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The Dow Has Fallen Nearly 1,500 Points From The Peak Of The Market, And Many Believe This “October Panic” Is Just Beginning…

October 19, 2018

The Dow Has Fallen Nearly 1,500 Points From The Peak Of The Market, And Many Believe This “October Panic” Is Just Beginning…

We haven’t had an October like this in a very long time. The Dow Jones Industrial Average was down another 327 points on Thursday, and overall the Dow is now down close to 1,500 points from the peak of the market. Unlike much of the rest of the world, it is still too early to say that the U.S. is facing a new “financial crisis”, but if stocks continue to plunge like this one won’t be too far away. And as you will see below, many believe that what we have seen so far is just the start of a huge wave of selling. Of course it would be extremely convenient for Democrats if stocks did crash, because it would give them a much better chance of doing well in the midterm elections. This is the most heated midterm election season that I can ever remember, and what U.S. voters choose to do at the polls in November is going to have very serious implications for the immediate future of our country.

After a very brief rally earlier in the week, stocks have been getting hammered again. The S&P 500 has now fallen for 9 out of the last 11 trading sessions, and homebuilder stocks have now fallen for 19 of the last 22 trading sessions. It was a “sea of red” on Thursday, and some of the stocks that are widely considered to be “economic bellwethers” were among those that got hit the hardest…

Several stocks seen as economic bellwethers fell sharply in the U.S., including United Rentals and Textron, which dropped at least 11 percent each. Snap-on and Caterpillar, meanwhile, fell 9.6 percent and 3.9 percent, respectively.

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

The Great Depression II

October 17, 2018

The Great Depression II

Whenever a movie has been a huge hit, the film industry tries to follow it up by doing a sequel. The sequel is almost invariably far more costly, as there’s the anticipation by those who create it that it will be an even bigger blockbuster than the original.

The Great Depression of the 1930’s is seen by most people to be the be-all and end-all of economic catastrophes and there’s good reason for that. Although the economic cycle has always existed, the period leading up to October 1929 was unusual, as those in the financial sector had become unusually creative.

Brokers encouraged people to buy into the stock market as heavily as they could afford to. When that business began to level off, they encouraged people to buy on margin. The idea was that the buyer would only put up a fraction of the money for the purchase and the broker would “guarantee” full payment to the seller. As a condition to the agreement, the buyer would have to relinquish to the broker the right to sell his stock at any point that he wished, should he feel the need to do so to get himself off the hook in the event of a significant economic change.

Both the buyer and the broker were buying stocks with money that neither one had. But the broker entered into the gamble so that he could charge commissions, which he would be paid immediately. The buyer entered into the gamble, as he had been promised by the broker that stocks were “going to the moon” and that he’d become rich.

Banks got into the game, as well. At one time, banks took money on deposit, then lent that money out at interest. They would always retain a percentage of the deposited money within the bank to assure that they could meet whatever the normal demand for withdrawals might be.

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

Ten Years After the Last Meltdown: Is Another One Around the Corner?

October 16, 2018

Ten Years After the Last Meltdown: Is Another One Around the Corner?

September marked a decade since the bursting of the housing bubble, which was followed by the stock market meltdown and the government bailout of the big banks and Wall Street. Last week’s frantic stock market sell-off indicates the failure to learn the lesson of 2008 makes another meltdown inevitable.In 2001-2002 the Federal Reserve responded to the economic downturn caused by the bursting of the technology bubble by pumping money into the economy. This new money ended up in the housing market. This was because the so-called conservative Bush administration, like the “liberal” Clinton administration before it, was using the Community Reinvestment Act and government-sponsored enterprises Fannie Mae and Freddie Mac to make mortgages available to anyone who wanted one — regardless of income or credit history.

Banks and other lenders eagerly embraced this “ownership society”’ agenda with a “lend first, ask questions when foreclosing” policy. The result was the growth of subprime mortgages, the rush to invest in housing, and millions of Americans finding themselves in homes they could not afford.

When the housing bubble burst, the government should have let the downturn run its course in order to correct the malinvestments made during the phony, Fed-created boom. This may have caused some short-term pain, but it would have ensured the recovery would be based on a solid foundation rather than a bubble of fiat currency.

Of course Congress did exactly the opposite, bailing out Wall Street and the big banks. The Federal Reserve cut interest rates to historic lows and embarked on a desperate attempt to inflate the economy via QE 1, 2, and 3.

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

Peter Schiff Explains “What Happens Next” In 47 Words

October 12, 2018

Peter Schiff Explains “What Happens Next” In 47 Words

Outspoken critic of The Fed and one of the few that can see through the endless barrage of bullshit to how this really ends, has laid out in a tweet “what happens next”…

Likely sequence of events:

1. Bear market;

2. Recession;

3. Deficits explode;

4. Return of ZIRP and QE;

5. Dollar tanks;

6. Gold soars;

7. CPI spikes;

8. Long-term rates rise;

9. Fed. forced to hike rates during recession

10. A financial crisis without stimulus or bailouts!

h/t @PeterSchiff

‘Ground Zero’ – Will The Dollar Shortage Kick Off The Next Financial Crisis?

October 11, 2018

‘Ground Zero’ – Will The Dollar Shortage Kick Off The Next Financial Crisis?

There’s an old saying.

“You can’t fight the dollar.”

And what this means is: because the world’s chained to the U.S. dollar (thanks to its reserve status) – everyone’s constantly affected by whichever way the dollar’s value goes.

If the dollar declines – then the foreign economies and currencies get a boost from an inflow of capital.

But if the dollar rises – then the opposite happens. Foreign economies and their currencies sink.

You can understand why, then, so many countries today are peeved with the Federal Reserve’s tightening. They’re all suffering the unintended consequences of a stronger dollar.

I’ve written about this problem before. . .

Foreign Central Banks from all over the world – such as Argentina, India, Vietnam, Indonesia, and many more – are all defending their own local currencies against a stronger dollar.

Those that borrowed trillions of dollars are exposed here. A rising dollar against their own falling local currencies creates a mismatch between liabilities (the rising U.S. dollar). And assets (their own weakening currencies).

Also keep in mind that as rates rise, the dollar-indebted foreign corporations and banks are all feeling the pain of increased borrowing costs.

For instance – I wrote last week that onshore bond defaults in China just hit a record high as liquidity gets tighter. . .

That’s why today – as U.S. interest rates rise (especially as of late hitting a seven-year high). And the dollar gets stronger – the global cost of capital keeps getting more expensive.

Thus – putting it simply – overseas investors and corporations are finding it increasingly difficult and costlier to get their hands on dollars.

And yet – so far – the market doesn’t realize just how costly and scarce U.S. dollars are becoming. . .

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

We Just Witnessed The Biggest U.S. Bond Crash In Nearly 2 Years – What Does This Mean For The Stock Market?

October 4, 2018

We Just Witnessed The Biggest U.S. Bond Crash In Nearly 2 Years – What Does This Mean For The Stock Market?

U.S. bonds have not fallen like this since Donald Trump’s stunning election victory in November 2016. Could this be a sign that big trouble is on the horizon for the stock market? It seems like bonds have been in a bull market forever, but now suddenly bond yields are spiking to alarmingly high levels. On Wednesday, the yield on 30 year U.S. bonds rose to the highest level since September 2014, the yield on 10 year U.S. bonds rose to the highest level since June 2011, and the yield on 5 year bonds rose to the highest level since October 2008. And this wasn’t just a U.S. phenomenon. We saw bond yields spike all over the developed world on Wednesday, and the mainstream media is attempting to put a happy face on things by blaming a “booming economy” for the bond crash. But the truth is not so simple. For U.S. bonds, Bill Gross says that it was a lack of foreign buyers that drove yields higher, and he says that this may only be just the beginning…

And, according to Gross, the carnage may not end here: “Lack of foreign buying at these levels likely leading to lower Treasury prices,” echoing what we said last week. And as foreign investors pull back from US paper, look for even higher yields, and an even higher dollar, which in turn risks re-inflaming the EM crisis that had mercifully quieted down in recent weeks.

I believe that Gross is right on target.

And Jeffrey Gundlach has previously warned that when yields get to this level that it would be a “game changer”…

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

Weekly Commentary: Portending an Interesting Q4

September 29, 2018

Weekly Commentary: Portending an Interesting Q4

“Those who do not learn history are doomed to repeat it.” I’ll add that those that learn the wrong lessons from Bubbles are doomed to face greater future peril. The ten-year anniversary of the financial crisis has generated interesting discussion, interviews and scores of articles. I can’t help but to see much of the analysis as completely missing the critical lessons that should have been garnered from such a harrowing experience. For many, a quite complex financial breakdown essentially boils down to a single flawed policy decision: a Lehman Brothers bailout would have averted – or at least significantly mitigated – crisis dynamics.

I was interested to listen Friday (Bloomberg TV interview) to former Treasury Secretary Hank Paulson’s thoughts after a decade of contemplation.

Bloomberg’s David Westin: “It’s been ten years, as you know, since the great financial crisis that you stepped into. Tell us the main way in which the financial system is different today than what you faced when you came into the Treasury?”

Former Treasury Secretary Hank Paulson: “Well, it’s very, very different today. So, let’s talk about what I faced. What I faced was a situation where going back decades the government had really failed the American people, because the financial system had not kept pace with the modern financial markets. The protections that were put in place after the Great Depression to deal with panics were focused on banks – protecting depositors with deposit insurance. Meanwhile, the financial markets changed. And when I arrived (2006), half or more of the Credit was flowing outside of the banking system.

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

The Stock Market Just Crashed In Italy, And Argentina Has Panic-Raised Interest Rates To 65 Percent

September 28, 2018

The Stock Market Just Crashed In Italy, And Argentina Has Panic-Raised Interest Rates To 65 Percent

In the 9th largest economy in the world, the financial markets are crashing, and in the 21st largest economy in the world the central bank just raised interest rates to 65 percent to support a currency that is completely imploding. While the mainstream media in the United States continues to be obsessed with all things Kavanaugh, an international financial crisis threatens to spiral out of control. Stock prices are falling and currencies are collapsing all over the planet, but because the U.S. has been largely unaffected so far the mainstream media is mostly choosing to ignore what is happening. But the truth is that this is serious. The financial crisis in Italy threatens to literally tear the EU apart, and South America has become an economic horror show. The situation in Brazil continues to get worse, the central bank of Argentina has just raised interest rates to 65 percent, and in Venezuela starving people are literally eating cats and dogs in order to survive. How bad do things have to get before people will start paying attention?

On Friday, Italian stocks had their worst day in more than two years, and it was the big financial stocks that were on the cutting edge of the carnage…

Shares in Italian banks .FTIT8300, whose big sovereign bond portfolios makes them sensitive to political risk, bore the brunt of selling pressure, sinking 7.3 percent as government bonds sold off and the focus turned to rating agencies.

Along with the main Italian stock index .FTMIB, the banks had their worst day since the June 2016 Brexit vote triggered a selloff across markets.

Italian bonds got hit extremely hard too. The following comes from Business Insider…

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

How the Crisis Caused a Pension Train Wreck

September 26, 2018

How the Crisis Caused a Pension Train Wreck

We’ve been writing for some time that one of the consequences of the protracted super-low interest rate regime of the post crisis era was to create a world of hurt for savers, particularly long-term savers like pension funds, life insurers and retirees. Even though the widespread underfunding at public pension plans is in many cases due to government officials choosing to underfund them (New Jersey in the early 1990s is the poster child), in many cases, the bigger perp is the losses they took during the crisis, followed by QE lowering long-term interest rates so much that it deprived investor of low-risk income-producing investments. Pension funds and other long-term investors had only poor choices after the crisis: take a lot of risk and not be adequately rewarded for it (as we have shown to be the case with private equity).

And as we’ve also pointed out, if you think public pension plans are having a rough time, imagine what it is like for ordinary people (actually, most of you don’t have to imagine). It is very hard to put money aside, given rising medical and housing costs. Unemployment means dipping into savings. And that’s before you get to emergencies: medical, a child who gets in legal trouble, a car becoming a lemon prematurely. And even if you are able to be a disciplined saver, you also need to stick to an asset allocation formula. For those who deeply distrust stocks, it’s hard to put 60% in an equity index fund (one wealthy person I know pays a financial planner 50 basis points a year just to put his money into Vanguard funds because he can’t stand to pull the trigger).

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

Ken Griffin: The Next Financial Crisis Will Hit In 12-24 Month

September 26, 2018

Ken Griffin: The Next Financial Crisis Will Hit In 12-24 Months

With Ray Dalio predicting that the US has about 2 years until the next recession, earlier today the head of hedge fund Citadel, Ken Griffin, echoed the Bridgewater founder and predicted that there are “at least 18-to-24 months left in the market rally”, thanks to the “giant adrenaline shot” of the U.S. tax overhaul.

Speaking at the Bloomberg Global Business Forum in New York Wednesday, Griffin said that “we are in this debt-fueled buying binge.” He said that the U.S. economy is “running hot now” thanks to President Trump’s actions: “The Trump policies, whether deregulation or tax reform, are certainly pushing corporate America to go, go, go,” he said, citing low unemployment and meaningful wage growth.

That’s the “good” news. The bad new: the artificial “binge” that will extend what is already the longest bull market of all time is “laying the seeds of the next financial crisis“, said Griffin.

And what may come as a surprise to many, Griffin admitted that that he’s already managing his fund for the next economic downturn. “My position today is very much focused on managing the tail risks for that… we are late in the cycle, the animal spirits have been unleashed and when these correction occur they happen with very little notice“, he said.

In terms of specific crisis catalysts, the hedge fund manager said his biggest worry is the European Union, where individual nations like Italy and Spain can’t print euros to rescue their own economies.

“Every crisis in the West for the last 50 years has been ultimately solved by intervention of governments,” he said. “There has been a huge sea change that has taken place, which is in the EU, the individual governments can no longer issue debt in their own currency.”

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

What Will Trigger The Next Oil Price Crash?

September 24, 2018

What Will Trigger The Next Oil Price Crash?

Are we nearing another financial crisis?

The supply-side story for oil prices is heavily skewed to the upside, with production losses from Iran and Venezuela causing a rapid tightening of the market. But the demand side of the equation is much more complex and harder to pin down.

Economists and investment banks are increasingly sounding the alarm on the global economy, raising red flags about the potential dangers ahead. Goldman Sachs and JPMorgan Chase recently suggested that a full-scale trade war would lead the steep corporate losses and a bear market for stocks.

The Trump administration just took its trade war with China to a new level, adding $200 billion worth of tariffs on imported Chinese goods. That was met with swift retaliation. Trump promised another $267 billion in tariffs are in the offing.

JPMorgan said that after scanning through more than 7,000 earnings transcripts, the topic of tariffs was widely discussed and feared. Around 35 percent of companies said tariffs were a threat to their business, JPMorgan said, as reported by Bloomberg.

But the risks don’t stop there. The Federal Reserve is steadily hiking interest rates, making borrowing more expensive around the world and upsetting a long line of currencies. The strength of the U.S. dollar has led to havoc in Argentina and Turkey, with slightly less but still significant currency turmoil in India, Indonesia, South Africa, Russia and an array of other emerging markets. Currency problems could morph into bigger debt crises, as governments struggle to repay debt, and companies and individuals get crushed by dollar-denominated liabilities.

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

Goldman Warns Of A Default Wave As $1.3 Trillion In Debt Is Set To Mature

September 23, 2018

Goldman Warns Of A Default Wave As $1.3 Trillion In Debt Is Set To Mature

Ten years after the Lehman bankruptcy, the financial elite is obsessed with what will send the world spiraling into the next financial crisis. And with household debt relatively tame by historical standards (excluding student loans, which however will likely be forgiven at some point in the future), mortgage debt nowhere near the relative levels of 2007, the most likely catalyst to emerge is corporate debt. Indeed, in a NYT op-ed penned by Morgan Stanley’s, Ruchir Sharma, the bank’s chief global strategist made the claim that “when the American markets start feeling it, the results are likely be very different from 2008 — corporate meltdowns rather than mortgage defaults, and bond and pension funds affected before big investment banks.”

But what would be the trigger for said corporate meltdown?

According to a new report from Goldman Sachs, the most likely precipitating factor would be rising interest rates which after the next major round of debt rollovers over the next several years in an environment of rising rates would push corporate cash flows low enough that debt can no longer be serviced effectively.

* * *

While low rates in the past decade have been a boon to capital markets, pushing yield-starved investors into stocks, a dangerous side-effect of this decade of rate repression has been companies eagerly taking advantage of low rates to more than double their debt levels since 2007. And, like many homeowners, companies have also been able to take advantage of lower borrowing rates to drive their average interest costs lower each year this cycle…. until now.

According to Goldman, based on the company’s forecasts, 2018 is likely to be the first year that the average interest expense is expected to tick higher, even if modestly.

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

How the Next Downturn Will Surprise Us

September 20, 2018

How the Next Downturn Will Surprise Us

In their campaign to contain the risks that caused the Great Recession, central bankers may have planted the seeds for the next global economic crisis.

Image

CreditCreditJi Lee

After the fall of Lehman Brothers 10 years ago, there was a public debate about how the leading American banks had grown “too big to fail.” But that debate overlooked the larger story, about how the global markets where stocks, bonds and other financial assets are traded had grown worrisomely large.

By the eve of the 2008 crisis, global financial markets dwarfed the global economy. Those markets had tripled over the previous three decades to 347 percent of the world’s gross economic output, driven up by easy money pouring out of central banks. That is one major reason that the ripple effects of Lehman’s fall were large enough to cause the worst downturn since the Great Depression.

Today the markets are even larger, having grown to 360 percent of global G.D.P., a record high. And financial authorities — trained to focus more on how markets respond to economic risk than on the risks that markets pose to the economy — have been inadvertently fueling this new threat.

Over the past decade, the world’s largest central banks — in the United States, Europe, China and Japan — have expanded their balance sheets from less than $5 trillion to more than $17 trillion in an effort to promote the recovery. Much of that newly printed money has found its way into the financial markets, where it often follows the path of least regulation.

Central bankers and other regulators have largely succeeded in containing the practice that caused disaster in 2008: risky mortgage lending by big banks. But with so much easy money sloshing around in global markets, new threats were bound to emerge — in places the regulators aren’t watching as closely.

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

“The World Is Sleepwalking Into A Financial Crisis”: Former UK PM Gordon Brown

September 14, 2018

“The World Is Sleepwalking Into A Financial Crisis”: Former UK PM Gordon Brown

Former British Prime Minister Gordon Brown warned that a leaderless world is sleepwalking towards a repeat of its near meltdown of the last significant financial crisis a decade ago.

Britain’s former prime minister – during the period when the collapse of Lehman Brothers triggered the worst financial crisis since the Great Depression – said that after a decade of stagnation the global economy is now moving into a “decade of vulnerability.”

“We are in danger of sleepwalking into a future crisis,” Brown told The Guardian in a recent interview at his estate in Scotland. “There is going to have to be a severe awakening to the escalation of risks, but we are in a leaderless world.”

The former prime minister, who lost the 2010 election following Britain’s deepest recession on a post-war basis, said that countercyclical measures by governments and central banks have become widely exhausted. He warned the ability for global central banks to drop interest rates is not as readily possible today as it was a decade ago, while finance ministries would also have difficulty injecting fiscal stimulus, and here is the surprise: there is no guarantee that China would bail out the world, again.

“The cooperation that was seen in 2008 would not be possible in a post-2018 crisis both in terms of central banks and governments working together. We would have a blame-sharing exercise rather than solving the problem.”

Brown had its doubts that China would be as cooperative for the second time to provide a global stimulus, primarily due to the Trump administration’s trade war launched squarely at Beijing. “Trump’s protectionism is the biggest barrier to building international cooperation,” he said.

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

The Makings of a 2020 Recession and Financial Crisis

September 13, 2018

The Makings of a 2020 Recession and Financial Crisis

Although the global economy has been undergoing a sustained period of synchronized growth, it will inevitably lose steam as unsustainable fiscal policies in the US start to phase out. Come 2020, the stage will be set for another downturn – and, unlike in 2008, governments will lack the policy tools to manage it.

NEW YORK – As we mark the decennial of the collapse of Lehman Brothers, there are still ongoing debates about the causes and consequences of the financial crisis, and whether the lessons needed to prepare for the next one have been absorbed. But looking ahead, the more relevant question is what actually will trigger the next global recession and crisis, and when.

The current global expansion will likely continue into next year, given that the US is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path. But by 2020, the conditions will be ripe for a financial crisis, followed by a global recession.

There are 10 reasons for this. First, the fiscal-stimulus policies that are currently pushing the annual US growth rate above its 2% potential are unsustainable. By 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%.

Second, because the stimulus was poorly timed, the US economy is now overheating, and inflation is rising above target. The US Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates as well as the US dollar.

Meanwhile, inflation is also increasing in other key economies, and rising oil prices are contributing additional inflationary pressures. That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.

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

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