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So many of the exact same patterns that we witnessed just before the stock market crash of 2008 are playing out once again right before our eyes. Most of the time, a stock market crash doesn’t just come out of nowhere. Normally there are specific leading indicators that we can look for that will tell us if major trouble is on the horizon. One of these leading indicators is the junk bond market. Right now, a closely watched high yield bond ETF known as JNK is sitting at 35.77. If it falls below 35, that will be a major red flag, and it will be the first time that it has done so since 2009. As you can see from this chart, JNK started crashing in June and July of 2008 – well before equities started crashing later that year. A crash in junk bonds almost always precedes a major crash in stocks, and so this is something that I am watching carefully.

And there is a reason why junk bonds are crashing. In 2015 we have seen the most corporate bond downgrades since the last financial crisis, and corporate debt defaults are absolutely skyrocketing. The following comes from a recent piece by Porter Stansberry…

So far this year, nearly 300 U.S. corporations have seen their bonds downgraded. That’s the most downgrades per year since the financial crisis of 2008-2009. The year isn’t over yet. Neither are the downgrades. More worrisome, the 12-month default rate on high-yield corporate debt has doubled this year. This suggests we are well into the next major debt-default cycle.

Another thing that I am watching closely is the price of oil.

A massive crash in the price of oil preceded the stock market crash of 2008, and over the past year we have seen another dramatic crash in the price of oil.

…click on the above link to read the rest of the article…

Analyst Warns Of Turbulence: ‘Geopolitical Dislocations Could Result In Key Resource Supplies Disappearing’

October 26, 2015

Analyst Warns Of Turbulence: ‘Geopolitical Dislocations Could Result In Key Resource Supplies Disappearing’

Some of the world’s biggest investors have been taking significant positions in the commodity resource sector as of late, most notably in gold. With geopolitical tension and fear of economic breakdown reaching a near boiling point, it’s not difficult to see why. Instability pervades the entire system, encompassing everything from financial markets to social safety nets. And while it is easy to ignore the seriousness of current events because stock markets remain at record highs and mainstream pundits continue to toe the recovery line, the fact is that an unexpected and seemingly minor event could well send the entire world into a tailspin.

According to analyst John Kaiser, this is exactly what we need to be concerned with. In a candid interview with Future Money Trends Kaiser explains just how political dislocations could result in supply lines to critical commodities like food, copper, zinc and gold being cut – even without a major war – should the United States, Russia and China continue to bump heads.

(Watch at Future Money Trends or Youtube)

Forget about the big, giant macro-economic increases in overall global GDP, but instead let’s look at the turbulence we’re starting to see where China is asserting itself in the South China Sea area… where Putin is eyeing its lost colonies in Europe and Central Asia and thinking maybe we should re-establish the Soviet empire… where we see instability in the middle east.

Then you also realize that a lot of metal comes from China… a lot of metal comes from Russia. And if we end up in a shoving match where, say, the United States pushes back in the South China Sea… and Chinese generals get all up in arms and we end up with an incident… well what happens if China suddenly has sanctions going against it… or something similar, that Russia goes beyond messing in the Ukraine and starts taking out Latvia or Estonia?

…click on the above link to read the rest of the article…

Everything’s Deflating And Nobody Seems To Notice

October 22, 2015

Everything’s Deflating And Nobody Seems To Notice

Whenever we at the Automatic Earth explain, as we must have done at least a hundred times in our existence, that, and why, we refuse to define inflation and deflation as rising or falling prices (only), we always get a lot of comments and reactions implying that people either don’t understand why, or they think it’s silly to use a definition that nobody else seems to use.

-More or less- recent events, though, show us once more why we’re right to insist on inflation being defined in terms of the interaction of money-plus-credit supply with money velocity (aka spending). We’re right because the price rises/falls we see today are but a delayed, lagging, consequence of what deflation truly is, they are not deflation itself. Deflation itself has long begun, but because of confusing -if not conflicting- definitions, hardly a soul recognizes it for what it is.

Moreover, the role the money supply plays in that interaction gets smaller, fast, as debt, in the guise of overindebtedness, forces various players in the global economy, from consumers to companies to governments, to cut down on spending, and heavily. We are as we speak witnessing a momentous debt deleveraging, or debt deflation, in real time, even if prices don’t yet reflect that. Consumer prices truly are but lagging indicators.

The overarching problem with all this is that if you look just at -consumer- price movements to define inflation or deflation, you will find it impossible to understand what goes on. First, if you wait until prices fall to recognize deflation, you will tend to ignore the deflationary moves that are already underway but have not yet caused prices to drop. Second, when prices finally start falling, you will have missed out on the reason why they do, because that reason has started to build way before a price fall.

…click on the above link to read the rest of the article…

The Baby Boomer Survival Guide (Part II)

September 30, 2015

The Baby Boomer Survival Guide (Part II)

A Lehman Moment for Commodities?

LONDON – Today, we continue our philosophical look at what you should do if you are running out of time and money. (You can catch up on Part I here.)

Where do we begin? With how to add wealth? Or how to lose it? The way to lose it is simple. You buy something that is not worth the money you paid for it. You are instantly poorer, whether you know it or not.

The pleasingly plump.
Illustration by jdeer69

DJIA, daily – still unsettled – click to enlarge.

That is what is happening today to stock market investors. The stocks they bought were not worth the money; now Mr. Market is letting them know. On Monday, the Dow dropped almost 2% to 16,002 points. Next stop: 15,000.

“It’s a bear market,” says Jim Cramer. It will be a “bloodbath,” says billionaire investor Carl Icahn. We don’t know. But our guess is that 10 years from now your stocks will be worth no more than they are today.

The biggest losers on Monday were in the commodities and biotech sectors. Well, Glencore – one of the world’s largest resource companies – is one of the companies not buying them.

Glencore shares have lost 75% of their value so far this year. If commodities prices stay at these low levels, it could be worth nothing by the end of the year. Glencore could be headed the way of Lehman Brothers…

Glencore, daily. On Tuesday the stock recovered a bit, after Glencore tried to refute speculation about its imminent demise with a press release “responding to speculation”… click to enlarge.

Biotechs dragged the Nasdaq down yesterday. But the sector is still up more than 425% since 2009. Plenty of room left on the downside, in other words. Icahn, by the way, seems to have signed on as an advisor to Donald Trump. This is a good thing. The presidential hopeful needs advice.

…click on the above link to read the rest of the article…

Is Glencore The Next Lehman? The World’s Largest Commodities Trading Company Is Toast

September 29, 2015

Is Glencore The Next Lehman? The World’s Largest Commodities Trading Company Is Toast

Are we about to witness the most important global financial event since the collapse of Lehman Brothers in 2008? Glencore has been known as the largest commodities trading company on the entire planet, and at one time it was ranked as the 10th biggest company in the world. It is linked to trillions of dollars of derivatives trades globally, and if the firm were to implode it would be a financial disaster unlike anything that we have seen in Europe since the end of World War II. Unfortunately, all signs are pointing to an inescapable death spiral for Glencore at this point. The stock price was down nearly 30 percent on Monday, and overall Glencore stock has plunged nearly 80 percent since May. There are certainly other candidates for “the next Lehman” (Petrobras and Deutsche Bank being two perfect examples), but Glencore has definitely surged to the front of the pack. Right now many analysts are openly wondering if the firm will even be able to survive to the end of next month.

If you are not familiar with Glencore, the following is a pretty good summary of the commodity trading giant from Wikipedia…

Glencore plc is an Anglo–Swiss multinational commodity trading and mining company headquartered in Baar, Switzerland, with its registered office in Saint Helier, Jersey. The company was created through a merger of Glencore with Xstrata on 2 May 2013. As of 2014, it ranked tenth in the Fortune Global 500 list of the world’s largest companies. It is the world’s third-largest family business.

As Glencore International, the company was already one of the world’s leading integrated producers and marketers of commodities. It was the largest company in Switzerland and the world’s largest commodities trading company, with a 2010 global market share of 60 percent in the internationally tradeable zinc market, 50 percent in the internationally tradeable copper market, 9 percent in the internationally tradeable grain market and 3 percent in the internationally tradeable oil market.

…click on the above link to read the rest of the article…

Demographics and Major Financial and Economic Trends

September 20, 2015

Demographics and Major Financial and Economic Trends

Demographics Driving Declines in Oil Consumption, Mounting Debt, & Central Bank Mismanagement

Sometimes, the simplest answer really is best. I contend the primary and simplest factor that need be watched to gauge present and future economic activity are the changes in core populations (15-64 year old segment of the larger population) for any nation or grouping.

The core’s declining growth and outright shrinkage appear to be the trigger for declining oil consumption*. In turn, this slowing activity drives central bank reactionary interest rate cuts intended to incentivize credit creation and leverage…all to get more (raise consumption) from less (a declining population set).

*Oil is generally irreplaceable by other sources and offers a good barometer of a nation’s general economic activity.

people Photo credit: fmh

The chart below highlights the Bank of Japan’s (BOJ) interest rate reactions to the changing demographic nature of the Japanese population. As Japan’s core population began declining, the BOJ pushed rates lower to incentivize more credit (consumption) from a declining number of consumers.

Chart-1, Japan core vs Old Japan’s core population vs. BoJ interest rates

And the Fed, faced with similar though less dire US demographic circumstances, emulated the BOJ’s actions despite the BOJ’s utter lack of success (below).

US interest rates, federal debt and core population trend – click to enlarge.

Central banks around the world, at best, are blinded by their formulas and hubris to the inevitable and certain demographic and population headwinds now very much upon us. These central banks are reacting to the least surprising, most reliable, and most important data in existence. Central banks, entrusted with economic stewardship of nations, have acted out of greed or the stupidity only academics can talk themselves into.

They have sailed downwind with all sheets available to make the good times fantastically better, but left nothing for the entirely predictable changing conditions we now face…negative demographics and population trends coupled with exhausted interest rate policy, over-indebtedness, and massive overcapacity for declining core populations.

…click on the above link to read the rest of the article…

Crude Oil – a “Ray of Hope”

September 16, 2015

Crude Oil – a “Ray of Hope”

Why Technical Developments Shouldn’t be Ignored

This is a little addendum to our recent comments on the crude oil market (which you can see here, here andhere, in chronological order). Apparently Goldman Sachs just published a research report calling for $20 oil – which strikes us as a bookend to their infamous $200 call in 2008, which preceded the ultimate peak at $149 by just one or two weeks if memory serves (readers may remember this call by GS – it did get a lot of press at the time).

13328798 Photo credit: fmh

The recent sharp reversal after a seeming break of support definitely deserves attention, especially as everybody seems certain that after having declined some 75% from its peak, the price of oil can only go down further. Obviously, no such certainties were in evidence anywhere near the peak or when WTI crude was still trading near $100 a year ago (even though the supply-demand situation had quite obviously deteriorated gravely already).

WTIC crude, weekly – a lateral support level was broken amid a price/RSI divergence, and then prices reversed back up. There hasn’t been any follow-through buying since then, so this reversal may yet fail, but it seems to us that the market is ripe for an upward correction even if the longer term bear market isn’t over yet – click to enlarge.

Anyway, we wanted to briefly come back to the reasons why we think such technical signals shouldn’t be ignored. For one thing, experience shows that price lows are put in long before the “fundamentals” indicate they should. In fact, price lows are routinely put in while the fundamental backdrop is seemingly still at its very worst. This is so because market prices are discounting negative fundamentals in advance to some extent; so even though the fundamental backdrop may still get worse, it offers no guarantee that prices will go even lower.

…click on the above link to read the rest of the article…

From Miracle to Cataclysm – why the commodity bust will last for years

September 12, 2015

From Miracle to Cataclysm – why the commodity bust will last for years

The Chinese Jīngjì qíjī, wirtschaftswunder, keizai no kiseki, milagro económico or whatever you want to call is neither a miracle nor distinctly Chinese. A basket case like Argentine managed to pull off a similar feat, albeit with more volatility, over a 42 year timespan beginning in 1870. Germany did even better between 1945 and 1970. And Japan had its own miracle from 1950 to 1990.

Giving the Beijing consensus, whatever that may be, credit for creating an unprecedented economic miracle is naïve and have led pundits all over the world to make disastrously optimistic forecasts for what the future will bring. Commodity producers as far away as Latin America, Africa and Australia have poured money into capacity expansions with a very simple strategy; can’t sell it? Dump it in China, they’ll take it. We have seen this, admittedly expressed more eloquently, first hand.

Source: Angus Maddison, International Monetary Fund, Bawerk.net

China is several countries centrally governed by a ruthless power elite with vested interest in maintaining the status quo. To expand their own power, wealth and status all they had to do was open up their borders to foreign capital and supplying it with slave labour. It is not very difficult, even a communist can figure it out. However, as the economy evolved it needed investments in infrastructure which was easily funded by stealing workers savings (financial repression on a scale the Yellen’s and Draghi’s of the world can only dream off) and funnelling it into state owned enterprises with lucrative government contracts. They didn’t even have to pay lip service to property rights as all property was and still is held by the state. In short, this stage of economic development involves resource allocation from the centre. As Michael Pettis argues in The Four Stages of Chinese Growth centralised capital allocation gets a tremendous support from the rent-seeking elite and are thus easy to implement.

…click on the above link to read the rest of the article…

Did The Fed Intentionally Spark A Commodity Sell-off?

August 28, 2015

Did The Fed Intentionally Spark A Commodity Sell-off?

The intention here is the bring facts to light so the public can decide.

I’m not quite sure what to believe on how and why oil prices remain more than 50 percent below free cash flow break even for most independent E&P companies. I know for sure it’s not just one reason and is more likely a confluence of events.

Part of the reason oil prices broke new six-year lows is tied to hedge funds shorting equities and pressuring equity pricing through shorting oil. Another reason is the desire of private equity firms to buy assets on cheap and some banks seeking M&A fees. Obviously OPEC policy has a part to play. There is also no doubt that EIA statistics mistakenly leave the impression that production has remained resilient throughout the summer. But the spark that set the ball in motion was the dollar strength as every major money center bank in the U.S. recommended going long EU equities and long the dollar because of further monetary easing in Europe.

The inverse correlation between the U.S. dollar and oil prices in June was virtually 100 percent, but that has changed more recently, as I have noted previously. At that time, investors here in the U.S. plowed into biotechnology and technology and went short oil as if they knew what assets central banks were going to buy and not buy based on all the free money from Europe and Japan.

Since the financial crisis began the cozy relationship between money center banks and the Federal Reserve, since the bail outs, is well known. For example, Goldman Sachs’ deep ties to the U.S. government are notorious and, not surprisingly, they led the charge in calls for a downturn in oil. So has the media, as I have extensively documented all year here.

…click on the above link to read the rest of the article…

New Vehicle Sales Collapse in Canada’s Oil Patch

August 27, 2015

New Vehicle Sales Collapse in Canada’s Oil Patch

Oil spills into the broader economy.

Canada’s economy has split in two. The resource producing economy is deteriorating at a breath-taking pace, broadsided by collapsing commodity prices. For Canada, the most important commodity is crude oil.

West Texas Intermediate has plunged below $39 a barrel, not seen since the Financial Crisis, and Western Canadian Select to a catastrophic $25 (C$33.32) a barrel. Canadian tar-sands producers are particularly hard hit; they’re the globe’s high-cost producers. And the epicenter of this activity is the province of Alberta.

Then there’s the rest of the economy, which is trying not to wobble too visibly as its foundation is breaking up. It is very likely that Canada is in a “technical recession” – defined as two quarters of negative GDP growth. The first five months already outlined a shrinking economy, dragged down not only by the resource sector but also by other weak links [read… It Gets Ugly in Canada].

Now everyone is waiting for the June GDP numbers to be released. Canada is heading into a general election this fall, and the economy is front and center.

But new vehicles sales are still hanging in there. As in the US, the industry is powered by cheap and easy credit. It’s enabled by a frazzled Bank of Canada that keeps lowering the rates. Subprime customers are being aggressively courted by banks and alternative lenders that lust for the easy profits to be made on folks who think they don’t have a choice. And Wall Street makes a bundle repackaging these subprime auto loans into highly rated structured securities.

So new vehicles sales rose 0.4% in July from a strong July 2014, to 177,844 units, setting a new monthly record, for the seventh month in a row, according to the Canadian Auto Dealer. July sales were 14.8% above the past-five-year average. Year-to-date, sales rose by 2.4% over last year.

…click on the above link to read the rest of the article…

Deflationary Collapse Ahead?

August 26, 2015

Deflationary Collapse Ahead?

Both the stock market and oil prices have been plunging. Is this “just another cycle,” or is it something much worse? I think it is something much worse.

Back in January, I wrote a post called Oil and the Economy: Where are We Headed in 2015-16? In it, I said that persistent very low prices could be a sign that we are reaching limits of a finite world. In fact, the scenario that is playing out matches up with what I expected to happen in my January post. In that post, I said

Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:

The amount consumers can afford for oil

The cost of oil, if oil price matches the cost of production

This mismatch between rising costs of oil production and stagnating wages is what has been happening. The unaffordability problem can be hidden by a rising amount of debt for a while (since adding cheap debt helps make unaffordable big items seem affordable), but this scheme cannot go on forever.

Eventually, even at near zero interest rates, the amount of debt becomes too high, relative to income. Governments become afraid of adding more debt. Young people find student loans so burdensome that they put off buying homes and cars. The economic “pump” that used to result from rising wages and rising debt slows, slowing the growth of the world economy. With slow economic growth comes low demand for commodities that are used to make homes, cars, factories, and other goods. This slow economic growth is what brings the persistent trend toward low commodity prices experienced in recent years.

A chart I showed in my January post was this one:

…click on the above link to read the rest of the article…

China’s market woes could be chance to ‘reset’ Canadian economy

August 25, 2015

China’s market woes could be chance to ‘reset’ Canadian economy

Canada should ‘rely less on commodity growth and put the emphasis on other sectors,’ analyst says

China’s staggering economic growth has been, in many ways, a boon for Canada.

Put simply, China need lots of the things we have to offer like wood, metals, and potash. It also has a voracious appetite for oil. While we still send the vast majority of our oil south, China’s consumption had in part kept oil prices high, which benefitted our resource-based economy.

Yesterday’s stock plummet in Shanghai, however, could further rattle already struggling commodities markets – ultimately hitting at Canadian producers.

The sell-off and ensuing market chaos was also an indication that doubts remain about China’s ability to maintain its projections for growth amid historic internal reforms that could considerably lower demand for many of the things Canada is offering.

“We are a commodities producer that relies on global economic growth and for the past 10 years or so that growth has come largely from China,” says Ian Nakamoto, director of research at the Toronto investment firm MacDougall, MacDougall & MacTier.

Throughout the 2000s, that growth coincided with a nationwide construction boom. The government poured money into infrastructure projects like high-speed rail, sprawling industrial parks and vast new roadways, formerly rural outposts developed into bustling urban centres.

But the focus and capital has now shifted from fuelling a commodities-dependent economy to establishing a consumer-driven one.

“It’s an impetus for Canadian policymakers and industries to rely less on commodity growth and put the emphasis on other sectors,” says Nakamoto.

Indeed, commodity prices are down across the board. The Economist magazine reported last week that the prices of all major commodities have fallen between 10 and 20 per cent this year, heralding the end of a so-called super-cycle that began in 2000.

…click on the above link to read the rest of the article…

The Global Economy Is Officially Melting Down

August 24, 2015

The Global Economy Is Officially Melting Down

As much as the financiers on Wall Street and the officials at the Fed would like the party to keep going, it looks it’s finally about to stop. Years of bailouts and monetary expansion have created one of the most inflated and artificial economic booms in history, and now it appears that this global economic bubble is deflating. Markets across the board are melting down as we speak, and the financial crash that supposedly “fringe” analysts have been predicting since 2008, is finally upon us. Take a look at what’s going down right now.

The Dow has fallen 1300 points from its peak. On Friday alone, it fell by 530 points, making it the 9th worst stock market crash in US history.
The Shanghai composite fell by more than 11% this week. All told, China’s stock market has lost a third of its value since its previous peak, and the only thing holding it up is their government’s intervention. It lost 4% of its value on Friday after it was revealed that their manufacturing activity had reached a 77 month low.
400 of the world’s richest people lost a total of $182 billion this week, amounting to 6.3% of their collective wealth. When the people who benefit the most from inflated markets are getting hurt, you know that the bubble is bursting.
The dollar’s rally may be finally nearing its end. Its value has fallen slightly, but consistently for the past 2 weeks.
Commodities have fallen to a 13 year low. The price of copper has reached a 6 year low while oil has suffered its longest decline since 1986.

That last one is very telling. You can always tell when the global economy is in bad shape based on the value of various commodities. It’s one of the strongest indicators for an economy, since it reveals how many real, tangible goods are being produced. Curiously, many of these commodities have been falling in value throughout the supposed recovery that we’ve been in since 2009.

…click on the above link to read the rest of the article…

China share plunge drives selling in Asian, European markets

August 24, 2015

China share plunge drives selling in Asian, European markets

Benchmark Shanghai Composite Index is down 38 per cent from its June 12 peak

World stock markets plunged on Monday after China’s main index sank 8.5 per cent — its biggest drop since the early days of the global financial crisis — amid deepening fears over the health of the world’s second-largest economy.

Oil prices, commodities and the currencies of many developing countries also tumbled on concerns that a sharp slowdown in China might hurt economic growth around the globe. Wall Street was expected to suffer heavy losses on the open.

The Shanghai index suffered its biggest percentage decline since February 2007, with many China-listed companies hitting their 10 per cent downside limits. The benchmark closed at 3,209.91 points, meaning it has lost all of its gains for 2015, though it is still more than 40 per cent above its level a year ago.

Shanghai is now down 38 per cent from its June 12 peak.

China’s dimming outlook is drawing calls for more economic stimulus from Beijing, though earlier government efforts to staunch the hemorrhage appear to have done little to stabilize markets.

Asia’s gloom spread to European markets, where Britain’s FTSE 100 fell 2.7 per cent, Germany’s DAX 2.6 per cent and the CAC 40 of France 2.5 per cent. Dow futures were down over 2 per cent while the S&P futures were 1.8 per cent lower.

Japan’s Nikkei fell 4.6 per cent to 18,540.68, its worst one-day drop since in over two and a half years.

“It is a key moment for China. The equity market in free fall, the banking system increasingly starved of liquidity, rising capital outflows, and a rapidly slowing economy,” Angus Nicholson, a market analyst for IG, said in a market note.

“Global markets look set to continue their rout into the European and U.S. sessions,” he said, noting that the scale of the losses may have been exaggerated by the thin trading volumes typical of late August.

…click on the above link to read the rest of the article…

Commodity Markets In Distress As Oil Rout Continues

August 21, 2015

Commodity Markets In Distress As Oil Rout Continues

One hundred and eleven years after the birth of Count Basie, and the ongoing rout in the crude complex is in full swing today. Downhill one-way traffic continues amid headlines such as ‘No End in Sight for Oil Glut‘ and ‘Oil Poised for Longest Weekly Losing Streak Since 1986 Amid Glut‘. As the headlines get more apocalyptic, and the price projections get lower (this week: $15 oil, no, $10 oil), the more it feels like we are approaching a turning point. Or at least a whipsaw.

Looking at the overnight data releases, China has served to endorse the current mood of doom and gloom via a preliminary manufacturing print of prodigiously downbeat proportions. A print of 47.1 was seen, which was considerably lower than last month’s 47.8, and shy of the consensus of 47.7. It is the lowest print since March 2009 (hark, the belly of the great recession).

China Caixin Preliminary PMI (source: investing.com)

In other preliminary releases, Eurozone manufacturing on the aggregate came in above consensus (and in line with last month’s level), aided by a decent number from Germany, but held in check by a miss from France (showing increasing contraction to boot). Eurozone services data on the aggregate also beat consensus, ticking higher on the prior month.

Weakness across the commodity complex as a whole continues to be an ongoing theme in global markets. The below chart illustrates the losses seen in the stock prices of various oil and mining companies, with Bloomberg estimating that $2.05 trillion has been wiped off their market caps. Meanwhile, the Bloomberg Commodity Index of 22 raw materials has dropped to its lowest level since 2002.

…click on the above link to read the rest of the article…

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