Financial Situation

War Is Coming And The Global Financial Situation Is A Lot Worse Than You May Think

city skyscrapers clock time stopwatch seconds - public domainOn the surface, things seem pretty quiet in mid-July 2016.  The biggest news stories are about the speculation surrounding Donald Trump’s choice of running mate, the stock market in the U.S. keeps setting new all-time record highs, and the media seems completely obsessed with Taylor Swift’s love life.  But underneath the surface, it is a very different story.  As you will see below, the conditions for a “perfect storm” are coming together very rapidly, and the rest of 2016 promises to be much more chaotic than what we have seen so far.

Let’s start with China.  On Tuesday, an international tribunal in the Hague ruled against China’s territorial claims in the South China Sea.  The Chinese government announced ahead of time that they do not recognize the jurisdiction of the tribunal, and they have absolutely no intention of abiding by the ruling.  In fact, China is becoming even more defiant in the aftermath of this ruling.  We aren’t hearing much about it in the U.S. media, but according to international news reports Chinese president Xi Jinping has ordered the People’s Liberation Army “to prepare for combat” with the United States if the Obama administration presses China to abandon the islands that they are currently occupying in the South China Sea…

“Chinese president Xi Jinping has reportedly ordered the People’s Liberation Army to prepare for combat,” reports Arirang.com. “U.S.-based Boxun News said Tuesday that the instruction was given in case the United States takes provocative action in the waters once the ruling is made.”

A U.S. aircraft carrier and fighter jets were already sent to the region in anticipation of the ruling, with the Chinese Navy also carrying out exercises near the disputed Paracel islands.

Last October, China said it was “not frightened” to fight a war with the U.S. following an incident where the guided-missile destroyer USS Lassen violated the 12-nautical mile zone China claims around Subi and Mischief reefs in the Spratly archipelago.

Meanwhile, the relationship between the United States and Russia continues to go from bad to worse.  The installation of a missile defense system in Romania is just the latest incident that has the Russians absolutely steaming, and during a public appearance on June 17th Russian President Vladimir Putin tried to get western reporters to understand that the world is being pulled toward war…

“We know year by year what’s going to happen, and they know that we know. It’s only you that they tell tall tales to, and you buy it, and spread it to the citizens of your countries. You people in turn do not feel a sense of the impending danger – this is what worries me. How do you not understand that the world is being pulled in an irreversible direction? While they pretend that nothing is going on. I don’t know how to get through to you anymore.”

And of course the Russians have been feverishly updating and modernizing their military in preparation for a potential future conflict with the United States.  Just today we learned that the Russians are working to develop a hypersonic strategic bomber that is going to have the capability of striking targets with nuclear warheads from outer space.

Unfortunately, the Obama administration does not feel a similar sense of urgency.  The size of our strategic nuclear arsenal has declined by about 95 percent since the peak of the Cold War, and many of our installations are still actually using rotary phones and the kind of 8 inch floppy disks for computers that were widely used back in the 1970s.

But I don’t expect war with China or Russia to erupt by the end of 2016.  Of much more immediate concern is what is going on in the Middle East.  The situation in Syria continues to deteriorate, but it is Israel that could soon be the center of attention.

Back in March, the Wall Street Journal reported that the Obama administration wanted to revive the peace process in the Middle East before Obama left office, and that a UN Security Council resolution that would divide the land of Israel and set the parameters for a Palestinian state was still definitely on the table…

The White House is working on plans for reviving long-stalled Middle East negotiations before President Barack Obama leaves office, including a possible United Nations Security Council resolution that would outline steps toward a deal between the Israelis and Palestinians, according to senior U.S. officials.

And just this week, the Washington Post reported that there were renewed “rumblings” about just such a resolution…

Israel is facing a restive European Union, which is backing a French initiative that seeks to outline a future peace deal by year’s end that would probably include a call for the withdrawal of Israeli troops and the creation of a Palestinian state. There are also rumblings that the U.N. Security Council might again hear resolutions about the conflict.

For years, Barack Obama has stressed the need for a Palestinian state, and now that his second term is drawing to a close he certainly realizes that this is his last chance to take action at the United Nations.  If he is going to pull the trigger and support a UN resolution formally establishing a Palestinian state, it will almost certainly happen before the election in November.  So over the coming months we will be watching these developments very carefully.

And it is interesting to note that there is an organization called “Americans For Peace Now” that is collecting signatures and strongly urging Obama to support a UN resolution of this nature.  The following comes from their official website…

Now is the time for real leadership that can revive and re-accredit the two-state solution as President Obama enters his final months in office. And he can do this – he can lay the groundwork for a two-state agreement in the future by supporting an Israeli-Palestinian two-state resolution in the United Nations Security Council.

Such a resolution would restore U.S. leadership in the Israeli-Palestinian arena. It would preserve the now-foundering two-state outcome. And it would be a gift to the next president, leaving her or him constructive options for consequential actions in the Israeli-Palestinian arena, in place of the ever-worsening, politically stalemated status quo there is today.

Sadly, a UN resolution that divides the land of Israel and that formally establishes a Palestinian state would not bring lasting peace.  Instead, it would be the biggest mistake of the Obama era, and it would set the stage for a major war between Israel and her neighbors.  This is something that I discussed during a recent televised appearance down at Morningside that you can watch right here…

At the same time all of this is going on, the global economic crisis continues to escalate.  Even though U.S. financial markets are in great shape at the moment, the same cannot be said for much of the rest of the world.

Just look at the country that is hosting the Olympics this summer.  Brazil is mired in the worst economic downturn that it has seen since the Great Depression of the 1930s, and Rio de Janeiro’s governor has declared “a state of financial emergency“.

Next door, the Venezuelan economy has completely collapsed, and some people have become so desperate that they are actually hunting cats, dogs and pigeons for food.

Elsewhere, China is experiencing the worst economic downturn that they have seen in decades, the Japanese are still trying to find the end of their “lost decade”, and the banking crisis in Europe is getting worse with each passing month.

In quite a few articles recently, I have discussed the ongoing implosion of the biggest and most important bank in Germany.  But I am certainly not the only one warning about this.  In one of his recent articles, Simon Black also commented on the turmoil at “the most dangerous bank in Europe”…

Well-capitalized banks are supposed to have double-digit capital levels while making low risk investments.

Deutsche Bank, on the other hand, has a capital level of less that 3% (just like Lehman), and an incredibly risky asset base that boasts notional derivatives exposure of more than $70 trillion, roughly the size of world GDP.

But of course Deutsche Bank isn’t getting a lot of attention from the mainstream media right now because of the stunning meltdown of banks in Italy, Spain and Greece.  Here is more from Simon Black…

Italian banks are sitting on over 360 billion euros in bad loans right now and are in desperate need of a massive bailout.

IMF calculations show that Italian banks’ capital levels are among the lowest in the world, just ahead of Bangladesh.

And this doesn’t even scratch the surface of problems in other banking jurisdictions.

Spanish banks have been scrambling to raise billions in capital to cover persistent losses that still haven’t healed from the last crisis.

In Greece, over 35% of all loans in the banking system are classified as “non-performing”.

Even though U.S. stocks are doing well for the moment, the truth is that trillions of dollars of stock market wealth has been lost globally since this time last year.  If you are not familiar with what has been going on around the rest of the planet, this may come as a surprise to you.  During my recent appearance at Morningside, I shared some very startling charts which show how dramatically global markets have shifted over the past 12 months.  You can view the segment in which I shared these charts right here…

I would really like it if the rest of 2016 was as quiet and peaceful as the past couple of days have been.

Unfortunately, I don’t believe that is going to be the case at all.

The storm clouds are rising and the conditions for a “perfect storm” are brewing.  Sadly, most people are not going to understand what is happening until it is far too late.

80 Percent Of Americans Say That They Are Not Better Off Than They Were Four Years Ago

Are you better off today than you were four years ago?  If not, then you are just like most other Americans.  According to a CBS News/New York Times poll that was released a few days ago, 80 percent of Americans say that their financial situation is not “better today” than it was four years ago.  But if you turn on the television and listen to what the “pundits” are saying, you would be tempted to think that we were in the midst of a robust economic recovery.  You would be tempted to think that the U.S. economy is in great shape and that we are heading for a really bright future.  But the fact that the stock market is soaring does not mean much to most Americans.  In fact, most Americans couldn’t care less that the Dow is well above 13,000 and that the NASDAQ is above 3,000.  What most Americans care about is having a job and being able to provide for their families.  If you haven’t paid the mortgage in three months or if you don’t have enough money to take your daughter to go see the doctor it really is not going to matter to you how well the boys and girls over on Wall Street are doing.  Right now most American families are doing worse than they were doing four years ago, and no amount of media hype is going to change that fact.

Yes, the stock market is doing really well for the moment, but the truth is that more than 50 percent of all stocks and bonds are owned by just 1 percent of the U.S. population.

Good for them.  It looks like the trillions of dollars that the Federal Reserve poured into the big Wall Street banks is really paying off nicely for the financial community.

Meanwhile, much of the rest of the country is deeply suffering.

It was recently reported that 1.5 million American families live on less than two dollars a day (before counting government benefits).

That is horrifying.

According to the U.S. Census Bureau, the percentage of Americans living in “extreme poverty” is now sitting at an all-time high.

All across this country poverty is exploding.  Food banks are experiencing more demand than ever before and those offering free healthcare are absolutely swamped.

And every single measure of government dependence has gone way up since Barack Obama entered the White House.

For example, since Barack Obama became president the number of Americans on food stamps has gone up by 45 percent.

Just think about that.

At this point the federal government is helping to feed an all-time record 46.5 million Americans every month.

Oh yeah, times are good.

According to the U.S. Census Bureau, 49 percent of all Americans live in a home that receives direct monetary benefits from the federal government.

That is much higher than it has been historically.

For example, back in 1983 less than a third of all Americans lived in a home that received direct monetary benefits from the federal government.

The big problem is that there are simply not enough jobs for everyone.

Listening to the media, you would be tempted to think that the U.S. economy is now pumping out huge numbers of good jobs.

But that is simply not the case.

Right now there are 5.6 million fewer jobs than there were when the last recession began back in late 2007.

So where are the millions of jobs you promised us Obama?

The federal government is trying to convince us that the unemployment rate is going down, but that is not really true.

The key is to look at the percentage of working age Americans that actually have jobs.  During the last recession that percentage fell dramatically as you can see from the chart below.  After every other recession since World War II the employment to population ratio has always bounced back.  But it has not happened this time.  Instead, the employment to population ratio has remained between 58 and 59 percent since the end of 2009….

We have not had a jobs recovery.  Hopefully we will have one before the next recession hits, but we are running out of time for that.

Tonight there are millions upon millions of hard working Americans that are staring at their television screens and wondering why they can’t find good jobs.  The pretty people on television are telling them that the employment situation is getting much better but they can’t find work no matter how hard they try.  It is a cruel joke on them.

When Barack Obama entered the White House, the number of “long-term unemployed workers” in the United States was approximately 2.6 million.  Today, that number is sitting at 5.6 million.

Thanks for the improvement Obama.

Meanwhile, the average duration of unemployment continues to hover near a record high.  Just look at the chart posted below.  Does this look like a “jobs recovery” to you?….

But of course Obama and those that support him want to make things sound like they are getting better.  They want people to run out and vote for him again in November.

If things are going well for you right now, be thankful, and also remember the millions upon millions of Americans out there that are deeply hurting in this economy.

If you gathered together all of the workers that are “officially” unemployed in the United States at this point into one nation, they would constitute the 68th largest country in the entire world.  It would be a nation larger than Greece or Portugal.

That is a lot of people.

Obama promised us that the Wall Street bailouts would make everything better.  He promised us that if we poured gigantic mountains of money into Wall Street that it would end up helping “Main Street”.

Well, the last time I looked Goldman Sachs was doing just fine.

So where is the help for Main Street?

In the United States today, the wealthiest one percent of all Americans have a greater net worth than the bottom 90 percent combined.

How much wealthier do they have to get before they start creating more jobs for the rest of us?

Obama (like most of our politicians) is a complete fraud when it comes to the economy.  He is all saddle and no horse.  He talks a good game but he doesn’t have any game.

As Wall Street has recovered, the rest of the country has actually been in decline.  Median household income in the United States is down 7.8 percent since December 2007 after adjusting for inflation.  Millions of American families are reaching the breaking point and millions of other families have already reached it.

Incomes have been declining but the cost of living has not.

For example, health insurance costs have risen by 23 percent since Barack Obama became president.

Has your paycheck increased by 23 percent?

The average price of a gallon of gasoline in the United States has increased by more than 90 percent since Barack Obama became president.

Has your paycheck increased by 90 percent?

Millions of American families have lost their homes while Obama has been president and millions more will soon lose their homes.  At this point there are more than 6 million mortgages in the United States that are overdue.

It is a horrible, horrible feeling to know that you can’t pay your mortgage and that you will soon lose your home and your family will be put out on the street.

None of us would ever want to end up in that situation.

And the housing market sure has not shown any signs of recovery under Barack Obama.

In January, U.S. home prices were the lowest that they have been in more than a decade.

Weren’t home prices and home sales supposed to be turning around by now?

Under Barack Obama, new home sales in the United States set a brand new all-time record low in 2009, they set a brand new all-time record low again in 2010, and they set a brand new all-time record low once again during 2011.

That trend is not going in the right direction.

Of course Barack Obama is not solely responsible for the performance of the U.S. economy.  Congress should share part of the blame as well, and the Federal Reserve is more responsible for our economic performance than anyone else is.

But one area where Barack Obama has had a huge impact is in the area of government spending.

While Barack Obama has been president, the U.S. national debt has risen from 10.6 trillion to 15.5 trillion.

Thanks Obama.

During the first three years of the Obama administration, the U.S. government has accumulated more debt than it did between 1776 and 1995.

So is Obama planning a change of course?

Of course not.

At this point, our national debt is increasing by about 150 million dollars every single hour.

So should we be thanking Obama for stealing 150 million dollars from our children and our grandchildren every hour?

Should we be thanking Obama for ruining our future?

I think not.

But you know what?

According to the CBS News/New York Times poll mentioned above, about half of America would actually vote for Obama if the next presidential election was held today.

That alone is a clear sign that this country is in a massive amount of trouble.

The truth is that the leaders we elect are an accurate reflection of who we are as a country.

And when you look at the collection of misfits in Washington D.C. right now, that does not say a lot about the character of this nation.

So where does America go from here?

That is up to you America.

Be Honest – The European Debt Deal Was Really A Greek Debt Default

Once the euphoria of the initial announcement faded and as people have begun to closely examine the details of the European debt deal, they have started to realize that this “debt deal” is really just a “managed” Greek debt default.  Let’s be honest – this deal is not going to solve anything.  All it does is buy Greece a few months.  Meanwhile, it is going to make the financial collapse of other nations in Europe even more likely.  Anyone that believes that the financial situation in Europe is better now than it was last week simply does not understand what is going on.  Bond yields are going to go through the roof and investors are going to start to panic.  The European Central Bank is going to have an extremely difficult time trying to keep a lid on this thing.  Instead of being a solution, the European debt deal has brought us several steps closer to a complete financial meltdown in Europe.

The big message that Europe is sending to investors is that when individual nations get into debt trouble they will be allowed to default and investors will be forced to take huge haircuts.

As this reality starts to dawn on investors, they are going to start demanding much higher returns on European bonds.

In fact, we are already starting to see this happen.

The yield on two year Spanish bonds increased by more than 6 percent today.

The yield on two year Italian bonds increased by more than 7 percent today.

So what are nations such as Italy, Spain, Portugal and Ireland going to do when it costs them much more to borrow money?

The finances of those nations could go from bad to worse very, very quickly.

When that happens, who will be the next to come asking for a haircut?

After all, if Greece was able to get a 50% haircut out of private investors, then why shouldn’t Italy or Spain or Portugal ask for one as well?

According to Reuters, German Chancellor Angela Merkel is already trying to warn other members of the EU not to ask for a haircut….

Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings.

“In Europe it must be prevented that others come seeking a haircut,” she said.

But investors are not stupid.  Greece was allowed to default.  If Italy or Spain or Portugal gets into serious trouble it is likely that they will be allowed to default too.

Investors like to feel safe.  They want to feel as though their investments are secure.  This Greek debt deal is a huge red flag which signals to global financial markets that there is no longer safety in European bonds.

So what is coming next?

Hold on to your seatbelts, because things are about to get interesting.

Around the globe, a lot of analysts are realizing that this European debt deal was not good news at all.  The following is a sampling of comments from prominent voices in the financial community….

*Economist Sony Kapoor: “The fact that a deal has been agreed, any deal, impresses people. Until they start de-constructing it and parts start unravelling.”

*Economist Ken Rogoff: “It feels at its root to me like more of the same, where they’ve figured how to buy a couple of months”

*Neil MacKinnon of VTB Capital: “The best we can say is that the EU have engineered a temporary reprieve”

*Graham Summers of Phoenix Capital Research:

First off, let’s call this for what it is: a default on the part of Greece. Moreover it’s a default that isn’t big enough as a 50% haircut on private debt holders only lowers Greece’s total debt level by 22% or so.

Secondly, even after the haircut, Greece still has Debt to GDP levels north of 130%. And it’s expected to bring these levels to 120% by 2020.

And the IMF is giving Greece another $137 billion in loans.

So… Greece defaults… but gets $137 billion in new money (roughly what the default will wipe out) and is expected to still be insolvent in 2020.

*Max Keiser: “There will be another bailout required within six months – I guarantee it.”

The people that are really getting messed over by this deal are the private investors in Greek debt.  Not only are they being forced to take a brutal 50% haircut, they are also being told that their credit default swaps are not going to pay out since this is a “voluntary” haircut.

This is completely and totally ridiculous as an article posted on Finance Addict pointed out…

We now know that private holders of Greek bonds will be “invited” (seriously–this was the word used in the EU summit statement) to take a write-down of 50%–halving the face value of the estimated $224 billion in bonds that they hold. This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020. The big question–apart from how many investors they will get to go along with this, given that they couldn’t reach their target of 90% investor participation when the write-down was only going to be 21%–is whether this will trigger a CDS pay-out.

That this is even up for discussion is mind-boggling. These credit default swaps are meant to be an insurance policy in case Greece doesn’t pay the agreed upon interest and return the full principal within the agreed timeframe. If they don’t pay out when bondholders are taking a 50% hit then what’s the point?

European politicians may believe that they have “solved” something, but the truth is that what they have really done is they have pulled the rug out from under the European financial system.

Faith in European debt is going to rapidly disappear and the euro is likely to fall like a rock in the months ahead.

The financial crisis in Europe is just getting started.  2012 looks like it is going to be an extremely painful year.

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