Financial Markets

The Big Dogs On Wall Street Are Starting To Get Very Nervous

February 21, 2013 by Michael

Why are some of the biggest names in the corporate world unloading stock like there is no tomorrow, and why are some of the most prominent investors on Wall Street loudly warning about the possibility of a market crash? Should we be alarmed that the big dogs on Wall Street are starting to get very nervous? In a previous article, I got very excited about a report that indicated that corporate insiders were selling nine times more of their own shares than they were buying. Well, according to a brand new Bloomberg article, insider sales of stock have outnumbered insider purchases of stock by a ratio of twelve to one over the past three months. That is highly unusual. And right now some of the most respected investors in the financial world are ringing the alarm bells. Dennis Gartman says that it is time to “rush to the sidelines”, Seth Klarman is warning about “the un-abating risks of collapse”, and Doug Kass is proclaiming that “we’re headed for a sharp fall”. So does all of this mean that a market crash is definitely on the way? No, but when you combine all of this with the weak economic data constantly coming out of the U.S. and Europe, it certainly does not paint a pretty picture.

According to Bloomberg, it has been two years since we have seen insider sales of stock at this level. And when insider sales of stock are this high, that usually means that the market is about to decline…

Corporate executives are taking advantage of near-record U.S. stock prices by selling shares in their companies at the fastest pace in two years.

There were about 12 stock-sale announcements over the past three months for every purchase by insiders at Standard & Poor’s 500 Index (SPX) companies, the highest ratio since January 2011, according to data compiled by Bloomberg and Pavilion Global Markets. Whenever the ratio exceeded 11 in the past, the benchmark index declined 5.9 percent on average in the next six months, according to Pavilion, a Montreal-based trading firm.

But it isn’t just the number of stock sales that is alarming. Some of these insider transactions are absolutely huge. Just check out these numbers…

Among the biggest transactions last week were a $65.2 million sale by Google Inc.’s 39-year-old Chief Executive Officer Larry Page, a $40.1 million disposal by News Corp.’s 81- year-old Chairman and CEO Rupert Murdoch and a $34.2 million sale from American Express Co. chief Kenneth Chenault, who is 61. Nolan Archibald, the 69-year-old chairman of Stanley Black & Decker Inc. who plans to leave his post next month, unloaded $29.7 million in shares last week and Amphenol Corp. Chairman Martin Hans Loeffler, 68, sold $27.5 million, according to data compiled by Bloomberg.

Google Chairman Eric Schmidt, 57, announced plans to sell as many as 3.2 million shares in the operator of the world’s most-popular search engine. The planned share sales, worth about $2.5 billion, represent about 42 percent of Schmidt’s holdings.

So why are all of these very prominent executives cashing out all of a sudden?

That is a very good question.

Meanwhile, some of the most respected names on Wall Street are warning that it is time to get out of the market.

For example, investor Dennis Gartman recently wrote that the game is “changing” and that it is time to “rush to the sidelines”…

“When tectonic plates in the earth’s crust shift earthquakes happen and when the tectonic plants shift beneath our feet in the capital markets margin calls take place. The tectonic plates have shifted and attention… very careful and very substantive attention… must be paid.

“Simply put, the game has changed and where we were playing a ‘game’ fueled by the monetary authorities and fueled by the urge on the part of participants to see and believe in rising ‘animal spirits’ as Lord Keynes referred to them we played bullishly of equities and of the EUR and of ‘risk assets’. Now, with the game changing, our tools have to change and so too our perspective.

“Where we were buyers of equities previously we must disdain them henceforth. Where we were sellers of Yen and US dollars we must buy them now. Where we had been long of gold in Yen terms, we must shift that and turn bullish of gold in EUR terms. Where we might have been ‘technically’ bullish of the EUR we must now be technically and fundamentally bearish of it. The game board has been flipped over; the game has changed… change with it or perish. We cannot be more blunt than that.”

That is a very ominous warning, but he is far from alone. Just the other day, I wrote about how legendary investor Seth Klarman is warning that the collapse of the financial markets could happen at literally any time…

“Investing today may well be harder than it has been at any time in our three decades of existence,” writes Seth Klarman in his year-end letter. The Fed’s “relentless interventions and manipulations” have left few purchase targets for Baupost, he laments. “(The) underpinnings of our economy and financial system are so precarious that the un-abating risks of collapse dwarf all other factors.”

Other big hitters on Wall Street are ringing the alarm bells as well. For example, Seabreeze Partners portfolio manager Doug Kass recently told CNBC that what he is seeing right now reminds him of the period just before the crash of 1987…

“I’m getting the ‘summer of 1987 feeling’ in the U.S. equity market,” Kass told CNBC, “which means we’re headed for a sharp fall.”

And of course the “perma-bears” continue to warn that the months ahead are going to be very difficult. For instance, “Dr. Doom” Marc Faber recently said that he “loves the high odds of a ‘big-time’ market crash“.

Another “perma-bear”, Nomura’s Bob Janjuah, is convinced that the stock market will experience one more huge spike before collapsing by up to 50%…

I continue to believe that the S&P500 can trade up towards the 1575/1550 area, where we have, so far, a grand double top. I would not be surprised to see the S&P trade marginally through the 2007 all-time nominal high (the real high was of course seen over a decade ago – so much for equities as a long-term vehicle for wealth creation!). A weekly close at a new all-time high would I think lead to the final parabolic spike up which creates the kind of positioning extreme and leverage extreme needed to create the conditions for a 25% to 50% collapse in equities over the rest of 2013 and 2014, driven by real economy reality hitting home, and by policymaker failure/loss of faith in “their system”.

So are they right?

We will see.

At the same time that many of the big dogs are pulling their money out of the market, many smaller investors are rushing to put their money back in to the market. The mainstream media continues to assure them that everything is wonderful and that this rally can last forever.

But it is important to keep in mind that the last time that Wall Street was this “euphoric” was right before the market crash in 2008.

So what should we be watching for?

As I have mentioned before, it is very important to watch the financial markets in Europe right now.

If they crash, the financial markets in the U.S. will probably crash too.

And the financial markets in Europe definitely have had a rough week. Just check out what happened on Thursday. The following is from a report by CNBC’s Bob Pisani…

Italy, Germany, France, Spain, U.K., Greece, and Portugal all on track to log worst day since Feb. 4. European PMI numbers were disappointing, with all major countries except Germany reporting numbers below 50, indicating contraction.

What does this mean? It means Europe remains mired in recession: “The euro zone is on course to contract for a fourth consecutive quarter,” Markit, who provides the PMI data, said. A new insight is that France is now joining the weakness shown in periphery countries.

You’re giving me agita: Italy was the worst market, down 2.5 percent. The CEO of banking company, Intesa Sanpaolo, said Italy’s recession has been so bad it could cause a fifth of Italian companies to fail, noting that topline for those bottom fifth have been shrinking 35 to 45 percent. Italian elections are this weekend.

It wasn’t any better in Asia. The Shanghai Index had its worst day in over a year, closing down nearly three percent.

And the economic numbers coming out of the U.S. also continue to be quite depressing.

On Thursday, the Department of Labor announced that there were 362,000 initial claims for unemployment benefits during the week ending February 16th. That was a sharp rise from a week earlier.

But I am not really concerned about that number yet.

When it rises above 400,000 and it stays there, then it will be time to officially become alarmed.

So what is the bottom line?

There are trouble signs on the horizon for the financial markets. Nobody should panic right now, but things certainly do not look very promising for the remainder of the year.

Watch The Financial Markets In Europe

February 7, 2013 by Michael

Is the financial system of Europe on the verge of a meltdown? I have always maintained that the next wave of the economic crisis would begin in Europe, and right now the situation in Europe is unraveling at a frightening pace. On Monday, European stocks had their worst day in over six months, and over the past four days we have seen the EUR/USD decline by the most that it has in nearly seven months. Meanwhile, scandals are erupting all over the continent. A political scandal in Spain, a derivatives scandal in Italy and banking scandals all over the eurozone are seriously shaking confidence in the system. If things move much farther in a negative direction, we could be facing a full-blown financial crisis in Europe very rapidly. So watch the financial markets in Europe very carefully. Yes, most Americans tend to ignore Europe because they are convinced that the U.S. is “the center of the universe”, but the truth is that Europe actually has a bigger population than we do, they have a bigger economy then we do, and they have a much larger banking system than we do. The global financial system is more integrated today than it ever has been before, and if there is a major stock market crash in Europe it is going to deeply affect the United States and the rest of the globe as well. So pay close attention to what is going on in Europe, because events over there could spark a chain reaction that would have very serious implications for every man, woman and child on the planet.

As I noted above, European markets started off the week very badly and things have certainly not improved since then. The following is how Zero Hedge summarized what happened on Thursday…

EuroStoxx (Europe’s Dow) closed today -1% for 2013. France, Germany, and Spain are all lower on the year now. Italy, following ENI’s CEO fraud, collapsed almost 3% from the US day-session open, leaving it up less than 1% for the year. Just as we argued, credit markets have been warning that all is not well and today’s afternoon free-fall begins the catch-down.

In addition, the euro has been dropping like a rock all of a sudden. Just check out this chart which shows what happened to the euro on Thursday. It is very rare to see the euro move that dramatically.

So what is causing all of this?

Well, we already know that the economic fundamentals in Europe are absolutely horrible. Unemployment in the eurozone is at a record high, and the unemployment rates in both Greece and Spain are over 26 percent. Those are depression-level numbers.

But up until now there had still been a tremendous amount of confidence in the European financial system. But now that confidence is being shaken by a whole host of scandals.

In recent days, a number of major banking scandals have begun to emerge all over Europe. Just check out this article which summarizes many of them.

One of the worst banking scandals is in Italy. A horrible derivatives scandal has pushed the third largest bank in Italy to the verge of collapse…

Monte dei Paschi di Siena (BMPS.MI), Italy’s third biggest lender, said on Wednesday losses linked to three problematic derivative trades totaled 730 million euros ($988.3 million) as it sought to draw a line under a scandal over risky financial transactions.

There is that word “derivative” that I keep telling people to watch for. Of course this is not the big “derivatives panic” that I have been talking about, but it is an example of how these toxic financial instruments can bring down even the biggest banks. Monte dei Paschi is the oldest bank in the world, and now the only way it is able to survive is with government bailouts.

Another big scandal that is shaking up Europe right now is happening over in Spain. It is being alleged that Spanish Prime Minister Mariano Rajoy and other members of his party have been receiving illegal cash payments. The following summary of the scandal comes from a recent Bloomberg article…

On Jan. 31, the Spanish newspaper El Pais published copies of what it said were ledgers from secret accounts held by Luis Barcenas, the former treasurer of the ruling People’s Party, which revealed the existence of a party slush fund. The newspaper said 7.5 million euros in corporate donations were channeled into the fund and allegedly doled out from 1997 to 2009 to senior party members, including Rajoy.

That doesn’t sound good at all.

So what is the truth?

Could Rajoy actually be innocent?

Well, at this point most of the population of Spain does not believe that is the case. Just check out the following poll numbers from the Bloomberg article quoted above…

According to the Metroscopia poll, 76 percent of Spaniards don’t believe the People’s Party’s denials of the slush-fund allegations. Even more damning, 58 percent of the party’s supporters think it’s lying. All of the Spanish businessmen with whom I discussed the latest scandal expect it to get worse before it gets better. Their assumption that there are more skeletons in the government’s closet indicates what little trust they have in their leaders.

Meanwhile, the underlying economic fundamentals in Europe just continue to get worse. One of the biggest concerns right now is France. Just check out this excerpt from a recent report by Phoenix Capital Research…

The house of cards that is Europe is close to collapsing as those widely held responsible for solving the Crisis (Prime Ministers, Treasurers and ECB head Mario Draghi) have all been recently implicated in corruption scandals.

Those EU leaders who have yet to be implicated in scandals are not faring much better than their more corrupt counterparts. In France, socialist Prime Minister Francois Hollande, has proven yet again that socialism doesn’t work by chasing after the wealthy and trying to grow France’s public sector… when the public sector already accounts for 56% of French employment.

France was already suffering from a lack of competitiveness. Now that wealthy businesspeople are fleeing the country (meaning investment will dry up), the economy has begun to positively implode.

As the report goes on to mention, over the past few months the economic numbers coming out of France have been absolutely frightful…

Auto sales for 2012 fell 13% from those of 2011. Sales of existing homes outside of Paris fell 20% year over year for the third quarter of 2012. New home sales fell 25%. Even the high-end real estate markets are collapsing with sales for apartments in Paris that cost over €2 million collapsing an incredible 42% in 2012.

Today, the jobless rate in France is at a 15-year high, and industrial production is headed into the toilet. The wealthy are fleeing France in droves because of the recent tax increases, and the nation is absolutely drowning in debt. Even the French jobs minister recently admitted that France is essentially “bankrupt” at this point…

France’s government was plunged into an embarrassing row yesterday after a minister said the country was ‘totally bankrupt’.

Employment secretary Michel Sapin said cuts were needed to put the damaged economy back on track.

‘There is a state but it is a totally bankrupt state,’ he said.

So what does all of this mean?

It means that the crisis in Europe is just beginning. Things are going to be getting a lot worse.

Perhaps that is one reason why corporate insiders are dumping so much stock right now as I noted in my article yesterday entitled “Do Wall Street Insiders Expect Something Really BIG To Happen Very Soon?” There are a whole host of signs that both the United States and Europe are heading for recession, and a lot of financial experts are warning that stocks are way overdue for a “correction”.

For example, Blackstone’s Byron Wien told CNBC the other day that he expects the S&P 500 to drop by 200 points during the first half of 2013.

Seabreeze Partners portfolio manager Doug Kass recently told CNBC that what is happening right now in the financial markets very much reminds him of the stock market crash of 1987…

“I’m getting the ‘summer of 1987 feeling’ in the U.S. equity market,” Kass told CNBC, “which means we’re headed for a sharp fall.”

Toward the end of 2012 and at the very beginning of 2013 we saw markets both in the U.S. and in Europe move up steadily even though the underlying economic fundamentals did not justify such a move.

In many ways, that move up reminded me of the “head fakes” that we have seen prior to many of the largest “market corrections” of the past. Often financial markets are at their most “euphoric” just before a crash hits.

So get ready.

Even if you don’t have a penny in the financial markets, now is the time to prepare for what is ahead.

We all need to learn from what Europe is going through right now. In Greece, formerly middle class citizens are now trampling one another for food. We all need to prepare financially, mentally, emotionally, spiritually and physically so that we can weather the economic storm that is coming.

Most Americans are accustomed to living paycheck to paycheck and being constantly up to their eyeballs in debt, but that is incredibly foolish. Even in the animal kingdom, animals work hard during the warm months to prepare for the winter months. Even so, we should all be working very hard to prepare during prosperous times so that we will have something stored up for the lean years that are coming.

Unfortunately, if events in Europe are any indication, we may be rapidly running out of time.

Do Wall Street Insiders Expect Something Really BIG To Happen Very Soon?

February 6, 2013 by Michael

Why are corporate insiders dumping huge numbers of shares in their own companies right now? Why are some very large investors suddenly making gigantic bets that the stock market will crash at some point in the next 60 days? Do Wall Street insiders expect something really BIG to happen very soon? Do they know something that we do not know? What you are about to read below is startling. Every time that the market has fallen in recent years, insiders have been able to get out ahead of time. David Coleman of the Vickers Weekly Insider report recently noted that Wall Street insiders have shown “a remarkable ability of late to identify both market peaks and troughs”. That is why it is so alarming that corporate insiders are selling nine times as many shares as they are buying right now. In addition, some extraordinarily large bets have just been made that will only pay off if the financial markets in the U.S. crash by the end of April. So what does all of this mean? Well, it could mean absolutely nothing or it could mean that there are people out there that actually have insider knowledge that a market crash is coming. Evaluate the evidence below and decide for yourself…

For some reason, corporate insiders have chosen this moment to unload huge amounts of stock. According to a CNN article, corporate insiders are now selling nine times more of their own shares than they are buying…

Corporate insiders have one word for investors: sell.

Insiders were nine times more likely to sell shares of their companies than buy new ones last week, according to the Vickers Weekly Insider report by Argus Research.

What makes this so alarming is that corporate insiders have been exceedingly good at “timing the market” in recent years. The following comes from a recent CNBC article entitled “Sucker Alert? Insider Selling Surges After Dow 14,000“…

“In almost perfect coordination with an equity market that was rushing toward new all-time highs, insider sentiment has weakened sharply — falling to its lowest level since late March 2012,” wrote David Coleman of the Vickers Weekly Insider report, one of the longest researchers of executive buying and selling on Wall Street. “Insiders are waving the cautionary flag in an increasingly aggressive manner.”

There have been more than nine insider sales for every one buy over the past week among NYSE stocks, according to Vickers. The last time executives sold their company’s stock this aggressively was in early 2012, just before the S&P 500 went on to correct by 10 percent to its low for the year.

“Insiders know more than the vast majority of market participants,” said Enis Taner, global macro editor for RiskReversal.com. “And they’re usually right over a long period of time.”

There are other indications that the stock market may be headed for a significant tumble in the months ahead. For example, as a Zero Hedge article recently pointed out, the last time that the financial markets in the U.S. were as “euphoric” as they are now was right before the financial crisis of 2008.

And as I mentioned above, some people out there have recently made some absolutely jaw-dropping bets against stocks which will only pay off if there is a financial crash at some point in the next few months.

According to Business Insider, the recent purchase of 100,000 put options by a mystery investor has a lot of people on Wall Street talking…

According to Barron’s columnist Steven Sears, someone made a big bet against the financials ETF yesterday (ticker symbol XLF), and it has everybody buzzing.

The trader bought 100,000 put options on the ETF (a put option increases in value when the price of the underlying asset, in this case, the ETF, goes down).

To put that number in perspective, Sears writes, “Few investors ever trade more than 500 contracts, so a 100,000 order tends to stop traffic and prompt all sorts of speculation about what’s motivating the trade.” According to Sears, the trade “has sparked conversations across the market.”

Reportedly, those put options expire in April.

And as Art Cashin of UBS has noted, there was also another extremely large bet that was placed recently that is banking on a financial crash within the next two months…

A Very Big Bet In A Somewhat Unlikely Instrument – My friend, Jim Brown, the ever-alert consummate professional over at Option Investor pointed us to a rather unusual trade. Here’s what he wrote in last night’s edition of his valuable newsletter:

In past years I have reported on trades that were so large it appeared someone had inside knowledge of a pending event. Sometimes those were massive put positions on the S&P. A new trade just appeared that suggests there will be a market event in the near future. Last week somebody put on a call spread on the VIX using the April 20 and 25 puts. They bought 150,000 contracts for a net of $75 per contract. That is an $11,250,000 bet that the VIX will move over 20 over the next 60 days. You would have to be VERY confident in your outlook to risk $11 million on a directional position with the VIX at five year lows and the markets trying to break out to new highs.

So does all of this guarantee that the stock market is going to move a certain way?

Of course not.

But when you step back and look at the bigger picture, it does appear that Wall Street insiders are preparing for something.

Meanwhile, the government continues to assure us that happy days are here again for the U.S. economy and that we don’t have anything to worry about.

The Congressional Budget Office has just released a report that contains their outlook for the next decade. The report is entitled “The Budget and Economic Outlook: Fiscal Years 2013 to 2023”, and if you want a good laugh you should read it.

Here are some of the things that the CBO believes will happen…

-The CBO believes that government revenues will more than double by 2023.

-The CBO believes that government revenue as a percentage of GDP will rise from 15.8 percent today to 19.1 percent in 2023.

-The CBO believes that the unemployment rate will continually fall over the next decade.

-The CBO believes that the federal budget deficit will fall to just 2.4% of GDP in fiscal year 2015.

-The CBO believes that the federal budget deficit will only be $430 billion in 2015.

-The CBO believes that we will not have a single recession over the next decade.

-The CBO believes that inflation will stay at about 2 percent for the next decade.

-The CBO believes that U.S. GDP will grow by a total of 67 percent by 2023.

Wow, all of that sounds great until you go back and take a look at how CBO projections have fared in the past.

In fact, Bruce Krasting has gone back and looked at the numbers from the Congressional Budget Office’s Budget and Economic Outlook 2003. I think that you will find the differences between the CBO projections and what really happened to be very humorous…

Estimated 10-year budget surplus = $5.6T.

Reality = $6.6T deficit. A 200+% miss.

Estimate for 2012 Debt Held by Public = $1.2T (5% of GDP).

Reality = Debt Held by Public = $11.6T. A 1000% miss.

Estimated fiscal 2012 GDP = $17.4T.

Reality = $15.8T. A $1.6T (10%) miss.

So should we trust what the CBO is telling us now?

Of course not.

Instead, perhaps we should listen to some of the men that successfully warned us about the last financial crisis…

-“Dr. Doom” Marc Faber recently stated that he “loves the high odds of a ‘big-time’ market crash“.

-Economist Nouriel Roubini says that we should “prepare for a perfect storm“.

-Pimco’s Bill Gross says that we are heading for a “credit supernova“.

-Nomura’s Bob Janjuah believes that the financial markets will experience one more huge spike before collapsing by up to 50%…

I continue to believe that the S&P500 can trade up towards the 1575/1550 area, where we have, so far, a grand double top. I would not be surprised to see the S&P trade marginally through the 2007 all-time nominal high (the real high was of course seen over a decade ago – so much for equities as a long-term vehicle for wealth creation!). A weekly close at a new all-time high would I think lead to the final parabolic spike up which creates the kind of positioning extreme and leverage extreme needed to create the conditions for a 25% to 50% collapse in equities over the rest of 2013 and 2014, driven by real economy reality hitting home, and by policymaker failure/loss of faith in “their system”.

The truth is that no matter how much money printing the Federal Reserve does, it is only a matter of time before the financial markets catch up with economic reality.

The U.S. economy has been in decline for a very long time, and things just continue to get even worse. Here are just a few numbers…

-The percentage of the civilian labor force that is employed has fallen every single year since 2006.

-According to John Williams of shadowstats.com, truly accurate numbers would show that U.S. GDP growth has actually been continuously negative all the way back to 2005.

-U.S. families that have a head of household that is under the age of 30 have a poverty rate of 37 percent.

-One recent survey found that nearly half of all Americans are living on the edge of financial ruin.

-According to the U.S. Census Bureau, there are more than 146 million Americans that are considered to be either “poor” or “low income” at this point.

For many more statistics that demonstrate that the U.S. economy has continued to decline in recent years, please see this article: “37 Statistics Which Show How Four Years Of Obama Have Wrecked The U.S. Economy“.

So where is all of this headed?

Well, after the next major financial crisis in America things are going to get very tough.

We can get a hint for how things are going to be by taking a look at what is going on over in Europe right now.

Can you imagine people trampling each other for food? That is what is happening in Greece. Just check out this excerpt from a Reuters article…

Hundreds of people jostled for free vegetables handed out by farmers in a symbolic protest earlier on Wednesday, trampling one man and prompting an outcry over the growing desperation created by economic crisis.

Images of people struggling to seize bags of tomatoes and leeks thrown from a truck dominated television, triggering a bout of soul-searching over the new depths of poverty in the debt-laden country.

The suffering that the Greeks are experiencing right now will come to this country soon enough.

So enjoy this false bubble of debt-fueled prosperity while you can. It is going to end way too soon, and after that there will be a whole lot of pain.

Federal Reserve Money Printing Is The Real Reason Why The Stock Market Is Soaring

January 28, 2013 by Michael

You can thank the reckless money printing that the Federal Reserve has been doing for the incredible bull market that we have seen in recent months. When the Federal Reserve does more “quantitative easing”, it is the financial markets that benefit the most. The Dow and the S&P 500 have both hit levels not seen since 2007 this month, and many analysts are projecting that 2013 will be a banner year for stocks. But is a rising stock market really a sign that the overall economy is rapidly improving as many are suggesting? Of course not. Just because the Federal Reserve has inflated another false stock market bubble with a bunch of funny money does not mean that the U.S. economy is in great shape. In fact, the truth is that things just keep getting worse for average Americans. The percentage of working age Americans with a job has fallen from 60.6% to 58.6% while Barack Obama has been president, 40 percent of all American workers are making $20,000 a year or less, median household income has declined for four years in a row, and poverty in the United States is absolutely exploding. So quantitative easing has definitely not made things better for the middle class. But all of the money printing that the Fed has been doing has worked out wonderfully for Wall Street. Profits are soaring at Goldman Sachs and luxury estates in the Hamptons are selling briskly. Unfortunately, this is how things work in America these days. Our “leaders” seem far more concerned with the welfare of Wall Street than they do about the welfare of the American people. When things get rocky, their first priority always seems to be to do whatever it takes to pump up the financial markets.

When QE3 was announced, it was heralded as the grand solution to all of our economic problems. But the truth is that those running things knew exactly what it would do. Quantitative easing always pumps up the financial markets, and that overwhelmingly benefits those that are wealthy. In fact, a while back a CNBC article discussed a very interesting study from the Bank of England which showed a clear correlation between quantitative easing and rising stock prices…

It said that the Bank of England’s policies of quantitative easing – similar to the Fed’s – had benefited mainly the wealthy.

Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.

Many said the BOE’s easing added to social anger and unrest. Dhaval Joshi, of BCA Research wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it.”

So should we be surprised that stocks are now the highest that they have been in more than 5 years?

Of course not.

And who benefits from this?

The wealthy do. In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans.

Unfortunately, all of this reckless money printing has a very negative impact on all the rest of us. When the Fed floods the financial system with money, that causes inflation. That means that the cost of living has gone up even though your paycheck may not have.

If you go to the supermarket frequently, you know exactly what I am talking about. The new “sale prices” are what the old “regular prices” used to be. They keep shrinking many of the package sizes in order to try to hide the inflation, but I don’t think many people are fooled. Our food dollars are not stretching nearly as far as they used to, and we can blame the Federal Reserve for that.

For much more on rising prices in America, please see this article: “Somebody Should Start The ‘Stuff Costs Too Much’ Party“.

Sadly, this is what the Federal Reserve does. The system was designed to create inflation. Before the Federal Reserve came into existence, the United States never had an ongoing problem with inflation. But since the Fed was created, the United States has endured constant inflation. In fact, we have come to accept it as “normal”. Just check out the amazing chart in the video posted below…

The chart in that video kind of reminds me of a chart that I shared in a previous article…

Not that I expect the United States to enter a period of hyperinflation in the near future.

Actually, despite all of the reckless money printing that the Fed has been doing, I expect that at some point we are going to see another wave of panic hit the financial markets like we saw back in 2008. The false stock market bubble will burst, major banks will fail and the financial system will implode. It could unfold something like this…

1 – A derivatives panic hits the “too big to fail” banks.

2 – Financial markets all over the globe crash.

3 – The credit markets freeze up.

4 – Economic activity in the United States starts to grind to a halt.

5 – Unemployment rises above 20 percent and mortgage defaults soar to unprecedented levels.

6 – Tax revenues fall dramatically and austerity measures are implemented by the federal government, state governments and local governments.

7 – The rest of the globe rapidly loses confidence in the U.S. financial system and begins to dump U.S. debt and U.S. dollars.

I write about derivatives a lot, because they are one of the greatest threats that the global financial system is facing. In fact, right now a derivatives scandal is threatening to take down the oldest bank in the world…

Banca Monte dei Paschi di Siena, the world’s oldest bank, was making loans when Michelangelo and Leonardo da Vinci were young men and before Columbus sailed to the New World. The bank survived the Italian War, which saw Siena’s surrender to Spain in 1555, the Napoleonic campaign, the Second World War and assorted bouts of plague and poverty.

But MPS may not survive the twin threats of a gruesomely expensive takeover gone bad and a derivatives scandal that may result in legal action against the bank’s former executives. After five centuries of independence, MPS may have to be nationalized as its losses soar and its value sinks.

So when you hear the word “derivatives” in the news, pay close attention. The bankers have turned our financial system into a giant casino, and at some point the entire house of cards is going to come crashing down.

In response to the coming financial crisis, I believe that our “leaders” will eventually resort to money printing unlike anything we have ever seen before in a desperate attempt to resuscitate the system. When that happens, I believe that we will see the kind of rampant inflation that so many people have been warning about.

So what do you think about all of this?

Do you believe that Federal Reserve money printing is the real reason why the stock market is soaring?

Please feel free to post a comment with your thoughts below…

Goldman Sachs And The Big Hedge Funds Are Pushing Leverage To Ridiculous Extremes

January 14, 2013January 14, 2013 by Michael

As stocks have risen in recent years, the big hedge funds and the “too big to fail” banks have used borrowed money to make absolutely enormous profits. But when you use debt to potentially multiply your profits, you also create the possibility that your losses will be multiplied if the markets turn against you. When the next stock market crash happens, and the gigantic pyramid of risk, debt and leverage on Wall Street comes tumbling down, will highly leveraged banks such as Goldman Sachs ask the federal government to bail them out? The use of leverage is one of the greatest threats to our financial system, and yet most Americans do not even really understand what it is. The following is a basic definition of leverage from Investopedia: “The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.” Leverage allows firms to make much larger bets in the financial markets than they otherwise would be able to, and at this point Goldman Sachs and the big hedge funds are pushing leverage to ridiculous extremes. When the financial markets go up and they win on those bets, they can win very big. For example, revenues at Goldman Sachs increased by about 30 percent in 2012 and Goldman stock has soared by more than 40 percent over the past 12 months. Those are eye-popping numbers. But leverage is a double-edged sword. When the markets turn, Goldman Sachs and many of these large hedge funds could be facing astronomical losses.

Sadly, it appears that Wall Street did not learn any lessons from the financial crisis of 2008. Hedge funds have ramped up leverage to levels not seen since before the last stock market crash. The following comes from a recent Bloomberg article entitled “Hedge-Fund Leverage Rises to Most Since 2004 in New Year“…

Hedge funds are borrowing more to buy equities just as loans by New York Stock Exchange brokers reach the highest in four years, signs of increasing confidence after professional investors trailed the market since 2008.

Leverage among managers who speculate on rising and falling shares climbed to the highest level to start any year since at least 2004, according to data compiled by Morgan Stanley. Margin debt at NYSE firms rose in November to the most since February 2008, data from NYSE Euronext show.

So why is this so important?

Well, as a recent Zero Hedge article explained, even a relatively small drop in stock prices could potentially absolutely devastate many hedge funds…

What near record leverage means is that hedge funds have absolutely zero tolerance for even the smallest drop in prices, which are priced to absolute and endless central bank-intervention perfection – sorry, fundamentals in a time when global GDP growth is declining, when Europe and Japan are in a double dip recession, when the US is expected to report its first sub 1% GDP quarter in years, when corporate revenues and EPS are declining just don’t lead to soaring stock prices.

It also means that with virtually all hedge funds in such hedge fund hotel names as AAPL (the stock held by more hedge funds – over 230 – than any other), any major drop in the price would likely lead to a wipe out of the equity tranche at the bulk of AAPL “investors”, sending them scrambling to beg for either more LP generosity, or to have their prime broker repo desk offer them even more debt. And while the former is a non-starter, the latter has so far worked, which means that most hedge funds have been masking losses with more debt, which then suffers even more losses, and so on.

By the way, Apple (AAPL) just fell to an 11-month low. Apple stock has now declined by 26 percent since it hit a record high back in September. That is a very bad sign for hedge funds.

But hedge funds are not the only ones flirting with disaster. In a previous article about the derivatives bubble, I pointed out the ridiculous amount of derivatives exposure that some of these “too big to fail” banks have relative to their total assets…

According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 362 times greater than their total assets.

That is utter insanity, but we haven’t had a derivatives crash yet so everyone just keeps pretending that the emperor actually has clothes on.

When the derivatives crisis happens, things in the financial markets are going to fall apart at lightning speed. A recent article posted on goldsilverworlds.com explained what a derivatives crash may look like…

When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivates (think JP Morgan, Citygroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.

But for now, the party continues. Goldman Sachs and many of the big hedge funds are making enormous piles of money.

In fact, according to the Wall Street Journal, Goldman Sachs recently gave some of their top executives 65 million dollars worth of restricted stock…

Goldman Sachs Group Inc. GS -0.76% handed insiders including Chief Executive Lloyd Blankfein and his top lieutenants a total of $65 million in restricted stock just hours before this year’s higher tax rates took effect.

The New York securities firm gave 10 of its directors and executives early vesting on 508,104 shares previously awarded as part of prior years’ compensation, according to a series of filings with the Securities and Exchange Commission late Monday.

And the bonuses that employees at Goldman receive are absolutely obscene. A recent Daily Mail article explained that Goldman employees in the UK are expected to receive record-setting bonuses this year…

Britain’s army of bankers will re-ignite public fury over lavish pay rewards as staff at Goldman Sachs are expected to reward themselves £8.3 billion in bonuses on Wednesday.

The American investment bank, which employs 5,500 staff in the UK, will be the first to unveil its telephone number-sized rewards – an average of £250,000 a person – as part of the latest round of bonus updates.

The increase, up from £230,000 last year, comes as British families are still struggling to make ends meet five years after banks brought the economy to the brink of meltdown.

Wouldn’t you like to get a “bonus” like that?

Life is good at these firms while the markets are going up.

But what happens when the party ends?

What happens if the markets crash in 2013?

When you bet big, you either win big or you lose big.

For now, the gigantic bets that Wall Street firms are making with borrowed money are paying off very nicely.

But a day of reckoning is coming. The next stock market crash is going to rip through Wall Street like a chainsaw and the carnage is going to be unprecedented.

Are you sure that the people holding your money will be able to make it through what is ahead? You might want to look into it while you still can.

The Coming Derivatives Panic That Will Destroy Global Financial Markets

January 3, 2013December 4, 2012 by Michael

When financial markets in the United States crash, so does the U.S. economy. Just remember what happened back in 2008. The financial markets crashed, the credit markets froze up, and suddenly the economy went into cardiac arrest. Well, there are very few things that could cause the financial markets to crash harder or farther than a derivatives panic. Sadly, most Americans don’t even understand what derivatives are. Unlike stocks and bonds, a derivative is not an investment in anything real. Rather, a derivative is a legal bet on the future value or performance of something else. Just like you can go to Las Vegas and bet on who will win the football games this weekend, bankers on Wall Street make trillions of dollars of bets about how interest rates will perform in the future and about what credit instruments are likely to default. Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine. This works fine as long as there are not any wild swings in the economy and risk is managed with strict discipline, but as we have seen, there have been times when derivatives have caused massive problems in recent years. For example, do you know why the largest insurance company in the world, AIG, crashed back in 2008 and required a government bailout? It was because of derivatives. Bad derivatives trades also caused the failure of MF Global, and the 6 billion dollar loss that JPMorgan Chase recently suffered because of derivatives made headlines all over the globe. But all of those incidents were just warm up acts for the coming derivatives panic that will destroy global financial markets. The largest casino in the history of the world is going to go “bust” and the economic fallout from the financial crash that will happen as a result will be absolutely horrific.

There is a reason why Warren Buffett once referred to derivatives as “financial weapons of mass destruction”. Nobody really knows the total value of all the derivatives that are floating around out there, but estimates place the notional value of the global derivatives market anywhere from 600 trillion dollars all the way up to 1.5 quadrillion dollars.

Keep in mind that global GDP is somewhere around 70 trillion dollars for an entire year. So we are talking about an amount of money that is absolutely mind blowing.

So who is buying and selling all of these derivatives?

Well, would it surprise you to learn that it is mostly the biggest banks?

According to the federal government, four very large U.S. banks “represent 93% of the total banking industry notional amounts and 81% of industry net current credit exposure.”

These four banks have an overwhelming share of the derivatives market in the United States. You might not be very fond of “the too big to fail banks“, but keep in mind that if a derivatives crisis were to cause them to crash and burn it would almost certainly cause the entire U.S. economy to crash and burn. Just remember what we saw back in 2008. What is coming is going to be even worse.

It would have been really nice if we had not allowed these banks to get so large and if we had not allowed them to make trillions of dollars of reckless bets. But we stood aside and let it happen. Now these banks are so important to our economic system that their destruction would also destroy the U.S. economy. It is kind of like when cancer becomes so advanced that killing the cancer would also kill the patient. That is essentially the situation that we are facing with these banks.

It would be hard to overstate the recklessness of these banks. The numbers that you are about to see are absolutely jaw-dropping. According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 362 times greater than their total assets.

To get a better idea of the massive amounts of money that we are talking about, just check out this excellent infographic.

How in the world could we let this happen?

And what is our financial system going to look like when this pyramid of risk comes falling down?

Our politicians put in a few new rules for derivatives, but as usual they only made things even worse.

According to Nasdaq.com, beginning next year new regulations will require derivatives traders to put up trillions of dollars to satisfy new margin requirements.

Swaps that will be allowed to remain outside clearinghouses when new rules take effect in 2013 will require traders to post $1.7 trillion to $10.2 trillion in margin, according to a report by an industry group.

The analysis from the International Swaps and Derivatives Association, using data sent in anonymously by banks, says the trillions of dollars in cash or securities will be needed in the form of so-called “initial margin.” Margin is the collateral that traders need to put up to back their positions, and initial margin is money backing trades on day one, as opposed to variation margin posted over the life of a trade as it fluctuates in value.

So where in the world will all of this money come from?

Total U.S. GDP was just a shade over 15 trillion dollars last year.

Could these rules cause a sudden mass exodus that would destabilize the marketplace?

Let’s hope not.

But things are definitely changing. According to Reuters, some of the big banks are actually urging their clients to avoid new U.S. rules by funneling trades through the overseas divisions of their banks…

Wall Street banks are looking to help offshore clients sidestep new U.S. rules designed to safeguard the world’s $640 trillion over-the-counter derivatives market, taking advantage of an exemption that risks undermining U.S. regulators’ efforts.

U.S. banks such as Morgan Stanley (MS.N) and Goldman Sachs (GS.N) have been explaining to their foreign customers that they can for now avoid the new rules, due to take effect next month, by routing trades via the banks’ overseas units, according to industry sources and presentation materials obtained by Reuters.

Unfortunately, no matter how banks respond to the new rules, it isn’t going to prevent the coming derivatives panic. At some point the music is going to stop and some big financial players are going to be completely and totally exposed.

When that happens, it might not be just the big banks that lose money. Just take a look at what happened with MF Global.

MF Global has confessed that it “diverted money” from customer accounts that were supposed to be segregated. A lot of customers may never get back any of the money that they invested with those crooks. The following comes from a Huffington Post article about the MF Global debacle, and it might just be a preview of what other investors will go through in the future when a derivatives crash destroys the firms that they had their money parked with…

Last week when customers asked for excess cash from their accounts, MF Global stalled. According to a commodity fund manager I spoke with, MF Global’s first stall tactic was to claim it lost wire transfer instructions. Then instead of sending an overnight check, it sent the money snail mail, including checks for hundreds of thousands of dollars. The checks bounced. After the checks bounced, the amounts were still debited from customer accounts and no one at MF Global could or would reverse the check entries. The manager has had to intervene to get MF Global to correct this.

How would you respond if your investment account suddenly went to “zero” because the firm you were investing with “diverted” customer funds for company use and now you have no way of recovering your money?

Keep an eye on the large Wall Street banks. In a previous article, I quoted a New York Times article entitled “A Secretive Banking Elite Rules Trading in Derivatives” which described how these banks dominate the trading of derivatives…

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.

According to the article, the following large banks are represented at these meetings: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

When the casino finally goes “bust”, you will know who to blame.

Without a doubt, a derivatives panic is coming.

It will cause the financial markets to crash.

Several of the “too big to fail” banks will likely crash and burn and require bailouts.

As a result of all this, credit markets will become paralyzed by fear and freeze up.

Once again, we will see the U.S. economy go into cardiac arrest, only this time it will not be so easy to fix.

Do you agree with this analysis, or do you find it overly pessimistic? Please feel free to post a comment with your thoughts below…

Will The Wealthy Race To Dump Stocks And Other Financial Assets Before The Fiscal Cliff Kicks In?

November 13, 2012November 13, 2012 by Michael

The election results made it abundantly clear that taxes are going to be going up, and right now a lot of wealthy people all over America are trying to figure out how to best position themselves for the hit that is coming. There are a whole host of tax cuts that are set to expire on December 31st, and many analysts are now speculating that we could see a race to dump stocks and other financial assets before 2013 in order to get better tax treatment on those sales. Of course it is still possible that Congress may reach a bargain which would avoid these tax increases, but with each passing day that appears to be increasingly unlikely – especially regarding the tax increases on the wealthy. Whatever you may believe about this politically, the truth is that we should all be able to agree that these looming tax increases provide an incentive for wealthy people to sell off financial assets now rather than later. After all, there are very few people out there that would actually prefer to pay higher taxes on purpose. If the race to dump financial assets becomes a landslide, could this push stocks down significantly late in the year? Already there are all sorts of technical signs that indicate that stocks are ready for a “correction” at the very least. For example, the S&P 500 has already closed below its 200 day moving average for several days in a row. Could the “sell off” that has already begun become a race for the exits?

A lot of Americans have heard about the looming “fiscal cliff”, but most don’t really understand the specifics.

For investors, there are several key changes which will happen unless Congress does something by January 1st.

First of all, the tax rate on capital gains will go from 15 percent to 20 percent. For those with high incomes, the rate will be even higher than that thanks to a tax increase that our politicians managed to sneak into Obamacare. So, some wealthy individuals will see their capitals gains taxed at nearly 24 percent in 2013 unless something is done.

For dividends, the outlook is even more frightening. The tax rate on dividends will increase from 15 percent right now to over 43 percent for the highest income earners.

We have already seen these tax increases play into business decisions that have been made in recent months. For example, it is being reported that George Lucas potentially saved hundreds of millions of dollars in taxes by selling Star Wars to Disney this year rather than next year.

Anyone out there that wants to take advantage of the current tax rates on capital gains and dividend income better do so now, because these tax rates look like they are going to go away and they probably will not be back for a very, very long time.

According to CNBC, this makes the next couple of months an ideal time to dump stocks and other financial assets…

For many of the wealthy, 2012 is becoming a good year to sell.

They’re worried about the “fiscal cliff,” which is when tax cuts expire and spending cuts are set to go into effect at the end of the year.

Fearing an increase in capital gains and dividend taxes, many of the rich are unloading stocks, businesses and homes before the end of the year.

And the truth is that stocks simply did not have much higher that they could possibly go anyway. Anyone that is trying to “get out while the getting is good” should take heed of what Marc Faber recently told CNBC…

“The market is going down because corporate profits will begin to disappoint, the global economy will hardly grow next year or even contract, and that is the reason why stocks, from the highs of September of 1,470 on the S&P, will drop at least 20 percent, in my view.”

In fact, Faber is absolutely convinced that a full-blown stock market crash is coming no matter what happens with the fiscal cliff…

“I think the whole global financial system will have to be reset and it won’t be reset by central bankers but by imploding markets — either the currency [markets, debt market or stock markets,” he said. “It will happen — it will happen one day and then we’ll be lucky if we still have 50 percent of the asset values that we have today.”

Politics and economics have always been deeply intertwined. The results of the most recent election are going to have some very deep consequences. Already we have seen a large number of businesses either announce layoffs or that hours for their workers will be cut back. You can find a bunch of tweets from small business owners talking about how they won’t be hiring anyone or that they will be forced to reduce hours right here. You can find a bunch of tweets from average citizens all over the country talking about how their hours are already being cut back right here.

With each passing day, our country is getting poorer, it is getting even deeper in debt and our economy is becoming even more unstable. We are on a path that will only lead to total economic disaster, but the American people just voted for more of the same.

So now we will get to see how this all plays out.

Is there anyone out there that is still optimistic about what is coming next for the U.S. economy?

Warnings That A Massive Stock Market Crash Is Imminent

October 3, 2012October 3, 2012 by Michael

In the financial world, the month of October is synonymous with stock market crashes. So will a massive stock market crash happen this year? You never know. The truth is that our financial system is even more vulnerable than it was back in 2008, and financial experts such as Doug Short, Peter Schiff, Robert Wiedemer and Harry Dent are all warning that the next crash is rapidly approaching. We are living in the greatest debt bubble in the history of the world and Wall Street has been transformed into a giant casino that is based on a massive web of debt, risk and leverage. When that web breaks we are going to see a stock market crash that is going to make 2008 look like a Sunday picnic. Yes, the Federal Reserve has tried to prevent any problems from erupting in the financial markets by initiating another round of quantitative easing, but 40 billion dollars a month will not be nearly enough to stop the massive collapse that is coming. This will be explained in detail toward the end of the article. Hopefully we will get through October (and the rest of this year) without seeing a stock market collapse, but without a doubt one is coming at some point. Those on the wrong end of the coming crash are going to be absolutely wiped out.

A lot of people focus on the month of October because of the history of stock market crashes in this month. This history was detailed in a recent USA Today article….

When it comes to wealth suddenly disappearing, October can be diabolically frightful. The stock market crash of 1929 that led to the Great Depression occurred in October. So did the 22.6% plunge suffered by the Dow Jones industrial average in 1987 on “Black Monday.”

The scariest 19-day span during the 2008 financial crisis also went down in October, when the Dow plunged 2,675 points after investors fearing a financial collapse went on a panic-driven stock-selling spree that resulted in five of the 10 biggest daily point drops in the iconic Dow’s 123-year history.

So what will we see this year?

Only time will tell.

If a stock market crash does not happen this month or by the end of this year, that does not mean that the experts that are predicting a stock market crash are wrong.

It just means that they were early.

As I have said so many times, there are thousands upon thousands of moving parts in the global financial system. So that makes it nearly impossible to predict the timing of events with perfect precision. Financial conditions are constantly shifting and changing.

But without a doubt another major financial collapse similar to what happened back in 2008 (or even worse) is on the way. Let’s take a look at some of the financial experts that are predicting really bad things for our financial markets in the months ahead….

Doug Short

According to Doug Short, the vice president of research at Advisor Perspectives, the stock market is somewhere between 33% and 51% overvalued at this point. In a recent article he offered the following evidence to support his position….

● The Crestmont Research P/E Ratio (more)

● The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)

● The Q Ratio, which is the total price of the market divided by its replacement cost (more)

● The relationship of the S&P Composite price to a regression trendline (more)

Peter Schiff

Peter Schiff, the CEO of Euro Pacific Capital, has been one of the leading voices in the financial community warning people about the crisis that is coming.

During a recent interview with Fox Business, Schiff stated that the massive financial collapse that we witnessed back in 2008 “wasn’t the real crash” and he boldly declared that the “real crash is coming”.

So is Schiff right?

We shall see.

Robert Wiedemer

Economist Robert Wiedemer warned people what was coming before the crash of 2008, and now he is warning that what is coming next is going to be even worse….

“The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation . . . starting in 2012.”

Harry Dent

Financial author Harry Dent believes that the stock market could fall by as much as 60 percent in the coming months. He is convinced that stocks are hugely overvalued right now….

“We have the greatest debt bubble in history. We will see a worldwide downturn. And when you are in this type of recessionary environment stocks should be trading at five to seven times earnings.”

So are these guys right?

We shall see.

But I do find it interesting that some of the biggest names in the financial world are currently making moves as if they also believe that a massive financial crisis is coming.

For example, as I have written about previously, George Soros has dumped all of his holdings in banking giants JP Morgan, Citigroup and Goldman Sachs.

Infamous billionaire hedge fund manager John Paulson, the man who made somewhere around 20 billion dollars betting against the U.S. housing market during the last financial crisis, is making massive bets against the euro right now.

So where are these financial titans putting their money?

According to the Telegraph, both of these men are pouring enormous amounts of money into gold….

There was also news last week in an SEC filing that both George Soros and John Paulson had increased their investment in SPDR Gold Trust, the world’s largest publicly traded physical gold exchange traded fund (ETF).

Mr Soros upped his stake in the ETF to 884,400 shares from 319,550 and Mr Paulson bought 4.53m shares, bringing his stake to 21.3m.

At the current price of about $156 a share, these are new investments of about $88m of Mr Soros’ cash and more than $700m from Mr Paulson’s funds. These are significant positions.

So why would they do this?

Why would they pour millions upon millions of dollars into gold?

Well, it would make perfect sense to put so much money into gold if a massive financial crisis was coming.

So is the next financial crisis imminent?

We will see.

Most “financial analysts” that appear in the mainstream media would laugh at the notion that a stock market crash is imminent.

Most of them would insist that everything is going to be perfectly fine for the foreseeable future.

In fact, most of them are convinced that quantitative easing is going to cause stocks to go even higher.

After all, isn’t quantitative easing supposed to be good for stocks?

Didn’t I write an article just last month that detailed how quantitative easing drives up stock prices?

Yes I did.

So how can I be writing now about the possibility of a stock market crash?

Aren’t I contradicting myself?

Not at all.

Let me explain.

The first two rounds of quantitative easing did indeed drive up stock prices. The same thing will happen under QE3, unless the effects of QE3 are overwhelmed by a major crisis.

For example, if we were to see a total collapse of the derivatives market it would render QE3 totally meaningless.

Estimates of the notional value of the worldwide derivatives market range from 600 trillion dollars all the way up to 1.5 quadrillion dollars. Nobody knows for sure how large the market for derivatives is, but everyone agrees that it is absolutely massive.

When we are talking about amounts that large, the $40 billion being pumped into the financial system each month by the Federal Reserve during QE3 would essentially be the equivalent of spitting into Niagara Falls. It would make no difference at all.

Most Americans do not understand what “derivatives” are, so they kind of tune out when people start talking about them.

But they are very important to understand.

Essentially, derivatives are “side bets”. When you buy a derivative, you are not investing in anything. You are just gambling that something will or will not happen.

I explained this more completely in a previous article entitled “The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System“….

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.

Five very large U.S. banks (including Goldman Sachs, JP Morgan and Bank of America) have combined exposure to derivatives in excess of 250 trillion dollars.

Keep in mind that U.S. GDP for 2011 was only about 15 trillion dollars.

So we are talking about an amount of money that is almost inconceivable.

That is why I cannot talk about derivatives enough. In fact, I apologize to my readers for not writing about them more.

If you want to understand the coming financial collapse, one of the keys is to understand derivatives. Our entire financial system has been transformed into a giant casino, and at some point all of this gambling is going to cause a horrible crash.

Do you remember the billions of dollars that JP Morgan announced that they lost a while back? Well, that was caused by derivatives trades gone bad. In fact, they are still not totally out of those trades and they are going to end up losing a whole lot more money than they originally anticipated.

Sadly, that was just the tip of the iceberg. Much, much worse is coming. When you hear of a major “derivatives crisis” in the news, you better run for cover because it is likely that the entire house of cards is about to start falling.

And don’t get too caught up in the exact timing of predictions.

If a stock market crash does not happen this month, don’t think that the storm has passed.

A major financial crisis is coming. It might not happen this week, this month or even this year, but without a doubt it is approaching.

And when it arrives it is going to be immensely painful and it is going to change all of our lives.

I hope you are ready for that.

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