Historic Debt Is At The Core Of Our Decline
ZeroHedge.com Fri, 12/07/2018 - 19:45 Authored by Brandon Smith via Alt-Market.com, This article was originally published at Birch Gold Group As I predicted just after the 2016 presidential election, a sordid theater of blame has exploded over the state of the U.S. economy, with fingers pointing everywhere except (in most cases) at the true culprits behind the crash. Some people point to the current administration and its pursuit of a trade war. Others point to the Federal Reserve, with its adverse interest rate hikes into economic weakness and its balance sheet cuts. Some blame the Democrats for doubling the national debt under the Obama Administration and creating massive trade and budget deficits. And others look towards Republicans for not yet stemming the continually increasing national debt and deficits. In today’s economic landscape, the debt issue is absolutely critical. While it is often brought up in regards to our fiscal uncertainty, it is rarely explored deeply enough. I believe that economic crisis events are engineered deliberately by the financial elite in order to create advantageous conditions for themselves. To understand why, it is important to know the root of their power. Without extreme debt conditions, economic downturns cannot be created (or at least sustained for long periods of time). According to the amount of debt weighing down a system, banking institutions can predict the outcomes of certain actions and also influence certain end results. For example, if the Fed was interested in conjuring a debt based bubble, a classic strategy would be to set interest rates artificially low for far too long. Conversely, raising interest rates into economic weakness is a strategy that can be employed in order to collapse a bubble. This is what launched the Great Depression, it is what ignited the crash of 2008, and it is what’s going on today. The massive debt burden makes recovery difficult, if not impossible, and thus the system becomes increasingly dependent on the banking elites to resolve the problem. Debt is the fuel that keeps the centralization machine running. I am not talking about standard lending, though this can be a factor. What I'm talking about is debt created through policy; debt that’s created in an instant through the use of subversive and arbitrary measures, like central bank balance sheet initiatives or interest rates. And, debt that’s created through collusion between central banks, international banks, ratings agencies, and government using the removal of regulations, or the implementation of unfair regulatory standards. Debt is a drug. The banks have known this for quite some time and have exploited the opiate of easy money to leverage entire nations and cultures into servitude or self-destruction. To illustrate this point, let’s look at the debt numbers today. The national debt is closing in on $22 trillion, with over $1 trillion a year currently being added for the American taxpayer. Corporate debt is at historic highs not seen since 2008, with S&P Global reporting over $6.3 trillion in total debts and the largest companies holding only $2.1 trillion in cash as a hedge. U.S. household debt currently stands at around $13.3 trillion, which is $618 billion higher than the last peak back in 2008, during the credit crisis. U.S. credit card debt surpassed $1 trillion for the first time in 2018, the highest single year amount since 2007 (once again, we see that debt levels are spiking beyond the lines crossed just before the crash of 2008). So how can this debt be exploited to engineer an economic crisis? Let’s start with household and consumer debt. One would think that with so much lending and creation of consumer debt, we would see a massive expansion in home and auto markets. And for a time, we did. The problem was that most home purchases were being undertaken by major corporations like Blackrock, as they devoured distressed mortgages by the thousands and then turned those homes into rentals. In the auto market, there was a large spike in buying driven by lending, but this lending was accomplished through ARM-style car loans, the same kind of loans with lax standards that helped cause the mortgage crisis in 2008 Today, both in the housing market and the auto market, a crash is indeed taking place as the Fed raises interest rates and makes holding these loans ever more expensive. Pending home sales have tumbled to a four-year low, as one in four homes on the market is now forced to lower prices. Debt is becoming expensive, and therefore demand is slumping. Overall U.S. auto sales began a precipitous decline this September, which has continued through November, mostly due to higher interest rates. It is clear that an economic crash, which some are merely calling a bear market, is indicated in the swift decline in housing and autos, two of the most vital consumer sectors. But what about corporate debt? Let’s use GE, GM and Ford as litmus tests. GE is currently in the red for over $115 billion. And this doesn’t include its pension promises to employees, which amount to over $100 billion. Given that only $71 billion has been earmarked to cover the payments, any rate hikes from the Fed constitute a millstone on the necks of GE. The likely result will be continued layoffs. Last December, GE announced 12,000 jobs to be cut through 2018, and it is likely cuts will continue into 2019. GM, with long term debt of $102 billion (as of September) and cash holdings of around $35 billion, is now cutting over 14,000 jobs and shutting down multiple factories in the U.S. This is due, in part, to a combination of interest rate hikes and tariffs. However, the true point of fracture is because of the expansive debt that GM is responsible for. Without such debt, neither rate hikes nor Trump’s tariffs would have as intense an effect on these corporations. Ford, not to be outdone by GM, is set to announce up to 25,000 job cuts, though the bulk of them may be implemented in Europe. Ford has called this report by Morgan Stanley "premature", but we saw many similar "non-denial-denials" of these kinds of info leaks during the crash of 2008, and most of them ended up being true. Ford saw its debt rating downgraded by Moody’s earlier this year to one step above junk. With current liabilities of around $100 billion and only $25 billion in cash holdings, Ford is yet another company of the verge of crumbling due to huge liabilities it cannot afford to pay more interest on. We can see the stress that the Fed is able to place on corporations by looking at their stock buyback expenditures over the past few years. Until recently, it was the Fed’s low interest rates, overnight loans, and balance sheet purchases that allowed companies to buy back their own stocks and thereby artificially prop up the markets. In fact, one could argue that without stock buybacks, the bull rally that started in 2009 would have died out a long time ago and we would have returned to crash conditions much sooner. Well, this is exactly what is happening today. Stock buybacks in the last half of 2018 are dwindling as the Fed tightens policy and interest rates draw ever closer to the designated "neutral rate" of inflation. All it took as a measly 2% increase in interest to create a crisis, but with the level of debt choking the system, this should not be surprising to anyone. By lowering interest rates to near zero, what the Fed did was create a culture of irresponsible risk, and I believe they did this knowingly. Even Donald Trump has tied himself to the performance of the stock market and embraced the debt addiction, arguing for the Fed to stop or reduce interest rate hikes to keep the debt party going. Though, with Trump's White House crawling with international banking agents and think-tank ghouls there might be far more than meets the eye as Trump anchors himself to the performance of the Dow. The Fed is not going to stop. Why would they? They have created the perfect bubble. A bubble that encompasses not only corporate debt, consumer debt, and stock markets, but also bond markets and the U.S. dollar itself. If the goal is a move to centralize power, then the banking elites have the perfect crisis weapon in their hands, and they barely need to lift a finger (or raise rates) to trigger the event. As noted earlier, it is not only stock investors that are dependent on Fed interest rates, but also the U.S. government, as treasury debt becomes less desirable for foreign buyers. The higher the potential interest barrier for the US, the higher the cost, and the less faith foreign buyers have in our ability cover our liabilities while the Fed is still tightening. Both China and Japan have been quietly reducing treasury holdings and purchases. Failing bond auctions have been cited as a trigger for spikes in Treasury yields since the beginning of 2018. Again, even U.S. debt and the dollar are embroiled in the “everything bubble”. Debt in itself is not necessarily just a tool to gain more wealth; it is also a tool to change and mold societies through financial leverage and disaster. To understand who is creating any fiscal downturn, and to understand who benefits from economic crisis, one only needs to consider who controls the debt.
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3 Things That Happened Just Before The 2008 Crisis Are Happening Again Right Now
ZeroHedge.com Fri, 11/30/2018 - 11:10 Authored by Michael Snyder via The Economic Collapse blog, Real estate, oil and the employment numbers are all telling us the same thing, and that is really bad news for the U.S. economy. It really does appear that economic activity is starting to slow down significantly, but just like in 2008 those that are running things don’t want to admit the reality of what we are facing. Back then, Fed Chair Ben Bernanke insisted that the U.S. economy was not heading into a recession, and we later learned that a recession had already begun when he made that statement. And as you will see at the end of this article, current Fed Chair Jerome Powell says that he is “very happy” with how the U.S. economy is performing, but he shouldn’t be so thrilled. Signs of trouble are everywhere, and we just got several more pieces of troubling news. Thanks to aggressive rate hikes by the Federal Reserve, the average rate on a 30 year mortgage is now up to about 4.8 percent. Just like in 2008, that is killing the housing market and it has us on the precipice of another real estate meltdown. And some of the markets that were once the hottest in the entire country are leading the way down. For example, just check out what is happening in Manhattan… In the third quarter, the median price for a one-bedroom Manhattan home was $815,000, down 4% from the same period in 2017. The volume of sales fell 12.7%. Of course things are even worse at the high end of the market. Some Manhattan townhouses are selling for millions of dollars less than what they were originally listed for. Sadly, Manhattan is far from alone. Pending home sales are down all over the nation. In October, U.S. pending home sales were down 4.6 percent on a year over year basis, and that was the tenth month in a row that we have seen a decline… Hope was high for a rebound (after new-home-sales slumped), but that was dashed as pending home sales plunged 2.6% MoM in October (well below the expected 0.5% MoM bounce). Additionally, Pending Home Sales fell 4.6% YoY – the 10th consecutive month of annual declines… When something happens for 10 months in a row, I think that you can safely say that a trend has started. Sales of new homes continue to plummet as well. In fact, we just witnessed a 12 percent year over year decline for sales of new single family houses last month… Sales of new single-family houses plunged 12% in October, compared to a year ago, to a seasonally adjusted annual rate of 544,000 houses, according to estimates by the Census Bureau and the Department of Housing and Urban Development. With an inventory of new houses for sale at 336,000 (seasonally adjusted), the supply at the current rate of sales spiked to 7.4 months, from 6.5 months’ supply in September, and from 5.6 months’ supply a year ago. If all of this sounds eerily similar to 2008, that is because it is eerily similar to what happened just before and during the last financial crisis. Up until now, at least the economic optimists could point to the employment numbers as a reason for hope, but not anymore. In fact, initial claims for unemployment benefits have now risen for three weeks in a row… The number of Americans filing applications for jobless benefits increased to a six-month high last week, which could raise concerns that the labor market could be slowing. Initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 234,000 for the week ended Nov. 24, the highest level since the mid-May, the Labor Department said on Thursday. Claims have now risen for three straight weeks. This is also similar to what we witnessed back in 2008. Jobless claims started to creep up, and then when the crisis fully erupted there was an avalanche of job losses. And just like 10 years ago, we are starting to see a lot of big corporations start to announce major layoffs. General Motors greatly upset President Trump when they announced that they were cutting 14,000 jobs just before the holidays, but GM is far from alone. For a list of some of the large firms that have just announced layoffs, please see my previous article entitled “U.S. Job Losses Accelerate: Here Are 10 Big Companies That Are Cutting Jobs Or Laying Off Workers”. A third parallel to 2008 is what is happening to the price of oil. In 2008, the price of oil shot up to a record high before falling precipitously. Well, now a similar thing has happened. Earlier this year the price of oil shot up to $76 a barrel, but this week it slid beneath the all-important $50 barrier… Oil’s recent slide has shaved more than a third off its price. Crude fell more than 1% Thursday to as low as $49.41 a barrel. The last time oil closed below $50 was in October 4, 2017. By mid morning the price had climbed back to above $51. Concerns about oversupply have sent oil prices into a virtual free-fall: Crude hit a four-year high above $76 a barrel less than two months ago. When economists are asked why the price of oil is falling, the primary answer they give is because global economic activity is softening. And that is definitely the case. In fact, we just learned that economic confidence in the eurozone has declined for the 11th month in a row… Euro-area economic confidence slipped for an 11th straight month, further damping expectations that the currency bloc will rebound from a sharp growth slowdown and complicating the European Central Bank’s plans to pare back stimulus. In addition, we just got news that the Swiss and Swedish economies had negative growth in the third quarter. The economic news is bad across the board, and it appears to be undeniable that a global economic downturn has begun. But current Fed Chair Jerome Powell insists that he is “very happy about the state of the economy”… Jerome H. Powell, the Federal Reserve’s chairman, has also taken an optimistic line, declaring in Texas recently that he was “very happy about the state of the economy.” That is just great. He can be as happy as he wants, and he can continue raising interest rates as he sticks his head in the sand, but nothing is going to change economic reality. Every single Fed rate hiking cycle in history has ended in a market crash and/or a recession, and this time won’t be any different. The Federal Reserve created the “boom” that we witnessed in recent years, but we must also hold them responsible for the “bust” that is about to happen. This Is How The "Everything Bubble" Will End
ZeroHedge.com Fri, 11/30/2018 - 17:45 Authored by Nick Giambruno via InternationalMan.com, I think there’s a very high chance of a stock market crash of historic proportions before the end of Trump’s first term. That’s because the Federal Reserve’s current rate-hiking cycle, which started in 2015, is set to pop “the everything bubble.” I’ll explain how this could all play out in a moment. But first, you need to know how the Fed creates the boom-bust cycle… To start, the Fed encourages malinvestment by suppressing interest rates lower than their natural levels. This leads companies to invest in plants, equipment, and other capital assets that only appear profitable because borrowing money is cheap. This, in turn, leads to misallocated capital – and eventually, economic loss when interest rates rise, making previously economic investments uneconomic. Think of this dynamic like a variable rate mortgage. Artificially low interest rates encourage individual home buyers to take out mortgages. If interest rates stay low, they can make the payments and maintain the illusion of solvency. But once interest rates rise, the mortgage interest payments adjust higher, making them less and less affordable until, eventually, the borrower defaults. In short, bubbles are inflated when easy money from low interest rates floods into a certain asset. Rate hikes do the opposite. They suck money out of the economy and pop the bubbles created from low rates. It Almost Always Ends in a Crisis Almost every Fed rate-hiking cycle ends in a crisis. Sometimes it starts abroad, but it always filters back to U.S. markets. Specifically, 16 of the last 19 times the Fed started a series of interest rate hikes, some sort of crisis that tanked the stock market followed. That’s around 84% of the time. You can see some of the more prominent examples in the chart below. Let’s walk through a few of the major crises… • 1929 Wall Street Crash Throughout the 1920s, the Federal Reserve’s easy money policies helped create an enormous stock market bubble. In August 1929, the Fed raised interest rates and effectively ended the easy credit. Only a few months later, the bubble burst on Black Tuesday. The Dow lost over 12% that day. It was the most devastating stock market crash in the U.S. up to that point. It also signaled the beginning of the Great Depression.Between 1929 and 1932, the stock market went on to lose 86% of its value. • 1987 Stock Market Crash In February 1987, the Fed decided to tighten by withdrawing liquidity from the market. This pushed interest rates up. They continued to tighten until the “Black Monday” crash in October of that year, when the S&P 500 lost 33% of its value. At that point, the Fed quickly reversed its course and started easing again. It was the Chairman of the Federal Reserve Alan Greenspan’s first – but not last – bungled attempt to raise interest rates. • Asia Crisis and LTCM Collapse A similar pattern played out in the mid-1990s. Emerging markets – which had borrowed from foreigners during a period of relatively low interest rates – found themselves in big trouble once Greenspan’s Fed started to raise rates. This time, the crisis started in Asia, spread to Russia, and then finally hit the U.S., where markets fell over 20%. Long-Term Capital Management (LTCM) was a large U.S. hedge fund. It had borrowed heavily to invest in Russia and the affected Asian countries. It soon found itself insolvent. For the Fed, however, its size meant the fund was “too big to fail.” Eventually, LTCM was bailed out. • Tech Bubble Greenspan’s next rate-hike cycle helped to puncture the tech bubble (which he’d helped inflate with easy money). After the tech bubble burst, the S&P 500 was cut in half. • Subprime Meltdown and the 2008 Financial Crisis The end of the tech bubble caused an economic downturn. Alan Greenspan’s Fed responded by dramatically lowering interest rates. This new, easy money ended up flowing into the housing market. Then in 2004, the Fed embarked on another rate-hiking cycle. The higher interest rates made it impossible for many Americans to service their mortgage debts. Mortgage debts were widely securitized and sold to large financial institutions. When the underlying mortgages started to go south, so did these mortgage-backed securities, and so did the financial institutions that held them. It created a cascading crisis that nearly collapsed the global financial system. The S&P 500 fell by over 56%. • 2018: The “Everything Bubble” I think another crisis is imminent… As you probably know, the Fed responded to the 2008 financial crisis with unprecedented amounts of easy money. Think of the trillions of dollars in money printing programs – euphemistically called quantitative easing (QE) 1, 2, and 3. At the same time, the Fed effectively took interest rates to zero, the lowest they’ve been in the entire history of the U.S. Allegedly, the Fed did this all to save the economy. In reality, it has created enormous and unprecedented economic distortions and misallocations of capital. And it’s all going to be flushed out. In other words, the Fed’s response to the last crisis sowed the seeds for an even bigger crisis. The trillions of dollars the Fed “printed” created not just a housing bubble or a tech bubble, but an “everything bubble.” The Fed took interest rates to zero in 2008. It held them there until December 2015 – nearly seven years. For perspective, the Fed inflated the housing bubble with about two years of 1% interest rates. So it’s hard to fathom how much it distorted the economy with seven years of 0% interest rates. The Fed Will Pop This Bubble, Too Since December 2015, the Fed has been steadily raising rates, roughly 0.25% per quarter. I think this rate-hike cycle is going to pop the “everything bubble.” And I see multiple warning signs that this pop is imminent. • Warning Sign No. 1 – Emerging Markets Are Flashing Red Earlier this year, the Turkish lira lost over 40% of its value. The Argentine peso tanked a similar amount. These currency crises could foreshadow a coming crisis in the U.S., much in the same way the Asian financial crisis/Russian debt default did in the late 1990s. • Warning Sign No. 2 – Unsustainable Economic Expansion Trillions of dollars in easy money have fueled the second-longest economic expansion in U.S. history, as measured by GDP. If it’s sustained until July 2019, it will become the longest in U.S. history.In other words, by historical standards, the current economic expansion will likely end before the next presidential election. • Warning Sign No. 3 – The Longest Bull Market Yet Earlier this year, the U.S. stock market broke the all-time record for the longest bull market in history. The market has been rising for nearly a decade straight without a 20% correction. Meanwhile, stock market valuations are nearing their highest levels in all of history. The S&P 500’s CAPE ratio, for example, is now the second-highest it’s ever been. (A high CAPE ratio means stocks are expensive.) The only time it was higher was right before the tech bubble burst. Every time stock valuations have approached these nosebleed levels, a major crash has followed. Preparing for the Pop The U.S. economy and stock market are overdue for a recession and correction by any historical standard, regardless of what the Fed does. But when you add in the Fed’s current rate-hiking cycle – the same catalyst for previous bubble pops – the likelihood of a stock market crash of historic proportions, before the end of Trump’s first term, is very high.That’s why investors should prepare now. One way to do that is by shorting the market. That means betting the market will fall. Keep in mind, I’m not in the habit of making “doomsday” predictions. Simply put, the Fed has warped the economy far more drastically than it did in the 1920s, during the tech or housing bubbles, or during any other period in history. I expect the resulting stock market crash to be that much bigger. |
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