The Next Great Depression

Beware – The Last 7 Times The Yield Curve Inverted The U.S. Economy Was Hit By A Recession

Seven times since the 1960s we have seen the yield curve invert, and in each of those seven instances an economic recession in the United States has followed.  Will this time be any different?  Today, the yield curve is the flattest that it has been in 11 years, and many analysts believe that we will see an inversion before the end of 2018.  If an inversion does take place, experts will be all over the mainstream media warning about “an imminent recession”.  Unfortunately, most Americans don’t understand these things, and when they hear terms like “yield curve” they tend to quickly tune out.  So in this article we are doing to define what a yield curve is, why it is so important, and why another U.S. recession may be rapidly approaching.

Let’s start with a really basic definition of a yield curve.  This one comes from Investopedia…

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is also used to predict changes in economic output and growth.

But most of the time, the experts that are talking about “the yield curve” are talking about the difference between interest rates on two-year and ten-year U.S. Treasury bonds.  The following comes from CNBC…

Start with a government issued two-year Treasury bond and a 10-year Treasury bond. They both pay interest. Typically, the 10-year pays a higher interest rate than the two-year to compensate buyers for the time difference. The difference between the interest rates in these two bonds is called the “spread”. If the spread is greater than zero, it means the two-year interest rate is lower than the 10-year, and that is normally the case.

A normal spread for these two bonds will take the appearance of a rising chart — an upward sloping yield curve. But when the spread goes negative, the yield curve “inverts” giving the appearance of a negative yield curve.

An “inverted yield curve” strikes fear among investors because it makes lending unprofitable.

As a USA Today article recently explained, our banks borrow at short-term rates and lend that money out at long-term rates…

Banks borrow at short-term rates, lend long term and profit from the difference. So the gap between long and short rates predicts future loan profitability. The bigger the gap, the more eager banks are to lend. The yield curve is a great predictive proxy for future lending.

Lending matters because loans allow for economically expansive activities. Sally deposits $10,000 at Community Banks-R-Us, which can keep $1,000 in reserve and lend out $9,000 to Jim’s Widgets. Jim uses that to grow his business. Hence lending can fuel growth. So, steeper yield curves spur economic activity. Flatter curves render less.

Our economy is fueled by debt, and an inverted yield curve tends to greatly discourage lending.  When banks cut back on lending, that has the effect of “choking off” the economy, and that usually leads to an economic contraction…

In this interest-rate environment, banks would lose money by making loans. Not necessarily on all loans, but it does make some loans unfeasible and some less profitable, forcing banks to cut back on making loans; thereby choking off the access to credit markets that businesses need to grow. When it becomes harder for businesses to borrow, many businesses cancel or delay projects and hiring. Weaker businesses go out of business because they lose access to credit, which in turn causes layoffs. When this happens, it takes about a year, on average, for the U.S. economy to slip into a recession.

The yield curve inverted prior to the recession of 2008, and lending started to get a lot tighter.  The resulting recession was a surprise to many Americans, but it should not have been.  It was simply the logical conclusion of basic economic forces at work.

In fact, an inverted yield curve has preceded every single recession since the 1960s, but Federal Reserve Chair Jerome Powell doesn’t seem concerned that it is about to happen again…

Asked whether “a dramatic change in the shape of the yield curve in any way influence the trajectory you guys are on with respect to normalizing interest rates and the balance sheet,” Powell stated “no,” adding that “what really matters is what the neutral rate of interest is.”

That’s the interest rate level that neither stimulates growth or slows it down — something that changes over time and which Fed officials try hard to gauge.

Interestingly, yield curves are about to “invert” in Japan, Germany and China too.

But it should be noted that there are some experts that insist that we are focusing on the wrong things.  One of those experts is Ken Fisher…

Almost everyone everywhere misses that the total global yield curve matters much more than America’s. And it’s doing just fine, thank you. Today’s global financial system is super interconnected. Behemoth banks can borrow in low-rate countries such as Germany, transfer funds here, hedge for currency risk and lend to Jim’s Widgets in mere seconds.

The global yield curve combines every developed country’s curve, weighted by the size of each economy. You get Britain’s 0.88 percent 10-year/three-month spread, Canada’s 0.69 percent gap, Germany’s 0.92 percent, France’s 1.23 percent, Japan’s 0.18 percent and the rest. Mash them all together based on GDP weighting, and that gets you a 0.9 percent global spread that’s bouncing along, going nowhere fast. Current U.S. yield curve fears miss this.

In the end, Fisher may be right.

Without a doubt, the global financial system is more interconnected today than ever before, and we may find a way to muddle through even if the yield curve inverts in the United States.

But I wouldn’t count on it.  An inverted yield curve has accurately predicted a recession every single time since the 1960s, and it is not likely to be wrong this time around either.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is publisher of The Most Important News and the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Nearly 40 Million Americans Are Still On Food Stamps

If the U.S. economy is “doing well”, then why are almost 40 million Americans still on food stamps?  That number is almost exactly where it was at the end of the last recession, and supposedly we have made so much progress since that time.  Of course any progress that has been made has been extremely uneven.  Earlier today, I wrote about how the gap between the rich and the poor in this country is the biggest that it has been since the 1920s.  For years, the Federal Reserve’s quantitative easing program pumped “hot money” into the financial markets, and that was an enormous blessing to the top 1 percent.  But meanwhile tens of millions of average families have continued to struggle and the middle class has continued to decline.  In the U.S. today, 66 percent of all of our jobs pay less than 20 dollars an hour, and close to 40 million Americans rely on the federal government to feed them every month.  The following comes from Bloomberg…

Judging by the number of Americans on food stamps, it doesn’t feel like one of the best job markets in almost a half century and the second-longest economic expansion on record.

Enrollment in the Supplemental Nutrition Assistance Program, better known as food stamps, fell to 39.6 million in April, the most recent government data show. That’s down from a record 47.8 million in 2012, but as a share of the population it’s just back to where it was as the economy emerged from the longest and deepest downturn since the Great Depression.

It is hard to argue that we are a “prosperous nation” with a number like that hanging over our heads.

Yes, some Americans have prospered individually in recent years, but many more have been deeply suffering.

In order for a family of four to qualify for food stamps, they must make less than $2,665 a month…

SNAP is available for households with incomes up to $2,665 per month for a family of four, or 130 percent of the federal poverty level. Recipients are also subject to asset and employment tests, and states can modify the program with federal permission. Households receiving SNAP had an average monthly gross income of $814 in 2016, and 20 percent had no income.

Could your family survive on just $2,665 a month?

Yet that is exactly where tens of millions of Americans find themselves today.

Yesterday I wrote about the “cesspool” that the once beautiful city of Portland, Oregon has become, and in this article I would like to share with you an excerpt from an article about the epidemic of squatters in the city of Detroit…

The Detroit Land Bank owns nearly 30,000 residential structures in the city, and with as many as 4,300 of them occupied — it’s a magnitude unlike any other place.

Squatters are a tricky problem: remove them and add to the city’s homeless population and its massive inventory of abandoned buildings. Let them stay, and the land bank is summoned often to investigate what some of its occupants may be up to: dog fighting, prostitution, drug dealing, overdoses, gambling, gun possession or running a chop shop.

Detroit police also are called regularly to land bank properties to investigate dead bodies — at least 50 homicides over the last four years.

This is what life is like for much of the country today.  The small sliver of our population that is “living the high life” is greatly outnumbered by people just barely surviving from month to month.

In fact, 102 million working age Americans do not have a job at this moment.  In case you were wondering, that number is substantially higher than it was at any point during the last recession.

If you can believe it, during the last recession we never even hit the 100 million mark.

There are so many parallels that could be made between the current state of affairs and America in the 1920s.  During the “roaring twenties”, everybody thought that the good times would last forever and that stock prices would go up indefinitely, and then one day we suddenly plunged into the worst financial crisis and the worst economic depression that the nation had ever seen.

And most people don’t even realize that we are far more vulnerable today than we have ever been in all of U.S. history.  I have been sharing numbers that back up that premise on an almost daily basis, and today let me share another example with you that comes from Mike Maloney…

  • Just prior to the dotcom collapse of 2000 and the hundreds of bankruptcies that followed, 9% of the S&P 1,500 were zombie companies.
  • Just prior to the 2008 financial crisis and the hundreds of bankruptcies that followed, 12% of the S&P 1,500 were zombie companies.
  • Right now, 15% of the S&P 1,500 are zombie companies.

Just like the “roaring twenties”, our current debt-fueled economic bubble will burst as well, and many believe that it will result in the worst economic crisis that America has ever known.

But as long as the music on Wall Street keeps playing, the optimists will continue to insist that “happy days are here again” and that the party can keep on going indefinitely.

Of course no party lasts forever, and eventually the moment will come when it is time to turn out the lights for good.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is publisher of The Most Important News and the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Ron Paul Warns That When The “Biggest Bubble In The History Of Mankind” Bursts It Could “Cut The Stock Market In Half”

When this bubble finally bursts, will we witness the biggest stock market crash in U.S. history?  “The bigger they come, the harder they fall” is a well used phrase, but I think that it is very appropriate in this case.  From a low of 6,443.27 on March 6th, 2009, we have seen the Dow nearly quadruple in value since the last financial crisis.  It has been a remarkable run, and it has lasted far longer than virtually any of the experts anticipated.  But what goes up must come down eventually.  This stock market bubble was almost entirely fueled by easy money from the Federal Reserve, and now that easy money has been cut off.  The insiders can see the handwriting on the wall and they are getting out of the market at a pace that we haven’t seen since 2008.  Could it be possible that the day of reckoning is finally at our door?

Of course we have been hearing warnings like this for a very long time.  In fact, I have been warning about a market crash for a very long time.  Just the other day, one of my readers insisted that if something was going to take place that “it would have happened by now”.  In the Internet age, we have been trained to have very short attention spans, but financial bubbles don’t care about the length of our attention spans.  They all inevitably come to a bitter end, but they don’t reach that end until they are good and ready.

And without a doubt we are on borrowed time, but meanwhile so many of us that are continually warning about what we are facing are getting a lot of heat for it.

For instance, when Ron Paul told CNBC that the stock market is “the biggest bubble in the history of mankind”, he was strongly criticized for it, but he was 100 percent correct…

This market is in the “biggest bubble in the history of mankind,” and when it bursts, it could cut the stock market in half, he told CNBC’s “Futures Now” Thursday.

If the Dow only plummets to about 12,000 or so during the coming downturn we will be exceedingly fortunate, because the truth is that stock prices need to fall by at least that much just to get us into the neighborhood where stock prices will start to make sense once again.

Today, sales to stock price ratios are hovering near all-time highs.

The same thing is true for earnings to stock price ratios and GDP to stock price ratios.

The only other times these ratios have been so elevated were just before major stock market crashes.

In the end, these ratios always, always, always return to their long-term averages eventually.

It may take many years, but it always happens.

So what factors led Ron Paul to make such an ominous prognostication?  The following comes from CNBC…

“The Congress spending and the Federal Reserve manipulation of monetary policy and interest rates — debt is too big, the current account is in bad shape, foreign debt is bad and it’s not going to change,” he said.

Paul isn’t alone in his critique. A number of politicians have voiced concern over ballooning deficits, including current House Speaker Paul Ryan, who raised a warning on the nation’s debt in 2012.

Of course it isn’t just the U.S. that is drowning in debt.

According to the Institute of International Finance, total global debt just hit a brand new record high of 247 trillion dollars…

Every quarter the Institute of International Finance publishes a new number of the total amount of global debt outstanding, and every quarter the result is the same: a new record high

Today was no exception: according to the IIF’s latest Global Debt Monitor, the amount of debt held in the world rose by the biggest amount in two years during the first quarter of 2018, when it grew by $8 trillion to hit a new all time high of $247 trillion, up from $238 trillion as of Dec. 31, 2017 and up by $30 trillion from the end of 2016.

Global debt has been rising much, much faster than global GDP, and at this point there is three times as much debt in the world as there is money.

There is no possible way that all of that debt can ever be paid off.  The only way that the party can continue is for debt to continue growing faster than global GDP, and everyone knows that is simply not sustainable in the long-term.

So an absolutely monumental “adjustment” is coming.  You can call it a “crash”, a “collapse” or anything else that you would like, but just as certainly as you are reading this article it is coming.

It is just a matter of time.

But for now, the talking heads on television continue to insist that everything is just fine and that the stock market still has more room to go up…

There’s still room for stock markets to rise and worries of an impending recession are premature, according to Berenberg Capital Markets’ chief economist.

“Even if profits peaked in (the first quarter of) 2018, which remains uncertain, history suggests the stock market has room to appreciate,” Mickey Levy, Berenberg’s chief Americas and Asia economist, said in a client note this week. He pointed to data demonstrating how in every economic expansion since the mid-1970s, the S&P 500 index went on to appreciate for a “significant period” after corporate profits peaked.

I wish that CNBC would have me on just one time so that I could refute some of these guys.

Since 1913, the Federal Reserve has gone through 18 rate hiking cycles.  In 18 out of 18 cases, those rate hiking cycles have ended in either a recession or a market crash.

Do you really think that the 19th time will be different?

10 years ago, virtually everyone thought that the “boom times” would last forever too.  But they didn’t.  Instead, we plunged into the greatest economic and financial crisis since the Great Depression, but at this point 2008 seems like ancient history to most people.

Yet again we have fooled ourselves into thinking that the good times will just continue to keep on rolling, and once again our society will be in for a very rude awakening when the inevitable crash finally arrives.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is publisher of The Most Important News and the author of four books including The Beginning Of The End and Living A Life That Really Matters.

An Absolutely Epic Escalation Of The Trade War Has Us On The Precipice Of A Cataclysmic Global Economic Crisis

If Americans really understood how much their standard of living was about to change, the streets of our major cities would be packed with protesters by tomorrow morning.  For the past several decades, China and other low cost exporters have been flooding our shores with hundreds of billions of dollars worth of cheap goods.  This is the only reason why you can go to Wal-Mart and buy a shirt for three bucks.  But since we buy far more stuff from the rest of the world than they buy from us, we ultimately have to go back to those other nations and beg them to lend our money back to us so that we can pay our bills.  This sick, twisted co-dependent relationship has enabled Americans to live a debt-fueled standard of living that is far beyond what we deserve, and now our rapidly escalating trade war with China is going to bring the party to a crashing halt.  On Tuesday, the Trump administration released a list of $200,000,000,000 worth of Chinese exports that will be hit with 10 percent tariffs.  Those tariffs are in addition to the 25 percent tariffs that had previously been announced on 50 billion dollars worth of Chinese exports.  These new tariffs are scheduled to go into effect on August 30th, and the Chinese have already pledged to retaliate.

In essence, our trade war with China has now “gone nuclear”, and this is going to have extremely serious implications for the U.S. economy.  The following is a short excerpt from the statement that U.S. Trade Representative Robert Lighthizer released about these new tariffs…

On Friday, in response to unfair Chinese practices, the United States began imposing tariffs of 25 percent on approximately $34 billion worth of Chinese imports. These tariffs will eventually cover up to $50 billion in Chinese imports as legal processes conclude. The products targeted by the tariffs are those that benefit from China’s industrial policy and forced technology transfer practices.

China has since retaliated against the United States by imposing tariffs on $34 billion in U.S. exports to China, and threatening tariffs on another $16 billion. It did this without any international legal basis or justification.

As a result of China’s retaliation and failure to change its practices, the President has ordered USTR to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports. This is an appropriate response under the authority of Section 301 to obtain the elimination of China’s harmful industrial policies.

Without a doubt, something needed to be done about China’s unfair trade practices.  The Chinese manipulate currency rates, they impose very high tariffs on U.S. goods, and they have been stealing our intellectual property for decades.

But it is very unlikely that anyone is going to “win” this trade war, and in the short-term all it is going to mean is a whole lot of economic and financial pain.

According to Politico, the new tariff list that was just released hits a very broad range of products…

The new tariff list broadens the types of goods caught up in the trade war by targeting items like seafood, minerals, chemicals, and personal care items, such as shampoo and soap. It also includes a number of consumer products such as handbags, luggage, gloves and paper.

Do you buy any of those things?

Well, expect to pay significantly more in the not too distant future.

When compiling this new list, the Trump administration specifically “took into account what could cause disruptions to China’s economy”.  The following comes from CNBC…

Some of the products on the list facing tariffs are from Made in China 2025 sectors, the official said. Made in China 2025 is a strategic plan to make China a leader in key global industries, including technology.

When compiling the list of goods, the U.S. Trade Representative took into account what could cause disruptions to China’s economy.

So what do you think that the Chinese are going to do in response?

Yes, they are going to look at measures that will “cause disruptions to America’s economy”.

The Chinese are a very proud people, and they aren’t stupid.  They know where our pain points are, and they will not be afraid to go for the jugular.

China cannot match this round of U.S. tariffs dollar for dollar, because China only imports approximately 130 billion dollars worth of U.S. goods a year.

But China could decide to cut off some or all agricultural imports from the United States, and that would be absolutely devastating to many farming states.  In fact, many farming states are already feeling substantial pain from the tariffs that China has already imposed…

“Agricultural states, I think, are being hit the hardest,” said Rodney Ludema, a Georgetown University professor and former senior international economist in the White House Council of Economic Advisers under President Barack Obama. The tariffs spare states “that are heavily service-dependent, like New York.”

In terms of value, some 38 percent of products on the tariff list are agricultural, including soybeans, sorghum, tobacco and meat, said Chad Bown, a senior fellow at the Peterson Institute for International Economics. That’s bad news for farm-belt states, primarily in the Midwest.

In addition, China could decide to “go nuclear” by cutting off U.S. investment in China, by restricting our access to rare earth elements, or by dumping our debt.

The only reason why we have even been able to get to 21 trillion dollars in debt is because nations such as China have been buying our debt at ultra-low interest rates that are way below the real rate of inflation.

If China quit buying our debt and started dumping their current holdings, interest rates would start skyrocketing and we would be in a world of hurt almost immediately.

We don’t have the kind of leverage that some people seem to think that we have.  And there are many prominent experts that are warning that we are heading for catastrophic consequences.  For example, just consider what David Stockman recently told CNBC…

The United States is heading to a “massive trade war” because President Donald Trump “doesn’t know what he’s doing,” said former Reagan budget director David Stockman.

“We have an absurd policy — dangerous, stupid. The worst that I’ve seen since my whole career started in 1970 under [President Richard] Nixon, and he did some crazy things,” Stockman said Tuesday on CNBC’s “Closing Bell.”

The financial markets have reacted very strongly to these latest developments.  As soon as the new tariffs were announced, Asian stocks began to drop and Dow futures plummeted about 300 points from the closing highs.

Unfortunately, most ordinary Americans simply do not grasp the importance of what is happening, because we have never seen anything like this in modern American history.  The two largest economies on the entire planet are now in a state of economic conflict, and there is no way that this is going to end well.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is publisher of The Most Important News and the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Experts Warn Of Chaos For The U.S. Economy As China Declares That “The Biggest Trade War In Economic History” Has Begun

Nothing is going to be the same after this.  On Friday, the United States hit China with 34 billion dollars in tariffs, and China immediately responded with similar tariffs.  If it stopped there, this trade war between the United States and China would not be catastrophic for the global economy.  But it isn’t going to stop there.  Donald Trump is already talking about hitting China with an additional 500 billion dollars in tariffs, which would essentially cover pretty much everything that China exports to the U.S. in a typical year.  The Chinese have accused Trump of starting “the biggest trade war in economic history”, and they are pledging to fight for as long as it takes.  As I discussed yesterday, the only way that one side is going to “win” this trade war is if the other side completely backs down, and that simply is not going to happen.  So there is going to be economic pain, and that pain is likely to intensify for as long as this trade war persists.  U.S. businesses that will be affected by foreign tariffs are already cutting back production and laying off workers, and CNN is reporting that 1,300 products have suddenly become more expensive for U.S. consumers.  There will be nowhere that anyone can hide from this trade war, and it will ultimately affect every single man, woman and child in the entire country.

Most Americans are not paying any attention to these ongoing developments, but the Chinese sure are.

Earlier today, the Chinese Ministry of Commerce called the U.S. tariffs “typical trade bullying”, and it warned that this trade war could trigger “global market turmoil”…

“This act is typical trade bullying,” the spokesperson said, before adding: “It seriously jeopardizes the global industrial chain … Hinders the pace of global economic recovery, triggers global market turmoil and will affect more innocent multinational companies, general companies and consumers.”

China’s primary English language newspaper was even more direct with their criticism…

The government-run English language China Daily newspaper said: “The Trump administration is behaving like a gang of hoodlums with its shakedown of other countries, particularly China.”

Here in the United States, the start of a major trade war with China really doesn’t seem like that big of a deal if you listen to the mainstream media.  Most people just seem to think that things will continue to go well for our country no matter how many stupid decisions we make.  It is almost as if a lot of Americans no longer understand that extremely reckless acts can have exceedingly severe consequences.

One man that understands what is happening is the founder of the largest hedge fund on the entire planet.  On Friday, Ray Dalio posted the following ominous message on Twitter…

“Today is the first day of the war with China.”

Please note that he did not say “the trade war with China”.

The truth is that trade wars can often lead to shooting wars, and we need to hope that cooler heads will prevail.

But for now, it looks like things will continue to escalate…

But Trump has said his administration will respond to retaliation from Beijing with much bigger waves of tariffs, raising the prospect of worsening tit-for-tat reprisals. On Thursday, he suggested the possibility of tariffs on almost $500 billion more of Chinese goods.

He described the potential escalation to reporters aboard Air Force One: “Thirty-four, and then you have another 16 in two weeks and then, as you know, we have 200 billion in abeyance and then after the 200 billion we have 300 billion in abeyance. OK?” Trump said. “So we have 50 plus 200 plus almost 300.”

If we hit China with 500 billion dollars in tariffs, there is no telling what the Chinese might do.

As I discussed the other day, the Chinese could start dumping our debt or cut off our access to rare earth elements.

Either move would be absolutely catastrophic for the United States.

We don’t know how this trade war will ultimately end, but as Reuters has pointed out, “it’s going to get ugly”…

The U.S.-China trade war will be fought in the trenches, and it’s going to get ugly. The first round of tariffs hits on Friday, and U.S. President Donald Trump says they might come to cover more than $500 billion of goods. Exporters will feel the pain first, but uncertainty will also dampen investment, impede research and twist reform. It marks a moment of mourning for those who hoped the world’s two largest economies could work things out.

And guess what?

Russia just joined the trade war against the United States as well.  The following comes from Zero Hedge…

Whether this is a coordinated response is unclear – and certainly on a much smaller scale – but Bloomberg reports that Russian Prime Minister Dmitry Medvedev signed a decree this morning imposing higher tariffs on U.S. products in retaliation for U.S. duties on metals imports, according to Economy Ministry statement.

Reuters reports that Russia’s additional duties will apply to imports of fiber optics, equipment for road construction, oil and gas industry, metal processing and mining, according to an economy ministry statement.

These tariffs are going to have very real consequences for U.S. businesses and U.S. workers.

Even though this trade war just started, some firms are already being hit very hard.  Here is one example from USA Today…

Trans-Matic, of Holland, Michigan, shapes metal, mostly into auto parts, as well as components for door locks. It has paid higher steel costs for several months as U.S. steelmakers raised prices in anticipation of higher American tariffs on metal imports, company Chief Financial Officer Steve Patterson says.

Trans-Matic has passed along the price hikes to its auto-supplier customers, but some have scaled back orders, reducing Trans-Matic’s revenue in that key sector by 5 to 10 percent, Patterson says. As a result, the company is giving its 300 U.S. employees about five hours a week in overtime instead of their usual 10.

For other firms, layoffs have already become a reality.  Just ask the largest nail maker in the United States…

In Poplar Bluff, Missouri, Mid-Continent Nail, the nation’s largest nail maker, laid off 60 workers last month. Sales plunged 70 percent after Trump placed a 25 percent tariff on steel from Mexico and Canada. When the company boosted its prices, customers defected. Now, Mid-Continent is strongly considering a second round of 200 layoffs, company spokeswoman Elizabeth Heaton says, and all 500 employees could be axed by Labor Day.

The longer this trade war lasts, the worse things are going to get.

Fighting a trade war just with China would have been bad enough.  But instead, we have decided that we are going to take on pretty much the entire world simultaneously, and I don’t know if I have the words to describe how painful that is going to be for all of us.

Many Americans seem to believe that the U.S. economy is an unsinkable ship, and at this moment we are heading directly for an absolutely enormous iceberg.

Let us hope that someone is able to pull a rabbit out of a hat, because right now things are looking quite bleak.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Things Just Went Nuclear In Our Trade War With China, And A Giant Shockwave Is About To Hit The U.S. Economy

It is difficult to find the words to describe just how serious America’s trade war with China is becoming.  As you will see below, the two largest economies on the entire planet are on a self-destructive course that almost seems irreversible at this point.  The only way that this trade war is going to come to a rapid conclusion is if one side is willing to totally submit and accept an extremely bitter and humiliating defeat on the global stage, and that is not likely to happen.  So in the short-term, and probably beyond that, we are going to experience a tremendous amount of economic pain.  In fact, if one wanted to create a recipe for economic disaster, it would be hard to beat having the Federal Reserve dramatically raise interest rates at the exact same time that the U.S. government is starting trade wars with all of the other major economic powers simultaneously.  Unless something drastically changes in the very near future, there is no way that the U.S. is going to be able to get through this without experiencing severe pain.

Many had hoped that President Trump would settle down after the initial salvos in this new trade war, but instead on Sunday evening we learned that he has decided to go nuclear.  The following comes from CNBC…

President Donald Trump plans to bar many Chinese companies from investing in U.S. tech and to block additional technology exports to China, The Wall Street Journal reported on Sunday evening, citing people familiar with the matter.

The two measures are set to be announced by the end of the week, and are intended to counter Beijing’s Made in China 2025 — a Chinese initiative to be a global leader in technology.

A report from Reuters included some additional very important details.  Apparently this new plan would ban any firm that has 25 percent Chinese ownership or greater from investing in any U.S. companies that have “industrially significant technology”…

The U.S. Treasury Department is drafting curbs that would block firms with at least 25 percent Chinese ownership from buying U.S. companies with “industrially significant technology,” a government official briefed on the matter said on Sunday.

So we are not just talking about “tech firms”.  The Trump administration is greatly concerned about Chinese theft of our technology, and without a doubt this has been rampant, and so the goal is to keep the Chinese from investing in any more of our companies that have important technology.

And theoretically that could include nearly all of them.

For years, the Chinese have been pouring massive amounts of money into the United States and have been investing very heavily in our industries.  Now that is going to come to an almost full stop, and the consequences are going to be enormous.

Yes, we certainly need to stand up to China, but it sure is going to be nearly impossible to try to replace all of that Chinese investment from other sources.

And of course this latest announcement comes less than two weeks before the U.S. and China are scheduled to begin imposing massive tariffs on one another.  The following comes from Bloomberg…

On July 6, the U.S. is set to impose tariffs on $34 billion in Chinese goods. Tariffs on an additional $16 billion in Chinese products will go into effect after a public review period is completed. When Beijing vowed to retaliate on the same amount of U.S. goods and under the same timeline, Trump directed his U.S. Trade Representative to identify an additional $200 billion worth of Chinese goods that could be subject to a 10-percent tariff.

Donald Trump is playing hardball with China and is betting that they will fold.

I can already tell you that the Chinese will not fold.

So we are going to suffer some pretty severe consequences, and Finian Cunningham detailed some of these in a recent article.  First of all, Chinese tariffs on our agricultural products will likely hit our farmers really hard…

If China goes ahead with threats to impose counter-tariffs on US agricultural products, such as soybeans, corn and meat, the impact on farm states like Iowa, Idaho and Illinois across the mid-west will be severe. Voters from these states were crucial to Trump getting elected to the White House in 2016. By taking the US into a trade war with China, Trump will end up hitting his own political base hardest.

Secondly, U.S. consumers will begin seeing significantly higher prices for consumer goods at our major retailers…

Another repercussion is higher retail prices for consumer goods like televisions and footwear imported from China, if Trump slaps on punitive tariffs. That will inflate consumer prices and crimp household budgets, especially among the lower-income population, who again tended to vote for Trump. Net result is that the fragile American economy would likely tank from cash-strapped consumers, who are already living on the edge.

Thirdly, if the Chinese decide to start dumping U.S. Treasury bonds that could create a new crisis on Wall Street very rapidly…

Yet, in this accounting, the real pain hasn’t even begun. China’s ultimate trade weapon is its massive holdings of US Treasury bonds. With nearly $1.2 trillion-worth in holdings of US federal debt, China is by far the world’s largest creditor for Washington. US-based news outlet Bloomberg calls it Beijing’s “nuclear option”.

Let me throw in another factor that I mentioned in a previous article.  China has a virtual monopoly on the production of rare earth elements, and if they totally cut us off they could almost instantly cripple a number of our high tech industries.  We have plenty of rare earths here in the United States, but we have not developed our mining or production capabilities to anywhere near a sufficient level for our needs.  This was a ghastly national security error, and in the short-term it could mean an absolutely immense amount of pain.

On top of everything else, China appears to be gearing up for a currency war.  It is already being said that the Yuan is being “weaponized”, and if the value of the Yuan continues to fall precipitously it is going to cause a tremendous amount of chaos globally.

So keep an eye on China and on the Chinese financial markets, because big trouble is already brewing…

A slew of negative factors — from a trade war with the U.S. to the risk of a credit crunch — has weighed on China’s financial markets in recent weeks. The benchmark Shanghai stock index is on the brink of a bear market after tumbling almost 20 percent from its recent high, while analysts have started cutting their forecasts for the nation’s currency. Investors have been piling into the relative safety of government debt instead.

“The yuan is faced with a double whammy –- escalating trade tensions are hurting sentiment and the easier monetary policy is also pressuring the currency,” said Gao Qi, a currency strategist at Scotiabank in Singapore. “Traders will step up shorting the yuan in the offshore market, but we won’t likely see massive fund outflows considering the capital curbs in place.”

As one surveys the current state of the global economic chessboard, it is easy to see that we are just two or three moves away from a major global economic crisis.

Just like in 2008, that could mean dramatically falling stock prices, surging corporate bankruptcies and millions of Americans losing their jobs.

And this time around, we could be facing much higher prices and a greatly reduced standard of living.

We are way overdue for the next great economic crisis, and now the powers that be seem absolutely determined to bring it on.

Anyone that is optimistic about the global economy in light of these most recent developments is simply not being rational, because we have never seen storm clouds this big on the horizon in all of modern American history.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is the author of four books including The Beginning Of The End and Living A Life That Really Matters.

18 Times The Fed Has Gone Through A Rate Hiking Cycle, And 18 Times It Has Caused A Huge Stock Market Decline And/Or A Recession

Since 1913, the Federal Reserve has engaged in 18 distinct interest rate hiking campaigns, and in every single one of those instances the end result was a large stock market decline, a recession, or both.  Now we are in the 19th rate tightening cycle since 1913, but many of the experts are insisting that things will somehow be different this time.  They assure us that the U.S. economy will continue to grow and that stock prices will continue to soar.  Of course the truth is that if something happens 18 times in a row, there is a really, really good chance that it will happen on the 19th time too.  For years I have been trying to get people to understand that our country has been on an endless roller coaster ride ever since the Fed was created back in 1913.  Things can seem quite pleasant when the economy is on one of the upswings, but the downswings can be extremely painful.

It was economist Lance Roberts that pointed out this correlation between rate hiking cycles and economic troubles.  When I came across his most recent article, it really got my attention…

A sustained interest rate hiking campaign, as undertaken by the Fed, has always resulted in negative stock market returns.

Always. Not usually, not might-be-correlated-to. Always. As in, 18 out of 18 times. Until now. When we’ve had the single highest percentage increase in history (93.33% peak to trough, so far).

To support his claims, he posted this chart…

So far, however, there hasn’t been a huge stock market drop or a recession during this rate hiking cycle.

Has something changed?

Is the 19th time going to be fundamentally different?

Roberts believes that the unprecedented intervention by the Fed that we have seen in recent years that has fueled corporate buybacks has successfully “delayed the inevitable stock market correction”…

So what gives? Of course, it’s the Fed. Having kept interest rates near zero for years on end and having filled corporate coffers with super cheap debt used to fuel market-bubble-sustaining corporate buybacks, the Fed has delayed the inevitable stock market correction.

I definitely agree with Roberts – a colossal stock market correction is inevitably coming.

And the warning signs are all around us.  As I have discussed so many times before, junk bonds are often an early warning sign for a major financial crisis, and it is extremely interesting to note that it looks like Deutsche Bank is planning a “fire sale” of their energy junk bonds.  The following analysis comes from Zero Hedge…

Bloomberg reports that Deutsche is planning to sell the loan book as a whole and has marketed it to North American and European peers, said one of the people. The portfolio is expected to sell for par value, said the people, who asked not to be identified because they weren’t authorized to speak publicly; good luck with that!

The bank’s energy business is expected to wrap up on June 30, one of the people said. The bank has been an active lender in the energy space in the past year, participating in the financing of companies including Peabody Energy Corp. and Coronado Australian Holdings Pty., according to data compiled by Bloomberg.

So to summarize: Moody’s is warning that when the economy weakens we will see an avalanche of defaults like we haven’t seen before; Corporate debt-to-GDP and investor risk appetite is reminding a lot of veterans of previous credit peaks; and now the most desperate bank in the world is offering its whole junk energy debt book in a firesale… just as high yield issuance starts to slump.

Wow.

To me, that is one of the strongest indications yet that things are about to take a major turn for the worse for the global financial system.

And even former Federal Reserve chair Ben Bernanke is sounding quite pessimistic these days.  The following comes from a Bloomberg article entitled “Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020”…

The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,” Bernanke said, referring to the hapless character in the Road Runner cartoon series.

When you read that quote, alarm bells should have been going off in your head.

If his forecast is accurate, that means that the U.S. economy’s Wile E. Coyote moment will come just in time for the 2020 election…

The timing of Bernanke’s possible slowdown would line up badly for Trump, who has called the current economy the best ever and faces reelection in late-2020.

Wouldn’t that be convenient for the elite?

U.S. voters tend to be extremely influenced by the performance of the economy, and so a major economic downturn would not bode well for Trump’s chances.

Similarly, if a major crisis erupts during the second half of this year, it will probably mean big problems for Republicans in November.  Timing is everything in politics, and when the next crisis comes most voters won’t even consider the fact that it had been building for a very, very long time.  All they will care about is who is in office at the time.

But for the moment, most of the “experts” are assuring us that things will be rosy for the foreseeable future.  For example, a couple of prominent analysts over at Goldman Sachs are saying that tech stock prices are likely to continue to rise…

“Unlike the technology mania of the 1990s, most of this success can be explained by strong fundamentals, revenues and earnings rather than speculation about the future,” strategists Peter Oppenheimer and Guillaume Jaisson wrote in a note. “Given that valuations in aggregate are not very stretched, we do not expect the dominant size and contribution of returns in stock markets to end any time soon.”

And the optimists will continue to be right up until the moment that the bubble finally bursts.

Whenever the Federal Reserve starts raising rates, it always results in a bad ending.

This time will be no different, and anyone that is trying to convince you otherwise is just being delusional.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Why Is The Mainstream Media Suddenly Buzzing About “Another Global Financial Crisis”?

All of a sudden, the mainstream media is starting to sound a lot like The Economic Collapse Blog.  Throughout the Obama years, the mainstream media in the United States always seemed extremely hesitant to suggest that difficult economic times may be ahead, but now talk of “another global financial crisis” seems to be all over the place.  Is this because they truly believe that one is coming, or is it just another angle that they can use to attack Donald Trump?  In any event, it is undeniable that evidence is mounting that big trouble could be right around the corner.  European financial markets are already in meltdown mode, a major international trade war has just erupted, the worst “retail apocalypse” in modern U.S. history is accelerating, and our debt problems continue to grow with each passing day.  Normally the mainstream news is much more subdued than I am about all of this stuff, and so I was very surprised to see reporter James Pethokoukis come out with an article entitled “Here comes another global financial crisis”…

Investors are increasingly worried that an escalating political crisis in Italy could lead to a populist, euroskeptic government taking power. As a result, there’s rising uncertainty about whether the country might eventually abandon the euro currency zone or default on its giant debt pile. To make things worse, the Trump administration continues to toy with the idea of a trade war with Europe and China. That would be the last thing the global economy would need if the Italian situation deteriorates further. Debt crises and trade wars are a toxic combination.

And remember, this comes just days after George Soros ominously declared that “we may be heading into another major financial crisis.”

So what has changed?

Certainly, what is happening in Italy is starting to get everyone’s attention.  Here is more from James Pethokoukis…

Italy is the eurozone’s third-largest economy, 10 times the size of Greece’s. It also has the world’s third-largest sovereign debt market, some $2.7 trillion. Only Greece has a higher public debt-to-GDP ratio in the eurozone. My AEI colleague Desmond Lachman, a former International Monetary Fund official and Wall Street emerging market strategist, argues that Italy’s troubles have the potential to roil the global economy much like the 2008 Lehman bankruptcy. (The 10th anniversary of “Free Market Day” is coming!) America wouldn’t be spared.

And it isn’t just Italy.  Financial institutions all over Europe are deeply troubled, and that includes the largest bank in Germany.

On Thursday, Deutsche Bank’s stock price crashed to an all-time low.  This caused such a stir that the bank was actually forced to issue a statement about it.

I have been writing about the troubles at Deutsche Bank for a very long time.  When they finally go down for good, it is going to create a “Lehman Brothers moment” for the entire planet.  This week, there were two key revelations that led to the dramatic stock price decline.  The following comes from Wolf Richter…

This came after leaked double-whammy revelations the morning: One reported by the Financial Times, that the FDIC had put Deutsche Bank’s US operations on its infamous “Problem Bank List”; and the other one, reported by the Wall Street Journal, that the Fed, as main bank regulator, had walloped the bank last year with a “troubled condition” designation, one of the lowest rankings on its five-level scoring system.

Meanwhile, the other major factor that has investors starting to panic is the beginning of an international trade war.

It takes a great deal to get the Canadians upset, but they have already retaliated against the tariffs that the Trump administration just imposed on them…

Canada will retaliate against new U.S. tariffs by imposing its own trade barriers on U.S. steel, aluminum and other products, Canadian Foreign Minister Chrystia Freeland said Thursday.

Freeland said Canada plans to slap dollar-for-dollar tariffs on the U.S. The Nafta partner’s proposed import taxes would also cover whiskey, orange juice and other food products alongside the steel and aluminum tariffs.

And it is expected that we will see retaliation from the Chinese, the Europeans and Mexico shortly.  All of this is causing a great deal of consternation on Capitol Hill, and it could mean big trouble for Republicans in November.

At the same time all of this is going on, this week we learned that 13 of Bank of America’s 19 “bear market indicators” have now been triggered.  The following summary comes from Zero Hedge…

Specifically, the following indicators have now been triggered, with the latest 2 bolded:

  • Bear markets have always been preceded by the Fed hiking rates by at least 75bp from the cycle trough
  • Minimum returns in the last 12m of a bull market have been 11%
  • Minimum returns in the last 24m of a bull market have been 30%
  • 9m price return (top decile) vs. S&P 500 equalweight index
  • Consensus projected long-term growth (top decile) vs. S&P 500 equalweight index
  • We have yet to see a bear market when the 100 level had not been breached in the prior 24m
  • Similarly, we have yet to see a bear market when the 20 level had not been breached in the prior 6m
  • Companies beating on both EPS & Sales outperformed the S&P 500 by less than 1ppt within the last three quarters
  • While not always a major change, aggregate growth expectations tend to rise within the last 18m of bull markets
  • Trailing PE + CPI y/y% >20 in the prior 12m
  • Based on 1- and 3-month estimate revision trends; see footnote for more detail
  • Trailing PE + CPI (y/y%) >20 within the last 12m
  • In the preceding 12m of all but one (1961) bull market peak, the market has pulled back by 5%+ at least once

And here are the 6 indicators that have yet to ring the proverbial bell.

  • Each of the last three bear markets has started when a net positive % of banks were tightening C&I lending standards
  • Companies with S&P Quality ratings of B or lower outperform stocks rated B+ or higher
  • Forward 12m earnings yield (top decile) vs. S&P 500 equalweight index
  • A contrarian measure of sell side equity optimism; sell signal trigged in the prior 6m
  • A contrarian measure of buy side optimism
  • Does not always lead or catch every peak and all but one inversion (1970) has coincided with a bear market within 24m

Like so many others, I’ve got a bad feeling about all of this.

And so does best-selling author James Rickards.  He seems quite convinced that we are heading for the largest market collapse that anyone has ever seen…

Each crisis is bigger than the one before. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.

This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008.

Today, systemic risk is more dangerous than ever. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.

It has been 10 years since 2008, and conditions are definitely ripe for another great financial crisis.

Stay frosty my friends, because it looks like events are going to accelerate greatly in the months ahead.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is the author of four books including The Beginning Of The End and Living A Life That Really Matters.

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