Tag Archives: credit bubble

Sorry Permabulls, It’s Not Different This Time – Got Gold?

An inverted yield curve has historically been the most accurate indicator of an impending or concurrent recession. The inversion during late 2006 and most of 2007 is a good example. Studies have shown that curve inversions precede a recession anywhere from 6 months to 2 years. I would argue that, stripping away the affects of inflation and data manipulation, real economic activity has been somewhat recessionary for several years.

The shelf-life of financial topics is about as long as the lifespan of a mayfly (about 24  hours). Several months ago, a debate raged about the significance of the inverted yield curve (short term rates are higher than longer term rates). Most perma-bull pundits who populate mass financial media advised their minions to ignore the yield inversion because “it’s different this time.”

The inverted yield curve discussion disappeared soon after the stock market responded to the stock market intervention after the Christmas massacre. However, over the past  several days, the yield curve has “collapsed” in the sense that yields at the long end (10-years and beyond) have fallen more sharply than at the front end of curve, resulting in a yield curve inversion that is now at its steepest since 2007 (measured using the 3-month T-bill rate vs the 10-year Treasury yield).

The chart to the right was prepared by Phoenix Capital (with my edits). It shows the SPX from 1999 to present on a weekly basis vs the the yield curve (3-month T-bill minus the yield on the 10-yr Treasury bond). When the blue line in the bottom panel goes below the black line (the black line is my edit to clarify when the spread between the 3mo Bill and 10yr Treasury has gone negative), the yield on the 3-mo Bill is higher than the yield on the 10yr Treasury.

The chart must have been prepared prior to the holiday weekend because the 3-mo/10yr has been inverted since Monday. But more to the point, you’ll note that this particular “flavor” of inversion was accompanied by a sharp drop in the stock market from 2000-2003 and from 2007-2009. The yields have been inverted between other segments of the curve (1yr to 5yr, for instance) nearly continuously since last summer.  The curve is even more inverted now than when I wrote this commentary for my Short Seller’s Journal subscribers last week.  The 5yr Treasury is well below 2%.  The 3mo/5yr inversion is close to half a percentage point (46 basis points).

In addition, the upper bound of the Fed Funds rate “target” (2.25-2.50%) is now above the entire yield curve out to 10 years. The bond market is signaling to the Fed that the economy sucks and the Fed Funds rate needs to be reduced down to at least 2%. The term “bond market vigilantes” was coined originally by Ed Yardeni in the early 1980’s to convey the idea the bond market could be used to “guide” the Fed’s monetary policy implementation. The “bond vigilantes” right now are “screaming” at the Fed to reduce the Fed Funds rate and to ease monetary policy.

While the market can’t dictate the Fed Funds rate, big bond funds with a total rate of return mission will pile into the Treasury bonds at the longer end of the curve, driving down yields (bond prices rise) in the expectation that the Fed will have to cut rates sooner or later. This is the market dynamic that induces an inverted curve.

Whether or not the Fed will “listen” to the bond market and cut the Fed Funds rate at the midJune FOMC meeting remains to be seen. To be sure, the researchers at the Fed who advise on policy know that the real rate of inflation is significantly higher than CPI-measured inflation. They also know the economy is reeling. But the Fed has to balance easier monetary policy with setting policy that supports the U.S. dollar.

Maintaining a stable dollar is critical to inducing foreign money to buy Treasuries, the supply of which will soar once the debt ceiling is lifted. If the Fed cuts rates too soon or too quickly, especially relative to the ECB or PBoC, the dollar could experience a not insignificant sell-off. This in turn would cause further damage to the economy.

The above commentary is an excerpt from my latest Short Seller’s Journal. Each week I present detailed analysis of weekly economic reports. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

But We Were Told “It’s Different This Time”

“U.S. Officials Meet in Secret Over Junk-Loan Frenzy as Recession Alarms Flash”

U.S. Treasury Secretary Steven Mnuchin on Thursday led a secret meeting of top U.S. financial regulators on the risks to global markets from the recent surge in corporate borrowing…”No details were provided on the gist of the discussion, though according to the statement the panel heard an ‘update from Craig Phillips, a counselor to Mnuchin, on recent market developments involving corporate credit and leveraged lending'”. – Article link

Something(s) is(are) starting to melt-down “behind the scenes” in the global financial system.  The meeting referenced above is the “tell.”  Craig Phillips, “counselor to Mnuchin,” was formerly a managing director and member of the Global Operating Committee of BlackRock.   It’s quite likely that Phillips’ former colleagues have put Phillips on high alert about problems developing in the credit markets, both domestically and globally.

Even more interesting is that fact that Fed Chairman, Jerome Powell, gave a speech recently in which he denied that credits risks are mounting in the system:  “Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate.”

Powell’s assertion eerily echoes a similar comment made by then-Fed Head, Helicopter Ben Bernanke in mid-2007 about subprime mortgage risk being “contained.”  But Powells’ statement followed by a meeting convened by Treasury Secretary Mnuchin under the advisement of a former BlackRock hatchet-man is the silent scream of insiders who see the probability of another financial system tsunami forming…

Of course, the yield curve has been sending these warnings for about a year.  But they keep telling us it’s different this time…

A Debt-Riddled System That Is Hitting The Wall

An elevated level of corporate debt, along with the high level of U.S. government debt, is likely to mean that the U.S. economy is much more interest rate sensitive than it has been historically. – Robert Kaplan, President of the Dallas Fed

Fed officials always understate risks embedded in the system. Translated, the statement above implies the Fed is worried about the amount of debt accumulated in the U.S. economic system over the last 8 years. Kaplan specifically referenced the $6.2 trillion in corporate debt outstanding as a reason for the Fed to stop raising the Fed funds rate. Non-financial corporate debt as a percentage of GDP is now at a record high:

More eye-raising for me was the warning issued by the BIS (Bank for International Settlements – the global Central Bank for central banks). The BIS warned that the surging supply of corporate debt, specifically the amount of BBB-rated debt, has left the credit market vulnerable to a crash once the economic weakness triggers ratings downgrades. A large scale ratings downgrade of triple-B issuers to junk would cause an avalanche of selling from funds which can’t hold non-investment grade debt. This has the potential to seize-up the credit markets.

The BIS would not issue a warning like this unless it was already seeing troubling developments in the numbers to which it has access. Recall that leveraged loan ETFs plunged in value the last two months of 2018. Same with high yield bond ETFs, though the drop in leveraged bank loans was more troubling given their status as senior secured and ahead of junk bonds in the legal pecking order.

As you can see from the chart below, it looks like the value of senior leveraged bank loans may be headed south again:

Just like the stock market, fixed income prices rallied sharply after the Fed and the Trump Government acted to arrest the sell-off in the stock market in late December. But this was always a short-term “fix,” as economic fundamentals continued to deteriorate, perhaps at a hastened pace because of the Government shutdown. But neither the shut-down nor the trade war are the causes of the collapsing global economy.

More evidence the consumer is tapped out – Deutsche Bank wrote a report detailing signs that the average U.S. household is running up against its willingness and ability to assume more debt and monthly interest expense. I have been suggesting this was the case for a few months in SSJ. One indicator I thought was interesting is a chart showing that the average hours worked in sectors selling “big ticket” items is now declining (home furnishings, travel arrangement and reservation services and used car dealers).

Another chart showed that, based on regional Fed surveys of senior loan officers at banks, demand for credit cards, auto loans and personal loans is declining:

One of the reasons for the drop in loans is simply that the average consumer simply can not afford the monthly cost of taking on additional debt, especially higher-cost credit card and auto debtl. Just as significant is the fact that interest rates on these types of loans are rising quickly – i.e. the average credit card interest rate is now 17% vs 14% a year ago. Deutsche Bank omits to explain why the interest rate on these types of loans is rising much faster than the Fed funds.

The interest rate charged on a loan reflects the “risk free” rate (Fed funds), the time value of money and – most important – the inherent risk associated with specific types of loans. Interest rates on credit cards and auto loans are rising to reflect the increased risk attached to these forms of credit – i.e. the rising delinquency and default rates.

Besides the rising cost of necessities, the average household is getting squeezed from higher interest payments on the record amount of household debt that has accumulated over the last 10 years. The chart below shows the year-over-year growth in household interest payments going back the 1960’s:

The aggregate household interest payment has soared at a 15% Y/Y rate. Interest payments as a share of total household spending have jumped to the highest level since the financial crisis. Virtually every prior time when interest payments spiked this much, a recession promptly followed.

Last but not least, as Treasury debt hits a new record every day, it was reported by the Treasury that the U.S. budget surplus in January, traditionally one of the only months of the year with a spending surplus because of tax receipt timing, was only $9 billion. This missed the consensus estimate of $25 billion and was far below the January 2018 surplus of $49 million. For the first 4 months of the Government’s fiscal year, the budget deficit was $310 billion, 77% higher than the $175.7 billion deficit for the same period last year.

The budget deficit will surely be much higher than the $1.2 trillion annualized rate recorded in the first four months of this FY. Federal interest expense hit a record high for the four-month period. Annualized, the projected $575 billion interest expense alone for FY 2019 would be more than the entire budget deficit in FY 2014.

Finally, the Deutsche Bank report showed two graphics showing the “current conditions” index for buying cars and homes for the top 33% of households by income. The index measures the intent to make a purchase. The current conditions index for car purchases was at its lowest since 2012. For home buying, the intent to purchase index was at its lowest since 2008.

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The commentary above is partially excerpted from the latest Short Seller’s Journal. This is a weekly subscription service which analyzes economic data and trends in support of ideas for shorting market sectors and individual stocks, including ideas for using options. You can learn more about this here: Short Seller’s Journal information

Financial Market Collapse: Not an “IF” But A “When?”

“’DON’T PANIC!!!!’ Just 6.9% off of the most offensive valuation extreme in history.” – Tweet from John Hussman, Hussman Funds

The above quote from John Hussman was a shot at the financial media, which was freaking out over the sell-off in the stock market on Wednesday and Thursday last week. As stock bubbles become more irrational, the rationalizations concocted to explain why stocks are still cheap and can go higher become more outrageous. The financial media was devised to function as a “credible” conduit for Wall Street’s deceitful, if not often fraudulent, sales-pitch.

Perhaps the biggest fraud in the last 10 years perpetrated on investors was the Dodd-Frank financial “reform” legislation. The Dodd-Frank Act was promoted by the Obama Government as legislation that would protect the public from the risky and often fraudulent business practices of the big financial institutions – primarily the Too Big To Fail Banks. It was supposed to prevent another 2008 financial crisis (de facto financial collapse).

However, in effect, the Act made it easier for big banks to disguise or hide their predatory business operations. Ten years later it is glaringly apparent to anyone who bothers to study the facts, that Dodd-frank has been nothing of short of a catastrophic failure. Debt, and especially risky debt, is at record levels at every level of the economic system (Government, corporate, individual). OTC derivatives are at higher levels than 2008. This is without adjusting for accounting changes that enabled banks to understate their derivatives risk exposure. The stock market bubble is the most extreme in history by most measures and housing prices as a ratio to household income are at an all-time record level.

A lot of skeletons in the closet suddenly pop out of “hiding” when the stock market has a week like this past week. An article published by Bloomberg titled, “A $1 trillion Powder Keg Threatens the Corporate Bond Market” highlights the fact that corporate America took advantage of the Fed’s money printing to issue a record amount of debt. Over the last couple of years, the credit quality of this debt has deteriorated. More than 50% of the “investment grade” debt is rated at the lowest level of investment grade (Moody’s Baa3/S&P BBB-).

However, the ratings tell only half the story. Just like the last time around, the credit rating agencies have been over-rating much of this debt. In other words, a growing portion of the debt that is judged investment grade by the ratings agencies likely would have been given junk bond ratings 20 years ago. In fact, FTI Consulting (a global business advisory firm) concluded based on its research that corporate credit quality as measured by ratings distribution is far weaker than at the previous cycle peaks in 2000 and 2007. FTI goes as far as to assert, “it isn’t even close.”

I’ll note that FTI’s work is based using corporate credit ratings as given. However, because credit ratings agencies once again have become scandalously lenient in assigning ratings, there are consequences from relying on the judgment of those who are getting paid by the same companies they rate. In reality, the overall credit quality of corporate debt is likely even worse than FTI has determined.

The debt “skeleton” is a scary one. But even worse is the derivatives “skeleton.” This one not only hides in the closet but, thanks to regulatory “reform,” it’s been stashed in the attic above the closet. An article appeared in the Asia Times a few days ago titled, “Has The Derivatives Volcano Already Begun To Erupt?” I doubt this one will be reprinted by the Wall Street Journal or Barron’s. This article goes into the details about the imminent risk of foreign exchange derivatives to the global financial system. There’s a notional amount of $90 trillion in FX derivatives outstanding, which is up from $60 trillion in 2010.

Many of you have heard about the growing dollar “shortage” in Europe and Japan. Foreign entities issue dollar-denominated debt but transact in local currency. FX derivatives enable these entities to swap local currency for dollars with banks. However, these banks have to borrow the dollars. European banks are now running out of capacity to borrow dollars, a natural economic consequence of the reckless financial risks that these banks have taken, as enabled by the Central Bank money printing.

As it becomes more difficult for European and Japanese banks to borrow dollars, it drives up the cost to hedge local currency/dollar swaps. Compounding this, U.S. banks with exposure to the European banks are required to put up more reserves against their exposure, which in turn acts to tighten credit availability.  It’s a vicious self-perpetuating circle that is more than partially responsible for driving 10yr and 30yr Treasury bond yields higher recently.  Perhaps this explains why the direction of the Dow/SPX and the 10-yr Treasury have been moving in correlation for the past few weeks rather than inversely.

But it’s not just FX derivatives. There’s been $10’s of trillions on credit default swaps underwritten in the last 8 years. The swaps are based on the value of debt securities. For instance, Tesla bonds or home mortgage securities. As the economy deteriorates, the ability of debtors to service their debt becomes compromised and the market value of the debt declines. As delinquencies turn into defaults, credit default swaps are exercised. If the counter-party is unable to pay (AIG/Goldman in 2008), the credit default swap blows up.

And thus the fuse on the global derivatives bomb is lit. The global web of derivatives is extremely fragile and highly dependent on the value of the assets and securities used as collateral. As the asset values decline, more collateral is required (a “collateral call”). As defaults by those required to post more collateral occur, the fuses that have been lit begin to hit gunpowder. This is how the 2008 financial crisis was ignited.

In fact, given the financial turmoil in Italy, India and several other important emerging market countries, I find it hard to believe that we have not seen evidence yet of FX derivative accidents connected to those situations. My best guess is that the Central Banks have been able to diffuse derivative problems thus-far. However, the drop in the stock market on Wednesday surely must have triggered some equity-related derivatives mishaps. At some point, the derivative fires will become too large s they  ignite from unforeseen sources – i.e.the derivatives skeletons come down from hiding in the attic – and that’s when the real fun begins, at least if you are short the market.

I would suggest that the anticipation of an unavoidable derivatives-driven crisis is the reason high-profile market realists like Jim Rogers and Peter Schiff have recently issued warnings that the coming economic and financial crisis will be much worse than what hit in 2008.

What’s Going On With Gold?

Several of us who stick our neck out in public with analytic opinions on the market have been thinking  that gold has reached a tradable bottom.  I’m sure many would say that view is flawed based on today’s action.  Let me preface my thoughts by saying that, over the last 17 years of daily active involvement in the precious metals sector, I don’t pull my hair out over intra-day or even intra-year volatility.  Measured from the beginning of 2002, gold is up 441% while the S&P 500 is up 158%.

The point here is that, given how easy it is to print up paper gold contracts and flood the market, the price of gold can do anything on any given day. If you want to own gold for the reasons to own gold, you have be play the long game. The mining stocks do not seem to care about the day-to-day vagaries of the gold price right now. You shouldn’t either.

The trading pattern in gold is somewhat similar to its trading pattern in the summer of 2008, right before the great financial crisis (de facto banking system collapse) was set in motion.   The price of gold was taken down from $1020 in mid-March to $700 by October, while the financial system was melting down. That set up gold’s record run to $1900 over the next three years.

It’s becoming obvious to anyone who chooses to not put their head in the sand or become intoxicated with the copious amounts of official propaganda, that the U.S. Government is technically bankrupt and the financial bubbles fomented by a decade of money printing, credit creation and near-zero interest rates are about to explode.  It’s not coincidental that gold was slammed ahead of Congressional testimony by Fed-head Jerome Powell, one of the primary propaganda-spinning hand-puppets.

Gold started rolling downhill after the London a.m. fix. Right after it. The cliff-dive occurred as the Comex floor was opening. This is a pure paper operation. It’s either the hedge funds or the banks piling into the short-side of the market by flooding the market with paper gold and hitting all bids in sight. The managed money category of trader segment in the COT report has been getting net short and more net short the last two weeks. Hedge funds could be shorting even more paper gold, trying to push it further downhill to book profits on their shorts. OR it could be the banks piling into the short side but hide this by booking the trades they report to the CME (daily o/i) and the CFTC (weekly COT) into the managed money trader account in the COT report.

The latter is entirely possible. JP Morgan was already caught once doing this in silver. If you don’t trust the Government to report the truth, why would you trust the banks to report the truth? After all, the banks ARE the Government.

Today’s action has nothing to do with the $/yuan to gold relationship or the $/yen to gold relationship. The dollar is higher and gold usually trades inversely to the dollar. Gold likely is being managed like this to help disguise the coming financial and economic bombs that are set to explode – just like in 2008.

We’re dealing with a system in which banks and other big corporations control the Government and there is no RULE OF LAW whatsoever. Think about what you would do if you completely lacked a moral compass and were in control of the system, to a large degree. You would do exactly what they are doing. And I’m not talking about just gold. It’s everything. They have used debt to put the squeeze on the population.

The Housing Market: A Bigger Bubble Than 2008 Is Popping

The XHB homebuilder ETF is decisively below three key moving averages after it knifed below its 50 dma last week.  KB Homes reported a big earnings and revenue “beat” on Thursday after the market closed.  The stock soared as much as 9% on Friday.  Per the advice I gave my subscribers about shorting the inevitable price-spike in the stock,  I shorted the stock Friday mid-day (July and August at-the-money puts).  The stock is down 6% from its high Friday and is back below all of its key moving averages (21, 50, 200).

Several subscribers have emailed me today to report big gains on put options purchased Friday.   When a stock sells off like this after “beating” Wall St estimates and raising guidance, it’s a very bearish signal.  I’ve identified the best homebuilders to short and I provide guidance on timing and the use of put options.

Housing is dropping and it’s demand-driven, not supply-driven – All three housing market reports released two weeks ago showed industry deterioration. The homebuilder “sentiment” index for May, now known as the “housing market” index for some reason, showed its 4th decline since the index peaked in December. The index level of 68 in May was 10 points below Wall Street’s expectation. The index is a “soft data” report, measuring primarily homebuilder assessment of “foot traffic” (showings) and builder sentiment.

While the housing starts report for May showed an increase over April’s report, the permits number plunged. Arguably the housing starts report is among the least reliable of the housing reports because of the way in which a “start” is defined (put a shovel in the ground, that’s a “start”). On the other hand, permits filed might reflect builder outlook. To further complicate the analysis, the report can be “lumpy” depending on the distribution between multi-family starts/permits and single family home starts/permits.

A good friend of mine in North Carolina was looking at the Denver apartment rental market earlier this week and was shocked at the high level of vacancies. I would suggest this is similar in most larger cities. It also means that multi-family building construction will likely drop off precipitously over the next 12 months.

Existing home sales for May reported Wednesday showed the second straight month-to- month drop and the third straight month of year-over-year declines. The headline SAAR (Seasonally Adjusted Annualized Rate) number – 5.43 million – missed Wall Street’s forecast for 5.5 million. April’s number was revised lower. Once again the NAR chief spin-meister blames the drop on low inventory. But this is outright nonsense. The month’s supply for May increased from April and, at 4.1 months, is above the average month’s supply for the trailing 12 months. It’s also above the average months supply number for all of 2017. If low inventory is holding back pent-up demand, then May sales should have soared, especially given that May is historically one of the best months seasonally for home sales. The not seasonally adjusted number for May was 3.4% below May 2017.

The primary reason for declining home sales, as I’ve postulated in several past issues, is the shrinking pool of buyers who can afford to support the monthly cost of home ownership. The Government lowered the bar for its taxpayer-backed mortgage programs every year since 2014. It lowered the down-payment requirement, broadened the definition of what constitutes a down-payment (as an example, seller concessions can be counted as part of a down-payment) thereby reducing even further the amount of cash required from a buyer’s bank account at closing, it cut mortgage insurance fees and it lowered income and credit score restrictions. After all this, the Government is running out of people into whom it can stuff 0-3% down payment, 50% DTI mortgages in order to keep the housing market propped up.

A lot of short term (buy and rent for 1-2 years and then flip) investors and flippers are holding homes that will come on the market as home prices fall. The majority of the MLS notices I receive for the zip codes in Denver I track are “price change” notices. All of them are price reductions. Whereas a year ago the price reductions were concentrated in the high-priced homes, now the price reductions are spread evenly across all price “buckets.” Denver was one of the first hot markets to crack in the mid-2000’s bubble and I’m certain what I’m seeing in Denver is occurring across the country in most mid to large metropolitan areas. Yes, I’m sure there’s a few exceptions but, in general, high prices, rising mortgage rates and stagnant wages are like poison darts being thrown at the housing bubble.

The analysis above is an excerpt from the June 24th Short Seller’s Journal.   My subscribers and I are making a small fortune shorting homebuilders and homebuilder-related stocks.  I will adding a couple other sectors in up-coming issues that are ready to shorted aggressively.  You can learn more about this service by following this link:  Short Seller’s Journal information.

Paul Craig Roberts: “How Long Can The Federal Reserve Stave Off the Inevitable?”

IRD Note: The average household is bloated with debt, housing prices have peaked, many public pensions are on the verge of collapse in spite of 9-years of rising stock, bond and alternative asset values. But all of this was built on a foundation of debt, fraud and corruption. Dr. Paul Craig Roberts asks, “does the Fed have another ‘rabbit’ to pull out its hat?…

When are America’s global corporations and Wall Street going to sit down with President Trump and explain to him that his trade war is not with China but with them? The biggest chunk of America’s trade deficit with China is the offshored production of America’s global corporations. When the corporations bring the products that they produce in China to the US consumer market, the products are classified as imports from China.

Six years ago when I was writing The Failure of Laissez Faire Capitalism, I concluded on the evidence that half of US imports from China consist of the offshored production of US corporations. Offshoring is a substantial benefit to US corporations because of much lower labor and compliance costs. Profits, executive bonuses, and shareholders’ capital gains receive a large boost from offshoring. The costs of these benefits for a few fall on the many—the former American employees who formerly had a middle class income and expectations for their children.

In my book, I cited evidence that during the first decade of the 21st century “the US lost 54,621 factories, and manufacturing employment fell by 5 million employees. Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent. US factories employing 500-1,000 workers declined by 44 percent; those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent. These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures” (p. 100).

In other words, to put it in the most simple and clear terms, millions of Americans lost their middle class jobs not because China played unfairly, but because American corporations betrayed the American people and exported their jobs. “Making America great again” means dealing with these corporations, not with China. When Trump learns this, assuming anyone will tell him, will he back off China and take on the American global corporations?

The loss of middle class jobs has had a dire effect on the hopes and expectations of Americans, on the American economy, on the finances of cities and states and, thereby, on their ability to meet pension obligations and provide public services, and on the tax base for Social Security and Medicare, thus threatening these important elements of the American consensus. In short, the greedy corporate elite have benefitted themselves at enormous cost to the American people and to the economic and social stability of the United States.

The job loss from offshoring also has had a huge and dire impact on Federal Reserve policy. With the decline in income growth, the US economy stalled. The Federal Reserve under Alan Greenspan substituted an expansion in consumer credit for the missing growth in consumer income in order to maintain aggregate consumer demand. Instead of wage increases, Greenspan relied on an increase in consumer debt to fuel the economy.

The credit expansion and consequent rise in real estate prices, together with the deregulation of the banking system, especially the repeal of the Glass-Steagall Act, produced the real estate bubble and the fraud and mortgage-backed derivatives that gave us the 2007-08 financial crash.

The Federal Reserve responded to the crash not by bailing out consumer debt but by bailing out the debt of its only constituency—the big banks.

Click here to read the rest: Paul Craig Roberts/Fed

WTF Just Happened? Elites Scramble to Disable the Italian Economic Landmine

Italy is financially disintegrating.  The banking world would not care except for one small detail:  If Italy defaults in its debt obligations, it will set off a daisy-chain of OTC derivative credit default swap defaults resembling a financial nuclear holocaust.  This chart of Deutsche Bank’s stock price reflects the growing risk of this event:

Deutsche Bank has been hitting all-time lows since its listing on the NYSE in October 2001. The systemic risk posed by a financial collapse of Deutsche Bank is enormous. Yet, it should be allowed to occur to prevent the continued transfer of U.S. and European taxpayer money to fund DB’s payroll and large bonuses. The schizophrenic volatility of the stock markets is further reflection of the underlying financial volcano in danger of erupting.

In the latest episode of WTF Just Happened, Eric Dubin and Dave Kranzler discuss ongoing financial collapse of Italy and the likely method employed by the Fed, ECB, and BIS to keep the banking system corpse on life support (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

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Visit these links to learn more about the Investment Research Dynamic’s Mining Stock Journal and Short Seller’s Journal.  I recommended Almadex Minerals at 28 cents in April 2016 – it closed Friday at $1.13.  I recommended shorting Hovnanian at $2.88 in January  – it closed at $1.89 on Friday and has been as low as $1.70.

Is Emerging Market Turmoil Deutsche Bank’s “Black Swan?”

Rising energy prices and collapsing emerging currencies are two developments that are not receiving much attention in the mainstream propaganda narrative. But either development which could end up “pulling the rug” out from underneath the markets.

I pieced together the graphic to the right from an article on Zerohedge about the developing currency and debt crisis in emerging markets and, specifically, Latin America. This topic is not receiving much attention from the mainstream financial media. I guess facts that undermine the “strong economy” narrative go unreported. If it’s not reported, it doesn’t exist, right?

The top chart shows the abrupt plunge in an index of emerging market currencies. But most
of that decline is attributable to the plunging currencies in Latin America. Currently the Brazilian real is in free-fall, followed closely by the Mexican peso.

The bottom chart shows an index of emerging market debt prices. The index has plunged over 6 points, or nearly 7% since mid-April. In terms of bond prices, that’s a mini-crash. And that’s an index. Individual bond issues are getting massacred.

I was trading junk bonds in 1994 when the emerging market debt crisis hit hard in late January. Prior to that, emerging market debt issuance had just been through a mini-bubble. The money pumped into the system by Greenspan to “save the markets” from the collapse of Drexel Burnham and the related S&L collapse, plus to save the markets from the blow-back from the collapse of Russia, precipitated a mini-boom in high yield and emerging market debt.

The crisis started with a loss of confidence in the Mexican banking system and quickly spread like the flu throughout Latin America. The effects soon spilled-over into the U.S. markets. Between January and the end of March 1994, the Dow plunged 10.6%. The credit markets were a mess, especially the junk bond market. A friend of mine on the EM desk at BT was worried about losing his job.

It’s impossible to know the extent to which Central banks are working to prevent the current EM crisis from spreading, but at some point there will be a spillover effect in our markets.

As everyone knows, Deutsche Bank has resumed the collapse that started in 2008 before the Fed, ECB and Bundesbank combined to keep DB from collapsing.  Why was DB saved? Because DB’s balance sheet likely represents the largest systemic risk to the global financial system.   It has been burning furniture for years and now the bank is unloading more than 10% of its workforce as well as dismantling its North American and Investment Banking operation.  25% of the equity sales and trading personnel are being elimated.

No one outside of DB has any possibility of understanding DB’s OTC derivatives book. It’s highly probably that DB insiders do not understand the scale of counter-party risk exposure.   When DB acquired Bankers Trust, Anshu Jain took the emerging market derivatives business and injected it with steroids. Why? Because the fees were enormous.

On top of this, DB has enormous exposure via credit default swaps to the risky southern European financial systems.   A good friend of mine has reason to believe that if Italy goes into a tail-spin, it could take DB down with it.

In truth, we don’t know how bad the situation is inside DB because the financial reporting requirements imposed on banks have been substantially rolled-back over the last several years.   However, really bad news began to leak out on DB about the time the LIBOR-OIS spread began to rise and the dollar began to rise quickly.   The misdirection propaganda attributed this to corporate dollar repatriation connected to the Trump tax cuts.   Now the cost to buy credit protection on DB debt is starting to soar.  Credit default swaps have become the financial’s new “smoke alarm.”

DB’s stock is down nearly 39% since December 18, 2017. Since mid-January 2014, DB stock is down 78%.  Not sure why this fact doesn’t get coverage from the mainstream financial media other than the fact that it throws a wet blanket on the warm and fuzzy “synchronized global recovery” fairytale.

WTF Just Happened? Gold, The Dollar And Interest Rates

What’s going on with gold, the dollar and interest rates – especially gold?  All of the variables that fundamentally support much higher gold prices are lined up perfectly.  Why isn’t gold moving higher?  The popular narrative in the mainstream financial media would leave one to believe that the dollar is soaring.  Eric and Dave put a big dent in that notion.  Additionally, in a long-term historical context, the recent rise in interest rates is tiny, yet marginally higher interest are already wreaking havoc on the economy (retail, auto and home sales).   What’s going to happen to the economy when the 10-yr Treasury hits 4%, which is still well below its long-run historical norm? (click on image to enlarge)

Eric Dubin and Dave Kranzler dig into these topics in the next episode of WTF Just Happened (WTF Just Happened is a produced in association with Wall St. For Main Street – Eric Dubin may be reached at  Facebook.com/EricDubin):

Visit these links to learn more about the Investment Research Dynamic’s Mining Stock Journal and Short Seller’s Journal.  I recommended Almadex Minerals at 28 cents in April 2016 – it closed Friday at $1.13.  I recommended shorting Hovnanian at $2.88 in January  – it closed at $1.89 on Friday and has been as low as $1.70.