Return Of Crisis
everywhere are in deep, deep trouble
markets the world over are increasingly chaotic;
either retreating or plunging. Our view remains that
there’s a gigantic market crash in the coming future
-- one that has possibly started now.
for expecting a market crash is simple: Bubbles
arise when asset prices inflate above what
underlying incomes can sustain. Centuries ago, the
Dutch woke up one morning and discovered that tulips
were simply just flowers after all. But today, the
public has yet to wake up to the
mathematical reality that over $200 trillion in debt
and perhaps another $500 trillion of un(der)funded
liabilities really cannot ever be paid back
under current terms. However, this fact is
dawning within the minds of more and more critical
thinkers with each passing day.
for these obligations to be reset to a reality-based
level, something has to give. The central banks have
tried to modify the phrase “under current terms” by
debasing the currency these obligations are written
in via inflation. Try as they have, though, they’ve
been unable to create the sort of "goldilocks"
low-level inflation that would slowly sublimate that
massive pile of debt into something more manageable.
inflation has not happened. Why not? Because they've
failed to note that plan of handing all of their
newly printed money to a very wealthy elite -- while
a socially popular thing to do among the cocktail
party set -- simply has concentrated the inflation
to the sorts of assets the monied set buys: private
jets, penthouse apartments, fine art, large
gemstones, etc. So yes, their efforts produced price
inflation; just of the wrong sort.
all the central banks have really accomplished is to
assure that when the deflation monster finally
arrives it will be gigantic, highly damaging and
possibly uncontrollable. I'll admit to being
worried about this next crash/crisis because I
imagine it will involve record-setting losses, human
misery due to lost jobs and dashed dreams, and
possibly even the prospect of wars and serious
Let me be
blunt: this next crash will be far worse and more
dramatic than any that has come before. Literally,
the world has never seen anything like the situation
we collectively find ourselves in today. The
so-called Great Depression happened for purely
monetary reasons. Before, during and after the
Great Depression, abundant resources, spare capacity
and willing workers existed in sufficient quantities
to get things moving along smartly again once the
financial system had been reset.
there’s something different in the story line: the
absence of abundant and high-net energy oil. Many of
you might be thinking “Hey, the price of oil is
low!” which is true, but only momentarily.
Remember that price is not the same thing as net
energy, which is what's left over after you expend
energy to get a fossil fuel like oil out of the
ground. As soon as the world economy tries to grow
rapidly again, we’ll discover that oil will quickly
go through two to possibly three complete doublings
in price due to supply issues. And those oil price
spikes will collide into that tower of outstanding
debt, making the economic growth required to inflate
them away a lot more expensive (both cost-wise and
energetically) to come by.
passing moment, the world has slightly less high-net
energy conventional oil and is replacing that with
low-net energy oil. Consider how we're producing
less barrels of production in the North Sea while
coaxing more out of the tar sands. From a volume or
a price standpoint right now, the casual observer
would notice nothing. But it takes a lot more energy
to get a barrel of oil from tar sands. So there's
less net energy which can be used to grow the world
economy after that substitution.
a price standpoint, our model at Peak Prosperity
includes the idea that there’s a price of oil that’s
too high for the economy to sustain (the ceiling)
and a price that’s too low for the oil companies to
remain financially solvent (the floor). That ceiling
and that floor are drawing ever closer. When we
reach the point at which there’s not enough of a gap
between them to sustainably power the growth our
economy currently is depending on, there’s nothing
left but to adjust our economic hopes and dreams to
more realistic -- and far lower -- levels.
happens most folks will undergo a "forced
simplification" of their lifestyles (as well as
their financial portfolios), which they will
experience as disruptive and emotionally difficult.
That's not fear-mongering; it's just math. (And it's
the reason why we encourage
developing a resilient lifestyle today, to
insulate yourself from this disruption, as well as
be able to enter the future with optimism.)
Too Much Debt
diagnosis of the fatal flaw facing the global
economy and its financial systems has remained
unchanged since before 2008. We can sum it up with
these three simple words:
Too much debt.
below visualizes our predicament plainly. It has
always been mathematically impossible (not to
mention intellectually bankrupt) to expect to grow
one's debt at twice the rate of one's income in
All but the
most blinkered can rapidly work out the fallacy
captured in the above chart. Sooner or later,
borrowing at a faster rate than income growth was
going to end because it has to.
Again, it's just math. Math that our central
planners seem blind to, by the way -- all of whom
embrace "More debt!" as a solution, not a problem.
being given the opportunity to re-think their
strategy in the wake of the 2008 credit crisis, the
world’s central banks instead did everything in
their considerable power to create conditions for
the most rapid period of credit accumulation in all
global debt number is only larger now, somewhere
well north of $200 trillion here in Q1 2016. But
consider, if you will, that entire world had ‘only’
managed to accumulate $87 trillion in total debt by
2000 (this is just debt, mind you, it does not
include the larger amount of unfunded liabilities).
Yet governments then managed to pour on an
additional $57 trillion just between the end of 2007
and the half way point of 2014, just seven and half
short years later.
Was this a
good idea? Or monumental stupidity? We’re about to
My vote is
Banks In Trouble
In just the
first few weeks of 2016, the prices of many bank
stocks have suddenly dropped to deeply distressed
territory. And the price of insurance against
default on the bonds of those banks is now spiking.
don't know exactly what ails these banks -- and, if
history is any guide, we probably won’t find out
until after this next crisis is well underway -- but
we can tell from the outside looking in that
something is very wrong.
hyper-interconnected world of global banking, if one
domino falls, it will topple any number of others.
The points of connectivity are so numerous and
tangled that literally no human is able to predict
with certainty what will happen. Which is why the
action now occurring in the banking sector is
beginning to smell like 2008 all over again:
Says 'Frightening' Seeing Financial Stocks Below
DoubleLine Capital’s Jeffrey Gundlach said
it’s “frightening” to see major
trading at prices below their
financial crisis levels.
He cited Deutsche Bank AG and Credit Suisse
Group AG as examples in a talk outlining bearish
views at a conference in Beverly Hills,
California, on Friday. Both banks fell
this week to their lowest levels since the early
1990s in European trading.
“We see the price of major
financial stocks, particularly in Europe, which
are truly frightening,”
Gundlach said. “Do you know that Credit Suisse,
which is a powerhouse bank, their stock price is
lower than it was in the depths of the financial
crisis in 2009? Do you know that Deutsche Bank
is at a lower price today than it was in 2009
when we were talking about the potential
implosion of the entire global banking system?”
it looks like the trouble is likely to begin in
Europe, where we’ve been tracking the woes of
Deutsche Bank (DB) for a while. But in Italy, banks
are carrying 18% non-performing loans and an
additional double digit percentage of ‘marginally
performing' or impaired loans. Taken together, these
represent more than 20% of Italy's GDP, which is
banking sector may have upwards of 25% to 30% bad or
impaired loans on the books. That means the entire
banking sector is kaput. Finis.
Insolvent and ready for the restructuring vultures
to take over.
in a fractional reserve banking system operating at
a 10% reserve ratio, when a bank's bad loans
approach its reserve ratio, it's pretty much toast.
By 15% that's pretty much a certainty. By 20% you
just need to figure out which resolution specialist
to call. At 25% or 30%, you probably should pack a
bag and skip town in the dead of night.
chart provides some of the context for Europe more
broadly. I’ve highlighted everything from Europe in
yellow, showing how the banks there currently top
the list of awfulness:
weakness in European financial shares, combined with
other factors, is dragging down Europe’s stock
market dramatically. The decline has now wiped out
all of 2015’s market gains and has broken
convincingly below the neckline (yellow line, below)
of a typical “Head & Shoulders” formation:
beginning of the year, the stock prices of these
select banks are down (as of COB Friday 2/5/16):
pretty hefty losses over a short period of time, and
that’s meaningful. While the headline equity indexes
are managing to keep their losses minimized, these
bellwether stocks from the critical finance sector
are stampeding out the back door.
And when I
say ‘critical’, I mean in the sense that a hefty
amount of the overall earnings within the S&P 500
and other major stock indexes were fraudulent
profits were derived from the banks feeding on
central bank thin-air money and front-running
central bank policy.
there to worry about? Well, just pick something. It
could be a combination of headwinds conspiring to
drag down bank earnings from here. Take your pick:
reduced trading and M&A revenue, and lower profits
from ridiculously flat yield curves and negative
have to include the possibility that No more
bailouts are coming. Why not? Mainly because it
would be politically incendiary at this moment to
even try such a thing. Public resentment of the
banks is high all over the world, and in the US
specifically, there’s an election primary that is
hinging for the Democrats on Wall Street coziness.
Maybe the markets are pricing that in?
Or it could
be that these banks have been playing with fire
(again) and got burned (again). We know for sure
that a number hold a boatload of junk debt from the
energy sector that will need to be written off. And
we suspect many are staring at losses from writing
too many derivative contracts that have turned
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