The Air Has Been Let Out Of The Balloon

Do you hear that sound?  It is the sound of Europe being hit with a cold dose of financial reality.  The air has been let out of the balloon, and investors all over the world are realizing that absolutely nothing has been solved in Europe.  The solutions being proposed by the politicians in Europe are just going to make things worse.  You don’t solve a sovereign debt crisis by shredding confidence in sovereign debt.  But that is exactly what the “voluntary 50% haircut” has done.  You don’t solve a sovereign debt crisis by pumping up your “bailout fund” with borrowed money from China, Russia and Brazil.  More debt is just going to make things even worse down the road.  You don’t solve a sovereign debt crisis by causing a massive credit crunch.  By giving European banks only until June 2012 to dramatically improve their credit ratios, it is going to force many of them to seriously cut back on lending.  A massive credit crunch would significantly slow down economic activity in Europe and that is about the last thing that the Europeans need right now.  If the deal that was reached last week was the “best shot” that Europe has got, then we are all in for a world of hurt.

On Monday, investors all over the globe began to understand the situation that we are now facing.  The Dow was down 276 points, and the euphoria of late last week had almost entirely dissipated.

But much more important is what is happening to European bonds.

Investors are reacting very negatively to the European debt deal by demanding higher returns on bonds.

Perhaps the most important financial number in the world right now is the yield on 10 year Italian bonds.

The yield on 10 year Italian bonds is up over 6 percent, and the 6 percent mark is a key psychological barrier.  If it stays above this mark or goes even higher, that is going to mean big trouble for Italy.

The Italian government just can’t afford for debt to be this expensive.  The higher the yield on 10 year bonds goes, the worse things are going to be for Italy financially.

Of course it was completely and totally predictable that this would happen as a result of the “voluntary 50% haircut” that is being forced on private Greek bondholders, but the politicians over in Europe decided to go this route anyway.

Major Italian banks also got hammered on Monday.  The following is how a CNN article described the carnage….

Shares of UniCredit, the largest bank in Italy, sunk more than 4% on Friday in Milan and were down nearly another 6% Monday. Intesa, the second-largest Italian bank, slipped 7% Monday, while Mediobanca, Italy’s third-largest financial institution, fell about 4%.

The financial world can handle a financial collapse in Greece.  But a financial collapse in Italy would essentially be the equivalent of financial armageddon for Europe.

That is why Italy is so vitally important.

Another EU nation to watch closely is Portugal.

The yield on 2 year Portuguese bonds is now over 18 percent.  A year ago, the yield on those bonds was about 4 percent.

In many ways, Portugal is in even worse shape than Greece.

A recent article by Ambrose Evans-Pritchard discussed the debt problems that Portugal is faced with.  The following statistic was quite eye-opening for me….

Portugal’s public and private debt will reach 360pc of GDP by next year, far higher than in Greece.

Like Greece, Portugal is essentially insolvent at this point.  Their current financial situation is unsustainable and politicians in Portugal are already suggesting that they should be able to get a “sweet deal” similar to what Greece just got.

You see, the truth is that what this Greek debt deal has done is that it has opened up Pandora’s Box.  Most of the financially troubled nations in Europe are eventually going to want a “deal”, and this uncertainty is going to drive investors crazy.

There is very little positive that can be said about this debt deal.  It has bought Europe a few months perhaps, but that is about it.

As the new week dawned, financial professionals all over the globe were harshly criticizing this deal….

*The CEO of TrimTabs Investment Research, Charles Biderman, says that the big problem with this deal is that the fundamental issues have not been addressed….

“The euphoria about the latest euro zone bailout will fade quickly, as investors realize that the underlying solvency issues have not been addressed”

*Bob Janjuah of Nomura Securities International in London was even harsher….

“This latest round of euro zone shock and awe is, in my view, nothing more than a confidence trick and has possibly even set up an even worse financial outcome.”

In fact, Janjuah says that the debt deal is essentially a “Ponzi scheme”….

This latest bailout relies on the market not calling what I see is a huge “bluff”, because if the market does call it, the bailout simply won’t be credible or even deliverable. It is instead akin to a self-referencing ponzi scheme, and I can’t believe eurozone policymakers have even considered going down this route. After all, we all have recent experience of how such ponzi schemes end, and we all remember how eurozone officials often belittled and berated US policymakers for their role in the US housing/CDO/SIV financial bubble.

*The chief economist at High Frequency Economics, Carl Weinberg, is calling the European debt deal a scheme “of Madoffian proportions“….

“Now they (EU Leaders) are keen to tap into resources that are not their own to fund this crazy scheme of guarantees, leveraged off guarantees to sell bonds and bank shares that no one may want to buy, (in order) to restore value in the banking system destroyed by other bonds that no one wants to own right now. This is a construct of Madoffian proportions”

Even George Soros is criticizing the deal.  George Soros is saying that this European debt deal will help stabilize things for a maximum of three months.

Of course with Soros there is always an agenda and you never know what his motives are.  Perhaps he is honestly concerned about the financial health of Europe, or perhaps he is trying to feed the panic to get Europe to crash even faster.  With Soros you never really know what he is up to.

In any event, the crisis in Europe is already claiming financial casualties in the United States.

MF Global, a securities firm headed up by former New Jersey governor Jon Corzine, has filed for bankruptcy protection.

As a recent CNBC article noted, the firm failed because of bad debts on European sovereign debt….

The bankruptcy protection filing from MF Global — a mid-sized trading firm run by former New Jersey Gov. and Goldman Sachs CEO Jon Corzine — only helped amplify the realization that more difficulties remain. MF Global got into trouble mainly because Corzine made tragically wrong bets on European sovereigns that unraveled when it became clear that bondholders of Greek debt will not be made whole as the nation tries to make its way out of its fiscal morass.

As time goes on, there will be more financial casualties.  The truth is that someone is going to pay the price for the financial foolishness of these countries in Europe.

Politicians in Europe did not want to increase the “bailout fund” with any of their own money, so they are going to go crawling to China, Russia and Brazil and beg those countries to lend them huge amounts of money.

This is incredibly foolish, and it is already fairly clear that China is going to play hardball with Europe.  China has Europe exactly where China wants them, and China will likely demand all sorts of crazy things before they will lend Europe any cash for this bailout fund.

As a recent CNN article noted, Europe is going to be in a lot of trouble if they can’t get money out of China, Russia and Brazil….

The hope is that China and other sovereign wealth fund will invest in new special vehicles that will allow the EFSF to add leverage to increase the amount of funding available.

Without the help of China, Brazil, Russia and others, Europe is back where it started. And it still seems clear that the stronger northern European nations aren’t keen on the idea of a full bailout of their southern siblings.

What a mess.

It is a comedy of errors for the politicians over in Europe.  They can’t seem to get anything right.  In fact, everything that they do seems to make a financial collapse in Europe even more likely.

Keep a close eye on the bond yields over in Europe.  Especially keep a close eye on the yield on 10 year Italian bonds.

A massive financial storm is coming to Europe.

It is going to rock the entire globe.

Now is the time to make certain that your financial house is not built on a foundation of sand.  Get your assets into safe places and keep them safe because the road ahead is going to be quite rocky.

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.

A Bad Mood Has Descended On World Financial Markets

Have you noticed that a really bad mood seems to have descended on world financial markets?  Fear and pessimism are everywhere.  The global economy never truly recovered from the financial crisis of 2008, and right now everyone is keeping their eyes open for the next “Lehman Brothers moment” that will send world financial markets into another tailspin.  Investors have been very nervous for quite some time now, but this week things seem to be going to a whole new level.  Fears about the spread of the debt crisis in Europe and about the failure of debt ceiling talks in the United States have really hammered global financial markets.  On Monday, the Dow Jones Industrial Average dropped 151 points.  Italian stocks fared even worse.  The stock market in Italy fell more than 3 percent on Monday.  The stock markets in Germany and France fell more than 2 percent each.  On top of everything else, the fact that protesters have stormed the U.S. embassy in Syria is causing tensions to rise significantly in the Middle East.  Everywhere you turn there seems to be more bad news and large numbers of investors are getting closer to hitting the panic button.  Hopefully things will cool down soon, because if not we could soon have another full-blown financial crisis on our hands.

Even many of those that have always tried to reassure us suddenly seem to be in a really bad mood.

For example, U.S. Treasury Secretary Timothy Geithner admitted to “Meet the Press” that the U.S. economy is really struggling and that for many Americans “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”

Does Geithner know something that we don’t?

To say that what Americans are facing will be “harder than anything they’ve experienced in their lifetime now, for a long time to come” is very, very strong language.

It almost sounds like Timothy Geithner could be writing for The Economic Collapse blog.

It certainly is not helping things that the Democrats and the Republicans still have not agreed on a deal to raise the debt ceiling.  It is mid-July and Barack Obama and John Boehner continue to point fingers at each other.

Of course if they do reach a “deal” it will likely be a complete and total joke just like their last “deal” was.

But for now they are playing politics and trying to position themselves well for the 2012 election season.

Meanwhile, world financial markets are starting to get a little nervous about this situation.  The newly elected head of the IMF, Christine Lagarde, has stated that she “can’t imagine for a second” that we are going to see the U.S. default on any debt.  Most investors seem to agree with Lagarde for now, but if we get to August 2nd without a deal being reached things could change very quickly.

But it isn’t just the debt ceiling crisis that is causing apprehension in the United States.  The truth is that there are a host of indications that the U.S. economy is continuing to struggle.

Even big Wall Street banks are laying people off.  A recent Reuters article described the bad mood that has descended on Wall Street right now….

Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and some other large U.S. investment banks are not just laying off weak performers and back-office employees. They are also cutting the pay of those they are keeping, scrutinizing expense reports and expecting even the most profitable workers to bring in more business for the same amount of compensation.

That is not a good sign for the U.S. economy.

If the corrupt Wall Street banks are even struggling, what does that mean for the rest of us?

But the big trouble recently has been in Europe.  The sovereign debt crisis continues to get worse and worse.

As I wrote about yesterday, the emerging financial crisis in Italy has EU officials in a bit of a tizzy.  If Italy requires a bailout it is going to be an unmitigated disaster.

One of the most respected financial journalists in Europe, Ambrose Evans Pritchard, says that financial tensions in the EU are rising to dangerous levels….

If the ECB’s Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago – and I think he is – it is hard see how the threat is any less serious right now.

Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.

Last year it was just small countries like Greece and Ireland that were causing all the trouble.

Now Italy (the fourth largest economy in the EU) and Spain (the fifth largest economy in the EU) are making headlines.

Up to this point, the EU has had all kinds of nightmares just trying to bail countries like Greece out.

What is going to happen if Italy or Spain goes under?

At this point things with Greece have gone so badly that some EU officials are actually suggesting that Greece should just default on some of the debt.

Yes, you read the correctly.

There are news reports coming out of Europe that say that EU leaders are actually considering allowing the Greek government to default on some of their bonds.  According to The Telegraph, “the move would be part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.”

All of this chaos is causing bond yields in Europe to go soaring.

Earlier today, The Calculated Risk blog detailed some of the stunning bond yields that we are now seeing in Europe….

The Greek 2 year yield is up to a record 31.1%.

The Portuguese 2 year yield is up to a record 18.3%.

The Irish 2 year yield is up to a record 18.1%.

And the big jump … the Italian 2 year yield is up to a record 4.1%. Still much lower than Greece, Portugal and Ireland, but rising.

Could you imagine paying 31.1% interest on your credit cards?

Well, imagine what officials in the Greek government must be feeling right about now.

If these bond yields do not go down, we are going to have a full-blown financial crisis on our hands in Europe.  If these bond yields keep rising, we are going to have a complete and total financial nightmare in Europe.

The only way that any of these nations that are drowning in debt can keep going is if they can borrow more money at low interest rates.  There are very few nations on earth that would be able to survive very high interest rates on government debt for an extended period of time.

Pay attention to what is happening in Europe, because it will eventually happen in the United States.  Right now we are only paying a little more than $400 billion in interest on the national debt each year because of the super low interest rates we are able to get.

When that changes, our interest costs are going to absolutely skyrocket.

Not that the United States needs any more economic problems.

Right now Americans are more pessimistic about the economy than they have been in ages.

In a recent article entitled “16 Reasons To Feel Really Depressed About The Direction That The Economy Is Headed” I noted a number of the recent surveys that seem to indicate that the American people are in a real bad mood about the economy right now….

*One of the key measures of consumer confidence in the United States has hit a seven-month low.

*According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%.

*According to one recent poll, 39 percent of Americans believe that the U.S. economy has now entered a “permanent decline”.

*Another recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.

The American people are in a really bad mood and investors around the world are in a really bad mood.  More bad financial news seems to come out every single day now.  Everyone seems to be waiting for that one “moment” that is going to set off another financial panic.

Hopefully we can get through the rest of this summer without world financial markets falling apart.  But the truth is that the global economy is even more vulnerable today than it was back in 2008.  None of the things that caused the financial crash of 2008 have been fixed.

We will eventually have a repeat of 2008.  In fact, next time things could be even worse.

The entire world financial system is a house of cards sitting on a foundation of sand.  Eventually another storm is going to come and the crash is going to be great.

Uh Oh – Italy Is Coming Apart Like A 20 Dollar Suit

Did anyone really think that Italy would be able to get through this thing without needing a bailout?  Just when you thought that things in Europe could get back to normal for a little while, here comes Italy.  On Friday, there was a bit of a “mini-panic” as investors started dumping Italian financial assets.  European officials are concerned that the sovereign debt crisis that has ravaged Greece, Ireland and Portugal will now put the Italian economy through the wringer.  European Council President Herman Van Rompuy has called an emergency meeting for Monday morning.  He is denying that the meeting is about Italy, but everyone knows that Italy is going to be discussed.  European Central Bank President Jean-Claude Trichet and European Commission President Jose Manuel Barroso along with a host of other top officials will also be at this meeting.  If it does turn out that Italy needs a bailout, it is going to change the entire game in Europe.

What is going on in Italy right now is potentially far more serious than what has been going on in Greece.  Italy is the fourth largest economy in the European Union.  If Italy requires a bailout, the rest of Europe might not be able to handle it.

An anonymous European Central Bank source told one German newspaper the following on Sunday….

“The existing rescue fund in Europe is not sufficient to provide a credible defensive wall for Italy”

The source also added that the current bailout fund “was never designed for that“.

Italy has already implemented austerity measures.

This was not supposed to happen.

But it is happening.

This latest crisis was precipitated by a substantial sell-off of Italian financial assets on Friday.  An article posted by Bloomberg described the pounding that the two largest Italian banks took….

UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s biggest banks, fell to the lowest in more than two years in Milan yesterday as contagion from Europe’s debt crisis threatened to spread to the region’s third-largest economy.

UniCredit plunged 7.9 percent, the biggest decline since March 30, 2009, while Intesa dropped 4.6 percent. Both hit lows not seen since the period when markets were emerging from the crisis spawned by the collapse of Lehman Brothers Holdings Inc.

Unfortunately, this is just the continuation of a trend that has been going on for a while.

When you look at them as a group, the stocks of the five largest Italian banks have lost 27% since the beginning of 2011.

That is not a good sign.

Also, investors are starting to dump Italian government debt.  Reuters says that the yield on 10 year Italian bonds is approaching the danger zone….

The spread of the Italian 10-year government bond yield over benchmark German Bunds hit euro lifetime highs around 2.45 percentage points on Friday, raising the Italian yield to 5.28 percent, close to the 5.5-5.7 percent area which some bankers think could start putting heavy pressure on Italy’s finances.

The Italian national debt is now up to about 120 percent of GDP.  The Italian government would be able to manage it if interest rates were very, very low.  But unfortunately they are rising fast and if they get too much higher they are going to become suffocating.

As I have written about previously, government debt becomes very painful once you take low interest rates out of the equation.  For example, if Greece could borrow all of the money that it wanted to borrow at zero percent interest, it would not have a debt problem.  But now the yield on 2 year Greek bonds is over 30 percent, and there is not a government on the face of the earth that can afford to pay interest that high for long.

Unfortunately for Italy, this could just be the beginning of rising interest rates.  Just recently, Moody’s warned that it may be forced to downgrade Italy’s Aa2 debt rating at some point within the next couple of months.

If things continue to unravel in Italy, all of the credit agencies may downgrade Italy sooner rather than later.

The frightening thing about Italy is that a financial crisis has a way of exposing corruption, and there are very few countries that can match the kind of corruption that goes on in Italy.

As a child, I had the chance to live in Italy.  I love Italy.  The people are friendly, the weather is great, the architecture is amazing and the food is spectacular.  I will always have great affection for Italy and I will always cheer for the Italian national team when the World Cup rolls around.

However, I also know that corruption is deeply ingrained into Italian culture.  It is simply a way of life.

Just check out the prime minister of Italy.  Silvio Berlusconi is the consummate Italian politician.  He is greatly loved by many, but it would take days to detail all of the scandals that he has been linked to.

At this point, Berlusconi has become a parody of himself.  Each new sex scandal or financial scandal just adds to his legend.  Italy is one of the only nations in Europe where such a corrupt politician could have stayed in office for so long.

Not that the U.S. government is much better.  Our government becomes more corrupt with each passing year.

But the point is that if a financial collapse happens in Italy and people start “turning over rocks” it could turn up all sorts of icky stuff.

So what is Europe going to do if Italy needs a bailout?

Well, they are probably going to have to fire up the printing presses because it would probably take a whole lot more euros than they have right now.

The truth is that the EU has now entered a permanent financial crisis.  You have a whole bunch of nations that have accumulated unsustainable debts and that cannot print their own currencies.  The financial system of the EU as it is currently constructed simply does not work.

Some believe that the sovereign debt crisis will eventually cause the breakup of the EU.  Others believe that this crisis will cause it to be reformed and become much more integrated.

In any event, what just about everyone can agree on is that the financial problems of Europe are not going away any time soon.  For now, EU officials are keeping all of the balls in the air, but if at some point the juggling act falters, the rest of the world better look out.

A financial crash in Europe would be felt in every nation on earth and it would be absolutely devastating.  Let’s hope that we still have some more time before it happens.

Stock Prices Have Fallen For Six Weeks In A Row

Well, it’s official.  U.S. stock prices have fallen for six weeks in a row.  So will next week make it seven?  The last time stocks declined for seven weeks in a row was back in May 2001 when the “dot-com” bubble was bursting.  At this point, the Dow has declined by approximately 5 percent since the beginning of June.  Things don’t look good.  So exactly what is going on here?  Well, it is undeniable that the recent mini-bubble in stocks has been too good to be true.  The S&P 500 had surged nearly 30 percent since last September.  Much of this has been fueled by the Federal Reserve’s latest round of quantitative easing, but now that is coming to an end in a few weeks and investors are a bit spooked.  Meanwhile, wars and revolutions are sweeping the Middle East, Japan is dealing with the damage caused by the tsunami and by Fukushima, Europe is trying to figure out how to bail out Greece again and the U.S. debt crisis is continually getting worse.  In addition, wave after wave of bad economic news is certainly not helping the mood on Wall Street.  In many ways, a “perfect storm” is developing and many are now extremely concerned about what the rest of 2011 is going to bring for Wall Street.

QE2 is slated to conclude at the end of June, and many investors are deeply disappointed that it does not appear that we are not going to see QE3 right away.  Many fear that the end of quantitative easing will pop the current mini-bubble in stocks and commodities.  At the moment, financial markets are more jittery than they have been in a long time.

Frank Davis, director of sales and trading with LEK Securities, says that there is a lot of pessimism on Wall Street right now….

“There’s a lot of emotion in this market at the moment, and the conversations among traders are nearly all leaning toward the bear side”

So what are some of the signs that this downturn on Wall Street may turn into a full-blown crash?

Well, according to the Wall Street Journal, junk bonds are being sold off at an alarming rate right now.  Does the following quote from the Journal remind anyone of 2008 at least a little bit?….

A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.

Also, many of the big Wall Street banks are already laying off workers.  In a previous article I wrote about the potential for Wall Street to go into “panic mode“, I noted that Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all laying people off or are considering staff cuts.

The truth is that the big banks on Wall Street are not nearly as stable as most people think that they are.  Moody’s recently warned that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.

Another major story on Wall Street right now is oil.  OPEC recently announced that oil production levels will not be raised, even though the price of oil has been hovering around $100 a barrel.

World oil supplies are very tight right now.  In fact, the globe actually consumed 5 million barrels per day more oil than it produced during 2010.  This was possible because the difference was apparently made up by drawing down reserves.

But if oil supplies are this tight already, what is going to happen if a major war (as opposed to all of the minor wars that are already happening) erupts in the Middle East?

The world is sitting on the edge of a financial disaster.

It is important to keep in mind that Europe is also in far worse financial condition than it was just prior to the financial collapse of 2008.

It is being reported that German finance minister Wolfgang Schaeuble is convinced that a “full-blown” financial meltdown by Greece is a very real possibility. The cost of insuring Greek debt has soared to a brand new record high, and officials all over Europe are in panic mode.

But financial problems are not just happening in Greece.  The largest bank in France has just cut in half the amount of cash that customers can withdraw from ATMs each week.

Most Americans don’t spend much time thinking about the financial condition of Europe, but the truth is that what happens in Europe is going to play a major role in the months and years ahead.

Of course most Americans already know that the U.S. government is a financial mess.

As the “debt ceiling deadline” of August 2nd draws closer, the U.S. government has been raiding retirement funds in order to stay under the debt limit.

Many investors are quite nervous about what may happen if the U.S. government actually does start defaulting on debt on August 2nd.

Others claim that the U.S. government is already in default.

The only Chinese agency that gives credit ratings on sovereign debt says that the U.S. government “has already been defaulting” and the Chinese government has been repeatedly warning that the U.S. needs to get its finances in order.

In any event, this debt ceiling drama will get resolved one way or another.

The bigger question is this….

How is the U.S. government going to respond when the next financial crash happens?

Back in 2008, the Federal Reserve and the U.S. government took unprecedented steps to prop up Wall Street.

But can they really do that again if we see another major crash in 2011 or 2012?

Many believe that things will be totally different this time around.  Just check out what Jim Rogers recently told CNBC….

“The debts that are in this country are skyrocketing,” he said. “In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.

“When the problems arise  next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around.”

Jim Rogers is right about that.

The next time we see a collapse on the scale of 2008 it is going to be a much bigger mess.

Global financial markets are extremely vulnerable right now and there are a whole host of potential “tipping points” which could push them over the edge.

The Federal Reserve and the U.S. government more or less used up all of their ammunition on the 2008 crisis.

If we see another collapse in 2011 or 2012 there is not going to be much of a safety net available.

The entire world financial system is simply swamped with way too much debt.  The world has never seen anything even remotely close to the gigantic mountains of debt that have been accumulated around the world today.

The current global financial system is not sustainable.  More crashes are inevitable.  A lot of people are going to get steamrolled.

Hopefully you will not be one of them.

Global Financial Markets Plunge As The World Watches Japan Descend Into A Nuclear Nightmare

Global financial markets are in turmoil as the situation in Japan continues to deteriorate.  Stock markets are plunging all over the world as investors flock to investments that are considered to be safer.  The 9.0 earthquake and the unprecedented tsunami in Japan would have been more than enough to spook investors and unleash chaos on world financial markets, but now the unfolding nightmare at the Fukushima Dai-ichi nuclear facility is really starting to cause panic.  Right now there is a mass exodus out of the city of Tokyo.  But not everyone can leave the city.  There are over 30 million people living in and around Tokyo.  So where in the world could you possibly put 30 million refugees?  Sadly, the truth is that millions of Japanese are going to stay in Tokyo no matter how high the radiation gets.  Let us hope that Japanese authorities can get the situation at the Fukushima Dai-ichi nuclear facility under control, but the fact that they have resorted to dropping water from helicopters and shooting water cannons at these nuclear reactors is not comforting.

World financial markets are certainly not expressing a lot of confidence right now.  This week alone, $300 billion in U.S. stock values have been wiped out.  The Dow Jones industrial average lost about 2 percent of its total value on Wednesday.  The Nikkei 225 stock index has lost about 10 percent of its total value since the beginning of this crisis.  At one point it was down more than 16 percent, but a gigantic monetary injection from the Bank of Japan has helped to stabilize things at least for now.  There are also some that believe that the Japanese government is now directly buying up stocks to keep them from falling even further.

Stock markets across Europe have been plunging as well.  An article posted on the USA Today website described some of the carnage on Wednesday….

In Europe, the FTSE 100 index of leading British shares closed down 97.05 points, or 1.7% at 5,598.23 while France’s CAC-40 fell 84.29 points, or 2.2%, to 3,696.56. Germany’s DAX ended 133.82 points, or 2%, lower at 6,513.84.

The financial ripples from this crisis are going to be felt for a long, long time.

In order to rebuild Japan, the Japanese government is somehow going to have to borrow massive amounts of money.  But the Japanese national debt was already projected to reach 228 percent of GDP this year.

The Japanese government has become an incredibly bad credit risk, but lowering their credit rating right now would seem to be in very bad taste.  So far, all three major credit rating agencies are taking a “wait and see” approach when it comes to Japan.

Unfortunately, the crisis in Japan is far from over.

The situation at the Fukushima Dai-ichi nuclear facility just seems to grow more dire with each passing day.  Right now, the primary concern is the 40 years of spent fuel rods that are stored throughout the complex.

Ed Lyman, a physicist at the Union of Concerned Scientists, recently explained why the pools that store the spent fuel rods are the biggest problem at this point….

“For the time being, the greatest concern is the spent fuel pools because there is a clear pathway for release of radioactivity from the pools into the environment.”

The phrase “spent fuel rods” may make it sound like they should no longer be a threat, but the truth is that these fuel rods remain extremely hot and extremely radioactive for years after they are done being used.  For some reason, someone thought that it would be a good idea to store these spent fuel rods in huge pools of water near the top of each of the nuclear reactor buildings at the Fukushima Dai-ichi complex.

These spent fuel rod pools are not housed in the same kind of containment vessels that the nuclear reactors are.  Therefore there is a much greater danger that radiation from these spent fuel rods could be released into the surrounding environment.

A recent article by Paul Joseph Watson did a great job of explaining just how big of a problem these spent fuel rods represent….

The Fukushima Daiichi plant has seven pools dedicated to spent fuel rods. These are located at the top of six reactor buildings – or were until explosions and fires ravaged the plant. On the ground level there is a common pool in a separate building that was critically damaged by the tsunami. Each reactor building pool holds 3,450 fuel rod assemblies and the common pool holds 6,291 fuel rod assemblies. Each assembly holds sixty-three fuel rods. In short, the Fukushima Daiichi plant contains over 600,000 spent fuel rods – a massive amount of radiation that will soon be released into the atmosphere.

Each of these 600,000 spent fuel rods is a potential “dirty bomb”.

Are you starting to grasp just how serious this all is?

It is absolutely critical that all of these spent fuel rods remain submerged in water.

If the water drops in the spent fuel pools there will be nothing to keep the spent fuel rods cool and they will start to degrade very, very quickly.

Unfortunately, things don’t look good right now.  U.S. authorities today expressed their belief that the spent fuel rods in unit 4 are now exposed and that a great deal of radiation is being released.  In fact, Gregory Jaczko, the chairman of the Nuclear Regulatory Commission, stated during Congressional testimony today that he believes that an extremely high level of radiation is being released by exposed spent fuel rods at the Fukushima Dai-ichi nuclear facility at this point….

We believe that radiation levels are extremely high, which could possibly impact the ability to take corrective measures.

It would be hard to understate the courage of those that are working inside the Fukushima Dai-ichi nuclear facility right now. They all likely realize that they are all going to die very quickly. They are laying down their lives in an effort to save their countrymen. According to a recent report from CBS News these workers say that they are not afraid to die….

Although communication with the workers inside the nuclear plant is nearly impossible, a CBS News consultant spoke to a Japanese official who made contact with one of the workers inside the control center.

The official said that his friend told him that he was not afraid to die, that that was his job.

Would all of us respond the same way?

Even the media that are reporting on this disaster in Japan are starting to be affected by this radiation.  Lester Holt revealed this morning that his entire crew had tested positive for radiation after returning from an assignment.

Meanwhile, Barack Obama is acting as if all of this stuff going on in Japan is no big deal. In fact, as Keith Koffler recently observed, Obama seems to be really enjoying himself in the midst of this crisis….

This morning, as Japan’s nuclear crisis enters a potentially catastrophic phase, we are told that Obama is videotaping his NCAA tournament picks and that we’ll be able to tune into ESPN Wednesday to find out who he likes.

Saturday, he made his 61st outing to the golf course as president, and got back to the White House with just enough time for a quick shower before heading out to party with Washington’s elite journalists at the annual Gridiron Dinner.

If you are curious about Obama’s picks for the NCAA tourney, they are posted on the official White House website.

This weekend, the Obamas are headed down to Brazil. According to an article in Forbes, the Obama plan to do a good bit of sightseeing while they are there….

The Obama family will also take in the sights in Rio. A trip to Corcovado mountain, where the Christ the Redeemer statue stands (France gave us Lady Liberty, gave Brazil Jesus) is supposedly on the itinerary. What trip to Rio would be complete without it?

Isn’t it great to see Obama acting like a true leader in the midst of one of the greatest moments of crisis that the world has seen since World War 2?

What in the world is Obama possibly thinking?

One thing about a major crisis is that it reveals the true character of those affected by it.  Many are responding to this crisis in Japan with great acts of courage and heroism.

Others are not rising to the occasion.

Let us just hope and pray that the Japanese figure out a way to get the situation at the Fukushima Dai-ichi nuclear complex under control.  If a “worst case scenario” happens we could soon be facing an unprecedented nuclear nightmare.

30 Reasons Why People Should Be Getting Really Nervous About The State Of The U.S. Economy

The mainstream media is full of happy economic news these days.  The S&P 500 has shot up 16 percent since the beginning of July.  Ford Motor Company just reported a profit that jumped nearly 70 percent in the third quarter.  It was Ford’s best third quarter performance ever and it was the 6th quarterly profit in a row for the company.  Other major firms have announced earnings that have far exceeded expectations in recent weeks.  Hooray!  The pundits are proclaiming that the economic collapse is over and that the U.S. economy has won.  It is almost enough to make one tear into a stirring rendition of “Happy Days Are Here Again”.  But perhaps we should take a moment and get a hold of ourselves first.  After all, the underlying economic fundamentals have not changed.  The same long-term trends that were ripping the U.S. financial system apart a month or two ago are still continuing to do so.  Millions upon millions of American families are still deeply suffering.  So exactly what in the world is going on here?  Well, this is what is known as a “sucker’s rally”.  Those on the inside know better than to throw money at this market.  In fact, corporate insiders are now selling off stock so fast you would think it is going out of style.  Meanwhile, hordes of innocent rubes are jumping back into the stock market thinking that it is the perfect time to get in. 

The truth is that these “good times” are only temporary.  Don’t get used to them.  The following are 30 reasons why people should be getting really, really nervous about the state of the U.S. economy…. 

#1 Corporate insiders are selling off stock at a blinding pace and are looking for the exits.  Alan Newman, the editor of the Crosscurrents newsletter, examined a number of the top performing stocks in the market including Google, Apple and Target and found that the ratio of corporate insider stock sold to corporate insider stock purchased over the last six months for those companies was 3,177 to 1.  At the group of firms that Newman looked at, corporate insiders had purchased 38,000 shares of stock over the last six months and yet had sold off over 120 million shares.

#2 Analysts at both Bank of America and Goldman Sachs both believe that the U.S. Federal Reserve is going to initiate a new round of quantitative easing in November.  It does not take a genius to figure out that this is very likely to push up inflation and have very serious consequences for the U.S. dollar.

#3 Economists at Goldman Sachs are projecting that the Fed will have to purchase at least $4 trillion in assets during this next round of quantitative easing to get the U.S. economy moving in a positive direction once again.

#4 In the United States today, there are 5,057 janitors with Ph.D.’s, other doctorates, or professional degrees.

#5 Investors have very little faith in the U.S. dollar (and in paper currencies in general) at this point.  Precious metals are soaring to obscene heights.  The price of gold has increased more than 20 percent in 2010.  The price of silver has skyrocketed about 40 percent this year.  These are not signs that indicate that the U.S. financial system is stable.

#6 Robin Griffiths, a technical strategist at Cazenove Capital, told CNBC on Monday that the U.S. dollar is in danger of becoming “toxic waste”.

#7 In the United States today, 317,000 waiters and waitresses have college degrees.

#8 U.S. lending institutions repossessed an all-time record total of 102,134 homes in the month of September.  That was the first time that home repossessions in the U.S. had ever exceeded the 100,000 mark during a single month.

#9 According to a Standard & Poor’s/Case-Shiller home price report that was released on Tuesday, single family home prices in the United States declined  for a second straight month in August.

#10 In the United States today, over 18,000 parking lot attendants have college degrees.

#11 During the months of August and September, the state of Nevada had an unemployment rate of 14.4 percent, which was the highest in the history of the state.  Not that the rest of the country is doing any better.  The state of California has become a complete and total economic disaster zone, and the city of Detroit, Michigan is literally dying.

#12 The “official” unemployment rate in the United States has been at nine and a half percent or above for 14 consecutive months.

#13 The number of people unemployed in the state of California is approximately equivalent to the populations of Nevada, New Hampshire and Vermont combined.

#14 According to the president of the Federal Reserve Bank of New York, there are approximately 3 million more vacant housing units than usual in the United States.

#15 China has reduced the export quota on rare earth elements for the second half of 2010 by 72%, thus strengthening their position in the world economy even more.  Rare earth elements are absolutely crucial to the manufacture of a vast array of high technology products, and now even more of them will have to be made in China.

#16 In 1985, the U.S. trade deficit with China was 6 million dollars for the entire year.  In the month of August alone, the U.S. trade deficit with China was over 28 billion dollars.

#17 Wheat, corn and other staples are absolutely soaring in price on world markets.  These higher food prices are going to hit U.S. consumers hard.

#18 In 2007, 3 U.S. banks failed.  In 2008, 25 U.S. banks failed.  In 2009, 140 U.S. banks failed.  Last Friday, it was announced that 139 U.S. banks have failed so far this year and it is not even the end of October yet.

#19 Total student loan debt in the United States is climbing at a rate of approximately $2,853.88 per second.

#20 Back in 1980, the United States imported approximately 37 percent of  the oil that we use.  Now we import nearly 60 percent of the oil that we use.

#21 According to an analysis by the Congressional Joint Committee on Taxation, the health care reform legislation that Congress didn’t read but passed into law anyway will generate $409.2 billion in additional taxes on the American people by the year 2019.

#22 Median household income in the U.S. declined from $51,726 in 2008 to $50,221 in 2009.  That was the second yearly decline in a row.

#23 One out of every six Americans is now enrolled in a government anti-poverty program, and yet the number of Americans signing up for food stamps and other social programs just continues to set new all-time records month after month after month.

#24 The number of Americans working part-time jobs “for economic reasons” is now the highest it has been in at least five decades.

#25 American 15-year-olds do not even rank in the top half of all advanced nations when it comes to math or science literacy.

#26 According to a recent poll conducted by CNBC, 92 percent of Americans believe that the performance of the U.S. economy is either “fair” or “poor”.

#27 After analyzing Congressional Budget Office data, Boston University economics professor Laurence J. Kotlikoff came to the conclusion that the U.S. government is now facing a “fiscal gap” of $202 trillion dollars.

#28 A trillion $10 bills, if they were taped end to end, would wrap around the earth more than 380 times.  That amount of money would still not be enough to pay off the U.S. national debt.

#29 According to the U.S. Treasury Department, the U.S. national debt is rapidly closing in on 14 trillion dollars and and will climb to an estimated $19.6 trillion by 2015.

#30 At our current pace, the Congressional Budget Office is projecting that U.S. government public debt will hit 716 percent of GDP by the year 2080.

The U.S. economy is in the midst of a long-term decline.  There are always going to be moments when it seems like things are getting a bit better, but then reality will kick in and the depressing slide will continue.

If you really want to understand what is happening to the U.S. economy, do not become fixated on the short-term numbers.  Instead, always keep an eye on the long-term trends.

The U.S. economy is dying.  We are getting whipped by the rest of the world and we are drowning in a sea of debt.  A little rally in the stock market is not going to do a thing to fix our very deep fundamental economic problems.