolfgang Schaeuble is publicly admitting that Germany will not be able to contribute any more money to the European bailout fund.

Also, the leader of Bavaria’s Social Christians, Horst Seehofer, said after the recent vote on the Greek bailout package that his party would go “this far, and no further“.

Recent opinion polls in Germany make it abundantly clear that the German people are overwhelmingly opposed to more bailouts.  Squeezing more money out of Germany simply is not going to happen, and that means that squeezing more money out of the rest of Europe is simply not going to happen.

In a recent editorial, Ambrose Evans-Pritchard described the current political situation in Europe in this manner….

Repeat after me:

THERE WILL BE NO FISCAL UNION.

THERE WILL BE NO EUROBONDS.

THERE WILL BE NO DEBT POOL.

THERE WILL BE NO EU TREASURY.

THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.

THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.

Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.

So exactly what “big” solution do Merkel and Sarkozy have up their sleeves that does not involve more money?

Can they really produce the goods or are they just blowing smoke?

Perhaps global financial markets should be focusing on what we can see rather than on what we cannot see.

For example, the first major bank bailout in Europe has now happened.  Dexia is being bailed out, and it is going to cost more than 100 billion dollars.

The funny thing is that Dexia actually passed the banking stress test that was conducted a few months ago.

What does that say about all of the major European banks that did not pass the stress test?

Also, perhaps global financial markets should focus on all of the credit ratings that are being downgraded all over Europe.

Lately, we have seen a cascade of credit rating downgrades.

For example, Moody’s slashed Italy’s credit rating by three levels last Tuesday, and the other day S&P slashed the credit ratings of seven different major Italian banks.

The problems in Europe continue to grow worse, and yet the stock market is soaring.

It doesn’t make a lot of sense, does it?

If Greece defaults, it is going to be a major disaster.

If Italy or Spain defaults, it is going to be financial armageddon.

The world truly is on the verge of a massive financial crisis.  If you don’t want to believe me, perhaps you might believe some of the top financial officials in the world….

*Bank of England Governor Sir Mervyn King: “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever”

*U.S. Treasury Secretary Timothy F. Geithner recently stated that if something is not done quickly, Europe faces “cascading default, bank runs and catastrophic risk.”

*IMF advisor Robert Shapiro: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected.”

For many more shocking quotes about how bad things have gotten in Europe, just check out this article.

Merkel and Sarkozy are holding really weak cards but they have chosen to raise the stakes anyway.

Their bluff may calm financial markets for a month or two, but in the end they will not be able to stop what is coming.

A great financial collapse is coming to Europe.

Try to get out of the way of the coming avalanche while you still can.

And So It Begins – The First Major European Bank Has Been Bailed Out And More Bailouts Are Coming

And so it begins.  The first major European bank bailout of 2011 has now happened.  French/Belgian banking giant Dexia has failed and both governments have pledged to participate in a rescue plan.  But Dexia will not be the last major European bank to fail.  Even now, governments all over Europe are feverishly developing plans to bail out major national banks in the event that the current financial crisis goes from bad to worse.  Instead of learning the lessons of 2008, most major European banks have continued to pile up huge mountains of debt, leverage and risk.  Now the bill for that stupidity is about to be passed on to the taxpayers of those nations.  But with most nations in Europe already drowning in debt, are bank bailouts really the right course of action?  What is it going to happen to Europe if dozens of major banks start failing and trillions of euros are needed to bail them all out?

Dexia is the first victim of the new credit crunch.  It got to the point where Dexia simply could not get access to the funding that it needed in the credit markets.

We are starting to see this all over Europe.  Nobody wants to loan much money to European banks right now because it is unclear what is going to happen next in Europe and it is uncertain which banks are stable and which are on the verge of collapse.

This is so similar to what happened back in 2008.

But Dexia is not going to be “the next Lehman Brothers” because the governments of France and Belgium are stepping in to save Dexia from collapse.

A recent article in the Financial Post described how the rescue of Dexia is likely to proceed….

Dexia will effectively be broken up, with the sale of healthier operations while toxic assets, including Greek and other peripheral euro zone government bonds, will be placed in a state-supported “bad bank.”

The details of the plan will be negotiated over the coming days, but authorities are making it clear that Dexia is not going to be allowed to collapse.  Bank of France Governor Christian Noyer is assuring everyone that Dexia is going to have access to plenty of liquidity….

“We will loan Dexia as much as it needs”

It appears that the “too big to fail” doctrine is alive and well in Europe.

Sadly, this is not the first time that Dexia has been bailed out.  France and Belgium also bailed out Dexia back in 2008.

But this was not supposed to happen.

Just three months ago, Dexia received “a clean bill of health” from regulators during European Union bank stress testing.

It just shows how credible those “stress tests” really are.

So are more European bank bailouts coming?

It certainly looks that way.

An article in the Financial Post on Tuesday stated the following….

European finance ministers agreed on Tuesday to prepare action to safeguard their banks as doubts grew about whether a planned second bailout package for debt-laden Greece would go ahead.

Of course when they talk about the need “to safeguard their banks” they are talking about those that are deemed “too big to fail”.  Just like in the United States, banks that are “too small” don’t get bailed out at all.

But western governments are very protective of the big banks.  The big banks are allowed to take gigantic risks, and if they succeed they make tons of money and if they fail then the taxpayers bail them out.

With big trouble on the horizon in Europe, authorities are already getting ready to bail out the major banks.  A Bloomberg article from last month acknowledged that the German government has been very busy getting ready to bail out their major banks in the event that a Greek default becomes a reality….

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.

As you read this, there are already signs of trouble at major German banks.  For example, Deutsche Bank has just announced that it is eliminating 500 more jobs.

The fundamental problems that Europe is facing are not being solved and the financial crisis is getting progressively worse.  With each passing day, more bad financial news comes pouring in.

For example, Moody’s slashed Italy’s bond ratings by three levels on Tuesday.

A reduction of just one level is very serious business.  For Moody’s to hit Italy that hard is a really big deal.

Italian banks have also been targeted by the credit rating agencies.  The other day, S&P slashed the credit ratings of seven different Italian banks.

If Italy goes down, it is going to be an absolute nightmare.  The Italian economy absolutely dwarfs the Greek economy.  The EU has been really struggling to bail out Greece, and there is no way in the world that they would be able to bail out Italy.

So if nations such as Italy or Spain start collapsing, will the U.S. Federal Reserve step in to help bail them out?

You never know.

The sad truth is that the Federal Reserve can do pretty much whatever it wants and nobody can stop them.

As I wrote about the other day, the Federal Reserve has agreed to join with other major central banks to lend hundreds of billions of dollars to major European banks in October, November and December.

As the past few years have shown, wherever big, global banks are in trouble, the Federal Reserve is sure to step in and help.

And many big banks in Europe are definitely headed for trouble.  Right now, European banks are holding more than $4 trillion in European sovereign debt.

A lot of that debt is bad debt.  Today, troubled European nations Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

That is a whole lot of debt out there, and many big banks are so leveraged that just a 5 percent reduction in the value of their holdings could wipe them out.

Hold on to your hats folks.

So what should we be watching next?

Well, Greece continues to be a huge problem.

The IMF, the European Central Bank and the European Union are very frustrated with Greece right now.

On Monday, it was revealed that Greece is not going to hit the deficit reduction targets set for it by the “troika” either this year or next year.

European officials have been particularly displeased that Greece has been getting all of this aid money and yet has not been strictly adhering to the austerity measures that they agreed to.

However, the reality is that the austerity measures that Greece has actually bothered to implement have hit the Greek economy really hard.  The more Greece reduces government spending the more the Greek economy seems to slow down.

Greek Finance Minister Evangelos Venizelos recently announced that the Greek economy is projected to shrink by 5.3% in 2011, and Greek debt continues to spiral out of control.

Meanwhile, severe economic pain continues to spark huge protests all over Greece.  Scenes of riot police firing tear gas and protesters throwing stones at police have become so common in Greece that most of us don’t even pay much attention anymore.

But all of us should pay attention to what is happening in Greece.

Eventually these kinds of economic riots will spread throughout the rest of the western world as well.

And every day Greece just seems to get closer and closer to default.

At this point, global financial markets seem to consider a Greek default to be inevitable.  The yield on 2 year Greek bonds is now over 65 percent.  The yield on 1 year Greek bonds is now over 135 percent.

Greece is toast without more bailout money.

But now major politicians all over Germany are declaring that Germany is done contributing money to the European bailout fund.

And without Germany, the rest of the eurozone is not going to be able to continue the bailouts.

So the clock is ticking.

Once the current bailout fund has dried up, the bailout game will be over.

What will happen then?

Will that be what sets off a massive financial collapse in Europe?

Could we actually see the end of the euro?

For a long time there was speculation that it would be weak nations such as Greece that would leave the euro.

But now it appears increasingly likely that if someone is going to leave the euro it might be Germany.

Most German citizens would be in favor of such a move.  One recent poll conducted for Stern magazine actually found that 54 percent of all Germans would favor leaving the euro.

But if Germany left the euro it would absolutely implode.  German economic strength is the primary thing holding the euro up at this point.

In any event, it is going to be very interesting to watch what will happen to Europe over the coming months.

Greece, Italy, Portugal and Spain are all steadily marching toward collapse.

Germany says that it is done bailing out other members of the eurozone.

Dozens of major European banks are teetering on the brink of disaster.

People get ready – a storm is coming.

Time is running out for Europe and there is no help in sight.

Bad Financial News Keeps Pouring In: 14 Facts That Just Might Scare The Living Daylights Out Of You

Will the bad financial news ever stop?  A lot of people in the financial world were hoping for a much better fourth quarter after an absolutely disastrous third quarter.  Well, if Monday was any indication, October could end up being a really rough month for global financial markets.  So much bad financial news keeps pouring in that it really is a challenge to try to keep track of it all.  Greece seems to get closer to defaulting on their debts with each passing day, and it appears that Germany is not going to contribute any more bailout money beyond what they have already committed to.  Major banks on both sides of the Atlantic are on the verge of collapse, and investors all over the world are afraid that we may have another “Lehman Brothers moment” soon.  Shares of American Airlines dropped a staggering 33 percent on Monday as rumors that they will soon be entering bankruptcy swirled.  Yes, things certainly are getting interesting.  Back in 2008, the governments of the western world saved the financial system with gigantic bailouts that were absolutely unprecedented.  If the financial system crashes again at some point in the coming weeks or months, will the political will for more bank bailouts be there?  If not, what is going to happen to the banking system?

On both sides of the Atlantic, the big banks are highly leveraged, they have taken on a ton of risk and they are very deeply exposed to derivatives.  It is as if virtually nobody learned any lessons during the financial crisis of 2008.  Once again we are facing a situation where if a couple of financial dominoes fall it could send dozens of others tumbling to the ground.

Some very significant things happened on Monday.  But the media has gotten so used to reporting on tremendous financial instability that Monday’s events mostly got brushed to the side.  Instead, Amanda Knox captured most of the headlines.

But the reality is that some really, really monumental stuff has been going down.

The following are 14 facts that just might scare the living daylights out of you….

#1 On Monday, the Dow was down 258 points.  Lately it seems as though the Dow has been going up or down by several hundred points almost every single day, and that much volatility is not a good sign for the health of the financial system.

#2 Shares of Wall Street banking giant Morgan Stanley fell by another 8 percent on Monday.  Overall, shares of Morgan Stanley have declined by more than 50 percent since February.

#3 Bank of America stock dropped down to $5.53 a share on Monday.  Just a few years ago, it was trading for more than $50 a share.

#4 There are reports that Goldman Sachs may actually show a loss for the third quarter of 2011 and that yearly bonuses for employees may be slashed to next to nothing.  Yes, not too many people are going to have sympathy for Goldman Sachs, but this just shows how bad things are getting out there for the big Wall Street banks.

#5 Normally Goldman Sachs is quite upbeat, but lately they have been coming out with some really frightening reports.  For example, a new report from Goldman Sachs declares that there is a 40 percent chance that we are entering a “Great Stagnation“.

#6 Shares of European banking giant Dexia plunged by about 10 percent on Monday on rumors that it will soon need a significant bailout.  The stocks of major banks all across Europe have been getting absolutely hammered for weeks.

#7 Shares of American Airlines fell by 33 percent on Monday on rumors that the airline is about to enter bankruptcy.  Amazingly, trading in the stock was stopped 7 different times on Monday.

#8 It is being reported that approximately 240 pilots for American Airlines have retired in the last two months alone.  All of those pilots are retiring so that they can shield their pensions from the upcoming bankruptcy filing.

#9 Nearly the entire airline industry got hit really hard on Monday.  Shares of United Continental, U.S. Airways and Delta were all down more than 10 percent.

#10 Overall, U.S. stocks fell by 14 percent during the third quarter of 2011, and now the fourth quarter is off to a very rocky start.

#11 The incoming head of the European Central Bank, Mario Draghi, has publicly admitted that major European banks are having “funding problems“.  Just like back in 2008, we are rapidly heading for a giant “credit crunch”.

#12 A shocking new Bloomberg survey has found that approximately one out of every three international investors expects a “global economic meltdown” within the next 12 months, and 70 percent of them believe that the global economy is “deteriorating”.  Perhaps they have been reading The Economic Collapse Blog too much.

#13 Financial markets in Europe were rocked on Monday when it was revealed that Greece is not going to hit the deficit reduction targets set for it either this year or next year despite all of the severe austerity measures that have already been implemented.  Needless to say, a lot of financial authorities in Europe were very displeased by this news.

#14 German Finance Minister Wolfgang Schaeuble is publicly declaring that Germany will not contribute any more money to the European bailout fund.

The truth is that the political will for more bailouts has totally dried up in Germany.

The recent vote by the Bundestag to approve money for the European rescue fund should not be misinterpreted.

That vote simply approved money that was part of a deal that was agreed to over two months ago.

What is more important is what many major German politicians said after the vote.  Essentially, the overwhelming consensus is that Germany is done contributing money.  Once the money is gone from the current bailout pool (which is not anywhere close to what is really needed), there will be no more money from Germany.

That means that the era of the bailouts in Europe is drawing to a close.

In a recent editorial, Ambrose Evans-Pritchard described the situation in Germany in this manner….

The furious debate over the erosion of German fiscal sovereignty and democracy – as well as the escalating costs of the EU rescue machinery – has made it absolutely clear that the Bundestag will not prop up the ruins of monetary union for much longer.

Horst Seehofer, the leader of Bavaria’s Social Christians, said his party would go “this far, and no further”.

Let that last phrase sink in.

Basically, what politicians all over Germany are saying is that Germany has now done all that it is going to do.

The implications of this are huge.

Ambrose Evans-Pritchard recognized this in his editorial.  In fact, the usually reserved journalist actually used all caps for six straight sentences and broke out some very strong language that is very uncharacteristic for him….

Repeat after me:

THERE WILL BE NO FISCAL UNION.

THERE WILL BE NO EUROBONDS.

THERE WILL BE NO DEBT POOL.

THERE WILL BE NO EU TREASURY.

THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.

THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.

Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.

Basically, this is his way of saying that “the sky is falling” and that the financial system of Europe is doomed.

If you have followed the writing of Ambrose Evans-Pritchard for any length of time, then you know that he is one of the most respected financial journalists in the world and that he is not prone to indulge in much “doom and gloom”.  For him to say what he did is very significant.

But even if there were no financial problems in Europe, the United States would probably be slipping into another recession anyway.

Right now our economy is a total mess, and all kinds of people are coming out of the woodwork and are trying to take credit for “calling” the upcoming recession.

Some of the pronouncements are so bold that you would think that some half-crazed blogger wrote them.  For example, just check out the following quote from a report recently put out by the Economic Cycle Research Institute….

“Here’s what ECRI’s recession call really says: If you think this is a bad economy, you haven’t seen anything yet.”

But do the American people really need some experts to tell them that we are going into another recession?

The American people know what is going on.

According to one recent poll, 90 percent of the American people believe that economic conditions in the United States are “poor”.  According to another recent poll, 80 percent of the American people believe that we are actually in a recession right now.

So perhaps the American people are actually ahead of most of the so-called “experts”.

In any event, economic conditions in the United States continue to get worse.  The average American family is having a harder and harder time getting to the end of each month.  According to a Harris Interactive survey taken near the end of last year, 77 percent of all Americans are now living paycheck to paycheck.  In 2007, the same survey found that only 43 percent of Americans were living paycheck to paycheck.

At least Barack Obama is not talking so much about an “economic recovery” these days.  When asked recently if Americans are better off today than they were four years ago, Obama said the following….

“Well, I don’t think they’re better off than they were four years ago.”

Finally, something that we can all agree with Barack Obama about.

Sadly, things are about to get even worse.

Pay close attention to all of the bad financial news that keeps pouring in.

Just like in 2008, something really big is happening.

When the current bailout fund in Europe runs out in a few months, things could really start to unravel.

If Greece (or any other eurozone nation for that matter) defaults, it could set off a chain of financial events so catastrophic that it just might scare the living daylights out of all of us.

Let us hope for the best, but let us also prepare for the worst.

Tremendous fear and panic has gripped the financial world, and the underlying problems causing this crisis are not going to be solved any time soon.

We are about to enter unprecedented territory.

Hold on tight.

Is Financial Instability The New Normal?

The financial world is officially going crazy.  Can you believe what is going on out there right now?  Financial markets have been jumping up and down like crazy for months and this is creating a lot of fear.  Other than during the financial crisis of 2008, in the post-World War II era have we ever experienced as much financial instability as we are seeing right now?  Should we just accept that massive financial instability is going to be part of “the new normal” in the financial world?  The wild swings that we are witnessing in the global financial marketplace are making a whole lot of people very nervous right at the moment.  When markets go up, they tend to do it slowly and steadily.  When markets go down, a lot of times it can happen very rapidly.  Also, as I have mentioned before, more major stock market crashes happen during the fall than during any other time of the year.  The last major financial crisis happened during the fall of 2008, and things are starting to look a little bit more like 2008 with each passing day.  The last thing the global economy needs right now is another major financial meltdown, but that may be exactly what we are about to get.

The Dow got absolutely hammered once again on Thursday.  It was down almost 400 points, and it has lost a total of 674.83 points over the last two days combined.

In case you are wondering, yes, that is a very big deal.

It represents the largest two day decline that we have seen since November 2008, and at this point the Dow is on pace to have its worst week since September 2008.

Over the past two days, more than 900 billion dollars of “paper wealth” has disappeared.

Hopefully you did not share in that pain.

A couple of days ago, I discussed 21 signs that the financial world was on the verge of a nervous breakdown.  But I had no idea that things would get so ugly so soon.

So what comes next?

One of the keys is to watch what the “insiders” are doing.  Often they will say one thing and do another.

At the moment, corporate “insiders” are selling 7 dollars of stock for every 1 dollar of stock that they are buying.

Over the past couple of weeks, “insider” investing behavior has changed dramatically.  The following is from an article that was recently posted on MarketWatch….

The insiders have vanished.

Chief executives. Board members.

The head honchos. The people who know.

Just a few weeks ago, they were out in force, buying up shares in their own companies with both hands.

No longer. They’ve disappeared. Almost overnight.

“They’ve stopped buying,” says Charles Biderman, the chief executive of stock market research firm TrimTabs, which tracks the data.

For some reason, this almost always starts happening before a crash.  So obviously this is not a good sign.

A lot of normal investors have been pulling large amounts of money out of stocks as well.  The following is from a report in the Financial Post….

Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.

About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.

Are you starting to get the picture?

Not only that, but a third very troubling sign is that an extraordinary number of bets has been placed against the S&P 500.  As I noted the other day, if there is a stock market crash in the next few weeks, somebody is going to make a ton of money….

We are seeing an amazing number of bets against the S&P 500 right now.  According to CNN, the number of bets against the S&P 500 rose to the highest level in a year last month.  But that was nothing compared to what we are seeing for October.  The number of bets against the S&P 500 for the month of October is absolutely astounding.  Somebody is going to make a monstrous amount of money if there is a stock market crash next month.

It doesn’t take a genius to see all the dark financial clouds that are gathering on the horizon.

And all of the bad news that is constantly coming out of Europe is certainly not helping things.  For example, yesterday S&P slashed the credit ratings of seven different Italian banks.

Credit downgrades have become so frequent that we hardly even notice them anymore.

Pessimism is everywhere right now.  Suddenly it seems like almost everyone is predicting that another “recession” is coming….

*According to a recent Harvard Business Review survey, 70 percent of global business leaders believe that a global recession is “somewhat likely” or “very likely” in the coming months.

*Economist Nouriel Roubini says that we are “already in recession“.

*When asked by CNBC what he thought about the possibility of another recession, George Soros said the following the other day….

“I think we are in it already.”

As fear spreads, it is only going to make global financial instability even worse.  If something doesn’t change, we could soon have a full-blown panic on our hands.

So why should the rest of us care if global financial markets crash and a bunch of bankers lose a whole lot of money?

Well, unfortunately our entire economic system is based on credit.  When the last financial crash happened in 2008, the credit markets got really tight.  Economic activity started to freeze up.  We entered a deep recession and unemployment skyrocketed.

As much as many of you may want to see the house of cards fall down, the reality is that when it does it is going to deeply hurt millions upon millions of innocent people too.

During the last recession (which never really ended), millions of Americans that lost their jobs also lost their homes.

Back in 2006, the home vacancy rate in America was 11.6%.

In 2009, the home vacancy rate was 12.6%.

In 2010, the home vacancy rate was 13.1%.

Just like the number of Americans on food stamps, this is a figure that just keeps going up and up and up.

Could we eventually live in a country where one out of every five homes is standing empty?

The truth is that the U.S. economy is in the middle of a long-term decline.  The economy declined badly while George W. Bush was in office, and the decline has accelerated since Barack Obama entered the White House.

As I wrote about yesterday, the American people are feeling really depressed about the economy and 80 percent of them believe that we are in a recession right now.

So what kind of a mood are they going to be in if there is another major financial crisis and unemployment jumps up by several more percentage points?

We live in unprecedented times.  The financial world has become incredibly unstable, and none of us is really quite sure what “the new normal” is going to look like after all of this is over.

But one thing is for sure – things never stay the same for long.

The way that things have been in the past is not how things are going to be in the future.

A “perfect storm” is coming.

Everything that can be shaken will be shaken.

You better get ready.

Nervous Breakdown? 21 Signs That Something Big Is About To Happen In The Financial World

Will global financial markets reach a breaking point during the month of October?  Right now there are all kinds of signs that the financial world is about to experience a nervous breakdown.  Massive amounts of investor money is being pulled out of the stock market and mammoth bets are being made against the S&P 500 in October.  The European debt crisis continues to grow even worse and weird financial moves are being made all over the globe.  Does all of this unusual activity indicate that something big is about to happen?  Let’s hope not.  But historically, the biggest stock market crashes have tended to happen in the fall.  So are we on the verge of a “Black October”?

The following are 21 signs that something big is about to happen in the financial world and that global financial markets are on the verge of a nervous breakdown….

#1 We are seeing an amazing number of bets against the S&P 500 right now.  According to CNN, the number of bets against the S&P 500 rose to the highest level in a year last month.  But that was nothing compared to what we are seeing for October.  The number of bets against the S&P 500 for the month of October is absolutely astounding.  Somebody is going to make a monstrous amount of money if there is a stock market crash next month.

#2 Investors are pulling a huge amount of money out of stocks right now.  Do they know something that we don’t?  The following is from a report in the Financial Post….

Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.

About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.

#3 Siemens has pulled more than half a billion euros out of two major French banks and has moved that money to the European Central Bank.  Do they know something or are they just getting nervous?

#4 On Monday, Standard & Poor’s cut Italy’s credit rating from A+ to A.

#5 The European Central Bank is purchasing even more Italian and Spanish bonds in an attempt to cool down the burgeoning financial crisis in Europe.

#6 The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank have announced that they are going to make available an “unlimited” amount of money to European commercial banks in October, November and December.

#7 So far this year, the largest bank in Italy has lost over half of its value and the second largest bank in Italy is down 44 percent.

#8 Angela Merkel’s coalition is getting embarrassed in local elections in Germany.  A recent poll found that an astounding 82 percent of all Germans believe that her government is doing a bad job of handling the crisis in Greece.  Right now, public opinion in Germany is very negative toward the bailouts, and that is really bad news for Greece.

#9 Greece is experiencing a full-blown economic collapse at this point.  Just consider the following statistics from a recent editorial in the Guardian….

Consider first the scale of the crisis. After contracting in 2009 and 2010, GDP fell by a further 7.3% in the second quarter of 2011. Unemployment is approaching 900,000 and is projected to exceed 1.2 million, in a population of 11 million. These are figures reminiscent of the Great Depression of the 1930s.

#10 In 2009, Greece had a debt to GDP ratio of about 115%.  Today, Greece has a debt to GDP ratio of about 160%.  All of the austerity that has been imposed upon them has done nothing to solve their long-term problems.

#11 The yield on 1 year Greek bonds is now over 129 percent.  A year ago the yield on those bonds was under 10 percent.

#12 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.

#13 Italy now has a debt to GDP ratio of about 120% and their economy is far, far larger than the economy of Greece.

#14 The yield on 2 year Portuguese bonds is now over 17 percent.  A year ago the yield on those bonds was about 4 percent.

#15 China seems to be concerned about the stability of European banks.  The following is from a recent Reuters report….

A big market-making state bank in China’s onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday.

#16 European central banks are now buying more gold than they are selling.  This is the first time that has happened in more than 20 years.

#17 The chief economist at the IMF says that the global economy has entered a “dangerous new phase“.

#18 Israel has dumped 46 percent of its U.S. Treasuries and Russia has dumped 95 percent of its U.S. Treasuries.  Do they know something that we don’t?

#19 World financial markets are expecting that the Federal Reserve will announce a new bond-buying plan this week that will be designed to push long-term interest rates lower.

#20 If some wealthy investors believe that the Obama tax plan has a chance of getting through Congress, they may start dumping stocks before the end of this year in order to avoid getting taxed at a much higher rate in 2012.

#21 According to a study that was recently released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.

When financial markets get really jumpy like this, all it takes is one really big spark to set the dominoes in motion.

Hopefully nothing really big will happen in October.

Hopefully global financial markets will not experience a nervous breakdown.

But right now things look a little bit more like 2008 every single day.

None of the problems that caused the financial crisis of 2008 have been fixed, and the world financial system is more vulnerable today than it ever has been since the end of World War II.

As I wrote about yesterday, the U.S. economy has never really recovered from the last financial crisis.

If we see another major financial crash in the coming months, the consequences would be absolutely devastating.

We have been softened up and we are ready for the knockout blow.

Let’s just hope that the financial world can keep it together.

We don’t need more economic pain right about now.

20 Signs Of Imminent Financial Collapse In Europe

Are we on the verge of a massive financial collapse in Europe?  Rumors of an imminent default by Greece are flying around all over the place and Greek government officials are openly admitting that they are running out of money.  Without more bailout funds it is absolutely certain that Greece will soon default on their debts.  But German officials are threatening to hold up more bailout payments until the Greeks “do what they agreed to do”.  The attitude in Germany is that the Greeks must now pay the price for going into so much debt.  Officials in the Greek government are becoming frustrated because the more austerity measures they implement, the more their economy shrinks.  As the economy shrinks, so do tax payments and the budget deficit gets even larger.  Meanwhile, hordes of very angry Greek citizens are violently protesting in the streets.  If Germany allows Greece to default, that is going to start financial dominoes tumbling around the globe and it is going to be a signal to the financial markets that there is a very real possibility that Portugal, Italy and Spain will be allowed to default as well.  Needless to say, all hell would break loose at that point.

So why is Greece so important?

Well, there are two reasons why Greece is so important.

Number one, major banks all over Europe are heavily invested in Greek debt.  Since many of those banks are also very highly leveraged, if they are forced to take huge losses on Greek debt it could wipe many of them out.

Secondly, if Greece defaults, it tells the markets that Portugal, Italy and Spain would likely not be rescued either.  It would suddenly become much, much more expensive for those countries to borrow money, which would make their already huge debt problems far worse.

If Italy or Spain were to go down, it would wipe out major banks all over the globe.

Recently, Paul Krugman of the New York Times summarized the scale of the problem the world financial system is now facing….

Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.

Most Americans don’t spend a lot of time thinking about the financial condition of Europe.

But they should.

Right now, the U.S. economy is really struggling to stay out of another recession.  If Europe has a financial meltdown, there is no way that the United States is going to be able to avoid another huge economic downturn.

If you think that things are bad now, just wait.  After the next major financial crisis what we are going through right now is going to look like a Sunday picnic.

The following are 20 signs of imminent financial collapse in Europe….

#1 The yield on 2 year Greek bonds is now over 60 percent.  The yield on 1 year Greek bonds is now over 110 percent.  Basically, world financial markets now fully expect that Greece will default.

#2 European bank stocks are getting absolutely killed once again today.  We have seen this happen time after time in the last few weeks.  What we are now witnessing is a clear trend.  Just like back in 2008, major banking stocks are leading the way down the financial toilet.

#3 The German government is now making preparations to bail out major German banks when Greece defaults.  Reportedly, the German government is telling banks and financial institutions to be prepared for a 50 percent “haircut” on Greek debt obligations.

#4 With thousands upon thousands of angry citizens protesting in the streets, the Greek government seems hesitant to fully implement the austerity measures that are being required of them.  But if Greece does not do what they are being told to do, Germany may withhold further aid.  German Finance Minister Wolfgang Schaeuble says that Greece is now “on a knife’s edge“.

#5 Germany is increasingly taking a hard line with Greece, and the Greeks are feeling very pushed around by the Germans at this point.  Ambrose Evans-Pritchard made this point very eloquently in a recent article for the Telegraph….

Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been “Unconditional Capitulation”, and “Terrorization of Greeks”, and even “Fourth Reich”.

#6 Everyone knows that Greece simply cannot last much longer without continued bailouts.  John Mauldin explained why this is so in a recent article….

It is elementary school arithmetic. The Greek debt-to-GDP is currently at 140%. It will be close to 180% by year’s end (assuming someone gives them the money). The deficit is north of 15%. They simply cannot afford to make the interest payments. True market (not Eurozone-subsidized) interest rates on Greek short-term debt are close to 100%, as I read the press. Their long-term debt simply cannot be refinanced without Eurozone bailouts.

#7 The austerity measures that have already been implemented are causing the Greek economy to shrink rapidly.  Greek Finance Minister Evangelos Venizelos has announced that the Greek government is now projecting that the economy will shrink by 5.3% in 2011.

#8 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.

#9 Major banks in the U.S., in Japan and in Europe have a tremendous amount of exposure to Greek debt.  If they are forced to take major losses on Greek debt, quite a few major banks that are very highly leveraged could suddenly be in danger of being wiped out.

#10 If Greece goes down, Portugal could very well be next.  Ambrose Evans-Pritchard of the Telegraph explains it this way….

Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany’s austerity dictates in the long run. From there the chain-reaction into EMU’s soft-core would be fast and furious.

#11 The yield on 2 year Portuguese bonds is now over 15 percent.  A year ago the yield on those bonds was about 4 percent.

#12 Portugal, Ireland and Italy now also have debt to GDP ratios that are well above 100%.

#13 Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

#14 Major banks in the “healthy” areas of Europe could soon see their credit ratings downgraded.  For example, there are persistent rumors that Moody’s is about to downgrade the credit ratings of several major French banks.

#15 Most major European banks are leveraged to the hilt and are massively exposed to sovereign debt.  Before it fell in 2008, Lehman Brothers was leveraged 31 to 1.  Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.

#16 The ECB is not going to be able to buy up debt from troubled eurozone members indefinitely.  The European Central Bank is already holding somewhere in the neighborhood of 444 billion euros of debt from the governments of Greece, Italy, Portugal, Ireland and Spain.  On Friday, Jurgen Stark of Germany resigned from the European Central Bank in protest over these reckless bond purchases.

#17 According to London-based think tank Open Europe, the European Central Bank is now massively overleveraged….

“Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out.”

#18 The recent decision issued by the German Constitutional Court seems to have ruled out the establishment of any “permanent” bailout mechanism for the eurozone.  Just consider the following language from the decision….

“No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences”

#19 Economist Nouriel Roubini is warning that without “massive stimulus” by the governments of the western world we are going to see a major financial collapse and we will find ourselves plunging into a depression….

“In the short term, we need to do massive stimulus; otherwise, there’s going to be another Great Depression”

#20 German Economy Minister Philipp Roesler is warning that “an orderly default” for Greece is not “off the table“….

”To stabilize the euro, we must not take anything off the table in the short run. That includes, as a worst-case scenario, an orderly default for Greece if the necessary instruments for it are available.”

Right now, Greece is caught in a death spiral.  The more austerity measures they implement, the more their economy slows down.  The more their economy slows down, the more their tax revenues go down.  The more their tax revenues go down, the worse their debt problems become.

Greece could end up leaving the euro, but that would make their economic problems far, far worse and it would be very damaging to the rest of the eurozone as well.

Quite a few politicians in Europe are touting a “United States of Europe” as the ultimate solution to these problems, but right now the citizens of the eurozone are overwhelming against deeper economic integration.

Plus, giving the EU even more power would mean an even greater loss of national sovereignty for the people of Europe.

That would not be a good thing.

So what we are stuck with right now is the status quo.  But the current state of affairs cannot last much longer.  Germany is getting sick and tired of giving out bailouts and nations such as Greece are getting sick and tired of the austerity measures that are being forced upon them.

At some point, something is going to snap.  When that happens, world financial markets are going to respond with a mixture of panic and fear.  Credit markets will freeze up because nobody will be able to tell who is stable and who is about to collapse.  Dominoes will start to fall and quite a few major financial institutions will be wiped out.  Governments around the world will have to figure out who they want to bail out and who they don’t want to bail out.

It will be a giant mess.

For decades, the governments of the western world have been warned that they were getting into way too much debt.

For decades, the major banks and the big financial institutions were warned that they were becoming way too leveraged and were taking far too many risks.

Well, nobody listened.

So now we get to watch a global financial nightmare play out in slow motion.

Grab some popcorn and get ready.  It is going to be quite a show.

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