Financial

Anyone That Believes That Collapsing Oil Prices Are Good For The Economy Is Crazy

December 8, 2014December 8, 2014 by Michael

Are much lower oil prices good news for the U.S. economy? Only if you like collapsing capital expenditures, rising unemployment and a potential financial implosion on Wall Street. Yes, lower gasoline prices are good news for the middle class. I certainly would rather pay two dollars for a gallon of gas than four dollars. But in order to have money to fill up your vehicle you have got to have an income first. And since the last recession, the energy sector has been the number one creator of good jobs in the U.S. economy by far. Barack Obama loves to stand up and take credit for the fact that the employment picture in this country has been improving slightly, but without the energy industry boom, unemployment would be through the roof. And now that the “energy boom” is rapidly becoming an “energy bust”, what will happen to the struggling U.S. economy as we head into 2015?

At the start of this article I mentioned that much lower oil prices would result in “collapsing capital expenditures”.

If you do not know what a “capital expenditure” is, the following is a definition that comes from Investopedia…

“Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.”

Needless to say, this kind of spending is very good for an economy. It builds infrastructure, it creates jobs and it is an investment in the future.

In recent years, energy companies have been pouring massive amounts of money into capital expenditures. In fact, the energy sector currently accounts for about a third of all capital expenditures in the United States according to Deutsche Bank…

US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total. We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex.

These companies make these investments because they believe that there are big profits to be made.

Unfortunately, when the price of oil crashes those investments become unprofitable and capital expenditures start getting slashed almost immediately.

For example, the budget for 2015 at ConocoPhillips has already been reduced by 20 percent…

ConocoPhillips is one of the bigger shale players. And its decision to slash its budget for next year by 20% is raising eyebrows. The company said the new target reflects lower spending on major projects as well as “unconventional plays.” Despite the expectation that others will follow, it doesn’t mean U.S. shale oil production is dead. Just don’t expect a surge in spending like in recent years.

And Reuters is reporting that the number of new well permits for the industry as a whole plunged by an astounding 40 percent during the month of November…

Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.

If the price of oil stays this low or continues dropping, this is just the beginning.

Meanwhile, the flow of good jobs that this industry has been producing is also likely to start drying up.

According to the Perryman Group, the energy sector currently supports 9.3 million permanent jobs in this country…

According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence. The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation.

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

And these are good paying jobs. They aren’t eight dollar part-time jobs down at your local big box retailer. These are jobs that comfortably support middle class families. These are precisely the kinds of jobs that we cannot afford to lose.

In recent years, there has been a noticeable economic difference between areas of the country where energy is being produced and where energy is not being produced.

Since December 2007, a total of 1.36 million jobs have been gained in shale oil states.

Meanwhile, a total of 424,000 jobs have been lost in non-shale oil states.

So what happens now that the shale oil boom is turning into a bust?

That is a very good question.

Even more ominous is what an oil price collapse could mean for our financial system.

The last time the price of oil declined by more than 40 dollars in less than six months, there was a financial meltdown on Wall Street and we experienced the deepest recession that we have seen since the days of the Great Depression.

And now many fear that this collapse in the price of oil could trigger another financial panic.

According to Citigroup, the energy sector now accounts for 17 percent of the high yield bond market.

J.P. Morgan says that it is actually 18 percent.

In any event, the reality of the matter is that the health of these “junk bonds” is absolutely critical to our financial system. And according to Deutsche Bank, if these bonds start defaulting it could “trigger a broader high-yield market default cycle”…

Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.

“A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialized,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.

If the price of oil stays at this level or continues to go down, it is inevitable that we will start to see some of these junk bonds go bad.

In fact, one Motley Fool article recently stated that one industry analyst believes that up to 40 percent of all energy junk bonds could eventually go into default…

The junk bonds, or noninvestment-rated bonds, of energy companies are also beginning to see heavy selling as investors start to worry that drillers could one day default on these bonds. Those defaults could get so bad, according to one analyst, that up to 40% of all energy junk bonds go into default over the next few years if oil prices don’t recover.

That would be a total nightmare for Wall Street.

And of course bond defaults would only be part of the equation. As I wrote about the other day, a crash in junk bonds is almost always followed by a significant stock market correction.

In addition, plunging oil prices could end up absolutely destroying the banks that are holding enormous amounts of energy derivatives. This is something that I recently covered in this article and this article.

As you read this, there are five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives. Of course only a small fraction of that total exposure is made up of energy derivatives, but a small fraction of 40 trillion dollars is still a massive amount of money.

These derivatives trades are largely unregulated, and even Forbes admits that they are likely to be at the heart of the coming financial collapse…

No one understands the derivative risk positions of the Too Big To Fail Banks, JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs or Morgan Stanley. There is presently no way to measure the risks involved in the leverage, quantity of collateral, or stability of counter-parties for these major institutions. To me personally they are big black holes capable of potential wrack and ruin. Without access to confidential internal data about these risky derivative positions the regulators cannot react in a timely and measured fashion to block the threat to financial stability, according to a National Bureau of Economic Research study.

So do we have any hope?

Yes, if oil prices start going back up, much of what you just read about can be averted.

Unfortunately, that does not seem likely any time soon. Even though U.S. energy companies are cutting back on capital expenditures, most of them are still actually projecting an increase in production for 2015. Here is one example from Bloomberg…

Continental, the biggest holder of drilling rights in the Bakken, last month said 2015 output will grow between 23 percent and 29 percent even after shelving plans to allocate more money to exploration.

Higher levels of production will just drive the price of oil even lower.

At this point, Morgan Stanley is saying that the price of oil could plummet as low as $43 a barrel next year.

If that happens, it would be absolutely catastrophic to the most important industry in the United States.

In turn, that would be absolutely catastrophic for the economy as a whole.

So don’t let anyone tell you that much lower oil prices are “good” for the economy.

That is just a bunch of nonsense.

Guess What Happened The Last Time The Price Of Oil Crashed Like This?…

November 30, 2014November 30, 2014 by Michael

There has only been one other time in history when the price of oil has crashed by more than 40 dollars in less than 6 months. The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months. Well, now it is happening again, but this time the stakes are even higher. When the price of oil falls dramatically, that is a sign that economic activity is slowing down. It can also have a tremendously destabilizing affect on financial markets. As you will read about below, energy companies now account for approximately 20 percent of the junk bond market. And a junk bond implosion is usually a signal that a major stock market crash is on the way. So if you are looking for a “canary in the coal mine”, keep your eye on the performance of energy junk bonds. If they begin to collapse, that is a sign that all hell is about to break loose on Wall Street.

It would be difficult to overstate the importance of the shale oil boom to the U.S. economy. Thanks to this boom, the United States has become the largest oil producer on the entire planet.

Yes, the U.S. now actually produces more oil than either Saudi Arabia or Russia. This “revolution” has resulted in the creation of millions of jobs since the last recession, and it has been one of the key factors that has kept the percentage of Americans that are employed fairly stable.

Unfortunately, the shale oil boom is coming to an abrupt end. As a recent Vox article discussed, OPEC has essentially declared a price war on U.S. shale oil producers…

For all intents and purposes, OPEC is now engaged in a “price war” with the United States. What that means is that it’s very cheap to pump oil out of places like Saudi Arabia and Kuwait. But it’s more expensive to extract oil from shale formations in places like Texas and North Dakota. So as the price of oil keeps falling, some US producers may become unprofitable and go out of business. The result? Oil prices will stabilize and OPEC maintains its market share.

If the price of oil stays at this level or continues falling, we will see a significant number of U.S. shale oil companies go out of business and large numbers of jobs will be lost. The Saudis know how to play hardball, and they are absolutely ruthless. In fact, we have seen this kind of scenario happen before…

Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the US shale oil sector.” Even legendary oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.” This has happened once before. By the mid-1980’s, as oil output from Alaska’s North Slope and the North Sea came on line (combined production of around 5-6 million barrels a day), OPEC set off a price war to compete for market share. As a result, the price of oil sank from around $40 to just under $10 a barrel by 1986.

But the energy sector has been one of the only bright spots for the U.S. economy in recent years. If this sector starts collapsing, it is going to have a dramatic negative impact on our economic outlook. For example, just consider the following numbers from a recent Business Insider article…

Specifically, if prices get too low, then energy companies won’t be able to cover the cost of production in the US. This spending by energy companies, also known as capital expenditures, is responsible for a lot of jobs.

“The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending,” Goldman Sachs’ Amanda Sneider writes.

Even more troubling is what this could mean for the financial markets.

As I mentioned above, energy companies now account for close to 20 percent of the entire junk bond market. As those companies start to fail and those bonds start to go bad, that is going to hit our major banks really hard…

Everyone could suffer if the collapse triggers a wave of defaults through the high-yield debt market, and in turn, hits stocks. The first to fall: the banks that were last hit by the housing crisis.

Why could that happen?

Well, energy companies make up anywhere from 15 to 20 percent of all U.S. junk debt, according to various sources.

It would be hard to overstate the seriousness of what the markets could potentially be facing.

One analyst summed it up to CNBC this way…

“This is the one thing I’ve seen over and over again,” said Larry McDonald, head of U.S strategy at Newedge USA’s macro group. “When high yield underperforms equity, a major credit event occurs. It’s the canary in the coal mine.“

The last time junk bonds collapsed, a major stock market crash followed fairly rapidly.

And those that were hardest hit were the big Wall Street banks…

During the last high-yield collapse, which centered around debt tied to the housing sector, Citigroup lost 63 percent of its value in the following 60 days, Kensho shows. Bank of America was cut in half.

I understand that some of this information is too technical for a lot of people, but the bottom line is this…

Watch junk bonds. When they start crashing it is a sign that a major stock market collapse is right at the door.

At this point, even the mainstream media is warning about this. Just consider the following excerpt from a recent CNN article…

That swing away from junk bonds often happens shortly before stock market downturns.

“High yield does provide useful sell signals to equity investors,” Barclays analysts concluded in a recent report.

Barclays combed through the past dozen years of data. The warning signal they found is a 30% or greater increase in the spread between Treasuries and junk bonds before a dip.

If you have been waiting for the next major financial collapse, what you have just read in this article indicates that it is now closer than it has ever been.

Over the coming weeks, keep your eye on the price of oil, keep your eye on the junk bond market and keep your eye on the big banks.

Trouble is brewing, and nobody is quite sure exactly what comes next.

Did We Just Witness The Last Great Black Friday Celebration Of American Materialism?

November 28, 2014November 28, 2014 by Michael

Americans are going to spend more than 600 billion dollars this Christmas season, and on Friday we got to see our fellow citizens fight each other like rabid animals over foreign-made flat screen televisions and Barbie dolls. As disgusting as this behavior is to many of us, there may soon come a time when we will all fondly remember these days. Most Americans are completely unaware of what is currently happening in the financial world, but right now there are deeply troubling signs that we could be on the verge of another major global financial collapse. If the next great economic downturn does strike in 2015, that could mean that we may have just witnessed the last great Black Friday celebration of American materialism. As you read this, stock prices are approximately double the value that they should be, margin debt is hovering near all-time record highs, and the “too big to fail” banks are being far more reckless than they were just prior to the last major stock market implosion. So many of the exact same patterns that we witnessed back in 2007 and 2008 are repeating right now, and as you will see below, this includes a horrifying crash in the price of oil. Anyone with half a brain should be able to see the slow-motion financial train wreck that is unfolding right before our eyes.

Every year, it has been my tradition to write an article about the mini-riots that erupt in retail stores all around the country on Black Friday. This year things were a bit calmer because so many stores opened up on Thanksgiving itself, but there was still plenty of chaos. For example, in the video posted below you can see women viciously fighting one another over discounted lingerie and underwear…

But instead of launching into another diatribe about how we are committing national economic suicide by buying hundreds of billions of dollars of foreign-made goods with money that we do not have, I want to focus on what is coming next.

You see, I believe that in the not too distant future many of us will be wishing for the days when the debt-fueled U.S. economy was healthy enough for people to be wrestling with one another on the floor over good deals in our retail establishments.

The next great financial crash (which many have been anticipating for years) is rapidly approaching. So many of the same things that happened last time are happening again. As I noted above, this includes a crash in the price of oil.

In the months prior to the last stock market collapse, the price of oil began plummeting dramatically in the summer of 2008. This was an “early warning signal” that something was deeply amiss in the financial world…

Many people assume that a lower price for oil is good for the economy, but the exact opposite is actually true. The oil industry has become absolutely critical to the U.S. and Canadian economies. And in recent years, the “shale oil boom” has been one of the only bright spots for the United States. If the shale oil industry starts to fail because of lower prices, a lot of the boom areas all over the nation are going to go bust really quickly and a lot of the financial institutions that were backing these projects are going to feel an immense amount of pain.

Unfortunately for us, the “shale oil revolution” simply does not work at 80 dollars a barrel.

And it certainly does not work at 70 dollars a barrel.

As I write this, U.S. crude is sitting at about 66 dollars a barrel due to OPEC’s recent decision to not cut output.

That is the lowest price for U.S. crude since September 2009.

So just like we saw during the summer of 2008, crude oil prices are collapsing once again. The chart below comes from the Federal Reserve, but it is a few days out of date. Now that the price of crude is down to about 66 dollars, you have to imagine the price actually going below the bottom of this chart…

Needless to say, this price collapse is having a huge impact on the stock prices of oil companies. The following information about what happened in the markets on Friday comes from Business Insider…

Here were some of the biggest losers on Friday:

BP (BP), down 5%

Royal Dutch Shell (RDS.A), down 6%

Total (TOT), down 5%

Statoil (STO), down 14%

Exxon Mobil (XOM), down 5%

ConocoPhillips (COP), down 9%

Marathon Oil (MRO), down 13%

Occidental Petroleum (OXY), down 7%

Anadarko Petroleum (APC), down 14%

Linn Energy (LINE), down 13%

Whiting Petroleum (WLL), down 28%

Oasis Petroleum (OAS), down 32%

Kodiak Oil & Gas (KOG), down 28%

And this list goes on.

But this could just be the beginning of the oil price declines.

The most powerful oil official in Russia believes that the price of oil could fall below $60 next year…

Russia’s most powerful oil official Igor Sechin said in an interview with an Austrian newspaper that oil prices could fall below $60 by mid-way through next year.

Sechin, chief executive of Rosneft, Russia’s largest oil producer, also said U.S. oil production would fall after 2025 and that an oil market council should be created to monitor prices, the same day the OPEC cartel met in Vienna and left its output targets unchanged.

“We expect that a fall in the price to $60 and below is possible, but only during the first half, or rather by the end of the first half (of next year),” Sechin told the Die Presse newspaper.

And one oil industry analyst just told CNBC that he believes that the price of oil could ultimately plunge as low as $35 a barrel…

“When you look at the second half of 2015, that’s when you see oil beginning to dwarf demand by about a million, a million and a half barrels a day,” he said. “Thirty-five dollars is a possibility if they don’t get an agreement next spring because that’s when the oil really starts to build and you can have a billion barrels of oil with really no place to put it.”

This comes at a time when there are already a whole host of signs that the global economy is slowing down. Three of the ten largest economies on the planet have already slipped into recession, and the economic nightmare over in Europe just continues to get even worse. In fact, we just learned that the unemployment rate in Italy has shot above 13 percent for the first time ever recorded.

In addition, it is important to remember that the “real economy” in the United States is in far worse shape than it was just prior to the last financial crash. Just consider these numbers…

-In the United States today, the number of payday lending locations is greater than the number of McDonald’s and the number of Starbucks.

-One recent survey found that about 22 percent of all Americans have had to turn to a church food panty for assistance.

-This year, almost one out of every five households in the United States celebrated Thanksgiving on food stamps.

-The rate of government dependence in America is at an all-time high and approximately 60 percent of U.S. households get more in transfer payments from the government than they pay in taxes.

-According to a report that was just released by the National Center on Family Homelessness, the number of homeless children in the U.S. has soared to a new all-time record high of 2.5 million.

If things are this bad now, what are they going to look like after the next great financial crash?

And without a doubt, the next crash is coming. Hopefully we have at least a couple more months of relative stability, but many experts are now urgently warning that time is quickly running out.

By this time next year, Black Friday may look a whole lot different than it does today.

Are You Better Off This Thanksgiving Than You Were Last Thanksgiving?

November 25, 2014November 21, 2014 by Michael

Are you in better shape financially than you were last Thanksgiving? If so, you should consider yourself to be very fortunate because most Americans are not. As you chow down on turkey, stuffing and cranberry sauce this Thursday, please remember that there are millions of Americans that simply cannot afford to eat such a meal. According to a shocking new report that was just released by the National Center on Family Homelessness, the number of homeless children in the U.S. has reached a new all-time high of 2.5 million. And right now one out of every seven Americans rely on food banks to put food on the table. Yes, life is very good at the moment for Americans at the top end of the income spectrum. The stock market has been soaring and sales of homes worth at last a million dollars are up 16 percent so far this year. But most Americans live in a very different world. The percentage of Americans that are employed is about the same as it was during the depths of the last recession, the quality of our jobs continues to go down, the rate of homeownership in America has fallen for seven years in a row, and the cost of living is rising much faster than paychecks are. As a result, the middle class is smaller this Thanksgiving than it was last Thanksgiving, and most Americans have seen their standards of living go down over the past year.

In 2014, there are tens of millions of Americans that are anonymously leading lives of quiet desperation. They are desperately trying to hold on even though things just keep getting worse. For example, just consider the plight of 49-year-old Darrell Eberhardt. Once upon a time, his job in a Chevy factory paid him $18.50 an hour, but now he only makes $10.50 an hour and he knows that he probably would not be able to make as much in a new job if he decided to leave…

For nearly 20 years, Darrell Eberhardt worked in an Ohio factory putting together wheelchairs, earning $18.50 an hour, enough to gain a toehold in the middle class and feel respected at work.

He is still working with his hands, assembling seats for Chevrolet Cruze cars at the Camaco auto parts factory in Lorain, Ohio, but now he makes $10.50 an hour and is barely hanging on. “I’d like to earn more,” said Mr. Eberhardt, who is 49 and went back to school a few years ago to earn an associate’s degree. “But the chances of finding something like I used to have are slim to none.”

Of course you can’t support a family on $10.50 an hour.

You can barely support one person on $10.50 an hour.

But there are many men out there that would absolutely love to switch positions with Darrell Eberhardt. At this point, one out of every six men in their prime working years (25 to 54) does not have a job. That is an absolutely crazy number.

And of course just because you “have a job” does not mean that things are going well. The number of Americans that are “working part-time involuntarily” has risen by over 50 percent since the beginning of the last recession. There are millions of hard working Americans that would love to get a full-time job if they could land one. But these days “decent jobs” are in short supply.

For example, CNN recently profiled the story of college graduate Meghan Brachle…

Meghan would love to be a music teacher or play full-time in an orchestra. She studied music at Loyola University in New Orleans and plays the flute.

Instead, Meghan works a slew of part-time jobs and receives no benefits.

She is a cashier at Whole Foods, a substitute teacher, a flute tutor and an administrative assistant at a non-profit.

Even with all of her hard work, Brachle and her husband often really struggle to pay the bills…

With inconsistent hours, Meghan monthly income fluctuates between $1,000 and $3,000. Even with her husband’s teaching salary, the couple sometimes struggles to cover the $3,600 of monthly expenses they have.

“It’s very stressful,” Meghan, a college graduate, says. “I think about all the job applications I’ve turned in and all the interviews I’ve been on and all the other people who are in the same situation, looking for those same [full-time] jobs. It’s frustrating.”

Sadly, a lot of these part-time employers know that their employees desperately need these jobs and are using that leverage to treat them very poorly.

For example, it is being reported that any KMart employees that do not show up for work on Thanksgiving will be automatically fired.

What kind of nonsense is that?

And around the country at Wal-Mart stores, food drives are being held for “needy employees“.

So why wouldn’t Wal-Mart just pay their workers enough so that they could afford to take care of themselves in the first place?

Most people don’t realize this, but approximately one out of every four part-time workers in America is currently living below the poverty line. Many of them are working as hard as they can and still can’t make enough to take care of themselves.

Meanwhile, our paychecks are getting stretched further and further with each passing month.

When you don’t make much money, every dollar is precious. And when food prices go up substantially, it can be very painful. Unfortunately, that is precisely what is happening right now…

-From September to October, the price of a pound of Turkey rose from $1.58 to $1.66. That represents a 5.2 percent price increase in just one month.

-The price of a pound of ground beef has just risen to a brand new record high of $4.15 a pound, and more price increases are on the way. The U.S. Department of Agriculture is projecting that U.S. beef production will drop by another 1 billion pounds next year due to a variety of factors including the horrific multi-year drought out west.

-The entire planet is bracing for a huge chocolate shortage, and this threatens to push the price of chocolate beyond the reach of many American families…

Start hoarding those Hershey’s Kisses and stockpile your Snickers: The world could soon experience a chocolate shortage.

Mars Inc. and Barry Callebaut, two of the world’s largest chocolate makers, say that’s the path we’re headed down. They cite a perfect storm of factors: Less cocoa is being produced as more and more people are devouring chocolate.

In 2013, consumers ate about 70,000 metric tons more cocoa than was produced, The Washington Post reports, and that deficit could go up to 1 million metric tons by 2020. The Ivory Coast and Ghana produce more than 70 percent of the world’s cacao beans, and both countries are experiencing dry weather that limits growth. To make things worse, a fungal disease called frosty pod has destroyed 30 to 40 percent of global cocoa production.

As a result of all of the things that I have just discussed above, more Americans than ever are being forced to turn to the government for assistance. Today, the number of Americans getting a check from the government each month is at an all-time high, and at this point Americans collectively get more money from the government than they pay in taxes. For much, much more on this, please see my recent article entitled “21 Facts That Prove That Dependence On The Government Is Out Of Control In America“.

So if things are going well for you this Thanksgiving, you should be truly thankful.

For most of the country, things just continue to get even worse. And if the next major wave of our economic crisis arrives next year like many are projecting, this may just be the beginning of our economic pain.

3 Of The 10 Largest Economies In The World Have Already Fallen Into Recession – Is The U.S. Next?

November 25, 2014November 18, 2014 by Michael

Are you waiting for the next major wave of the global economic collapse to strike? Well, you might want to start paying attention again. Three of the ten largest economies on the planet have already fallen into recession, and there are very serious warning signs coming from several other global economic powerhouses. Things are already so bad that British Prime Minister David Cameron is comparing the current state of affairs to the horrific financial crisis of 2008. In an article for the Guardian that was published on Monday, he delivered the following sobering warning: “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.” For the leader of the nation with the 6th largest economy in the world to make such a statement is more than a little bit concerning.

So why is Cameron freaking out?

Well, just consider what is going on in Japan. The economy of Japan is the 3rd largest on the entire planet, and it is a total basket case at this point. Many believe that the Japanese will be on the leading edge of the next great global economic crisis, and that is why it is so alarming that Japan has just dipped into recession again for the fourth time in six years…

Japan’s economy unexpectedly fell into recession in the third quarter, a painful slump that called into question efforts by Prime Minister Shinzo Abe to pull the country out of nearly two decades of deflation.

The second consecutive quarterly decline in gross domestic product could upend Japan’s political landscape. Mr. Abe is considering dissolving Parliament and calling fresh elections, people close to him say, and Monday’s economic report is seen as critical to his decision, which is widely expected to come this week.

Of course Japan is far from alone.

Brazil has the 7th largest economy on the globe, and it has already been in recession for quite a few months.

And the problems that the national oil company is currently experiencing certainly are not helping matters…

In the past five days, 23 powerful Brazilians have been arrested, with even more warrants still outstanding.

The country’s stock market has become a whipsaw, and its currency, the real, has hit a nine-year low.

All of this is due to a far-reaching corruption scandal at one massive company, Petrobras.

In the last month the company’s stock has fallen by 35%.

The 9th largest economy in the world, Italy, has also fallen into recession…

Italian GDP dropped another 0.1% in the third quarter, as expected.

That’s following a 0.2% drop in Q2 and another 0.1% decline in Q1, capping nine months of recession for Europe’s third-largest economy.

Like Japan, there is no easy way out for Italy. A rapidly aging population coupled with a debt to GDP ratio of more than 132 percent is a toxic combination. Italy needs to find a way to be productive once again, and that does not happen overnight.

Meanwhile, much of the rest of Europe is currently mired in depression-like conditions. The official unemployment numbers in some of the larger nations on the continent are absolutely eye-popping. The following list of unemployment figures comes from one of my previous articles…

France: 10.2%

Poland: 11.5%

Italy: 12.6%

Portugal: 13.1%

Spain: 23.6%

Greece: 26.4%

Are you starting to get the picture?

The world is facing some real economic problems.

Another traditionally strong economic power that is suddenly dealing with adversity is Israel.

In fact, the economy of Israel is shrinking for the first time since 2009…

Israel’s economy contracted for the first time in more than five years in the third quarter, as growth was hit by the effects of a war with Islamist militants in Gaza.

Gross domestic product fell 0.4 percent in the July-September period, the Central Bureau of Statistics said on Sunday. It was the first quarterly decline since a 0.2 percent drop in the first three months of 2009, at the outset of the global financial crisis.

And needless to say, U.S. economic sanctions have hit Russia pretty hard.

The rouble has been plummeting like a rock, and the Russian government is preparing for a “catastrophic” decline in oil prices…

President Vladimir Putin said Russia’s economy, battered by sanctions and a collapsing currency, faces a potential “catastrophic” slump in oil prices.

Such a scenario is “entirely possible, and we admit it,” Putin told the state-run Tass news service before attending this weekend’s Group of 20 summit in Brisbane, Australia, according to a transcript e-mailed by the Kremlin today. Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events, he said.

Crude prices have fallen by almost a third this year, undercutting the economy in Russia, the world’s largest energy exporter.

It is being reported that Russian President Vladimir Putin has been hoarding gold in anticipation of a full-blown global economic war.

I think that will end up being a very wise decision on his part.

Despite all of this global chaos, things are still pretty stable in the United States for the moment. The stock market keeps setting new all-time highs and much of the country is preparing for an orgy of Christmas shopping.

Unfortunately, the number of children that won’t even have a roof to sleep under this holiday season just continues to grow.

A stunning report that was just released by the National Center on Family Homelessness says that the number of homeless children in America has soared to an astounding 2.5 million.

That means that approximately one out of every 30 children in the United States is homeless.

Let that number sink in for a moment as you read more about this new report from the Washington Post…

The number of homeless children in the United States has surged in recent years to an all-time high, amounting to one child in every 30, according to a comprehensive state-by-state report that blames the nation’s high poverty rate, the lack of affordable housing and the effects of pervasive domestic violence.

Titled “America’s Youngest Outcasts,” the report being issued Monday by the National Center on Family Homelessness calculates that nearly 2.5 million American children were homeless at some point in 2013. The number is based on the Education Department’s latest count of 1.3 million homeless children in public schools, supplemented by estimates of homeless preschool children not counted by the agency.

The problem is particularly severe in California, which has about one-eighth of the U.S. population but accounts for more than one-fifth of the homeless children, totaling nearly 527,000.

This is why I get so fired up about the destruction of the middle class. A healthy economy would mean more wealth for most people. But instead, most Americans just continue to see a decline in the standard of living.

And remember, the next major wave of the economic collapse has not even hit us yet. When it does, the suffering of the poor and the middle class is going to get much worse.

Unfortunately, there are already signs that the U.S. economy is starting to slow down too. In fact, the latest manufacturing numbers were not good at all…

The Federal Reserve’s new industrial production data for October show that, on a monthly basis, real U.S. manufacturing output has fallen on net since July, marking its worst three-month production stretch since March-June, 2011. Largely responsible is the automotive sector’s sudden transformation from a manufacturing growth leader into a serious growth laggard, with combined real vehicles and parts production enduring its worst three-month stretch since late 2008 to early 2009.

A lot of very smart people are forecasting economic disaster for next year.

Hopefully they are all wrong, but I have a feeling that they are going to be right.

How Will The Stock Market React To The End Of Quantitative Easing?

October 26, 2014 by Michael

It is widely expected that the Federal Reserve is going to announce the end of quantitative easing this week. Will this represent a major turning point for the stock market? As you will see below, since 2008 stocks have risen dramatically throughout every stage of quantitative easing. But when the various phases of quantitative easing have ended, stocks have always responded by declining substantially. The only thing that caused stocks to eventually start rising again was a new round of quantitative easing. So what will happen this time? That is a very good question. What we do know is that the the performance of the stock market has become completely divorced from economic reality, and in recent weeks there have been signs of market turmoil that we have not seen in years. Could the end of quantitative easing be the thing that finally pushes the financial markets over the edge?

After all this time, many Americans still don’t understand what quantitative easing actually is. Since the end of 2008, the Federal Reserve has injected approximately 3.5 trillion dollars into the financial system. Of course the Federal Reserve didn’t actually have 3.5 trillion dollars. The Fed created all of this money out of thin air and used it to buy government bonds and mortgage-backed securities.

If that sounds like “cheating” to you, that is because it is cheating. If you or I tried to print money, we would be put in prison. When the Federal Reserve does it, it is called “economic stimulus”.

But the overall economy has not been helped much at all. If you doubt this, just look at these charts.

Instead, what all of this “easy money” has done is fuel the greatest stock market bubble in history.

As you can see from the chart below, every round of quantitative easing has driven the S&P 500 much higher. And when each round of quantitative easing has finally ended, stocks have declined substantially…

And of course the chart above tells only part of the story. Since April 2013, the S&P 500 has gone much higher…

If someone from another planet looked at that chart, they would be tempted to think that the U.S. economy must be expanding like crazy.

But of course that is not happening.

This market binge has been solely fueled by reckless money printing by the Federal Reserve. It is not backed up by economic fundamentals in any way, shape or form.

And now that quantitative easing is ending, many are wondering if the party is over.

For example, just check out what CNN is saying about the matter…

Even in this bull market, all good things must come to an end.

The Federal Reserve is expected to close a chapter in history this week and announce the conclusion of its massive stimulus program. Known as quantitative easing, the program is widely credited with driving investors back into stocks in the aftermath of the financial crisis.

“I think to some extent quantitative easing has provided an assurance to investors that (has) kept them optimistic,” said Bruce McCain, Chief Investment Strategist of Key Private Bank in Cleveland, Ohio. “Now we’re going to have to see whether investors can ride without training wheels.”

Everyone knows that quantitative easing was a massive gift to those that own stocks.

So how will the stock market respond now that the monetary heroin is ending?

We shall see.

Meanwhile, deflationary pressures are already starting to take hold around the rest of the globe. The following is an excerpt from a recent Reuters report…

After months of focus on slack in U.S. labor markets, the Federal Reserve faces a new challenge: the possibility that weak inflation may be so firmly entrenched it upends the return to normal monetary policy.

The soft global inflation backdrop, from sliding oil prices to stagnant wages in advanced economies, has triggered debate over whether the Fed and its peers merely need to wait for a slow-motion business cycle to improve, or face a shift in the underlying nature of inflation after the global recession.

That uncertainty has become the Fed’s chief concern in recent weeks, likely to shape upcoming policy statements and delay even further the moment when interest rates, pinned near zero for nearly six years, will start rising again.

If the Federal Reserve and other global central banks were not printing money like mad, the global economy would have almost certainly entered a deflationary depression by now.

But all the Federal Reserve and other global central banks have done is put off the inevitable and make our long-term problems even worse.

Instead of fixing the fundamental problems that caused the great financial crash of 2008, the central bankers decided to try to paper over our problems instead. They flooded the global financial system with easy money, but today our financial system is shakier than ever.

In fact, we just learned that 10 percent of the biggest banks in Europe have failed their stress tests and must raise more capital…

The European Central Bank says 13 of Europe’s 130 biggest banks have flunked an in-depth review of their finances and must increase their capital buffers against losses by 10 billion euros ($12.5 billion).

The ECB said 25 banks in all were found to need stronger buffers — but that 12 have already made up their shortfall during the months in which the ECB was carrying out its review. The remaining 13 now have two weeks to tell the ECB how they plan to increase their capital buffers.

Most people do not realize how vulnerable our financial system truly is. It is essentially a pyramid of debt and credit that could fall apart at any time.

Right now, the “too big to fail” banks account for 42 percent of all loans and 67 percent of all banking assets in the United States.

Without those banks, we essentially do not have an economy.

But instead of being careful, those banks have taken recklessness to unprecedented heights.

At this moment, five of the “too big to fail” banks each have more than 40 trillion dollars of exposure to derivatives.

Most Americans don’t even understand what derivatives are, but when the next great financial crisis strikes we are going to be hearing a whole lot about them.

The big banks have transformed Wall Street into the biggest casino in the history of the planet, and there is no way that this is going to end well.

A great collapse is coming.

It is just a matter of time.

If A Few Ebola Cases Can Make The Stock Market Crash This Much, What Would A Full-Blown Pandemic Mean?

October 15, 2014October 15, 2014 by Michael

Is Ebola going to cause another of the massive October stock market crashes that Wall Street is famous for? At one point on Wednesday, the Dow was down a staggering 460 points. It ultimately closed down just 173 points, but this was the fifth day in a row that the Dow has declined. And of course Ebola is one of the primary things that is being blamed for this stunning stock market drop. Since September 19th, we have seen the S&P 500 fall about 7 percent and the Nasdaq fall nearly 10 percent. The VIX (the most important measure of volatility on Wall Street) shot up an astounding 22 percent on Wednesday. So many of the ominous signs for the markets that I wrote about on Tuesday are now even worse. If a handful of Ebola cases in the United States can cause this much panic in the financial world, what would a full-blown pandemic look like?

Of course Ebola is not the only reason why stocks are declining. Just look at what is happening over in Europe. The European Stoxx 600 index is already down a whopping 11.4 percent from the high that it hit just 18 days ago. That is officially considered to be “correction” territory.

And Greece experienced a full-blown stock market collapse on Wednesday…

As if the world didn’t have enough to be worried about (ISIS, Ebola, slowing China, Ukraine, slowing Germany, Fed tightening, etc.) now look what’s back: Greece. And in a big way.

The stock market is down over 9% on Wednesday, which is about as big as crashes come.

And the banks are getting absolutely smashed.

In general, markets tend to fall faster than they rise.

When there is a sudden downturn, the price action can be violent. And just like we saw back in 2008, financial stocks are leading the way. Just check out what happened to some of the biggest banks in America before the final bell sounded…

Volume leader Bank of America, down 5%, Citigroup, off 5.5%, and JP Morgan, down 4.6%, were particularly hard hit.

And thanks to Ebola fears, airline stocks plummeted as well…

Airline stocks were roiled by the prospects of curtailed travel due to the spreading Ebola virus. United Continental fell 4% and American Airlines was off 4.3%. Among tech stocks, Intel lost 3.3%. Apple fell 1.7% and Microsoft slipped 2.3%.

An increasing number of voices are concerned that we could be on the verge of a repeat of what happened back in 2008.

For example, Professor Steve Keen, the head of Economics, History & Politics at Kingston University in London, wrote the following in a piece for CNN entitled “Brace yourself for another financial crash“…

My acceleration indicator has been flagging that the stock market was due for a fall since mid-2013.

It’s a tribute to the power of the Fed’s Quantitative Easing that the market continued to defy the gravity of decelerating debt for so long. QE was really a program to inflate asset prices since, as my colleague Michael Hudson puts it, “the Fed’s helicopter money fell on Wall Street, not Main Street”.

But with QE being unwound, the stock market is now back under the control of the not so tender mercies of excessive private debt.

So welcome to the New Crisis — same as the Old Crisis. The roller coaster ride is likely to continue.

Others are even more pessimistic. For example, just check out what Daniel Ameduri of Future Money Trends recently told his readers…

“If it drops below 15,000 points I would suggest people start buying food and ammo, because this depression is about to turn nasty.”

However, keep in mind that not that much has really changed from a month or two ago.

Yes, we now have had three confirmed cases of Ebola in the United States, but this could be just the beginning.

At first, the fear of Ebola will be worse than the disease.

But if a worst-case scenario does develop in the United States where hundreds of thousands of people are getting the virus, the fear such a pandemic will create will be off the charts.

In the midst of a full-blown Ebola pandemic, we wouldn’t just be talking about a 10 percent, 20 percent or 30 percent stock market decline.

Rather, we would be talking about the greatest stock market collapse in the history of stock market collapses. In essence, there would not be much of a market at all at that point.

And if Ebola does start spreading wildly in this country, we would have a credit crunch that would make 2008 look like a Sunday picnic.

During times of extraordinary fear, financial institutions do not want to lend money to each other or to consumers. But our economy is entirely based on debt. If credit were to stop flowing, we would essentially not have an economy.

That is why we need to pray that this Ebola crisis stops here. But thanks to the incompetence of Barack Obama and the CDC, there has been a series of very grave errors in trying to contain this disease. This display of incompetence would be absolutely hilarious if we weren’t talking about a disease that could potentially kill millions of us.

Let us hope for the best, but let us also prepare for the worst. That means stocking up on the food and supplies that you will need to stay isolated for an extended period of time. As we have seen so many times in the past, basic essentials fly off of store shelves during any type of an emergency. During an extended Ebola pandemic, those essentials would be in very short supply and prices on the basics would absolutely skyrocket. Those that have taken the time to get prepared now will be way ahead of the game.

And if there were dozens or hundreds of people in your community that were contagious, you would definitely not want to go to a grocery store or anywhere else where large numbers of people circulate.

The key during any major pandemic is to keep yourself and your family isolated from the virus. This is basic common sense, but it is something that Barack Obama does not seem to understand. As I write this, he still has not done anything to restrict air travel between the United States and West Africa. Hopefully this very foolish decision will not result in scores of dead Americans.

9 Ominous Signals Coming From The Financial Markets That We Have Not Seen In Years

October 14, 2014 by Michael

Is the stock market about to crash? Hopefully not, and there definitely have been quite a few “false alarms” over the past few years. But without a doubt we have been living through one of the greatest financial bubbles in U.S. history, and the markets are absolutely primed for a full-blown crash. That doesn’t mean that one will happen now, but we are starting to see some ominous things happen in the financial world that we have not seen happen in a very long time. So many of the same patterns that we witnessed just prior to the bursting of the dotcom bubble and just prior to the 2008 financial crisis are repeating themselves again. Hopefully we still have at least a little bit more time before stocks completely crash, because when this market does implode it is going to be a doozy.

The following are 9 ominous signals coming from the financial markets that we have not seen in years…

#1 By the time the markets closed on Monday, we had witnessed the biggest three day decline for U.S. stocks since 2011.

#2 On Monday, the S&P 500 moved below its 200 day moving average for the first time in about two years. The last time this happened after such an extended streak of success, the S&P 500 ended up declining by a total of 22 percent.

#3 This week the put-call ratio actually moved higher than it was at any point during the collapse of Lehman Brothers in 2008. This is an indication that there is a tremendous amount of fear on Wall Street right now.

#4 Everybody is watching the VIX at the moment. According to the Economic Policy Journal, the VIX has now risen to the highest level that it has been since the heart of the European debt crisis. This is another indicator that there is extraordinary fear on Wall Street…

US stock market volatility has jumped to the highest since the eurozone debt crisis, according to a closely watched index, the the CBOE Vix index of implied US share price volatility.

It jumped to 24.6 late on Monday and is up again this morning. On Thursday, it was as low as 15.

That’s a very strong move, but things have been much worse. At height of the recent financial crisis – the Vix index peaked at 80.1 in November 2008.

Could we get there again? Yeah.

#5 The price of oil is crashing. This also happened in 2008 just before the financial crisis erupted. At this point, the price of oil is now the lowest that it has been in more than two years.

#6 As Chris Kimble has pointed out, the chart for the Dow has formed a “Doji Star topping pattern”. We also saw this happen in 2007. Could this be an indication that we are on the verge of another stock market crash similar to what happened in 2008?

#7 Canadian stocks are actually doing even worse than U.S. stocks. At this point, Canadian stocks have already dropped more than 10 percent from the peak of the market.

#8 European stocks have also had a very rough month. For example, German stocks have already dropped about 10 percent since July, and there are growing concerns about the overall health of the German economy.

#9 The wealthy are hoarding cash and precious metals right now. In fact, one British news report stated that sales of gold bars to wealthy customers are up 243 percent so far this year.

So what comes next?

Some experts are saying that this is the perfect time to buy stocks at value prices. For example, USA Today published a story with the following headline on Tuesday: “Time to ‘buy’ the fear? One Wall Street pro says yes“.

Other experts, however, believe that this could represent a major turning point for the financial markets.

Just consider what Abigail Doolittle recently told CNBC…

Technical strategist Abigail Doolittle is holding tight to her prediction of market doom ahead, asserting that a recent move in Wall Street’s fear gauge is signaling the way.

Doolittle, founder of Peak Theories Research, has made headlines lately suggesting a market correction worse than anyone thinks is ahead. The long-term possibility, she has said, is a 60 percent collapse for the S&P 500.

In early August, Doolittle was warning both of a looming “super spike” in the CBOE Volatility Index as well as a “death cross” in the 10-year Treasury note. The former referenced a sharp move higher in the “VIX,” while the latter used Wall Street lingo for an event that already occurred in which the fixed income benchmark saw its 50-day moving average cross below its 200-day trend line.

Both, she said, served as indicators for trouble ahead.

So what do you think?

Are we about to witness a stock market crash and another major financial crisis?

Or is this just another “false alarm” that will soon fade?

Please feel free to share what you think by posting a comment below…

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